UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2010
Commission File Number 1-32297

CPFL ENERGIA S.A.

(Exact name of registrant as specified in its charter)

Rua Gomes de Carvalho, 1,510, 14^th floor - Suite 1402
CEP 04547-005 Vila Olímpia - São Paulo, São Paulo
Federative Republic of Brazil
+55 11 3841-8507
(Address of principal executive offices)

Lorival Nogueira Luz Junior
+55 19 3756 8704 – lorival.luz@cpfl.com.br
Rodovia Campinas Mogi Mirim, km 2,5 – Campinas, São Paulo - 13088 900
Federative Republic of Brazil
(Name, telephone, e-mail and/or facsimile
number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None 

As of December 31, 2010, there were 481,137,130 common shares, without par value, outstanding

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  T   No  £ 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

Yes  £   No  T 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  T   No  £ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  £   No  £   N/A  T 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non‑accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer  T   Accelerated Filer  £   Non‑accelerated Filer  £ 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  £   IFRS  T   Other  £ 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 £   Item 18  £ 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).

Yes  £   No  T 

ii

Table of Contents

FORWARD-LOOKING STATEMENTS

This annual report contains information that constitutes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words, such as “believe,” “may,” “aim,” “estimate,” “continue,” “anticipate,” “will,” “intend,” “expect” and “potential,” among others.  Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition.  Those statements appear in a number of places in this annual report, principally under the captions “Item 3.  Key Information—Risk Factors,” “Item 4.  Information on the Company” and “Item 5.  Operating and Financial Review and Prospects.”  We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business.  Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements.  These factors include:

·         general economic, political, demographic and business conditions in Brazil and particularly in the markets we serve;

·         changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to environmental, tax and employment matters;

·         electricity shortages;

·         changes in tariffs;

·         our inability to generate electricity due to water shortages, transmission outages, operational or technical problems or physical damages to our facilities;

·         potential disruption or interruption of our services;

·         inflation and exchange rate variation;

·         the early termination of our concessions to operate our facilities;

·         increased competition in the power industry markets in which we operate;

·         our inability to implement our capital expenditure plan, including our inability to arrange financing when required and on reasonable terms;

·         changes in consumer demand;

·         existing and future governmental regulations relating to the power industry; and

·         the risk factors discussed under “Item 3.  Key Information—Risk Factors,” beginning on page 6.

Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to revise them after we distribute this annual report because of new information, future events or other factors.  In light of these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.

CERTAIN TERMS AND CONVENTIONS

A glossary of electricity industry terms is included in this annual report, beginning on page 103.

PRESENTATION OF FINANCIAL INFORMATION

We maintain our books and records in reais.  We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).  Our consolidated annual financial statements as of and for the year ended December 31, 2010 are our first financial statements prepared in accordance with IFRS.  IFRS 1 – “First‑time Adoption of International Financial Reporting Standards” has been applied in preparing these financial statements.  Until December 31, 2009, our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil (“Brazilian Accounting Principles”), and reconciled to generally accepted accounting principles in the United States.

Brazilian Accounting Principles differ in certain significant respects from IFRS.  When preparing our 2010 consolidated financial statements under IFRS, management amended certain accounting methods in the Brazilian Accounting Principles financial statements to comply with IFRS.  The comparative figures in respect of 2009 have been restated to reflect these adjustments.  Reconciliations and descriptions of the effect of the transition from Brazilian Accounting Principles to IFRS are presented in note 5 to our consolidated financial statements included elsewhere in this annual report.

We have translated some of the real  amounts contained in this annual report into U.S. dollars.  The rate used to translate such amounts was R$1.666 to US$1.00, which was the rate for the selling of U.S. dollars in effect as of December 31, 2010 as reported by the Central Bank of Brazil (the “Central Bank”).  The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of investors and should not be construed as implying that the real  amounts represent, or could have been or could be converted into, U.S. dollars at the above rate.  See “Item 3.  Key Information—Exchange Rates” for more information regarding the Brazilian foreign exchange rate system and historical data on the exchange rate between reais  and U.S. dollars.

ITEM 1.                        Identity of Directors, Senior Management and Advisers

Not applicable.

ITEM 2.                        Offer Statistics and Expected Timetable

Not applicable.

ITEM 3.                        Key Information

Selected Financial and Operating Data

The tables below contain a summary of our financial data as of and for each of the periods indicated.  The summary of our financial data was derived from our consolidated annual financial statements, prepared in accordance with IFRS, as issued by the IASB.  You should read this selected financial data in conjunction with our consolidated financial statements and the related notes thereto included in this annual report.

The selected consolidated financial information as of and for the years ended December 31, 2009 and 2010, prepared in accordance with IFRS, has been derived from our audited consolidated financial statements, which appear elsewhere in this annual report.

The following tables present our selected financial data as of and for each of the periods indicated.

STATEMENT OF OPERATIONS DATA

BALANCE SHEET DATA

OPERATING DATA(*)

(*)           Unaudited.

(1)           “Dividends” represent the total amount of dividends from net income for each period indicated, subject to approval of the shareholders at the general shareholders’ meeting to be held in the following year.

(2)           Short-term debt and long‑term debt include derivative and accrued interest.

(3)           Represents active consumers (meaning consumers who are connected to the distribution network), rather than consumers invoiced at period-end.

Exchange Rates

The Central Bank allows the real/U.S. dollar exchange rate to float freely, and it has intervened occasionally to control unstable movements in foreign exchange rates.  We cannot predict whether the Central Bank or the Brazilian government will continue to let the real  float freely or will intervene in the exchange rate market through a currency band system or otherwise.  The real  may substantially depreciate or appreciate against the U.S. dollar.  For more information on these risks, see “Item 3.  Additional Information—Risk Factors—Risks Relating to Brazil.”

The following table provides information on the selling exchange rate, expressed in reais  per U.S. dollar (R$/US$), for the periods indicated.

(1)           Year-end figures represent the average of the month-end selling exchange rates during the relevant period.

(1)           The figures provided for months in 2010 and 2011, as well as for the month of June up to and including June 3, 2011, represent the average of the selling exchange rates at the close of trading on each business day during such period.

RISK FACTORS

Risks Relating to Our Operations and the Brazilian Power Industry

We are subject to comprehensive regulation of our business, which fundamentally affects our financial performance.

Our business is subject to extensive regulation by various Brazilian regulatory authorities, particularly the National Electric Energy Agency, Agência Nacional de Energia Elétrica (“ANEEL”).  ANEEL regulates and oversees various aspects of our business and establishes our tariffs.  If we are obliged by ANEEL to make additional and unexpected capital investments and are not allowed to adjust our tariffs accordingly, or if ANEEL modifies the regulations related to such adjustment, we may be adversely affected.

In addition, the implementation of our strategy for growth, as well as the ordinary carrying out of our business may be adversely affected by governmental actions such as changes to current legislation, the termination of federal and state concession programs, creation of more rigid criteria for qualification in public energy auctions, or a delay in the revision and implementation of new annual tariffs.

If we are required to conduct our business in a manner substantially different from our current operations as a result of regulatory changes, our operations and financial results may be adversely affected.

The regulatory framework under which we operate is subject to legal challenge.

The Brazilian government implemented fundamental changes in regulation of the power industry under 2004 legislation known as the Lei do Novo Modelo do Setor Elétrico, or New Industry Model Law.  Challenges to the constitutionality of the New Industry Model Law are still pending before the Brazilian Supreme Court.  If all or part of the New Industry Model Law were held to be unconstitutional, there would be uncertain consequences for the validity of existing regulation and the further development of the regulatory framework.  The outcome of the legal proceedings is difficult to predict, but it could have an adverse impact on the entire energy sector, including our business and results of operations.

We are uncertain as to the renewal of our concessions.

We carry out our generation and distribution activities pursuant to concession agreements entered into with the Brazilian Federal Government.  Our concessions range in duration from 16 to 35 years, with the first expiration date in 2015.  Five of our distribution subsidiaries have concessions that expire in July 2015, with options to renew for an additional 20 years.  In 2010, these five distribution subsidiaries represented 5.4% of net operating revenues of our distribution companies and 5.7% of the energy distributed by our distribution companies.

