The Argentine Electricity Sector

Electricity was first made available in Argentina in 1887 with the first public street lighting in Buenos Aires. The Argentine Government’s involvement in the electricity sector began in 1946 with the creation of the Dirección General de Centrales Eléctricas del Estado (General Directorate of Electric Power Plants of the State) to construct and operate electricity generation plants. In 1947, the Argentine Government created Agua y Energía Eléctrica S.A. (Water and Electricity, or ‘AyEE’) to develop a system of hydroelectric generation, transmission and distribution for Argentina.

In 1961, the Argentine Government granted a concession to the Compañía Italo Argentina de Electricidad (Italian Argentinean Electricity Company, or ‘CIADE’) for electrical distribution in a part of the City of Buenos Aires. In 1962, the Argentine Government granted a concession formerly held by the Compañía Argentina de Electricidad (Argentine Electricity Company, or ‘CADE’) to Servicios Eléctricos del Gran Buenos Aires (Electricity Services of Greater Buenos Aires, or ‘SEGBA’) for the generation and distribution of electricity to parts of Buenos Aires. In 1967, the Argentine Government granted a concession to Hidroeléctrica Norpatagónica S.A. (‘Hidronor’) to build and operate a series of hydroelectric generation facilities. In 1978, CIADE transferred all of its assets to the Argentine Government, following which CIADE’s business became state owned and operated.

By 1990, virtually all of the electricity supply in Argentina was controlled by the public sector (97% of total generation). The Argentine Government had assumed responsibility for the regulation of the industry at the national level and controlled all of the national electricity companies, AyEE, SEGBA and Hidronor. The Argentine Government also represented Argentine interests in generation facilities developed or operated jointly with Uruguay, Paraguay and Brazil. In addition, several provinces operated their own electricity companies. Inefficient management and inadequate capital spending, which prevailed under national and provincial government control, were in large measure responsible for the deterioration of physical equipment, decline in quality of service and proliferation of financial losses that occurred during this period.

In 1991, as part of the economic plan adopted by then President Carlos Menem, the Argentine Government undertook an extensive privatization program of all major state owned industries, including within the electricity generation, transmission and distribution sectors. In 1992, the Argentine Congress adopted Law No. 24,065, the Electricity Regulation Framework (a supplement to Law No. 15,336, Federal Electricity Law, and its Administrative Order No. 1,398/92), which was the keystone for the reform and privatization of the sector. The goal of the law was to modernize the electricity sector by promoting efficiency, competition, improved service and private investment.
It restructured and reorganized the sector, and provided for the privatization of virtually all business activities that had been carried out by Argentine state-owned enterprises. The law established the basis for the ENRE (Ente Nacional Regulador de la Electricidad or the ‘National Electricity Regulatory Entity’) and other institutional authorities in the sector, the administration of the Wholesale Electricity Market(‘WEM’), pricing at the spot, tariff-setting in regulated areas and for evaluating assets to be privatized. This law also had a profound, albeit indirect, impact at the provincial level, as virtually all of the provinces followed the regulatory and institutional guidelines of this law. Finally, this law, which continues to provide the framework for regulation of the electricity sector since the privatization of this sector, divided generation, transmission and distribution of electricity into separate businesses, each subject to segment-specific regulation.

Under Law No. 24,065, distribution and transmission activities are considered public services and defined as natural monopolies. These activities are completely regulated by the Government and require a concession. Although the concessions granted to distributors do not impose specific investment parameters, distributors are obligated to connect new customers and meet any increased demand. The expansion of existing transmission facilities by the respective concessionaires is not restricted. In contrast, generation, although regulated by the Government, is not deemed a monopoly activity and is subject to free competition by new market entrants. Operation of hydroelectric power plants requires a concession from the Government. New generation projects do not require concessions but must be registered with the Former Secretariat of Energy (‘SE’).

Many of the provincial governments, following the privatization path in the sector, have established their own politically and financially independent regulatory bodies at the provincial level. Local distribution in the provinces (except the City of Buenos Aires and certain areas of the Province of Buenos Aires that were served by SEGBA and today are served by Edenor and Edesur) is regulated by each province. Previously, the utilities themselves had played a major role in making sector policies and setting tariffs for the provinces.

At the end of 2001 and beginning of 2002, Argentina experienced an unprecedented crisis that virtually paralyzed the country’s economy through most of 2002 and led to radical changes in Government policies. The crisis and the Government’s policies during this period severely affected the electricity sector. Pursuant to the Emergency Law, the Argentine Government, among other measures:

• Converted electricity prices and transmission and distribution tariffs from their original U.S. Dollar values to Pesos at a rate of Ps. 1.00 per US$1.00;
• Froze all regulated transmission and distribution tariffs, revoked all price adjustment provisions and inflation indexation mechanisms in public utility concessions (including electricity transmission and distribution concessions), and empowered the Executive Branch to conduct a renegotiation of these concessions, including the tariffs for electricity transmission and distribution services; and
• Required that spot prices on the WEM be calculated based on the price of natural gas (which is also regulated by the Argentine Government), regardless of the fuel actually used in generation activities, even if gas is unavailable.

These measures created a huge structural deficit in the operation of the WEM and, combined with the devaluation of the Peso and high rates of inflation, had a severe effect on the electricity sector in Argentina, as electricity companies experienced a decline in revenues in real terms and a deterioration of their operating performance. Most electricity companies had also incurred large amounts of foreign currency indebtedness under the Convertibility regime. Following the elimination of the Convertibility regime and the resulting devaluation of the Peso, the debt service burden of these companies increased sharply, leading many of these companies to suspend payments on their foreign currency debt in 2002. This situation caused many Argentine electricity generators, transmission companies and distributors to defer further investments in their networks. As a result, Argentine electricity market participants, particularly generators, are currently operating at near full capacity, which could lead to insufficient supply to meet a growing national energy demand. In addition, the economic crisis and the resulting emergency measures had a material adverse effect on other energy sectors, including oil and gas companies, which has led to a significant reduction in natural gas supplies to generation companies that use this commodity in their generation activities.

In December 2004 the Argentine Government adopted new rules to meet demand growth, including the construction by the Argentine Government of two new 800 MW combined cycle generators. These generators commenced operations at full capacity in the first half of 2010. The costs of construction were primarily financed with net revenues of generators derived from energy sales in the spot market, deposited into a fund called the Fondo de Inversiones Necesarias que Permitan Incrementar la Oferta de Energía Eléctrica en el Mercado Eléctrico Mayorista (’FONINVEMEM’).

The construction of these new generators reflects a recent trend by the Argentine Government to take a more active role in promoting energy investments in Argentina. An example of this is the creation of Energía Argentina S.A. (‘ENARSA’) (Law No. 25,943), currently Integración Energética Argentina S.A. (‘IEASA’) with the purpose of developing almost every activity in the energy sector, from the exploration and exploitation of hydrocarbons, the transport and distribution of natural gas, to the generation, transmission and distribution of energy. In addition to these projects, in April 2006 the Argentine Congress enacted a law that authorized the Executive Branch to create a special fund to finance infrastructure improvements in the Argentine energy sector through the expansion of generation, distribution and transmission infrastructure relating to natural gas, propane and electricity. The special fund would obtain funds through cargos específicos (specific charges) passed on to customers as an itemization on their energy bills.

