Annual Report - EDP

notes to the consolidated and company financial statementsEDP - Energias Portugal, S.A.for the years ended 31 december 2012 and 2011Notes to the Consolidated and Company Financial Statementsfor the years ended 31 December 2012 and 2011Tariffs are adjusted annually based on changes in portion A costs and in the monetary correction of portion B costs, by the index of variation of IGPM (Market pricesindex), discounted of productivity gains (factor X). Periodically (on average every 4 years), a Periodic Tariff Review occurs, generating the recalculation of all costs, thedefinition of a new BRR and a new reference company, capturing productivity gains occured in the period between revisions. In the beginning of 2010 an addendumto the concession contracts of distribution companies was signed to ensure the neutrality of sector costs.SupplyThe electricity suppliers that do not own electric assets, are authorised to act exclusively in the free market, selling or buying energy in quantity, conditions and pricesfreely negotiated. The commercialization of energy with a distributor is only possible through participation in the "Auction set by the distributors", with the negotiationof contracts, for a maximum of two years, and commencement of energy delivery within a period not exceeding two years.Public Domain AssetsIn Brazil, fixed assets used in the distribution and the supply activities are binded to these services and cannot be removed, sold, transferred or mortgaged without theprior and express consent of the regulator (ANEEL).Activity in the Renewable Energies SectorIn December 2007 the EDP Group incorporated EDP Renováveis, S.L. in Spain so as to concentrate the Group's subsidiaries in the renewable energies sector. At 18March 2008, EDP Renováveis was converted into a public limited company.On 4 July 2008, a share capital increase of EDP Renováveis was made through an Initial Public Offering (IPO) of 196,024,306 shares. This share capital increase wasnot subscribed by the EDP Group, resulting in a dilution of the interest held in EDP Renováveis from 100% to 77.53%. The share capital increase amounted to 1,566,726thousands of Euros, of which 980,121 thousands of Euros relates to the capital increase and 586,605 thousands of Euros relates to the share premium.ElectricityGenerationIn December 2012, EDP Renováveis, the subsidiary of EDP Group for the renewable energies sector, holds the share capital of EDP Renewables Europe, S.L. (EDPR EU,previous designated as Nuevas Energias del Ocidente, S.L), EDP Renewables North America , L.L.C. (EDPR NA, previous designated as Horizon Wind Energy, L.L.C. ) andEDP Renováveis Brasil, S.A., operating respectively in Europe, in the United States of America and in Brazil.EDP Renewables Europe operates through its subsidiaries located in Portugal, Spain, France, Belgium, Poland, Romania, Italy and United Kingdom. EDPR EU's mainsubsidiaries are: EDP Renováveis Portugal, EDP Renewables España, EDP Renewables France, Greenwind (Belgium), EDP Renewables Polska, EDP RenewablesRomania, EDP Renewables Italia. As at 31 December 2012, Spain and Portugal are the most relevant geographical markets where EDPR EU operates.In July 2007 the EDP Group acquired from Goldman Sachs, 100% of the share capital of EDPR NA, which develops, manages and operates wind farms in the UnitedStates of America. EDPR NA holds a series of wind farms in operation and a pipeline of projects under development for the construction of wind farms.Regulatory framework for the activities in SpainThe Electrical Sector in Spain is regulated by Law 54 of 27 November 1997 and the subsequent amendments to legislation. In May 2007, the Spanish Governmentapproved the Royal Decree (RD 661/2007) which implemented the new regulatory framework for wind energy installations to be built from 2008 to 2012, which will beapplicable for all operating assets from 31 December 2012.According to RD 661/2007, wind farms are entitled to choose between two remuneration schemes: (i) Fixed tariff and (ii) market plus premium: wind farms receive foreach hour the pool price plus a variable premium. Once the decision between the two schemes has been made for a specific wind farm, it is binding for, at least, oneyear. Wind farms installed before January 2008 are ruled by the transitory regime, established by Decree 436/2004. Under this transitory regime, that ended inDecember 2012, wind farms could choose between a fixed tariff and a market option receiving market price plus a fixed premium.In July 2010, the Ministry of Industry established an agrement with two major associations of renewable energy (Spanish Wind Energy Association and Protermosolar)to change the existing regulation. This agreement resulted in the approval of Royal Decree 1614/2010, of December 7, which defines (i) for the years 2011 and 2012 areduction of 35% in the income applicable to wind generation defined by Royal Decree 661/2007, (ii) an addendum to article 44.3 of Royal Decree 661/2007 clarifyingthat future revisions of the income for energy production through renewable sources will only be applied to the installed capacity from 2012 and (iii) the definition of alimit of 2,589 hours of operation for the installed capacity.On 28 January 2012 the Spanish Government enacted Royal-Decree Law 1/2012 that approves a temporary suspension of the remuneration for renewable energycapacity not included in the pre-assignation registry.In December 2012, through the Law 15/2012 of 27 December, the Spanish Government approved a 7% across-the-board tax on electricity generation. The tax will beapplied from 1 January 2013 onwards.Regulatory framework for the activities in PortugalThe Portuguese legal provisions applicable to the generation of electrical power based on renewable resources are currently established by Decree-Law No. 189/88dated 27 May, as amended by Decree-Law No. 168/99 dated 18 May, Decree-Law No. 312/2001 dated 10 December and Decree-Law No. 339-C/2001 dated 29December. Also relevant is Decree-Law No. 33-A/2005, dated 16 February, which establishes the current values used in the remuneration formula applicable toenergy produced by means of renewable resources and the deadlines for the application of such remuneration formula.176A World Full Of Energy