The Brazilian constitution requires that all concessions relating to public services be awarded through a bidding process.  Under laws and regulations specific to the electric sector, the Federal Government may renew existing concessions for additional periods of up to 30 years without a bidding process, provided that the concessionaire has met minimum performance standards and that the proposal is otherwise acceptable to the Federal Government.  The Federal Government has considerable discretion under the Concessions Law and the concession contracts with respect to renewal of concessions.  Moreover, there is no extensive history of administrative renewal practice.  As a result, we cannot assure you that our concessions will be renewed at all, or that they will be renewed on the same terms.

The tariffs that we charge for sales of electricity to captive consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.

ANEEL has substantial discretion to establish the tariff rates our distribution companies charge our consumers.  Our tariffs are determined pursuant to concession agreements with the Brazilian Federal Government, and in accordance with ANEEL’s regulations and decisions.

Our concession agreements and the Brazilian law establish a mechanism that permits three types of tariff adjustments:  (i) the annual adjustment (“reajuste anual”), (ii) the periodic revision (“revisão periódica”) and

We cannot be sure if ANEEL will establish tariffs at rates that are favorable to us, due to changes in the methods in calculating the periodic revision adjustments.  In addition, to the extent that any of these adjustments are not granted by ANEEL in a timely manner, our financial condition and results of operations may be adversely affected.

The methodology applicable to the third periodic revision cycle (2011 to 2014) is under discussion at public hearing No. 40/2010, conducted by ANEEL.  For the third cycle, ANEEL has proposed a new method for recognizing the costs we pass through to our consumers.  ANEEL is currently receiving comments from players within the electricity sector and will disclose its conclusions up to the third quarter of 2011.  As initially suggested by ANEEL, the new methodology negatively affects our financial condition and results of operations.  However, the outcome of public hearing No. 40/2010 is still uncertain and we cannot predict how the new methodology will impact our financial condition.

Additionally, ANEEL suggested a change in the methodology for calculating the TUSD and other electricity tariffs, which is under discussion at public hearing No. 120/2010.  The outcome of public hearing No. 120/2010 is also uncertain and we cannot foresee how this methodology will impact our financial condition.

We could be penalized by ANEEL for failing to comply with the terms of our concession agreements, which could result in fines, other penalties and, depending on the gravity of the non‑compliance, in our concessions being terminated.

ANEEL may impose penalties on us in the event that we fail to comply with any provision of our concession agreements.  Depending on the gravity of the non‑compliance, these penalties could include the following:

·         warning notices;

·         fines per breach of up to 2.0% of the revenues from the relevant concession in the year ended immediately prior to the date of the relevant breach;

·         injunctions related to the construction of new facilities and equipment;

·         restrictions on the operation of existing facilities and equipment;

·         intervention by ANEEL in the management of the concessionaire; and

·         termination of the concession.

In addition, the Brazilian government has the power to terminate any of our concessions by means of expropriation for reasons related to the public interest.

We are currently in compliance with all of the material terms of our concession agreements.  However, we cannot assure you that we will not be penalized by ANEEL for breaching our concession agreements or that our concessions will not be terminated in the future.  The compensation to which we are entitled upon termination of our concessions may not be sufficient for us to realize the full value of certain assets.  If any of our concession agreements is terminated for reasons attributable to us, the effective amount of compensation by the granting authorities could be materially reduced through the imposition of fines or other penalties.  Accordingly, the

Under the New Industry Model Law, an electricity distributor must contract in advance, through public bids, for 100% of its forecasted electricity needs for its distribution concession areas.  Over- or under-forecasting demand can have adverse consequences.  If our forecasted demand is incorrect and we purchase less or more electricity than we need, we may be prevented from fully passing through the costs of our electricity purchases and we may also be forced to enter into short‑term agreements to purchase electricity at prices substantially higher than under our long‑term purchase agreements.  For instance, the New Industry Model Law provides, among other restrictions, that if our forecasts fall significantly short of actual electricity demand, we may be forced to make up the shortfall with shorter term electricity purchase agreements.  If our acquisitions of electricity in the public auctions are above the Annual Reference Value (Valor Anual de Referência) established by the Brazilian government, we may not be able to fully pass through the costs of our electricity purchases.  Our forecasted electricity demand may prove inaccurate, including as a result of consumers moving between the different markets (regulated and free).  If there are significant variations between our electricity needs and the volume of our electricity purchases, our results of operations may be adversely affected.  See “Item 4.  Information on the Company—The Brazilian Power Industry—The New Industry Model Law.”

ANEEL may limit distributions that our regulated subsidiaries may make to us.

The amounts that our regulated subsidiaries may distribute to us in the form of dividends in any given fiscal year depend on such subsidiaries making a profit, as calculated in accordance with the Brazilian Corporation Law.  Despite the significant cash flow generated by our regulated subsidiaries, their results are affected by depreciation and by the amortization of intangible assets arising from the acquisition of RGE and Semesa.  As a result, this limitation may eventually prevent some portion of the cash generated by our regulated subsidiaries from being distributed to us as dividends.

We generate a significant portion of our operating revenues from consumers that qualify as Free Consumers, and that are allowed to seek alternative electricity suppliers.  We may face other types of competition that could adversely affect our market share and revenues.

Within our concession areas, other electricity suppliers are permitted to compete with us in offering electricity to certain consumers that qualify as Free Consumers, to whom our distribution subsidiaries may supply electricity only at regulated tariffs.  Such consumers qualified as Free Consumers may elect to opt out of our regulated distribution system upon the expiration of their contracts with us, by providing six months’ prior notice, or by providing a year’s prior notice if their contract has no fixed termination date.  At December 31, 2010, we supplied energy to 72 consumers qualified as Free Consumers, which accounted for approximately 2.5% of our net operating revenues and approximately 4.3% of the total volume of electricity sold by our distributors during 2010.  In addition, other consumers meeting certain criteria may become Free Consumers if they move to energy from renewable energy sources, such as small hydroelectric power plants or biomass.  At December 31, 2010 we had a total of 1,637 of these consumers which accounted for approximately 14.6% of our net operating revenues and approximately 18.3% of the total volume of electricity sold by our distribution companies during 2010.  A decision by our consumers qualified as Free Consumers to become Free Consumers and purchase electricity from electricity suppliers serving Free Consumers located in our concession areas would adversely affect our market share and results of operations.

In addition, it is possible that our large industrial clients could be authorized by ANEEL to generate electric energy for self consumption or sale to other parties, in which case they may obtain an authorization or concession for the generation of electric power in a given area, which could adversely affect our results of operations.

We are dependent on the prevailing hydrological conditions in the geographic region in which we operate.  In 2009, according to data from the National Electrical System Operator, Operador Nacional do Sistema Elétrico (“ONS”), more than 93.3% of Brazil’s electricity supply came from hydroelectric generation facilities.  Our region is subject to unpredictable hydrological conditions, with non‑cyclical deviations from average rainfall.  The most recent period of low rainfall was between 2000 and 2001, when the Brazilian government instituted the Rationing Program, a program to reduce electricity consumption that was in effect from June 1, 2001 to February 28, 2002.  The Rationing Program established limits for energy consumption for industrial, commercial and residential consumers, which ranged from a 15.0% to a 25.0% reduction in energy consumption.  If Brazil experiences another electricity shortage, the Brazilian government may implement similar or other policies in the future to address the shortage that could have a material adverse effect on our financial condition and results of operations.  A recurrence of poor hydrological conditions that result in a low supply of electricity to the Brazilian market could cause, among other things, the implementation of broad electricity conservation programs, including mandated reductions in electricity consumption.  We cannot assure you that periods of severe or sustained below-average rainfall will not adversely affect our future financial results.

Construction, expansion and operation of our electricity generation and distribution facilities and equipment involve significant risks that could lead to lost revenues or increased expenses.

The construction, expansion and operation of facilities and equipment for the generation and distribution of electricity involves many risks, including:

·         the inability to obtain required governmental permits and approvals;

·         the unavailability of equipment;

·         supply interruptions;

·         work stoppages;

·         labor unrest;

·         social unrest;

·         weather and hydrological interferences;

·         unforeseen engineering and environmental problems;

·         increases in electricity losses, including technical and commercial losses;

·         construction and operational delays, or unanticipated cost overruns;

·         the inability to win electricity auctions promoted by ANEEL; and

·         unavailability of adequate funding.

If we experience these or other problems, we may not be able to generate and distribute electricity in amounts consistent with our projections, which may have an adverse effect on our financial condition and results of operations.  We do not have insurance for many of these risks.

We are subject to environmental and health regulations that may become more stringent in the future and may result in increased liabilities and increased capital expenditures.