Finally, in September 2006 the Argentine Government, in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis, adopted new measures that seek to ensure that energy available in the market is used primarily to service residential users and industrial and commercial users whose energy demand is at or below 300 kW and who do not have access to other viable energy alternatives. In addition, these measures seek to create incentives for generation plants to meet increasing energy needs by allowing them to sell new energy generation into the Energía Plus (Energy Plus) system at unregulated market prices.

Continuing with the trend to encourage the installation of new generation, the SE by means of its Resolution No. 220/2007 and modifications thereto, allowed CAMMESA to execute WEM Supply Agreements with a generator agent of the WEM. The values to be paid by CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or the ‘Argentine Wholesale Electricity Market Clearing Company’) in consideration for the capacity and the energy supplied by the generator must be approved by the SE. The generator shall guarantee certain availability of the generation units (established as a percentage), and if it fails to do so, penalties apply.

In 2008, the SE allowed CAMMESA to execute WEM Supply Agreements with generators the intention of which is to execute plans to repair and/or repower their generating equipment, and for the cost which would exceed 50% of the revenues that they expect to receive on the sales to the spot market.

Since 2013, the SE introduced material changes to the structure and operation of the WEM through Resolution No. 95/2013, as amended, establishing a different remuneration scheme in Pesos (payable in cash and receivables) for the whole generation sector, except certain power plants and electricity sold under contracts with differential remuneration, regulated by SE.

In January 2017 the SEE (‘Secretariat of Electric Energy’) published Resolution No. 19E/2017, establishing a new legacy energy remuneration system US$-denominated for power capacity and non-fuel energy applicable as from February 1, 2017, with gradual increases until November 1, 2017, as well as the elimination of remunerations in the form of receivables. It is worth mentioning that the purchase and dispatch of fuels remains centralized in CAMMESA.

On the other hand, as a result of the state of emergency in the national electricity sector, on March 22, 2016 the SEE issued Resolution No. 21/16 launching a call for tenders for new thermal power generation capacity with the commitment to making it available through the WEM for the 2016/2017 summer, 2017 winter, and 2017/2018 summer periods. Moreover, in line with the measures seeking to increase the electric power generation offer, on May 10, 2017 the SEE issued Resolution No. 287/17 launching a call for tenders for co-generation projects and the closing to combined cycles over existing equipment.

Regarding renewable energies, in October 2015, Law No. 27,191 (regulated by Executive Order No. 531/16) was passed, which amends Law No. 26,190 on the promotion of renewable sources of energy. Among other measures, it provided that by December 31, 2025, 20% of the total demand for energy in Argentina should be covered with renewable sources of energy.

• MEyM (‘Ministry of Energy and Mining’) Resolution No. 71/16, issued on May 17, 2016, launched the ‘RenovAr 1’ open call for tenders, continuing with ‘RenovAr 1.5’ (MEyM Resolution No. 252-E/16) and ‘RenovAr 2.0’ (MEyM Resolution No. 275-E17)
• MEyM Resolution No. 281-E/2017 issued on August 18, 2017 regulated the MAT ER (‘Term Market from Renewable Energy Sources’) regime, which aims to set the conditions for large users within the WEM and WEM GUDI (‘Large Distribution Company Users’) to meet their demand supply obligation from renewable sources through the individual purchase within the MAT ER or through self-generation from renewable sources
• Finally, on December 27, 2017, Law No. 27,424 was published, which declares it of national interest the distributed generation of electric power from renewable sources destined to self-consumption and the possible injection of surpluses into the distribution network

Transactions among different participants in the electricity industry take place through the Wholesale Electricity Market, or WEM, which was organized concurrently with the privatization process as a competitive market in which generators, distributors and certain large users of electricity could buy and sell electricity at prices determined by supply and demand, and were allowed to enter into long-term electricity supply contracts. The WEM consists of:

• a term market where quantities, prices and contractual conditions are agreed upon directly between sellers and buyers (after the enactment of Former Secretariat of Energy (‘SE’) Resolution No. 95/2013, this was limited to the Energy Plus market);
• a spot market where prices are established on an hourly basis as a function of economic production cost; and
• a stabilized pricing system of spot prices, which we refer to as the seasonal price, set on a semi-annual basis and designed to mitigate the volatility of spot prices for purchases of electricity by distributors.

The following chart shows the relationships among the various actors in the WEM:

CAMMESA

The creation of the WEM (‘Wholesale Electricity Market’) made it necessary to create an entity in charge of the management of the WEM and the dispatch of electricity into the SADI (Sistema Argentino de Interconexión or ‘Argentine Electricity Grid’). The duties were entrusted to CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or ‘Argentine Wholesale Electricity Market Clearing Company’), a private company created for this purpose.

CAMMESA is in charge of:

• the dispatch of electricity into the SADI, maximizing the SADI’s safety and the quality of electricity supplied and minimizing wholesale prices in the spot market;
• planning energy capacity needs and optimizing energy use in accordance with the rules set forth from time to time by the Former Secretariat of Energy (‘SE’);
• monitoring the operation of the term market and administering the technical dispatch of electricity under agreements entered into in that market;
• acting as agent of the various WEM agents and carrying out the duties entrusted to it in connection with the electricity industry, including billing and collecting payments for transactions between WEM agents (upon enactment of SE Resolution No. 95/2013, this was limited to the contracts then in force and, thereafter, to those contracts executed under Energy Plus Program);
• purchasing and/or selling electric power from abroad or to other countries by performing the relevant import/export transactions;
• purchasing and administrating of fuels for the WEM generators (according to section 8 of SE Resolution No. 95/2013 and section 4 of SE Resolution No. 529/2014); and
• providing consulting and other related services.

Five groups of entities each hold 20% of the capital stock of CAMMESA. The five groups are the Argentine Government, the associations that represent the generation companies, transmission companies, distribution companies and large users.

CAMMESA is managed by a board formed by representatives of its shareholders. The board of CAMMESA is composed of ten regular and ten alternate directors. Each of the associations that represent generation companies, transmission companies, distribution companies and large users are entitled to appoint two regular and two alternate directors of CAMMESA. The other directors of CAMMESA are the Under Secretariat of Electric Energy, who is the board chairman in virtue of the delegation of the Minister of Federal Planning, Public Investment and Services, and an independent member, who acts as vice chairman. The decisions adopted by the board of directors require the affirmative vote of the board chairman. CAMMESA’s operating costs are financed through mandatory contributions by the WEM agents.

Generators

Generators are companies with electricity generating plants that sell output either partially or wholly through the SADI. Generators are subjected to the scheduling and dispatch rules set out in the regulations and managed by CAMMESA. Privately owned generators may also enter into direct contracts with distributors or large users. However this possibility was suspended by SE Resolution No. 95/2013.

As of December 31, 2017, Argentina had a nominal installed capacity as reported by CAMMESA of approximately 36,505 MW (+2,604 MW compared to 2016), composed by 62.7% of thermal, 30,4% of hydroelectric, 4.8% of nuclear and 2.1% of renewable. The main commercial commissioning were for units under SEE (‘Secretariat of Electric Energy’) Res. No. 21/16.

Moreover, during 2017 there was a 0.1% decrease in power generation, with very similar volumes, 136,035 GWh and 136,135 GWh, for the years 2017 and 2016, respectively.

