Electricity generation is subject to licensing and is carried out in a competitive environment.  Electricity generation is divided into two regimes: ordinary regime and special regime.  Special regime relates to the generation of electricity from endogenous and other renewable sources (except large hydropower plants).  Special regime generation is subject to different licensing requirements and benefits from special tariffs.  A last recourse supplier, currently EDP Serviço Universal, is obliged to purchase electricity generated under the Portuguese special regime.  The ordinary regime covers all other sources, including large hydropower plants.

Ordinary Regime

The principle of centralised planning of generation plants has been abandoned in the New Electricity Framework.  Initiatives to construct and operate new plants lie with market participants, and the Portuguese government will only intervene to supplement private initiatives, cover market failures or ensure electricity supply.

On June 30, 2007, all of the PPAs executed by EDP under the Old Electricity Framework have been terminated early pursuant to Decree Law 240/2004, and accordingly the power facilities that generated electricity for those agreements are now operated under market conditions.

In addition, EDP has regularised the status of the water concessions for its hydropower plants in accordance with Decree-Law no. 226-A/2007, of May 31.  As a result, EDP has retained the rights to operate 26 hydropower plants under market conditions (with 4,094 MW of installed capacity) beginning on the expiration dates previously provided in their respective PPAs until on average, 2047.

Special Regime

Special regime generation is primarily governed by Decree-Law 189/88 of May 27, and the amendments thereto (including Decree-Law no. 312/2001, of 10 December and, in respect of tariffs, Decree-Law no. 168/99, of May 18, Decree-Law no. 339-C/2001, of December 29, Decree-Law no. 33A/2005, of February 16, and Decree-Law no. 225/2007 of May 31) (“Decree-Law 189/88”).  However, special regime generation is also affected by Decree-Law 29/2006 and Decree-Law 172/2006, insofar as these relate to the SEN.

The statutory and regulatory regime applicable to the generation of renewable electricity differs from that applicable to the generation of electricity from other non-renewable sources in relation to licenses, tariffs and electricity sale rights.

The Portuguese special regime provides that qualified special regime operators may sell electricity to last recourse suppliers that are required to purchase electricity under the special regime pursuant to article 55 of Decree-Law 172/2006, of February 15.  The right of the special regime operator, and the correspondent obligation of the last recourse supplier, do not, however, limit the ability of special regime operators to sell electricity to other suppliers of electricity operating in the market. When the special regime operator sells the electricity to the last recourse supplier, it will receive an amount corresponding to the tariff applicable to special regime generation for the electricity sold.

Electricity transmission activities are carried out through the national transmission grid, under an exclusive concession granted by the Portuguese government.  Presently, the exclusive concession for electricity transmission has been awarded to REN Rede Eléctrica by article 69 of Decree-Law 29/2006, following the concession already awarded to REN Rede Eléctrica by article 64 of Decree-Law no. 182/95, of July 27.

Under the concession, REN Rede Eléctrica is responsible for the planning, implementation, and operation of the national transmission grid, the related infrastructure, as well as all of the relevant interconnections and other facilities necessary to operate the national transmission grid.  The concession also provides that REN Rede Eléctrica must coordinate the SEN infrastructures to ensure the integrated and efficient operation of the system, as well as the continuity and security of electricity supply.

Electricity distribution under the New Electricity framework occurs through the national distribution grid, consisting of a medium and high voltage network, and through the low voltage distribution grids.

The national distribution grid is operated through an exclusive concession granted by the Portuguese state.  This exclusive concession for the activity of electricity distribution is held by EDP’s subsidiary EDP Distribuição pursuant to article 70 of Decree-Law 29/2006, as a result of converting the license held by EDP Distribuição under the Old Electricity Framework into a concession agreement.  The terms of the concession are set forth in Decree-Law 172/2006.

The low voltage distribution grids continue to be operated under concession agreements to be entered into after a public tender administered by the relevant municipalities.  The existing concession agreements will be maintained but amended to comply with the new regime as provided for in Decree-Law 172/2006.