Our distribution and generation activities are subject to comprehensive federal and state legislation as well as supervision by Brazilian governmental agencies that are responsible for the implementation of environmental and health laws and policies.  These agencies could take enforcement action against us for our failure to comply with their regulations.  These actions could include, among other things, the imposition of fines and revocation of licenses.  It is possible that enhanced environmental and health regulations will force us to allocate capital expenditures to compliance, and consequently, divert funds from planned investments.  Such a diversion could have a material adverse effect on our financial condition and results of operations.

If we are unable to complete our proposed capital expenditure program in a timely manner, the operation and development of our business may be adversely affected.

We plan to invest approximately R$1,892 million in our generation activities, and R$4,779 million in our distribution activities during the period from 2011 through 2015.  Our ability to carry out this capital expenditure program depends on a variety of factors, including our ability to charge adequate tariffs for our services, our access to domestic and international capital markets and a variety of operating, regulatory and other contingencies.  We cannot be certain that we will have the financial resources to complete our proposed capital expenditure program, and failure to do so could have a material adverse effect on the operation and development of our business.

We are strictly liable for any damages resulting from inadequate provision of electricity services, and our contracted insurance policies may not fully cover such damages.

Under Brazilian law we are strictly liable for direct and indirect damages resulting from the inadequate provision of electricity distribution services.  In addition, our distribution facilities may, together with our generation utilities, be held liable for damages caused to others as a result of interruptions or disturbances arising from the generation, transmission or distribution systems, whenever these interruptions or disturbances are not attributed to an identifiable member of the ONS.  We cannot assure you that our contracted insurance policies will fully cover damages resulting from inadequate rendering of electricity services which may have an adverse effect on us.

We may not be able to create the expected benefits and return on investments from the new businesses we recently entered into.

We have entered into a number of new energy generation businesses (wind, thermoelectric and biomass energy) with substantial capital investments.  We have few operating history and track record in these industries and may not be able to foster the synergies with our traditional businesses.  In addition:

·         In the biomass business, we may suffer from a lack of sugar cane (a necessary input for the generation of this type of energy) in the market.  In addition, we depend to a certain extent on the performance of our partners in these projects in the construction and operation of the plants;

·         Among the significant uncertainties and risks with respect to our wind farms under construction, we have financial risk associated with the difference between the energy we generate and the energy contracted through the reserve energy contract (Contrato de Energia de Reserva – CER), in which we bear the risk of divergences arising from:  (a) wind intensity and duration different from that contemplated in the study phase of the project; (b) delay in commencement of operations of the wind farms under construction; and (c) unavailability of wind turbines at levels above the performance benchmarks;

If these new generation plants are not able to (i) generate the energy contracted by our clients, or (ii) generate the energy necessary to supply any clients in the free market, and (iii), the energy provided to us is insufficient to supply the contracted demand, we may be obliged to buy the shortfall in the spot market, in which the price per MWh is usually more volatile and may be higher than our price, resulting in an adverse effect on us.

Our growth, operating results and financial condition may be negatively affected by one or more of the above factors.

We are controlled by a few shareholders acting together, and their interests could conflict with yours.

As of December 31, 2010, VBC Energia S.A. (“VBC”), PREVI (through BB Carteira Livre I FIA), and Bonaire Participações S.A. (“Bonaire”), owned 25.55%, 31.02% and 12.62%, respectively, of our outstanding common shares.  These entities are parties to a shareholders’ agreement, pursuant to which they share the power to control us.  Our controlling shareholders may take actions that could be contrary to your interests, and our controlling shareholders will be able to prevent other shareholders, including you, from blocking these actions.  In particular, our controlling shareholders control the outcome of decisions at shareholders’ meetings, and they can elect a majority of the members of our Board of Directors.  Our controlling shareholders can direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses.  Their decisions on these matters may be contrary to the expectations or preferences of our noncontrolling shareholders, including holders of our ADSs.  See “Item 7.  Major Shareholders and Related Party Transactions—Shareholders’ Agreement.”

We are exposed to increases in prevailing market interest rates, as well as foreign exchange rate risk.

As of December 31, 2010, approximately 95.0% of our total indebtedness was denominated in reais  and indexed to Brazilian money-market rates or inflation rates, or bore interest at floating rates.  The remaining 5.0% of our total indebtedness was denominated in U.S. dollars and Japanese yen and substantially subject to currency swaps that converted these obligations into reais.  In addition, the costs of electricity purchased from Itaipu are indexed to the U.S. dollar exchange variation.  Our tariffs are adjusted annually in order to contemplate the losses or gains’ effects from such electricity acquisition. Accordingly, if these indexation rates rise or the U.S. dollar/real  or Japanese yen/real  exchange rates appreciate, our financing expenses will increase. 

Our indebtedness and debt service obligations could adversely affect our ability to operate our business and make payments on our debt.

As of December 31, 2010, we had a debt of 9,219 million.  Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal, interest or other amounts due in respect of our indebtedness.  In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions applicable under our existing indebtedness.  If we incur additional debt, the risks associated with our leverage would increase.

We may acquire other companies in the electricity business, as we have in the past, and these acquisitions could increase our leverage or adversely affect our consolidated performance.

We regularly analyze opportunities to acquire other companies engaged in activities along the entire electricity generation, transmission and distribution chain.  If we do acquire other electricity companies, it could increase our leverage or reduce our profitability.  Furthermore, we may not be able to integrate the acquired company’s activities and achieve the economies of scale and expected efficiency gains that often drive such acquisitions, and failure to do so could harm our financial condition and results of operations.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  This involvement, as well as Brazilian political and economic conditions, could adversely affect our business and the trading price of our ADSs and our common shares.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations.  The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports.  Our business, financial condition and results of operations may be adversely affected by changes in policy or regulations at the federal, state or municipal levels involving or affecting factors such as:

·         monetary policy;

·         currency fluctuations;

·         inflation; 

·         liquidity of domestic capital and lending markets;

·         tax policies;

·         changes in labor laws;

·         regulatory environment of our sector;

·         exchange rates and exchange controls and restrictions on remittances abroad, such as those that were briefly imposed in 1989 and early 1990; and

·         other political, social and economic developments in or affecting Brazil.

We cannot assure you that the Brazilian government will continue with the current economic policies, or that any changes implemented by the Brazilian government will not, directly or indirectly, affect our business and results of operations.

Exchange rate instability may adversely affect our financial condition and results of operations and the market price of the ADSs and our common shares.

The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  Between 2000 and 2002, the real  depreciated significantly against the U.S. dollar, reaching an exchange rate of R$3.53 per US$1.00 at the end of 2002.  Between 2003 and mid-2008, the real  appreciated significantly against the U.S. dollar due to the stabilization of the macro-economic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per US$1.00 in August 2008.  In the context of the crisis in the global financial markets after mid-2008, the real  depreciated against the U.S. dollar over the year 2008 and reached R$2.337 per US$1.00 at year end 2008.  During 2009, the real  appreciated against the U.S. dollar 25.5% in the context of the economic recovery and reached R$1.741 per US$1.00 at year end 2009.  On December 31, 2010, the exchange rate of the real  against the U.S. dollar was R$1.666 per US$1.00.  On June 3, 2011, the exchange rate was R$1.574 per US$1.00.  Although the real  has appreciated against the U.S. dollar recently, reaching R$1.56 per US$1.00 in April 2011, we cannot assure that the real  will not depreciate against the U.S. dollar in the future.

Depreciation of the real  increases the cost of servicing our foreign currency denominated debt and the cost of purchasing electricity from the Itaipu power plant, a hydroelectric facility that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs.  Depreciation of the real  against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, may curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies.  Depreciation of the real  against the U.S. dollar can also lead to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole.  On the other hand, appreciation of the real  relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current accounts, as well as dampen export-driven growth.  Depending on the circumstances, either depreciation or appreciation of the real  could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

Depreciation of the real  also reduces the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our common shares and, as a result, the ADSs.

Government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm our business.

Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real  interest rates in the world.  Between 2005 and 2010, the base interest rate (“SELIC”) in Brazil varied between 9.8% p.a. and 19.1% p.a.  Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business.  Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit.  Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business.  In addition, if Brazil again experiences high inflation, we may not be able to adjust the rates we charge our consumers to offset the effects of inflation on our cost structure.

Developments and the perception of risk in other countries, including the United States and emerging market countries, may adversely affect the market price of Brazilian securities, including the ADSs and our common shares.