• Thermal power generation remained as the main resource to meet the electricity demand, supplying an electricity volume of 88,462 GWh (65%), followed by hydroelectric power generation, which contributed 39,183 GWh net of pumping (29%), nuclear power generation, with 5,716 GWh (4%), and renewable power generation, with 2,674 GWh (2%). Additionally, there were imports for 734 GWh (50% lower than in 2016), exports for 69 GWh (lower than the 327 GWh recorded in 2016), and losses for 4,274 GWh (2.6% higher than in 2016).
• Hydroelectric power generation was 10% higher than that recorded in 2016. Thermal power generation remained as the main source for electricity supply, both with natural gas and liquid fuels (gas oil and fuel oil) and mineral coal. Nuclear generation recorded a 26% year-on-year decrease.

The following chart shows the evolution of power generation by source (thermal, hydroelectric, nuclear, and renewable) in GWh:

Transmission Companies

Transmission companies hold a concession to transmit electric energy from the bulk supply point to electricity distributors. The transmission activity in Argentina is subdivided into two systems: the High Voltage Transmission System (‘STEEAT’), which operates at 500 kV and transports electricity between regions, and the regional distribution system (‘STEEDT’) which operates at 132/220 kV and connects generators, distributors and large users within the same region. Transener is the only company in charge of the STEEAT, and six regional companies are located within the STEEDT (Litsa, Transnoa, Transnea, Transpa, Transba and Distrocuyo). In addition to these companies, there are also independent transmission companies that operate under a technical license provided by the STEEAT or STEEDT companies.

Transmission and distribution services are carried out through concessions. These concessions are re-distributed periodically based on a re-bidding process. Transmission companies are responsible for the operation and maintenance of their networks, but not for the expansion of the system. The transmission concessions operate under the technical, safety and reliability standards established by the ENRE (Ente Nacional Regulador de la Electricidad or ‘National Electricity Regulatory Entity’). Penalties are applied whenever a transmission concessionaire fails to meet these criteria, particularly those regarding outages and grid downtime. Generators can only build lines to connect to the grid, or directly to customers. Users pay for new transmission capacity undertaken by them or on their behalf. A public hearing process for these projects is conducted by the ENRE, which issues a ‘Certificate of Public Convenience and Necessity’. Transmission or distribution networks connected to an integrated system must provide open access to third parties under a regulated toll system unless there is a capacity constraint.

Distribution Companies

Distributors are companies holding a concession to distribute electricity to consumers. Distributors are required to supply any and all demand of electricity in their exclusive areas of concession, at prices (tariffs) and conditions set in regulation. Penalties for non-supply are included in the concessions agreements. The three distribution companies divested from SEGBA (Edenor, Edesur and Edelap) represent more than 40% of the electricity market in Argentina. Only a few distribution companies (i.e., Empresa Provincial de Energía de Córdoba, Empresa de Energía de Santa Fé, and Energía de Misiones) remain in the hands of the provincial governments and cooperatives. Edelap has been transferred to the jurisdiction of the Province of Buenos Aires.

Each distributor supplies electricity and operates the electricity distribution network in a specific geographical area under a concession. Each concession determines, among others, the concession area, the quality of service required, the tariffs to be paid by consumers, and the extent of the obligation to meet the demand.

The ENRE monitors the compliance of the distributors at the federal level, and provides a mechanism for public hearings in which complaints against distributors can be heard and resolved. In addition, the provincial regulatory bodies control the compliance of the local distributors with their respective concessions and local regulatory frameworks.

The provincial authorities and the ENRE control the fulfillment of the concession agreements of these public services in the provinces. Many provincial governments that have launched reforms in the electricity sector have followed the terms and conditions of the concessions used for the distribution of public services at the national level.

Large users

The wholesale electricity market classifies large users of energy into three categories: (1) Grandes Usuarios Mayores (Major Large Users or ‘GUMAs’), (2) Grandes Usuarios Menores (Minor Large Users or ‘GUMEs’) and (3) Grandes Usuarios Particulares (Particular Large Users or ‘GUPAs’).

Each of these categories of users has different requirements with respect to purchases of their energy demand. For example, GUMAs are required to purchase 50% of their demand through supply contracts and the remainder in the spot market, while GUMEs and GUPAs are required to purchase all of their demand through supply contracts.

Large users participate in CAMMESA by appointing two acting and two alternate directors through the Asociación de Grandes Usuarios de Energía Eléctrica de la República Argentina (‘Argentine Association of Electric Power Large Users’ or AGUEERA).

Under SE Note No. 5,129/13, CAMMESA was instructed to optimize generation dispatch and fuels considering the value of representative real purchase costs consistently with the conditions described by CAMMESA in the analysis previously sent to the Secretariat of Energy. This modification will result in a change in the current dispatch conditions and the fuel mix used for power generation.

The energy authority has continued with the policy started in the year 2003, whereby the spot price of the Wholesale Electricity Market (‘WEM’) is determined according to the variable cost of production with natural gas from available power generating units, even if said units are not generating electricity with such fuel (Former Secretariat of Energy (‘SE’) Resolution No. 240/03). The additional cost for consumption of liquid fuels is recognized outside the specified market price as a temporary dispatch surcharge.

As regards the generation capacity remuneration, the remuneration scheme approved by SE Resolution No. 19/17 in February 2017 —which abrogated the remuneration scheme established by SE Resolution No. 95/13, as amended by SE Resolution No. 22/16, as from the economic transactions for the month of February 2017— remains unchanged.

During 2017, the approved average monthly spot price for energy was AR$240/MWh, which is the maximum stipulated price pursuant to Secretariat of Electric Energy (‘SEE’) Resolution No. 20/17.

On the other hand, the following chart shows the average monthly price that all electricity system users should pay so that the power grid would not run into a deficit. Such cost includes not only the energy price, but also the power capacity fee, the cost of generation with liquid fuels, such as fuel oil or gas oil, and other minor items.

On February 2, 2017, the Secretariat of Electric Energy (‘SEE’) issued Resolution No. 19/17, which supersedes the remuneration scheme set forth by Secretariat of Energy (‘SE’) Resolution No. 22/16 and establishes guidelines for the remuneration to power generation plants as from February 1, 2017.

Resolution No. 19/17 provides for remunerative items based on technology and scale, establishing U.S. Dollar-denominated prices payable in Argentine Pesos by applying BCRA (Banco Central de la República Argentina or the ‘Central Bank of the Republic of Argentina’)’s exchange rate effective on the last business day of the month of the applicable economic transaction; furthermore, the transaction’s maturity will be that provided for in CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or the ‘Argentine Wholesale Electricity Market Clearing Company’)’s Procedures.

Remuneration for Available Power Capacity

Thermal Power Generators

Resolution No. 19/17 defines a minimum remuneration for power capacity based on technology and scale, and allows generating, co-generating and self-generating agents owning conventional Thermal Power Plants (‘CT’) to offer Guaranteed Availability Commitments for the energy and power capacity generated by their units and not committed under Energía Plus or under the Wholesale Electricity Market (‘WEM’) Supply Agreement pursuant to SE Resolution No. 220/07.

Availability Commitments for each unit should be declared for a term of three years, together with information for the Summer Seasonal Programming (except for 2017, when it was submitted for the winter seasonal period), with the possibility to offer different availability values for the summer and winter six-month periods.

Finally, generators will enter into a Guaranteed Availability Commitment Agreement with CAMMESA, which may assign it to the demand as defined by the SE. The thermal generators’ remuneration for committed power capacity will be proportional to their compliance.