Electricity supply is open to competition, subject only to a licensing regime.  Suppliers may openly buy and sell electricity.  For this purpose, they have the right of access to the national transmission and distribution grids upon payment of the access charges set by the Portuguese Energy Services Regulatory Authority (Entidade Reguladora dos Serviços Energeticos, ‘‘ERSE’’), an autonomous public entity.

Under market conditions, consumers are free to choose their supplier, without any additional fees for switching suppliers.  A new entity, whose activity will be regulated by ERSE, will be created to oversee the logistical operations that facilitate switching suppliers for consumers.

The New Electricity Framework enumerates certain public service obligations for suppliers to ensure the quality and continuity of supply, as well as consumer protection with respect to prices, access charges and access to information in simple and understandable terms.

EDP’s licensed supplier of electricity for the liberalised market is its subsidiary EDP Comercial.

As required by the Electricity Directive, since January 1, 2007, the role of last recourse supplier has been undertaken by an independent entity, EDP - Serviço Universal, S.A., created for this purpose by EDP’s subsidiary EDP Distribuição, and by the local low voltage distribution concessionaires until the free market is fully efficient and until the respective concession contracts have expired.

Pursuant to amendments introduced by Decree-Law 264/2007 of July 24, the last recourse supplier is further required to buy forward energy in the markets managed by OMIP and the Sociedade de Compensação de Mercados de Energia, S.A. (“OMIClear”) in the quantities and at auctions defined by DGEG. Purchases of energy in the market managed by OMIP include listed annual, quarterly and monthly electricity futures contracts, at base-load and with physical delivery. The purchases are recognised for the purpose of regulated costs whenever they reach maturity.

The last recourse supplier must manage the different forms of contracts in order to acquire energy at the lowest cost.  All unneeded surplus electricity acquired by the last recourse supplier is resold on the organised market.
 

The operation of organised markets for electricity is subject to joint authorisation from the Minister of Finance and the Minister responsible for the energy sector.  The entity managing the organised markets is also subject to authorisation from the Minister responsible for the energy sector and, when required by law, from the Minister of Finance.  Organised electricity markets should be integrated into any organised electricity markets established between Portugal and other EU Member States. 

Generators operating under the ordinary regime and suppliers, among others, can become market members.

The organised market corresponds to a system with different methods of contracting that allow supply and demand of electricity to meet, encompassing the forward, daily (comprised of bulk energy transactions to be delivered on the day after the contract date that must be physically settled) and intra-daily markets (comprised of transactions that must be physically settled).

Since July 1, 2007, MIBEL has been fully operational, with daily transactions from both Portugal and Spain, including a forward market that has operated since July 2006.  MIBEL currently has at present two market operators:

> OMEL, which is the current market operator of the Spanish market, manages MIBEL’s spot transactions market; and

> OMIP, which is presently managed from Portugal, manages MIBEL’s forward transactions market.  It is planned that OMEL and OMIP will be merged into a single market operator, OMI, pursuant to an agreement between the Spanish and Portuguese governments dated October 1, 2004, as amended. 

The non-organised markets consist of bilateral contracts between the entities of MIBEL, settled either by physical delivery or by differences and are subject to approval by ERSE in Portugal.

Under market conditions, consumers are free to choose their electricity supplier and are exempt from any payment when switching suppliers.  In order to manage the process of switching suppliers, which will also be required to manage the electricity reading and measurement equipment, a Logistics Operator for Switching Suppliers (“OLMC”) will be created.  This entity will have to be independent in a legal, organisational and decision-making sense, from the other entities in the SEN.

Transmission, distribution and last recourse supply, as well as the logistics and terms applicable to the operations for switching suppliers and for managing organised markets are subject to ERSE regulation.

Legislation applicable to this activity has yet to be developed.  Nevertheless, until the incorporation of the OLMC, ERSE has determined that management of the logistics for switching suppliers should be conducted by the operator of the medium and high voltage distribution grid, which currently is EDP Distribuição.