The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries.  Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor’s reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of the ADSs or our common shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

The global financial crisis which started during the second half of 2008 has had significant consequences, including in Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates and inflationary pressure, among others, which may, directly or indirectly, adversely affect us and the market price of Brazilian securities, including the ADSs and our common shares.  The Brazilian government has adopted measures to combat the effects of the financial crisis, such as expansion of credit.  Although the scenario has improved significantly since the second half of 2009, it is still not clear how these measures will affect Brazilian economy in 2011.

Risks Relating to the ADSs and Our Common Shares

Holders of our ADSs may encounter difficulties in the exercise of voting rights.

Holders of our common shares are entitled to vote on shareholder matters.  You may encounter difficulties in the exercise of some of your rights as a shareholder if you hold our ADSs rather than the underlying common shares.  For example, you are not entitled to attend a shareholders’ meeting, and you can only vote by giving timely instructions to the depositary in advance of the meeting.

If you surrender your ADSs and withdraw common shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.

As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our common shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the common shares into non‑Brazilian currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw common shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of or distributions relating to the common shares, you will not be able to remit abroad non‑Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital

If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our common shares or the return of your capital in a timely manner.  The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares.

We may not be able to offer our common shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our common shares in connection with any future issuance of our common shares unless a registration statement under the Securities Act is effective with respect to such common shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement relating to preemptive rights with respect to our common shares, and we cannot assure you that we will file any such registration statement.  If such a registration statement is not filed and an exemption from registration does not exist, Deutsche Bank, as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale.  However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the common shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States.  Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States.  The ten largest companies in terms of market capitalization represented 54,9% of the aggregate market capitalization of the BM&FBOVESPA S.A., Bolsa de Valores, Mercadorias & Futuros (“BM&FBOVESPA”), as of December 31, 2010.  The top ten stocks in terms of trading volume accounted for 58.3%, 53.7% and 50.0% of all shares traded on the BM&FBOVESPA in 2008, 2009 and 2010, respectively.

ITEM 4.                        Information on the Company

Overview

We are a corporation (sociedade por ações) incorporated and existing under the laws of Brazil with the legal name CPFL Energia S.A.  Our principal executive offices are located at Rua Gomes de Carvalho, 1,510, 14^th floor – Suite 1402, Vila Olímpia, CEP 04547-005, in the City of São Paulo, state of São Paulo, Brazil and our telephone number is +55 11 3841-8507.

We are a holding company that, through our subsidiaries, distributes, generates and commercializes electricity in Brazil.  We were incorporated in 1998 as a joint venture among VBC, 521 Participações S.A. and Bonaire to combine their interests in companies operating in the Brazilian power sector.

We are one of the largest electricity distributors in Brazil, based on the 39,250 GWh of electricity we distributed to approximately 6.7 million consumers in 2010.  In 2010, our installed capacity was 2,309 MW.  We are also involved in building four biomass generation projects and thirteen wind farms, through which we expect to increase our installed capacity to 2,949 MW once they are completed over the next three years.

We also engage in electricity commercialization and provide electricity-related services to our affiliates as well as unaffiliated parties.  In 2010, the total amount of electricity sold by our commercialization services was 7,272 GWh and 8,806 GWh to affiliated and unaffiliated parties, respectively.

In 2010 and through June 6, 2011, the following developments affected our corporate structure:

·         In June 2007, we acquired, through our subsidiary Perácio, all of the shares of CPFL Jaguariúna, representing 100% of its capital, for R$408 million in cash.  On March 2009, we merged Perácio into CPFL Jaguariúna and restructured CPFL Jaguariúna such that we now directly hold all of its subsidiaries.

·         In August 2008, we constructed a sugar cane bagasse-powered thermoelectric plant in partnership with Baldin Bioenergia in the city of Pirassununga, in the state of São Paulo.  Baldin plant started commercial operations on August 27, 2010, with installed capacity of 45 MW and assured energy of 112.4 GWh.

·         In August 2009, in order to obtain guarantees from Furnas Centrais Elétricas S.A. (“Furnas”), in the Foz do Chapecó plant, we conducted a restructuring of Foz do Chapecó Energia S.A., which no longer has our subsidiary CPFL Geração de Energia S.A. (“CPFL Geração”), Furnas and Companhia Estadual de Energia Elétrica (“CEEE”), as its shareholders but as its indirect holding companies.  CPFL Geração and CEEE became shareholders of Chapecoense Geração de Energia S.A., holding 51.0% and 9.0% of its capital stock, respectively, with the other 40.0% being held by Furnas.  This restructuring did not change the participation that the shareholders previously held in the plant.

·         In September 2009, we acquired 51.0% of the shares of EPASA Centrais Elétricas da Paraíba S.A., to invest in the generation of energy from fuel oil, with the construction of two thermoelectric power plants:  Termoparaíba and Termonordeste, which together have a total installed capacity of 341.6 MW and assured energy of 2,169.0 GWh.  Termonordeste started commercial operations on December 24, 2010 and Termoparaíba on January 13, 2011.

·         In September 2009, we acquired a complex of wind farms, in the state of Rio Grande do Norte, composed of the wind farms Santa Clara I, II, III, IV, V, VI and Eurus VI.  The wind farms are scheduled to start operations in the third quarter of 2012.  We expect to increase our installed capacity by 188 MW upon completion of these wind farms.

·         In October 20, 2009, we established our subsidiary Bio Formosa, for the generation of thermoelectric energy and water steam through co-generation plants powered by sugar cane bagasse and straw.  On November 6, 2009, CPFL Bio Formosa entered into an agreement for the construction of a thermoelectric power plant of 40 MW powered by sugar cane in the city of Baia Formosa in the state of Rio Grande do Norte.  It is scheduled to start operations in the third quarter of 2011.

·         On April 26, 2010, in a special shareholders’ meeting, our shareholders approved the merger of minority‑held shares of the following subsidiaries:  (i) Companhia Leste Paulista de Energia; (ii) Companhia Jaguari de Energia; (iii) Companhia Sul Paulista de Energia; (iv) Companhia Luz e Força de Mococa; (v) Companhia Jaguari de Geração de Energia; (vi) CPFL Serviços, Equipamentos, Indústria e Comércio S.A.; and (vii) Companhia Luz e Força Santa Cruz.  Therefore, we now hold 100% of these seven subsidiaries’ capital stock.

·         The wholly-owned subsidiaries Campo dos Ventos I, II, III, IV and V and Eurus V are closely-held companies that were acquired on July 16, 2010 to act as independent producers of electric energy from alternative sources, mainly wind power, in the state of Rio Grande do Norte.  On August 26, 2010, they participated in the wind power reserve auction promoted by ANEEL, in which Campo dos Ventos II entered into an agreement for the supply of 14 MW of electricity for a 20-year term beginning in 2013.  These subsidiaries are scheduled to start operations in the third quarter of 2013.  We expect to increase our installed capacity by 180 MW upon completion of these wind farms.

·         The wholy-owned subsidiaries CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra are closely-held companies that were established on January 27, 2010 with the main purpose of generating thermoelectric energy and water stream through co-generation plants powered by sugar-cane bagasse and straw.  On August 26, 2010, CPFL Bio Pedra participated in the wind power reserve auction promoted by ANEEL, in which it entered into an agreement for the supply of 24,3 MW of electricity for a 20-year term beginning in 2013.  CPFL Bio Buriti and CPFL Bio Ipê are scheduled to start operations in the second quarter of 2011 and CPFL Bio Pedra in the second quarter of 2012.

·         On April 7, 2011, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Jantus SL and/or a potential acquisition of 100% of the shares of Jantus II, a corporation that will be established by the sellers. Jantus has:  (i) four wind farms in operation in the state of Ceará with installed capacity of 210 MW and 20-year term agreements with Eletrobrás for the sale of energy, (ii) a wind farm project in the state of Rio de Janeiro with potential installed capacity of 135MW and an agreement with Eletrobrás for the sale of energy, and (iii) a portfolio of wind farm projects with total installed capacity of 732 MW in the states of Ceará and Piauí, of which 412 MW has already been certified and eligible for participation in the next electricity auctions.  The acquisition is subject to compliance with certain conditions provided for in the Sale and Purchase Agreement, including authorizations from regulatory authorities, and must be ratified by our shareholders.