Minimum Remuneration

It applies to generators with no Availability Commitments:

Base Remuneration

It applies to generators with Availability Commitments:

Additional Remuneration

This remuneration for the additional available power capacity aims to encourage Availability Commitments for the periods with a higher demand of the system. Bimonthly, CAMMESA will define a Monthly Thermal Generation Goal for the set of qualified generators, and will call for additional power capacity availability offers with prices not exceeding the additional price.

Hydroelectric Generators

In the case of Hydroelectric Power Plants (‘CH’), a base remuneration and an additional remuneration for power capacity were established. Power capacity availability is determined independently of the reservoir level, the contributions made, or the expenses incurred. Furthermore, in the case of pumping hydroelectric power plants, the following is considered to calculate availability: i) the operation as turbine at all hours within the period, and ii) the availability as pump at off-peak hours every day and on non-business days.

Base Remuneration

It is determined by the actual power capacity plus that under programmed and/or agreed maintenance:

As provided by SE Resolution No. 22/16, in the case of hydroelectric power plants maintaining control structures on river courses and not having an associated power plant, a 1.20 factor will be applied to the plant at the headwaters.

Additional Remuneration

It applies to power plants of any scale for their actual availability and based on the applicable period:

As from November 2017, the allocation and collection of 50% of the additional remuneration will be conditional upon the generator taking out insurance, to CAMMESA’s satisfaction, to cover for major incidents on critical equipment, and the progressive updating of the plant’s control systems pursuant to an investment plan to be submitted based on criteria to be defined by the SE.

Other Technologies: Wind Power

The remuneration is made up of a base price of US$7.5/MWh and an additional price of US$17.5/MWh, which are associated with the availability of the installed equipment with an operating permanence longer than 12 months as from the beginning of the Summer Seasonal Programming.

Remuneration for Generated and Operated Energy

The remuneration for Generated Energy is valued at variable prices according to the type of fuel:

The remuneration for Operated Energy applies to the integration of hourly power capacities for the period (over rotating units), and is valued at US$2.0/MWh for any type of fuel. In the case of CH, prices for Generated and Operated Energy are as follows:

Additional Remuneration for Low-Use Thermal Generators

Resolution No. 19/17 provides for an additional remuneration for low-use thermal generators having frequent startups based on the monthly generated energy for a price of US$2.6/MWh multiplied by the usage/startup factor.

The usage factor is based on the Rated Power Usage Factor recorded during the last rolling year, which will have a 0.5 value for thermal units with a usage factor lower than 30% and a 1.0 value for units with a usage factor lower than 15%. In all other cases, the factor will equal 0.0.

Additional Remuneration for Thermal Generators having Frequent Startups

The startup factor is established based on startups recorded during the last rolling year for issues associated with the economic dispatch made by CAMMESA. It will have a 0.0 value for units with up to 74 startups, a 0.1 value for units recording between 75 and 149 startups, and a 0.2 value for units recording more than 150 startups. In all other cases, the factor will equal 0.

Repayment of Overhauls Financing

Resolution No. 19/17 abrogates the Maintenance Remuneration and provides that, as regards the repayment of outstanding loans applicable to CTs and CHs, credits already accrued and/or committed to the cancellation of such maintenance works will be applied first. The balance will be repaid by discounting US$1/MWh for the energy generated until the total cancellation of the financing.

Recategorization of HINISA (‘Hydro Power Plant Los Nihuiles’)’s CHs

For the purposes of applying the effective remuneration scheme, on April 10, 2017, the SEE provided for the recategorization of the Nihuil I, Nihuil II and Nihuil III plants as small-scale plants, thus sustaining the claims repeatedly lodged by the Company since 2013.

Pursuant to the terms of SEE’s instruction to CAMMESA, the recategorization is effective as from April 2017. The impact of this recategorization represented, among others, a 50% increase in the base remuneration for power capacity, which thus rose from US$3,000 MW/month to US$4,500 MW/month.

Implementation Criteria for SEE Resolution No. 19/17

CAMMESA classifications for our legacy units are detailed below:

Notes:
* Only 26 MW of the unit under this resolution
** 1.20 factor applies to its remuneration
GT = gas turbine
ST = steam turbine
CC = combined cycle
HI = hidroelectric

The Former Secretariat of Energy (‘SE’) approved Resolution No. 1281/06, which establishes certain restrictions on the sale of electricity and implements the Energía Plus service, which consists of the offering of additional generation availability by generating agents. These measures imply that:

• Thermal and hydroelectric power plants without fuel contracts in place are not allowed to execute any new contract;
• LU300 (Large users with demands in excess of 300 kW) will only be allowed to contract their energy demand within the Term Market for the electrical consumption corresponding to 2005 (‘Base Demand’) with the thermoelectric plants existing in the Wholesale Electricity Market (‘WEM’);
• The new energy used by LU300 in excess of the Base Demand should be purchased with Energía Plus generation at a price to be freely negotiated between the parties;
• New agents joining the system should purchase their whole demand under the Energía Plus service; and
• New generation plants to be included in the Energía Plus service should have fuel supply and transportation contracts in place.

Within this framework, CTG (‘Güemes Thermal Power Plant’), EcoEnergía Co-Generation Power Plant and CTGEBA (‘Genelba Thermal Power Plant’) provide the Energía Plus service to different WEM clients, which represents a 283 MW power capacity.

If a generator cannot meet the power demand by an Energía Plus client, it should purchase that power in the market at the operated marginal cost. Furthermore, pursuant to Note No. 567/07, as amended, the SE has implemented the Surplus Demand Incremental Average Charge as the maximum price payable by LU300 for their Surplus Demand in case they do not have an effective Energía Plus service agreement. Currently these values amount to AR$650/MWh for Major Large Users and Minor Large Users and AR$0/MWh for Large Distribution Company Users.

Energía Plus contract values are denominated in U.S. Dollars; therefore, they are exposed to the nominal exchange rate and are based on the behavior of other WEM costs (mainly the WEM Agreements’ Surcharges), which represent the opportunity cost of the purchase of energy by Large Users. Since the addition of all these prices amounts to values equivalent to the generation cost, a number of customers choose not to enter into Energía Plus contracts. Consequently, generators have to sell their energy at the spot market, thus reducing their profitability margins.

In 2014, the National Government submitted a proposal to generators for the execution of a new thermal generation availability increase agreement through the application of LVFVDs (Liquidaciones de Ventas sin Fecha de Vencimiento a Definir or ‘Sales Settlements with Maturity Date to be Defined’) and the generators’ own resources. CTLL, CTG, CPB, HINISA and HIDISA entered into this agreement, which sets out the conditions for the incorporation of new generation capacity in CTLL through the installation of a high-efficiency gas turbine (105 MW), which was commissioned for service in July 2016, and two engines (15 MW), which are scheduled for commissioning during the third quarter of 2018.

In 2015, the National Government submitted a proposal to generators for the execution of a new agreement. CTLL, CTG, CPB, HINISA and HIDISA entered into this agreement, whereby CTLL would incorporate a new high-efficiency gas turbine (105 MW), as well as investments in renewable energies. However, this Agreement was canceled with the implementation of SEE (‘Secretariat of Electric Energy’) Resolution No. 19/17.

Notes: CTLL (‘Loma de la Lata Thermal Power Plant’), CTG (‘Güemes Thermal Power Plant’), CPB (‘Piedra Buena Thermal Power Plant’), HINISA (‘Hydro Power Plant Los Nihuiles’) and HIDISA (‘Hydro Power Plant Diamante’).

