In 1995, in order to attract investment in the power plants that the country needed, the State launched international tenders, offering investors Energy Acquisition Contracts, known as CAE. When these CAE were signed, return rates were set for the entirety of their duration (8.5% for the 33 EDP plants). With these agreements, producers undertook to supply the Public Service Electricity System (SEP) on an exclusive basis.
In 2003, with the aim of creating a competitive wholesale market, the European Commission forced member states to change their rules. Following European legislation changes, Decree-Law No. 240/2004 was approved, which determined the early termination of all long-term CAE signed in 1996.
To avoid paying producers the compensations provided for in the CAE, the State created the Contractual Equilibrium Maintenance Cost mechanism (or CMEC), which determined that the plants whose CAE were terminated before the due date would be paid the difference between the CAE amount and the revenue they might obtain in the market.
Thus, in 2005 EDP and REN - Rede Eléctrica Nacional (REN) signed the CAE termination agreements, which were amended in 2007 and took effect as of July 1st, 2007. As per the legislation, the CMEC amount to be received by EDP stood at €833,467 thousand, which, pursuant to the law in force, is subject to securitization.
The method used to determine the compensation to which EDP was entitled (CMEC)
was approved by the European Commission (EC) in 2004 (Decision N161/2004), which deemed it effective and strictly necessary; this decision was subject to legislative authorization by the Portuguese Parliament in the same year.
In June 2007, Decree-Law No. 226-A/2007 of May 31 came into force, approving the legal regime for the use of water resources under the terms set out by the Water Law.
Article 91 of said Decree-Law provides for the transmission of the right to use the water public domain from REN (the RNT concessionaire) to the companies holding the hydroelectric plants, with the latter being subject to the payment of an economic-financial equilibrium sum. Article 92 lays down the formula for calculating the economic-financial equilibrium sum, which was determined based on two assessments carried out by highly reputed independent organizations: Caixa - Banco de Investimento, SA, and Credit Suisse First Boston.
Against this background, on March 8, 2008, the State (through the National Water Institute, INAG), REN and EDP Produção signed the concession agreements relating to the plants of the former SEP; EDP Produção paid €759 million (the corresponding economic-financial equilibrium amount as per Decree No. 16982/07 of August 2) and obtained the right to operate those plants for a period which, in average, is 26 years longer than in the previous regime.
Ordinance 85-A/2013 was published on February 27, 2013, determining the nominal rate applicable to the tariff impact of the CMEC fixed portion annual amount, setting it at 4.72 %. This rate is applicable from January 1, 2013, to December 31, 2027, and translates into a cost reduction for the system of approximately €13 million per year, which currently corresponds to €120 million. This adjustment results from the application of the calculation mechanism for the fixed portion interest rate, as determined by Decree-Law No. 240/2004 of December 27, amended by Decree-Law No. 32/2013 of February 26, article 5 (4) (b) (iv).
Investigation into the CMECs
In 2012, the European Commission (EC) and the Portuguese authorities (Central Investigation and Prosecution Department - DCIAP) received similar complaints regarding the termination of the CAEs, the method behind the CMEC mechanism, and EDP's right to use the Public Water Domain (DPH).
Following the complaint, the EC requested clarification from the Portuguese State on the termination of the CAEs and their subsequent replacement by CMECs. In September 2013, the EC concluded that the compensation for the early termination of CAEs did not exceed the amount necessary to reimburse the investment costs to be recovered during the assets' lifespan, adding that the application of CMECs did not exceed the conditions notified to and approved by the Commission in 2004, and therefore decided
that no further investigation on the matter was necessary.
In May 2017, the EC closed its formal in-depth investigation into DPH's concession rights, concluding that the compensation paid by EDP was compatible with market conditions. The EC further concluded that the financial method used to assess the concession extension price was appropriate and resulted in a fair market price, and for this reason no State funding was granted to EDP.
The DCIAP investigation into the aforementioned complaint is still underway.
EDP does not accept any allegations of unlawful behavior by the company or by any member of the EDP Group and believes that the amount due for the early termination of CAEs and the amount paid for DPH concession rights were fair and in accordance with market conditions. However, in the current stage of the process, it is not possible to determine its outcome or impact on financial statements.