·         On April 19, 2011, we entered into a Joint Venture Agreement with Energias Renováveis S.A. (“ERSA”) to combine assets and projects relating to renewable energy sources (wind, biomass and small hydroelectric power plants).  The joint venture will encompass:  (i) the transfer of wind, biomass and small hydroelectric plants currently owned and operated by CPFL Geração and CPFL Comercialização Brasil S.A. (“CPFL Brasil”) to certain companies, which will subsequently transfer the wind, biomass and small hydroelectric plants to a holding company (“New CPFL”); (ii) the establishment of New CPFL by CPFL Geração and CPFL Brasil; (iii) the incorporation of New CPFL by ERSA, of which CPFL Geração and CPFL Brasil will own 63.3%; and (iv) the change of ERSA’s corporate name to CPFL Energia Renováveis S.A.  The joint venture is subject to compliance with certain conditions provided for in the Joint Venture Agreement, including authorizations from regulatory authorities, the corporate restructuring of our subsidiaries and compliance with conditions provided for in the Sale and Purchase Agreement for the acquisition of Jantus.  The Joint Venture Agreement must also be ratified by our shareholders.

Table of Contents

The following chart provides an overview of our corporate structure, as of April 30, 2011:
1Includes 13 companies
Santa Clara Wind Farms (Santa Clara I, Santa Clara II, Santa Clara III, Santa Clara IV, Santa Clara V, Santa Clara VI, Eurus VI); and
Campo dos Ventos Wind Farms (Campo dos Ventos I, Campo dos Ventos II, Campo dos Ventos III, Campo dos Ventos IV, Campo dos Ventos V and Eurus V).

Our core businesses are:

·         Distribution.  In 2010, our eight fully-consolidated distribution subsidiaries delivered 39,250 GWh of electricity to approximately 6.7 million consumers primarily in the states of São Paulo and Rio Grande do Sul.

·         Generation.  As of December 31, 2010, we had installed capacity of 2,309 MW.  During 2010, we generated a total of 9,142 GWh of electricity, and we had 7,786 GWh of assured energy, the amount of energy representing our long‑term average electricity production, as established by ANEEL, which is         the primary driver of our revenues relating to generation activities.  We hold equity interests in eight hydroelectric plants (Serra da Mesa, Monte Claro, Barra Grande, Campos Novos, Luiz Eduardo Magalhães-Lajeado, Castro Alves, 14 de Julho and Foz do Chapecó).  Although the concession for Serra da Mesa hydroelectric generation facility is held by Furnas, we are entitled to 51.54% of its assured energy.  We also own 34 small hydroelectric power plants and three thermoelectric power plants, two of which were acquired in 2009 (Termoparaiba and Termonordeste) through the acquisition of EPASA and are already active.  In 2008, we entered into energy generation from biomass through Baldin (CPFL Bioenergia), a sugar cane bagasse‑powered plant, which started operations in August 2010 with installed capacity of 45 MW and assured energy of 112.4 GWh.  In 2009, we constituted CPFL Bio Formosa and, in 2010, we constituted CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra in the same segment.  In 2009 and 2010, we acquired Santa Clara and Campo dos Ventos wind farms, respectively, companies engaged in the construction of wind farms.  By 2013, once all of these facilities become fully operational, we estimate that our installed capacity will reach 2,949 MW.  In October 2010, Foz do Chapecó hydroelectric plant started operations, currently representing an installed capacity of 855 MW, of which we hold a share of 51%, or 436.1 MW.  In December 2010, Termonordeste thermoelectric plant started operations with installed capacity of 170.8 MW, in which we hold a share of 51%, or 87.1 MW.  We closed 2010 with total installed capacity of 2,309 MW.  We will use part of our increased installed capacity for our own distribution and commercialization activities.

·         Commercialization and Electricity-Related Services.  Our subsidiary CPFL Brasil handles our commercialization operations and electricity-related services.  CPFL Brasil procures electricity for our distribution operations, sells electricity to Free Consumers, other commercialization companies and distribution utilities, and provides electricity-related services.  In 2010, we sold 16,078 GWh of electricity of which 8,806 GWh was sold to unaffiliated third parties.

Capital Expenditures

For a description of our capital expenditures, see below "Item 5. Operating and Financial Review and Prospects – Capital Expenditures."

Our Strategy

Our overall objective is to continue to be a leading supplier of electricity distribution services in Brazil, while expanding our generation and commercialization activities and maximizing profitability and shareholder value.  We seek to achieve these goals by consistently pursuing operational efficiency, growth through business synergies, financial discipline, social responsibility and enhanced corporate governance standards.  More specifically, our approach involves the following key business strategies:

Complete the development of our existing generation projects, expand our generation portfolio by developing new generation projects and become the market leader in renewable energy sources.  We have been developing a portfolio of new hydroelectric generating facilities.  Between 2005 and 2010, seven new plants became operational, which, together with our prior facilities, have a total installed capacity of 2,309 MW.  In 2008, we entered into energy generation from biomass through CPFL Bioenergia (Baldin energy generation plant).  In 2009, we (i) acquired a 51.0% stake in Centrais Elétricas da Paraíba (EPASA), owner of the Termonordeste and Termoparaíba thermoelectric power plants; (ii) incorporated CPFL Bio Formosa, a company for the development of energy generation from biomass of CPFL Group; and (iii) acquired seven companies engaged in the construction of wind farms.  In 2010, we (i) incorporated CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra, companies engaged in the generation of energy from biomass of and (ii) acquired a company engaged in the construction of wind farms.  In 2011, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Jantus, a company engaged in generation of energy through renewable sources, especially wind power, and into a Joint Venture Agreement with ERSA to combine assets and projects relating to renewable energy sources.  Both the acquisition of Jantus and the joint venture with ERSA are still subject to certain conditions, including approval by the regulatory authorities¹.

By the end of 2011, when CPFL Bio Formosa, CPFL Bio Buriti and CPFL Bio Ipê are expected to become fully operational and, considering the installed capacity of Termoparaiba (operational since January 2011), we expect our installed capacity to reach 2,511 MW.  By the end of 2012, when CPFL Bio Pedra and Santa Clara wind farms are expected to become fully operational, this capacity may reach 2,769 MW and, by the end of 2013, when we expect the Campo dos Ventos wind farms to become operational and two small hydroelectric power plants located in the state of Rio Grande do Sul to be refurbished, it may reach 2,949 MW.  Part of these generation facilities have associated long‑term power purchase agreements (“PPAs”), approved by ANEEL, which we believe will ensure us an attractive rate of return on our investment.  As per capita consumption of electricity in Brazil increases, we believe that there will continue to be new opportunities for us to explore investments in additional generation projects.

Focus on further improving our operating efficiency.  The distribution of electricity to captive consumers in our distribution concession areas is our largest business segment.  We continue to focus on improving our service and maintaining low operating costs by exploiting synergies across subsidiaries and investing in new systems that monitor our assets so that they are more efficiently managed.  We seek to create value for our shareholders by optimizing our debt portfolio and exercising shrewd financial judgment.  We also believe that a strong distribution business of sufficient scale will continue to provide a springboard for our strategies in electricity generation and commercialization.  We also make an effort to standardize and update our operations regularly, introducing automated systems where possible.  In 2008, we implemented the Six Sigma Quality process in our distribution processes.  In 2011, we started the Tauron project, aiming at an efficiency breakthrough in our distribution operations, based on new technologies, performance management, asset management and leadership.  We expect to fully implement Tauron project by 2013.

Expand and strengthen our commercialization business.  Free Consumers represent a significant segment of the electricity market in Brazil.  We strive to maintain our captive market.  However, where we face competition, we make an effort to retain those of our consumers that are Free Consumers by means of bilateral contracts with CPFL Brasil, our commercialization subsidiary, in addition to attracting additional Free Consumers from outside of our distribution companies’ concession areas.  In order to achieve this objective, we foster positive relationships with customers by providing electricity-related services, strategic advice and decision-making support.

Position ourselves to take advantage of consolidation in our industry by using our experience in successfully integrating and restructuring other operations.  We believe that with the stabilization of the regulatory environment in the Brazilian power industry, there may be substantial consolidation in the generation, the transmission and, particularly, the distribution sectors.  Given our financial strength and managerial expertise, we believe that we are well-positioned to take advantage of this consolidation.  If promising assets are available on attractive terms, we may make acquisitions that complement our existing operations and afford us further opportunities to take advantage of economies of scale.