As a result of the state of emergency in the national electricity sector, on March 22, 2016 the SEE (‘Secretariat of Electric Energy’) issued Resolution No. 21/16 launching a call for tenders for new thermal power generation capacity with the commitment to making it available through the WEM (‘Wholesale Electricity Market’) for the 2016/2017 summer, 2017 winter, and 2017/2018 summer periods. Successful bidders entered into a PPA (‘Power Purchase Agreement’) for a Fixed Price (US$/MW-month) and a Variable Price (US$/MWh, excluding fuels) with CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or ‘Argentine Wholesale Electricity Market Clearing Company’), which acted on behalf of WEM’s GU and distribution companies.

Pampa’s generation subsidiaries submitted four offers, and the following ones were awarded: CTLL (Loma de la Lata Thermal Power Plant’)’s 105 MW expansion, and the construction of CTIW (‘Ingeniero White Thermal Power Plant’) for a 100 MW capacity, which were commissioned for service in August and December 2017, respectively. Furthermore, Pampa acquired and developed the CTPP (‘Parque Pilar Thermal Power Plant’) project for a 100 MW capacity, which was commissioned for service in August 2017.

In line with the measures seeking to increase the electric power generation offer, on May 10, 2017 the SEE (‘Secretariat of Electric Energy’) issued Resolution No. 287/17 launching a call for tenders for co-generation projects and the closing to combined cycle over existing equipment. The projects should have low specific consumption (lower than 1,680 kcal/kWh with natural gas and 1,820 kcal/kWh with alternative liquid fuels), and the new capacity should not exceed the existing electric power transmission capacity; otherwise, the cost of the necessary extensions will be borne by the bidder.

Awarded projects will be remunerated under a PPA (‘Power Purchase Agreement’) which will be effective for a term of 15 years. The remuneration would be made up of the available power capacity price plus the variable non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power capacity surpluses would be remunerated pursuant to SEE Resolution No. 19/17.

Within this framework, 19 projects for the closing to combined cycle for a total capacity of 1,884 MW, and 21 co-generation projects for a total capacity of 2,713 MW were filed. Furthermore, Pampa submitted offers for the execution of three projects: i) a co-generation project at its Puerto General San Martín port petrochemical plant; ii) CTLL(‘Loma de la Lata Thermal Power Plant’)’s closing to combined cycle; and iii) Genelba Plus’ closing to combined cycle.

Pursuant to Resolution No. 820-E/17 issued on September 25, 2017, the SEE awarded only three co-generation projects (not including the one filed by the Company) for a power capacity of 506 MW, and called the remaining qualified bidder to improve their offers.

On October 18, 2017, SEE Resolution No. 926-E/17 awarded projects for a total power capacity of 1,304 MW.

Genelba Plus’ closing to combined cycle, which will add an incremental capacity of 383 MW to CTGEBA (‘Genelba Thermal Power Plant’)’s current facilities , which commissioning at open cycle is expected for the second quarter of 2019 and at closed cycle for the second quarter of 2020, is among the nine selected projects.

In October 2015, Law No. 27,191 (regulated by Executive Order No. 531/16) was passed, which amends Law No. 26,190 on the promotion of renewable sources of energy. Among other measures, it provided that by December 31, 2025, 20% of the total demand for energy in Argentina should be covered with renewable sources of energy. To meet such objective, WEM (‘Wholesale Electricity Market’)’s GU (Grandes Usuarios or ‘Large users’) and CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or ‘Argentine Wholesale Electricity Market Clearing Company’) should cover 8% of their demand with such sources by December 31, 2017, the percentage rising every two years until the objective is met. The agreements entered into with GU and GUDI (‘Large Distribution Company Users’) may not have an average price exceeding US$113/MWh.

Additionally, the law provides for several incentives to encourage the construction of renewable energy projects, including tax benefits (advance VAT return, accelerated depreciation on the income tax return, import duty exemptions, etc.) and the creation of the FODER (Fondo para el Desarrollo de Energía Renovables or ‘Fund for the Development of Renewable Energies’), which is destined, among other objectives, to the granting of loans, capital contributions, etc. for the financing of these projects.

RenovAr Program

MEyM (‘Ministry of Energy and Mining’) Resolution No. 71/16, issued on May 17, 2016, launched the ‘RenovAr 1’ open call for tenders. Pampa submitted four projects, three of which were wind farms in the Province of Buenos Aires for a total capacity of 200 MW, whereas the fourth project was a photovoltaic solar farm with a 100 MW power capacity to be installed in the Province of Catamarca. On October 7, MEyM Resolution No. 213/16 announced the successful bidders. The proposal for the 100 MW capacity Corti WFP (‘Wind Farm Project’), the current Wind Farm Engineer Mario Cebreiro (‘PEMC’), in the Province of Buenos Aires was one of the awarded projects, the commercial commissioning of which took place on June 8, 2018.

On August 17, 2017, the MEyM issued Resolution No. 275-E/17 launching the RenovAr Program – Round 2 National and International Open Call for Tenders. The call’s purpose was to install up to 1.2 GW power capacity, taking into consideration the source of energy, power capacity, technology and region, with a maximum price for each specific technology. On October 19, 2017, technical proposals were opened, with 228 projects submitted for a total offered power of 9.4 GW, including, among other technologies, 58 wind farm projects for a total capacity of 3.8 GW and 99 solar farm projects for a total capacity of 5.3 GW. Furthermore, MEyM Resolution No. 473-E/17 and 488-E/17 awarded a total 2 GW capacity including, among other technologies, 12 wind farm projects for a 1 GW capacity and 17 solar farm projects for a total 0.8 GW capacity.

Under such call, Pampa submitted the De la Bahía WFP for a total offered capacity of 49 MW, and the Las Armas WFP for a total offered capacity of 32 MW. Neither of the submitted projects was awarded.

MAT ER

MEyM Resolution No. 281-E/2017 issued on August 18, 2017 regulated the MAT ER (‘Term Market from Renewable Energy Sources’) regime, which aims to set the conditions for GU within the WEM and WEM GUDI to meet their demand supply obligation from renewable sources through the individual purchase within the MAT ER or through self-generation from renewable sources. Furthermore, it regulates the conditions applicable to renewable power generation projects. Specifically, it created the RENPER (‘Registry of Renewable Electric Power Generation Projects’) , where such projects will be registered.

Projects destined to supply the MAT ER may not be committed under other remuneration mechanisms (e.g., the Renovar program). However, projects covered under the Renovar Program may sell to CAMMESA up to 10% of the surplus energy exceeding commitments with CAMMESA under PPAs (‘Power Purchase Agreement’). Surplus energy exceeding that sold under the MAT ER and PPAs executed with CAMMESA will be sold in the Spot Market and remunerated pursuant to SEE Resolution No. 19/17.

Furthermore, agreements executed under the MAT ER regime will be administered and managed in accordance with the WEM Procedures. The contractual terms, life, allocation priorities, prices and other conditions, notwithstanding the maximum price set forth in Section 9 of Law No. 27,191, may be freely agreed between the parties, although the committed electricity volumes will be limited by the electric power from renewable sources produced by the generator or supplied by other generators or suppliers with which it has purchase agreements in place.

Pampa registered the Las Armas WFP, De La Bahía WFP, and an extension of the Corti WFP (Pampa Energía WFP), the current Wind Farm Engineer Mario Cebreiro (‘PEMC’), with the RENPER. It also requested the corresponding dispatch priority under MEyM Resolution No. 281/17, which was granted for the De La Bahía WFP and the Pampa Energía WFP.

