About 94% of the Group’s consolidated revenues come from annual fees paid for the provision of services regulated by the Italian Energy Authority. These regulations contain variables that could have an impact on the Group’s performance.
 

Volume effect
Terna’s revenues attributable to the management, operation and development of the National Transmission Grid, and to the management of dispatching activities, are regulated by tariffs set by the Authority for Electricity and Gas (AEEG). Such tariffs are applied to the overall volume of energy transmitted over the Italian network. This volume depends on factors that are beyond the Company’s control.
 

Given the current exceptional economic situation and the consequent decline in power consumption, and to protect transmission revenues from high levels of risk, the AEEG has, through Resolution ARG/elt No. 188/08, established a guarantee mechanism for the level of revenues earned by the Company from transmission activities as of the beginning of 2009 through the end of the regulatory period (December 31, 2011). According to this mechanism:

- for volumes that, upon final balance, are lower than those used for setting the tariffs for the year, the AEEG will supplement Terna's remuneration for the portion of volumes in excess of a 0.5% deductible;

- for volumes that, upon final balance, are higher than those used for setting the tariffs for the year, the AEEG will require Terna to refund the excess revenues for the portion of volumes in excess of a 0.5% deductible.

Terna has used this mechanism since 2009 and will continue to do so until the end of 2011. Resolution ARG/elt No. 204/09 also confirmed that the optional guarantee mechanism for the level of revenues for transmission services may be adopted for the DIS component to cover the costs of Terna operations. As of financial year 2009, Terna has used this mechanism.
 

Bonuses and Penalties
There are also currently some mechanisms for calculating bonuses and penalties in relation to specific activities conducted by the Company:
 

- in compliance with AEEG Resolution No.341/07, Terna is required to pay its portion of penalties due to surpassing the service continuity targets established by the AEEG for medium-voltage customers, as well as refunds to consumers connected to the medium- and low-voltage distribution networks in the event it exceeds the time limit for restoring power following prolonged interruptions of service affecting either the National Transmission Grid or the distribution networks;

- beginning in 2009, in compliance with Resolution No. 333/07, Terna is also required to pay a specific contribution to the Exceptional Events Provision established at the Electricity Equalization Fund based on the electricity not delivered for which Terna is responsible for the portion of outages exceeding two hours; 

- the mechanism of bonuses and penalties that was adopted in 2008 and 2009 (under Resolution No. 351/07) based on Terna’s capacity to forecast demand and power output from wind facilities was maintained for 2010; 

- with Resolution ARG/elt No. 188/08, the AEEG established the parameters for a bonus and penalty mechanism connected with the effective start of a number of investments to develop the National Transmission Grid, as defined by Terna and recognized by the AEEG as being of strategic importance. This optional mechanism is defined in greater detail in an AEEG measure to be adopted; 

- with Resolution ARG/elt 213/09, the AEEG confirmed the incentive payment mechanism related to procuring resources for Terna’s dispatching service which was introduced on an experimental basis for 2009. This mechanism uses the level of resources procured by Terna on the Ancillary Services Market as the variable for measuring Terna’s performance, and this is valid for the period 2010-2012. Payment of the incentive is conditioned upon meeting the same terms defined in 2009: maintaining safety standards and effectively monitoring and revising the algorithms for selecting the bids on the Ancillary Services Market.
 

The Terna Group conducts operations that are exposed to the risk of malfunction or unexpected service interruptions caused by events that are beyond Terna’s control, such as accidents, defects or breakdowns involving control systems or other equipment, deteriorating plant performance, natural disasters, terrorist attack, and other such extraordinary events. Restoration of elements of the part of the NTG owned by the Group and any damages for losses to third parties as a result of such events could, in principle, give rise to costs if the Group is found liable. Specific insurance policies are in place to mitigate the risks from operating activities.

The Company is involved, as both plaintiff and defendant, in a number of legal proceedings involving contracts, employees, the environment, regulatory matters, and public safety issues arising from normal business operations. See the paragraph “Commitments and contingencies arising from off-balance sheet items” of the Notes to the financial statements for Terna and for the Group, for more information.

In the conduct of its operations, Terna is exposed to various financial risks: market risk (namely exchange rate risk, interest rate risk and inflation risk), liquidity risk and credit risk.
As a part of the financial risk management policies approved by the Board of Directors, Terna has established the responsibilities and operating procedures for financial risk management, specifically as concerns the instruments to be used and the precise operating limits in managing them.
Terna’s risk management policies seek to identify and analyze the risks the Company is exposed to, establishing appropriate limits and controls and monitoring risks and compliance with such limits. These policies and related systems are revised on a regular basis in order to reflect any changes in market conditions and the Company’s activities.
For more information, see the paragraph “Market and financial risks - Terna S.p.A.” in Section “A. Accounting policies and measurement criteria” of the Notes to the 2009 financial statements.
 

Even in current market conditions, the Group expects to preserve a sufficient capacity to generate financial resources from operating activities. However, the plan for future investments should lead to an increase in debt. Although the Group has continued to enjoy the support of its banking partners in financing its debt, it may become necessary to take on additional financing, which in less favorable market conditions could result in an increase in financial expense.