Maintain a high level of social responsibility in the communities in which we operate.  We aim to hold our business operations to the highest standards of social responsibility and sustainable development in terms of our efforts to respect the environment.  We also support initiatives to advance the economic, cultural and social interests of the communities in which we operate and contribute effectively to their further development.

Follow enhanced corporate governance standards.  We are dedicated to maintaining the highest levels of management transparency, providing equitable shareholder rights and, through various measures, including the increase of our free float and the liquidity of our shares, generating value for our shareholders.

Our Service Territory 

Distribution

We are one of the largest electricity distributors in Brazil, based on the amount of electricity we delivered in 2010.  Our eight distribution subsidiaries together supply electricity to a region covering 176,310² square kilometers primarily in the States of São Paulo and Rio Grande do Sul.  Their service areas include 568 municipalities and a population of approximately 17.8 million people.  Together, they provided electricity to approximately 6.7 million consumers as of December 31, 2010.  Our eight subsidiaries distributed approximately 13% of the total electricity distributed in Brazil, calculated based on data from the Energetic Studies Company (Empresa de Pesquisas Energéticas - EPE).

Distribution Companies

We have eight distribution subsidiaries:

·         CPFL Paulista.  Companhia Paulista de Força e Luz (“CPFL Paulista”) supplies electricity to a region covering 90,440 square kilometers in the state of São Paulo with a population of approximately 9.4 million people.  Its service area covers 234 municipalities, including the cities of Campinas, Bauru, Ribeirão Preto, São José do Rio Preto, Araraquara and Piracicaba.  CPFL Paulista had approximately 3.7 million consumers as of December 31, 2010.  In 2010, CPFL Paulista distributed 20,649 GWh of electricity, which accounts for approximately 16.5% of the total electricity distributed in the state of São Paulo, and 6.7% of the total electricity distributed in Brazil, during that period.

·         CPFL Piratininga.  Companhia Piratininga de Força e Luz (“CPFL Piratininga”) supplies electricity to a region covering 6,785 square kilometers in the southern part of the state of São Paulo with a population of approximately 3.5 million people.  Its service area covers 27 municipalities, including the cities of Santos, Sorocaba and Jundiaí.  CPFL Piratininga had approximately 1.4 million consumers as of December 31, 2010.  In 2010, CPFL Piratininga distributed 8,931 GWh of electricity, accounting for approximately 7.1% of the total electricity distributed in the state of São Paulo, and 2.9% of the total electricity distributed in Brazil, during that period.

·         RGE.  Rio Grande Energia S.A. (“RGE”) supplies electricity to a region covering 58,823 square kilometers in the state of Rio Grande do Sul with a population of approximately 3.7 million people.  Its service area covers 262 municipalities, including the cities of Caxias do Sul and Gravataí.  RGE had approximately 1.3 million consumers as of December 31, 2010.  In 2010, RGE supplied 7,446 GWh of electricity (6,740 GWh distributed to Final Consumers, and 706 GWh delivered principally to small electric concessionaires and small rural cooperatives), which accounts for approximately 33.0% of the total electricity distributed in the state of Rio Grande do Sul, and 2.0% of the total electricity distributed in Brazil, during that period.

·         CPFL Santa Cruz.  Companhia Luz e Força Santa Cruz (“CPFL Santa Cruz”) supplies electricity to an area covering 11,775 square kilometers, which includes 27 municipalities in the northwest part of the state of São Paulo and three municipalities in the state of Paraná.  In 2010, CPFL Santa Cruz distributed 918 GWh of electricity to approximately 178,000 consumers, accounting for approximately 0.7% of the total electricity distributed in the state of São Paulo, and 0.3% of the total electricity distributed in Brazil, during that period.

·         CPFL Jaguari.  Companhia Jaguari de Energia (“CPFL Jaguari”) supplies electricity to an area covering 252 square kilometers, which includes two municipalities of the state of São Paulo.  In 2010, CPFL Jaguari distributed 419 GWh of electricity to approximately 33,000 consumers.

·         CPFL Mococa.  Companhia Luz e Força de Mococa (“CPFL Mococa”) supplies electricity to an area covering 1,844 square kilometers, which includes one municipality of the state of São Paulo and three municipalities in the state of Minas Gerais.  In 2010, CPFL Mococa distributed 208 GWh of electricity to approximately 41,000 consumers.

·         CPFL Leste Paulista.  Companhia Leste Paulista de Energia (“CPFL Leste Paulista”) supplies electricity to an area covering 2,589 square kilometers, which includes seven municipalities of the state of São Paulo.  In 2010, CPFL Leste Paulista distributed 304 GWh of electricity to approximately 51,000 consumers.

·         CPFL Sul Paulista.  Companhia Sul Paulista de Energia (“CPFL Sul Paulista”) supplies electricity to an area covering 3,802 square kilometers, which includes five municipalities of the state of São Paulo.  In 2010, CPFL Sul Paulista distributed 375 GWh of electricity to approximately 72,000 consumers.

Distribution Network

Our eight distribution subsidiaries own distribution lines with voltage levels ranging from 34.5 kV to 138 kV.  These lines distribute electricity from the connection point with the Basic Network to our power sub-stations, in each of our concession areas.  All consumers that connect to these distribution lines, such as Free Consumers or other concessionaires, are required to pay a tariff for using the system - Tarifa de Uso do Sistema de Distribuição (“TUSD”).

Each of our subsidiaries has a distribution network consisting of a widespread network of predominantly overhead lines and sub-stations having successively lower voltage ranges.  Consumers are classified in different voltage levels based on their consumption of, and demand for, electricity.  Large industrial and commercial consumers receive electricity at high voltage ranges (up to 138 kV) while smaller industrial, commercial and residential consumers receive electricity at lower voltage ranges (2.3 kV and below).

As of December 31, 2010, our distribution network consisted of 215,194 kilometers of distribution lines, including 262,983 distribution transformers.  Our eight distribution subsidiaries had 9,496 km of high voltage distribution lines between 34.5 kV and 138 kV.  At that date, we had 429 transformer sub-stations for transforming high voltage into medium voltages for subsequent distribution, with total transforming capacity of 13,035 mega-volt amperes.  Of the industrial and commercial consumers in our concession area, 282 had 69 kV, 88 kV or 138 kV high-voltage electricity supplied through direct connections to our high voltage distribution lines.

System Performance

Electricity Losses

We experience two types of electricity losses:  technical losses and commercial losses.  Technical losses are those that occur in the ordinary course of our distribution of electricity.  Commercial losses are those that result from illegal connections, fraud or billing errors and similar matters.  Electricity loss rates of our three largest distribution subsidiaries (CPFL Paulista, CPFL Piratininga and RGE) compare favorably to the average for other major Brazilian electricity distributors in 2009 according to the most recent information available from the Brazilian Association of Electric Energy Distributors, Associação Brasileira de Distribuidores de Energia Elétrica (“ABRADEE”), an industry association.

We are also actively engaged in efforts to reduce commercial losses from illegal connections, fraud, billing errors.  To achieve this, in each of our eight subsidiaries, we have deployed trained technical teams to conduct inspections, enhanced monitoring for irregular consumption, increased replacements for obsolete measuring equipment and developed a computer program to discover and analyze irregular invoicing.  Approximately 482,700 inspections were conducted during 2010, which we believe led to a recovery of receivables estimated at more than R$121 million.

Power Outages

The following table sets forth the frequency and duration of electricity outages per consumer for the years 2010 and 2009 for each of our distribution subsidiaries:

(1)           Frequency of outages per consumer per year (number of outages).

(2)           Duration of outages per consumer per year (in hours).

(1)           Frequency of outages per consumer per year (number of outages)

(2)           Duration of outages per consumer per year (in hours)

*              A power outage in Brazil on November 10, 2009, which interrupted the energy supply in 17 states and the Federal District, affected the FEC/DEC indexes in four of our distribution subsidiaries (CPFL Paulista, CPFL Piratininga, CPFL Jaguari and CPFL Santa Cruz), responsible for 66.0% of our supply.  Similar events occurred in 2002, 1999 and 1985 in Brazil.  The numbers presented after the slash sign do not consider the effects of the interruptions.

We seek to improve the quality and reliability of our power supply, as measured by the frequency and duration of our power outages.  According to data from ABRADEE for 2009, our frequency and duration of interruptions per consumer in the past few years compare favorably to the averages for other Brazilian distribution companies.