Renewable Energy Distributed Generation

On December 27, 2017, Law No. 27,424 was published, which declares it of national interest the distributed generation of electric power from renewable sources destined to self-consumption and the possible injection of surpluses into the distribution network. The Law also establishes the distribution public utility providers’ obligation to facilitate such injection, thus guaranteeing free access to the distribution network, notwithstanding the provinces’ own powers.

Furthermore, all national public building projects should contemplate the use of a distributed generation system from renewable sources based on their leveraged use, and after the conduction of an environmental impact study, if applicable. Besides, the enforcement authority will carry out a study of existing national public buildings and will suggest incorporating power efficiency systems, including renewable distributed generation capacity.

Executive Order No. 854/17, issued on October 25, 2017, created the CFE under the Federal Energy Agreement entered into by the National Government, CABA (‘Autonomous City of Buenos Aires’) and all the provinces of the country with the exception of San Luis, La Pampa, Río Negro, Misiones and Santiago del Estero. In general terms, the Agreement provides for the coordination of jurisdictions among the National Government, the provinces and CABA; the National Executive Branch will be responsible for designing long-term energy policies, which will be articulated, among others, by the CFE. The CFE’s purpose will be to provide for the sector’s middle and long-term planning and development, to recommend modifications to the legislation applicable to the sector, and to act as advisor.

The agreed items include, among others, the commitment to formalize the regulatory entities’ fields of action, including the normalization of regulatory agencies under intervention or having transitional authorities, and to adjust the role of public utility companies to avoid the overlapping of duties with those vested in the authorities. As regards tariffs, the harmonization of policies among the different jurisdictions and the establishment of a simple tariff system, with tariffs and prices compensating economic costs, were agreed. Furthermore, it was agreed that provisions and programs to be passed by the authorities should not create distortions in the application of royalties or other provincial revenues.

Finally, as regards taxation, the parties undertook to define the criteria for the setting of taxes on the sector to foster investments and reach an income share balance among the different jurisdictions.

The Public Emergency and Exchange Rate Regime Reform Law (Law No. 25,561) imposed the obligation on public utilities, such as Transener and its subsidiary Transba, to renegotiate their agreements in force with the Government while continuing supplying electricity services. This situation has significantly affected Transener and Transba’s economic and financial situation.

In May 2005, Transener and Transba signed with the UNIREN (‘Public Utility Contract Renegotiation and Analysis Unit’) the Memorandums of Understanding stipulating the terms and conditions for updating the Concession Agreements. The Memorandums of Understanding provided for the performance of an RTI (‘Integral Tariff Review’) before the ENRE (Ente Nacional Regulador de la Electricidad or ‘National Electricity Regulatory Entity’) and for the determination of a new tariff regime for Transener and Transba, which should have come into force in the months of February 2006 and May 2006, as well as for the recognition of increased operating costs incurred until the RTI-based new tariff regime comes into force.

Since 2006, Transener and Transba have requested the ENRE to comply with the provisions set forth in the Memorandum of Understanding, pointing out ENRE’s failure to fulfill its commitments thereunder and its consequences, as well as their availability to continue with the RTI process inasmuch as the other commitments undertaken by the parties remain in force and until a new RTI-based new tariff regime is decided upon. Furthermore, Transener and Transba filed their respective tariff claims for their consideration, the holding of a public hearing and the definition of the new tariff scheme.

In order to begin rectifying the tariff scenario, in December 2010 Transener and Transba entered into an Instrumental Agreement to the UNIREN’s Memorandum of Understanding with the SE (‘Former Secretariat of Energy’) and the ENRE, which mainly provided for the acknowledgment of a credit claim in favor of Transener and Transba for cost fluctuations recorded during the June 2005 – November 2010 period calculated as per the IVC (Índice de Variación de Costos or ‘Cost Variation Index’) established in the Memorandum of Understanding. These credits were assigned in consideration of disbursements by CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or ‘Argentine Wholesale Electricity Market Clearing Company’), which were executed through loan agreements.

Having collected these credits and still without the RTI, in May 2013 Transener and Transba, respectively, executed with the SE and the ENRE a Renewal Agreement, effective until December 31, 2015, which, among other provisions, acknowledged a credit claim for cost variations recorded during the December 2010 – December 2012 period. In view of the repeated delays in the implementation of the RTI provided for in the Memorandum of Understanding, the SE and the ENRE successively extended the recognition of higher costs up to and including November 2015. In May 2016, upon the expiration of the Renewal Agreement and without any pending recognized credit claims, Transener and Transba continued collecting the loans granted by CAMMESA, which were disclosed as liabilities. Finally, on December 26, 2016, Transener executed the last agreement with the SE and the ENRE, which recognized credits for cost variations in favor of Transener and Transba for the December 2015 – January 2017 period.

On June 19, 2017, CAMMESA made the last disbursement, thus offsetting all credits for cost variations.

RTI

On September 28, 2016, pursuant to the instruction provided by MEyM (‘Ministry of Energy and Mining’) Resolution No. 196/16, the ENRE passed Resolution No. 524/16 approving the program applicable to the RTI for Electric Power Transmission. The public hearing for the defense of the proposal was conducted in December 2016.

On January 31, 2017, the ENRE issued Resolutions No. 66/17 and No. 73/17 establishing the tariffs applicable for the 2017/2021 five-year period, the recognized capital base being AR$8,343 million and AR$3,397 million, and the granted regulated revenues amounting to AR$3,274 million and AR$1,499 million for Transener and Transba, respectively. Furthermore, the ENRE established the mechanism for adjusting the remuneration, the service quality system and the applicable penalties, the reward system and the investment plan to be executed by both companies during such period.

Based on the discrepancy between Transener and Transba’s proposal and what was granted by the RTI, on April 7 and 21, 2017, Transener and Transba filed a Motion for Reconsideration against ENRE Resolutions No. 66/17, 84/17 and 139/17, and No. 73/17, 88/17 and 138/17, respectively. In consolidated terms, the Motion for Reconsideration mainly requested an additional 50% increase in the recognized capital base, and a 28% increase in regulatory income.

Consequently, on October 25, 2017, the ENRE issued Resolutions No. 516/17 and No. 517/17 partially upholding the motions filed by Transener and Transba. As a result of this proceeding, the ENRE established, retroactively as of February 2017, a AR$8,629 million and AR$3,575 million recognized capital base and AR$3,534 million and AR$1,604 million annual regulated income for Transener and Transba, respectively. Notwithstanding the foregoing, claims submitted by Transener and Transba regarding the capital base valuation, on which the profitability fixed by ENRE Resolution No. 553/2016 is applied, and other issues that have not been resolved favorably will continue being heard before the SEE (‘Secretariat of Electric Energy’) under the appeal brought subordinately to the motions for reconsideration.

Furthermore, during fiscal year 2017, Transener and Transba requested the recognition of damages for the May 2013 – January 2017 period on account of breaches by the National Government in the adjustment of the remuneration for the supply of the high-voltage electric power transmission and regional distribution service in the Province of Buenos Aires based on the actual cost variations under the Transition Tariff Regime and the failure to remunerate the capital base and the reasonable profitability resulting from the RTI.