Based on data published by ANEEL, the duration and frequency of outages at CPFL Paulista and CPFL Piratininga are among the lowest in Brazil compared to companies of similar size.  The duration of outages at RGE are comparatively higher than those at CPFL Paulista and CPFL Piratininga, but they remain in line with the average rate for power companies in Southern Brazil mainly as a result of the lack of redundancies in its distribution system, the use of medium voltage lines and a lower level of automation in the network.

Our distribution subsidiaries have construction and maintenance technology that allows for repairs of the electricity network without interruption in electricity service, which allows us to have low levels of scheduled interruption, amounting to approximately up to 14% of total interruptions.  Unscheduled interruptions due to accidents or natural causes, including lightning storms, fire and wind represented the remainder of our total interruptions.  In 2010, we invested a total of R$999 million in improvements of (i) the logistics of our operations, (ii) our systems, and (iii) our infrastructure to support operations, across our different business segments.  We expect to invest an additional R$1,161 million for such purposes in 2011.

We strive to improve response times for our repair services.  The quality indicators for the provision of energy by CPFL Paulista and CPFL Piratininga have maintained levels of excellence while complying with regulatory standards.  This was also mainly the result of our efficient operational logistics, including the strategic positioning of our teams and the technology and automation of our network and operation centers, together with a preventive maintenance and conservation plan.

Purchases of Electricity

Most of the electricity we sell is purchased from unrelated parties, rather than generated by our facilities.  In 2010, 10.2% of the total electricity our distribution subsidiaries acquired was purchased from our generation subsidiaries.  Of the total energy that we purchased in 2010, 69.9% was purchased in the regulated market and 30.1% was purchased in the free market.

In 2010, we purchased 10,835 GWh of electricity from the Itaipu power plant, amounting to 20.7% of the total electricity we purchased.  Itaipu is located on the border of Brazil and Paraguay and is subject to a bilateral treaty between the two countries pursuant to which Brazil has committed to purchasing specified amounts of electricity.  This treaty will expire in 2023.  Electric utilities operating under concessions in the Midwest, South and Southeast regions of Brazil are required by law to purchase a portion of the electricity that Brazil is obligated to purchase from Itaipu.  The amounts that these companies must purchase are governed by take-or-pay contracts with tariffs established in US$/kW.  ANEEL annually determines the amount of electricity to be sold by Itaipu.  We pay for energy purchased from Itaipu in accordance with the ratio between the volume established by ANEEL and our statutorily established share, regardless of whether Itaipu generates such amount of electricity, at a price of

The Itaipu plant has an exclusive transmission grid.  Distribution companies pay a fee for the use of this grid.

In 2010, we paid an average of R$93.23 per MWh for purchases of electricity from Itaipu, as compared to R$104.41 during 2009 and R$88.10 during 2008.  These figures do not include the transmission fee.

We purchased 41,549 GWh of electricity in 2010 from generating companies other than Itaipu, representing 79.3% of the total electricity we purchased.  We paid an average of R$109.47 per MWh for purchases of electricity from generating companies other than Itaipu, as compared to R$104.44 per MWh in 2009.  For more information on the regulated market and the free market, see “—The Brazilian Power Industry—The New Industry Model Law.”

The following table shows amounts purchased from our suppliers in the regulated market and in the free market, for the periods indicated.

The provisions of our electricity supply contracts are governed by ANEEL regulations.  The main provisions of each contract relate to the amount of electricity purchased, the price, including adjustments for various factors such as inflation indexes, and the duration of the contract.

Transmission Tariffs.  In 2010, we paid a total of R$1,172 million in tariffs for the use of the transmission network, including Basic Network tariffs, connection tariffs and transmission of high-voltage electricity from Itaipu at rates set by ANEEL.

Consumers and Tariffs

Consumers

We classify our consumers into five principal categories.  See note 27 to our audited consolidated financial statements for a breakdown of our sales by category.

·         Industrial consumers.  Sales to final industrial consumers accounted for 29.6% of our revenue of electricity sales in 2010.

·         Residential consumers.  Sales to final residential consumers accounted for 38.9% of our revenue of electricity sales in 2010.

·         Commercial consumers.  Sales to final commercial consumers, which include service businesses, universities and hospitals, accounted for 20.1% of our revenue of electricity sales in 2010.

·         Rural consumers.  Sales to final rural consumers accounted for 3.1% of our revenue of electricity sales in 2010.

·         Other consumers.  Sales to other consumers, which include public and municipal services such as street lighting, accounted for 8.3% of our revenue of electricity sales in 2010.

Retail Distribution Tariffs.  We classify our consumers into two different groups, Group A consumers and Group B consumers, based on the voltage level at which the electricity is supplied to them.  Each consumer is placed in a certain tariff level defined by law and based on its respective classification, although some volume-based discounts are available.  Group B consumers pay higher tariffs.  Tariffs in Group B vary by type of consumer (industrial, residential, commercial or rural).  Consumers in Group A pay lower tariffs, decreasing from A4 to Al, because they are supplied electricity at higher voltages, which requires lower use of the energy distribution system.  The tariffs we charge for sales of electricity to Final Consumers are determined pursuant to our concession agreements and regulations established by ANEEL.  These concession agreements and related regulations establish a cap on tariffs that provides for annual, periodic and extraordinary adjustments.  For a discussion of the regulatory regime applicable to our tariffs and their adjustment, see “—The Brazilian Power Industry.”

Group A consumers receive electricity at 2.3 kV or higher.  Tariffs for Group A consumers are based on the voltage level at which electricity is supplied, and the time of year and the time of day electricity is supplied, although consumers may opt for a different tariff applicable in peak periods in order to optimize the use of the electric network.  Tariffs for Group A consumers consist of two components:  a “capacity charge” and an “energy charge.”  The capacity charge, expressed in reais  per kW, is based on the higher of (i) contracted firm capacity or (ii) power capacity actually used.  The energy charge, expressed in reais  per MWh, is based on the amount of electricity actually consumed.  Group A consumers are those that will likely qualify as Free Consumers under the New Industry Model Law.  See “—The Brazilian Power Industry—The New Industry Model Law.”

Group B consumers receive electricity at less than 2.3 kV (220V and 127V).  Tariffs for Group B consumers consist solely of an energy consumption charge and are based on the classification of the consumer.

The following tables sets forth our average retail prices for each consumer category for 2010 and 2009.  These prices include taxes (ICMS, PIS and COFINS) and were calculated based on our revenues and the volume of electricity sold in 2010 and 2009.

Under current regulations, residential consumers may be classified as low income residential consumers depending on the amount of energy they consume.  Regulations define low income residential consumers as consumers who utilize less than 80 kWh per month, or other volume of electricity up to 220 kWh per month, depending on the region in which they live.  Low income residential consumers may apply to receive benefits under some of the Brazilian government’s social programs.  One such benefit afforded to low income residential consumers is that they are not required to pay emergency capacity and emergency acquisition charges or any extraordinary tariff approved by ANEEL.

TUSD.  Under applicable laws and regulations, we are required to allow other consumers to use our high‑voltage distribution lines, including Free Consumers within our distribution concession areas that are supplied by other distributors.  All of our consumers must pay a fee for the use of our network.  In 2010, tariff revenues for the use of our network by Free Consumers amounted to R$1,128 millions.  The average tariff for the use of our network was R$88.15/MWh and R$73.45/MWh in 2010 and 2009, respectively, including the TUSD we charge to other distributors connected to our distribution network.

Billing Procedures

The procedure we use for billing and payment for electricity supplied to our consumers is determined by consumer category.  Meter readings and invoicing take place on a monthly basis for low voltage consumers, with the exception of rural consumers, whose meters are read in intervals varying from one to three months, as authorized by relevant regulation.  Bills are prepared from meter readings or on the basis of estimated usage.  Low voltage consumers are billed within three business days after the meter reading, with payment required within five business days after the invoice date.  In case of nonpayment, we send the consumer a notice of nonpayment with the following month’s invoice and we allow the consumer 15 days to settle the amount owed to us.  If payment is not received within three business days after that 15-day period, the consumer’s electricity supply is suspended.

High voltage consumers are billed on a monthly basis with payment required within five business days after the invoice date.  In the event of nonpayment, we send the consumer a notice four business days after the due date, giving a deadline of 15 days to make payment.  If payment is not made within three business days after that 15‑day period, the consumer’s service is discontinued.

According to data from ABRADEE for 2009, the percentage of customers in default of our three largest distribution subsidiaries compare favorably to the average for other major Brazilian electricity distributors.  For this purpose, consumers in default are consumers whose bills are one to 89 days due.  Bills due for over 89 days are deemed not recoverable.