Furthermore, the purpose of the six-monthly adjustment mechanism stipulated in the RTI is to keep real-term values of remunerations collectable by Transener and Transba during the five-year period of the RTI. This mechanism contemplates a trigger clause that weights the PPI (‘Wholesale Internal Price Index’) and the CPI (‘Consumer Price Index’) six-monthly variations published by the INDEC (Instituto Nacional de Estadística y Censos de Argentina or ‘National Institute of Statistics and Censuses’), with a variation equal to or higher than 5% (its maximum value) being assessed, which represents 30% of the inflation projected for 2017 in the National Budget.

For the December 2016 – June 2017 period, the trigger clause amounted to 9.02%, and the six-monthly adjustment for Transener and Transba remuneration was activated, taking into consideration the variations during such semester in the PPI, ‘Manufactured Products’ item, CPI and the Salary Index published by the INDEC, which weightings are defined based on the cost structure and average investments for the 2017-2021 period in the RTI. However, its application was deferred until December 15, 2017, when ENRE issued Resolutions No. 627/17 and No. 628/17 adjusting Transener and Transba remunerations by 11.35% and 10.96%, respectively, for the December 2016 – June 2017 period, retroactively to August 1, 2017.

Furthermore, on February 19, 2018, the ENRE issued Resolutions No. 37/18 and No. 38/18 adjusting Transener and Transba remunerations by 24.41% and 23.62%, respectively (both including a 0.2% X Factor – factor stimulating efficiency which transfers cost reductions to users adjustment), for the December 2016 – December 2017 period applicable on the remuneration scheme as of February 2017. Consequently, annual regulatory income in the amount of AR$4,395 million and AR$1,982 million were defined for Transener and Transba, respectively.

SEE Resolution No. 1085/17

SEE Res. No. 1085/17 issued on November 28, 2017 and effective as from December 1, 2017 established the methodology for the distribution of costs associated with the remuneration of transportation companies among the Transportation Systems’ users. These costs are distributed based on the demand and/or contribution of energy by each WEM (‘Wholesale Electricity Market’) agent (distribution companies, large users, self-generators and generators), directly and/or indirectly associated with the DisTro (‘High-Voltage Electric Energy Transmission System and/or Main Distribution Electric Energy Transmission System’), after discounting costs assigned to generating agents as operating and maintenance costs for connection and transformation equipment.

It is worth highlighting that prices payable by distribution companies in consideration of electric power transportation within the WEM are stabilized for their payment by distributors, and are calculated together with each Seasonal Programming or Quarterly Reprogramming. In the case of distributing agents whose demand is connected to different DisTros, the demand percentage to each DisTro will be ascertained, and the price will contemplate the demand and the price on a weighted basis.

Furthermore, prices applicable to large users within the WEM are calculated in the economic transaction on a monthly basis. In the case of WEM large users not directly associated with the high-voltage transportation and/or DisTro, the applicable monthly value will be that corresponding to the connecting agent.

Memorandum of Understanding between Edenor and the Argentine Government

On February 13, 2006, Edenor entered into a Contract Renegotiation Memorandum of Understanding with the UNIREN (‘Public Utility Contract Renegotiation and Analysis Unit’), which established, effective as from November 1, 2005, a 23% increase in the average distribution margin, which, however, may not result in an increase in the average utility tariff above 15%, as well as a 5% average additional VAD (‘Distribution Added Value’) increase to be allocated to certain specific investments in capital goods. Furthermore, it provided for the inclusion of a social tariff and established quality standards for the service to be rendered and a minimum investment plan in the electricity grid to be performed by Edenor, as well as the performance of an RTI (‘Integral Tariff Review’).

During the last few years following the execution of the Memorandum of Understanding and on account of the failure to perform the RTI, the SE (‘Former Secretariat of Energy’) and the ENRE (Ente Nacional Regulador de la Electricidad or ‘National Electricity Regulatory Entity’) passed several transitory measures seeking to reduce Edenor’s operating and asset deterioration resulting from the tariff freeze. The background and the current tariff situation are described below.

SE Resolution No. 32/15

As a result of the delay in the implementation of the Memorandum of Understanding and in order to fund expenses and investments associated with the ordinary operation of the public utility, on March 11, 2015 the SE passed Resolution No. 32/15 granting Edenor a transitory income increase as from February 1, 2015 to be charged against the RTI to be timely performed. This income results from the monthly difference between a theoretical tariff scheme embodied in an annex to said resolution and the schemes then effective for each tariff category. Additionally, pursuant to this provision, the amounts collected under the PUREE (‘Program for the Rational Use of Electric Power’) program are deemed part of Edenor’s income. It should be pointed out that this resolution did not generate any increases in the tariff scheme applicable to customers, but was borne directly by the National Government. This resolution was rendered ineffective on February 1, 2016 with the issuance of SE Resolutions No. 6/16 and 7/16.

ENRE Resolution No. 347/12

ENRE Resolution No. 347/12 applied a differential fixed amount to each of the different tariff categories, with the only exception of customers exempt from paying the tariff scheme provided for in ENRE Resolution No. 628/08. Such amounts —which continued to be deposited in a special account and were used exclusively for the execution of infrastructure and corrective maintenance works in Edenor’s facilities within the concession area— were managed by the FOCEDE (Fondo de Obras de Consolidación y Expansión de Distribución Eléctrica or ‘Fund for Electricity Distribution Expansion and Consolidation Works’).

Subsequently, on January 29, 2016, ENRE Resolution No. 2/16 was passed declaring the termination of the FOCEDE trust on January 31, 2016 and establishing a new system for the funds collected pursuant to ENRE Resolution No. 347/12, which ceased being deposited into such trust and started being managed by Edenor.

Finally, with the implementation of the RTI for Edenor in February 2017, these fixed amounts for works and maintenance stopped being charged as a special item on customer bills.

SE Resolution No. 250/13

Since May 2013, the SE has provided for the recognition of costs owed to Edenor resulting from the partial application of the MMC (‘Cost Monitoring Mechanism’), the result of which was lower than the actual increase stipulated in the 2007 Contractual Renegotiation Agreement, which was not duly transferred to tariffs. This measure was implemented with the passing of SE Resolution No. 250/13 and its subsequent extensions, which has allowed for the offsetting of this recognition with debts Edenor has generated under PUREE and with CAMMESA (Compañía Administradora del Mercado Eléctrico Mayorista or ‘Argentine Wholesale Electricity Market Clearing Company’) for energy purchases. This resolution was rendered ineffective on February 1, 2016 with the issuance of SE Resolutions No. 6/16 and 7/16.

Loan Agreements – Extraordinary Investments Plan

Due to the delay in obtaining the RTI, Edenor has secured the granting of loan agreements by the National Government to conduct the investments plan it may deem appropriate.

Pursuant to MEyM (‘Ministry of Energy and Mining’) Resolution No. 7/16, CAMMESA suspended, as from February 1, 2016 and until receiving further instructions, all effects from the executed loan agreements and the transfer of resources to distribution companies on behalf of the FOCEDE trust and, therefore, the new works plan will be financed exclusively with the tariff proceeds.

Furthermore, SEE (‘Secretariat of Electric Energy’) Resolution No. 840-E/2017, which was published in the Public Gazette (Boletín Oficial) on October 4, 2017, recognized in favor of Edenor the amount of AR$323 million in consideration of works performed before the termination of the FOCEDE Trust which had been timely implemented to administer the funds generated from the application of ENRE Resolution No. 347/12.

Tariff Transition Process

On January 27, 2016, MEyM Resolution No. 6/16 approved the quarterly summer reprogramming for the months of February through April 2016 within the WEM (‘Wholesale Electricity Market’) and fixed new energy reference prices applicable to users with supplies higher than 300 kW of power capacity at approximately AR$770/MWh, and at AR$320/MWh for other users; a discount scheme for residential users obtaining energy savings, and AR$30/MWh for residential users framed under the social tariff, whereby 150 kWh-month are subsidized at a price of AR$0/MWh. This resolution also instructed the ENRE to apply the social tariff to Edenor users meeting these criteria, and provided for the monthly payment of the utility bill.

On January 27, 2016, pursuant to Resolution No. 7/16, the MEyM instructed the ENRE to perform all necessary acts to fulfill Edenor’s RTI, annul the tariff schemes resulting from SE Resolution No. 32/15, and adjust the VAD to be charged against the RTI in Edenor’s tariff schemes, thus canceling the PUREE and suspending the loan agreements entered into with Edenor. Consequently, on January 29, 2016, the ENRE issued Resolutions No. 1/16 and 2/16 granting a new tariff scheme values for Edenor effective as from February 1, 2016.

Based on the MEyM’s instruction and pursuant to Resolution No. 7/16, the ENRE approved, through Resolution No. 55/16, the Program for the distribution RTI in 2016, establishing the criteria and methodology for the RTI process and its schedule, including the applicable public hearing.

It was pointed out that the presentation did not contemplate the value Edenor assigns to damages resulting from the failure to timely and properly implement the Memorandum of Understanding or the collection of income necessary to face the liabilities Edenor has incurred as a result of such breach. The public hearing was conducted on October 28, 2016.

RTI

On January 31, 2017, the ENRE issued Resolution No. 63/17, as amended by ENRE Resolutions No. 82 and 92/17, which established the final tariff schemes, the review of costs, quality levels required and other Edenor’s rights and obligations for the five-year period beginning February 1, 2017.

These resolutions provide that the ENRE, as instructed by the MEyM, should limit the VAD increase as a result of the RTI process applicable as from February 1, 2017 to a maximum 42% of the VAD, and that the application of the new VAD’s balance value will be completed in two phases, the first one in November 2017 and the last one in February 2018. Additionally, the ENRE will recognize to Edenor the VAD difference resulting from the gradual tariff increase recognized in the RTI in 48 installments payable as from February 1, 2018, which will be incorporated into the resulting VAD value as of that date.

These tariff increases include the prices established by SEE Resolution No. 20/17 issued on January 27, 2017, which approved the WEM’s summer seasonal reprogramming for the February 1 – April 30, 2017 period; this resolution set the power capacity reference price at AR$3.157/MW-month and made a distinction between energy reference prices applicable to customers with supplies higher than 300 kW of power capacity at approximately AR$1,070/MWh, and to other users at AR$640/MWh; the latter price being subject to a 25% – 85% discount scheme for residential customers whose demand does not reach 10 kW, based on the savings reached compared to the consumption recorded in the same month of the year 2015, and keeping AR$0/MWh for the base consumption of certain categories covered by the social tariff. Furthermore, based on the principles of gradualness and reasonableness, a 37.5% bonus on seasonal prices was established exclusively for the month of February 2017, a month with a high demand for electric power.

On August 17, 2017, in furtherance of the provisions of Sub-annex 2 of the concession agreement, ‘Procedure for the determination of the tariff scheme’, Edenor submitted to the ENRE the tariff scheme expected to be applied as from August 2017 for its consideration. This note also contained the calculation of ex-post adjustments on account of cost differences not transferred to tariffs, as well as the variation in the CPD (Costo Propio de Distribución or ‘Own Distribution Cost’), which amounted to 11.6% for the January – June 2017 six-month period.

In turn, on October 27, 2017, pursuant to the provisions of the RTI, Edenor submitted to the ENRE, for its consideration, the tariff scheme calculated for its application as from November 2017, which contemplates an 18% increase over the VAD.

On October 31, 2017, the ENRE, through Note No. 128,399 and upon the MEyM’s instruction, provided for the deferral until December 1, 2017 of the application of the VAD increase scheduled for November 1, 2017, as well as the CPD adjustment which should have been made in August 2017; in both cases, the result of such deferral should be recognized pursuant to the adjustment mechanism provided for by ENRE Resolution No. 63/2017 of the RTI.

On November 17, 2017, the MEyM submitted several issues before the public hearing called under Resolution No. 403-E/17, including new reference prices for energy and power capacity within the WEM for the 2017 – 2018 summer seasonal period, the coverage of almost 100% of the WEM monomic price being reached for December 2018. Following this hearing, another hearing was held pursuant to ENRE Resolution No. 526/2017, where the impact of the new seasonal prices, the VAD increase and the recognition of costs in Edenor’s customer bills was informed.

ENRE Resolution No. 603/17 dated November 30, 2017 established a new tariff scheme applicable to the December 2017-January 2018 two-month period, also contemplating, besides the 18% VAD increase and the 11.6% CPD update, a retroactive adjustment in real terms as of November 2017 and August 2017, respectively. Additionally, increases in power capacity reference prices, energy stabilized prices and the transfer of stabilized transportation prices to the end user pursuant to SEE Resolution No. 1091/17 were also taken into consideration. Furthermore, the power capacity reference price, the energy stabilized price and the transportation stabilized price were set for the December 2017 – January 2018, and February 2018 – April 2018 periods. For both periods, the power capacity reference price was set at approximately AR$3,157/MW-month and the transportation stabilized price at AR$44/MWh for the extra high voltage system; besides, a price was defined for regional distribution based on the distribution company, which, in the case of Edenor, amounted to AR$1.1/MWh.

Energy reference prices were applied making a distinction between customers with supplies higher than a 300 kW power capacity at AR$1,395/MWh for both periods, at AR$880/MWh for other users during the December 2017 – January 2018 period, and at AR$1,081/MWh for other users during the February 2018 – April 2018 period.

Furthermore, this resolution approved a new scheme applicable to users under the social tariff. This consists of a bonus in the stabilized price of electric power within the WEM which will be shown as a direct subsidy by the National Government in covered customers’ bills. The ENRE will verify the neutrality in the distribution company’s tariff proceeds, and, if applicable, the applicable ex-post adjustments will be made. For residential customers whose demand does not reach 10 kW, the discount scheme based on savings reached compared to the consumption recorded in the same month of the year 2015 is kept; if savings are not lower than 20%, a 10% discount will apply. Furthermore, the social tariff scheme for base consumptions pursuant to SEE Resolution No. 20/17 is kept in place, but with a 50% discount over the surplus until reaching 150 kWh/month over the base consumption.

Finally, ENRE Resolution No. 33/18 issued on January 31, 2018 published a new tariff scheme, effective as from February 1, 2018, which contemplates new power capacity and energy reference prices; applies the last 17.8% VAD increase and the 22.5% CPD update corresponding to the August 2017 – January 2018 six-month period, and considers a total amount of AR$6,343.4 million recoverable in 48 installments, which includes the corresponding CPD updates as from February 17 and is subject to an annual review in February 2019, 2020 and 2021.

It is worth highlighting that the 22.5% CPD update contemplates a -2.51% efficiency stimulus E factor resulting from the RTI as an element geared at transferring to the distributor’s users expected efficiency gains as from i) factor X, which captures gains resulting from management optimization and the existence of economies of density, which reduces the CPD; and ii) investments factor Q, which captures the impact of the cost of capital and the evolution of exploitation costs resulting from investments made by the company, which increases the CPD.