Customer Service

We strive to provide high-quality customer service to our distribution consumers.  We operate call centers at each of our distribution subsidiaries providing customer service 24 hours a day, 7 days a week.  In 2010, our call centers responded to approximately 10.3 million calls.  We also provide customer service through our Internet website, which handled approximately 10.1 million customer requests in 2010, and through our branch offices, which handled approximately 1.8 million customer requests in 2010.  The growth in electronic requests has allowed us to reduce our customer service costs and provide customer service through our call center to a larger number of

Generation of Electricity

We are actively expanding our generating capacity.  In accordance with Brazilian regulation, revenues from generation are based mainly on assured energy of each facility, rather than its installed capacity or actual output.  Assured energy is a fixed output of electricity established by the Brazilian government in the relevant concession agreement.  For certain companies, actual output is determined periodically by the ONS in view of demand and hydrological conditions.  Provided generators have sold their electricity and participate in the Energy Reallocation Mechanism, Mecanismo de Realocação de Energia (“MRE”), they will receive at least the revenue amount corresponding to the assured energy, even if they do not actually generate all of it.  Conversely, if a generating facility’s output exceeds its assured energy, its incremental revenue is equal only to the costs associated therewith.  Most of our hydroelectric plants are members of the MRE, which mitigates hydrologic risks.

At December 31, 2010, CPFL Geração owned a 51.54% interest in the assured energy from the Serra da Mesa power plant.  Through our generation subsidiaries CERAN, BAESA, ENERCAN and Chapecoense, CPFL Geração also owned interests in the Monte Claro, Barra Grande, Campos Novos, Castro Alves, 14 de Julho and Foz do Chapecó plants, which have been operational since December 2004, November 2005, February 2007, March 2008, December 2008 and October 2010, respectively.  Through CPFL Jaguariúna, we owned a 6.93% interest in the Luis Eduardo Magalhães power plant.  We also operated 34 small hydroelectric power plants and three thermoelectric power plants, two of which were acquired in 2009 (Termonordeste and Termoparaíba) through the acquisition of EPASA.  Termonordeste started operations on December 24, 2010 and Termoparaíba, on January 13, 2011.  On August 27, 2010, our first sugarcane bagasse-powered plant started operations, through CPFL Bioenergia (Baldin energy generation plant).

Our total installed capacity from all of these facilities was 2,309 MW as of December 31, 2010.  We produce electricity almost exclusively through our hydroelectric plants.  We generated 9,142 GWh in 2010, 5,984 GWh in 2009 and 6,659 GWh in 2008.  We are also currently involved in the construction of CPFL Bio Formosa, CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra co‑generation plants, in the construction of the Santa Clara and Campo dos Ventos wind farms.  We expect to refurbish two small hydroelectric power plants in the state of Rio Grande do Sul in 2013.  Upon completion of these facilities, we expect to have a total installed capacity of 2,949 MW by the end of 2013.

The following table sets forth certain information relating to our principal facilities in operation as of April 30, 2011:

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(1)           The concession for Serra da Mesa is held by Furnas.  We have a contractual right to 51.54% of the assured energy of this facility, under a 30-year rental agreement, expiring in 2028.

(2)           Power plants that will be upgraded by 2013.

(3)           Power plants that are not active.

(4)           Hydroelectric projects with an installed capacity equal to or less than 1,000 kW that are registered with the regulatory authority and the administrator of power concessions, but do not require concession or authorization processes for operating.

(5)           Power plants that currently do not have assured energy approved by the MME.  The energy that they produce is used by our distribution subsidiaries, reducing our energy purchases.  We have applied for the assignment of a total of 78.6 GWh per year of assured energy for these nine small hydroelectric power plants and are waiting for MME and ANEEL approval.

Serra da Mesa.  Our largest hydroelectric facility in operation is the Serra da Mesa facility, which we acquired in 2001 from VBC, one of our controlling shareholders.  Furnas began construction of the Serra da Mesa facility in 1985.  In 1994, construction was suspended due to a lack of resources, which led to a public bidding procedure in order to resume construction.  Serra da Mesa currently consists of three hydroelectric facilities located on the Tocantins River in the state of Goiás.  The Serra da Mesa facility began operations in 1998 and has an installed capacity of 1,275 MW.  The concession for the Serra da Mesa facility is owned by Furnas, which is also the operator, and we own part of the facility.  Under Furnas’ rental agreement with us, which has a 30-year term commencing in 1998, we have the right to 51.54% of the assured energy of the Serra da Mesa facility until 2028, irrespective of the actual electricity produced by the facility, even if, during the term of the concession, there is an expropriation or forfeiture of the concession or the term of the concession expires.  We sell all of such electricity to Furnas under an electricity purchase contract that expires in 2014 at a price that is adjusted annually based on the IGP-M.  After the expiration of this electricity purchase arrangement with Furnas, we will retain, until 2028, the right to 51.54% of the assured energy of Serra da Mesa.  We will be allowed to commercialize it in accordance with regulations applicable at such time.  Our share of the installed capacity and assured energy of the Serra da Mesa facility is 657 MW and 3,030 GWh/year, respectively.  On May 5, 2008, Furnas requested the renewal of the plant concession term for an additional 29 years.  On February 15, 2011, ANEEL forwarded Furna’s request to MME, which approval is still pending.

CERAN Complex.  We own a 65.0% interest in CERAN, a joint venture that was granted a 35-year concession in March 2001 to construct, finance and operate the CERAN hydroelectric complex.  The other shareholders are CEEE (30.0%) and Desenvix (5.0%).  The CERAN hydroelectric complex consists of three hydroelectric plants:  Monte Claro, Castro Alves and 14 de Julho.  The complex is located on the Antas River approximately 120 km north of Porto Alegre, near the city of Bento Gonçalves, in the state of Rio Grande do Sul.  The entire CERAN Complex has an installed capacity of 360 MW and estimated assured energy of 1,515.5 GWh per year, of which our share will be 985.1 GWh/year.  We sell our participation in the assured energy of this complex to affiliates in our group.  These facilities are operated by CERAN, under CPFL Geração’s supervision.

Monte Claro (CERAN Complex).  In 2004, Monte Claro’s first generator became operational, with an installed capacity of 65 MW and assured energy of 509.8 GWh a year, and in 2006, the second generator became operational, with an installed capacity of 65 MW and assured energy of 7.0 GWh per year.  The plant has a total of 130 MW in installed capacity and 516.8 GWh in assured energy per year.

Castro Alves (CERAN Complex).  In March 2008, the first generation unit of the Castro Alves plant became operational, with an installed capacity of 43.4 MW and annual assured energy of 353.0 GWh.  In April 2008, the second generation unit became operational, with an installed capacity of 43.4 MW and annual assured energy of 207.6 GWh.  This plant became fully operational in June 2008, with a total installed capacity of 130 MW and annual assured energy of 560.6 GWh. Castro Alves added 84.5 MW to our capacity and an annual assured energy of 364.4 GWh.

14 de Julho (CERAN Complex).  The first generation unit of the 14 de Julho plant became operational in December, 2008, and the second generation unit became fully operational in March, 2009.  This plant has a total installed capacity of 100 MW and an annual assured energy of 438.0 GWh. 14 de Julho added 65 MW to our capacity and an annual assured energy of 284.7 GWh.

Barra Grande.  This facility became fully operational on May 1, 2006 with a total installed capacity of 690 MW and total assured energy of 3,334.1 GWh per year.  CPFL Geração owns a 25.01% interest in this plant.  The other shareholders of the joint venture are Alcoa (42.18%), CBA (Companhia Brasileira de Alumínio) (15.00%), DME (Departamento Municipal de Eletricidade de Poços de Caldas) (8.82%), and Camargo Corrêa Cimentos S.A. (9.00%).  We sell our participation in the assured energy of this facility to affiliates in our group.

Campos Novos.  We own a 48.72% interest in ENERCAN, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in May 2000 to construct, finance and operate the Campos Novos hydroelectric facility.  The plant was constructed on the Canoas River in the state of Santa Catarina, and became fully operational on May 1, 2007 with a total installed capacity of 880 MW and assured energy of 3,310.4 GWh per year, of which our interest is 1,612.9 GWh per year.  The other shareholders of ENERCAN are CBA (24.73%), Votorantim Metais Níqueis S.A. (20.04%) and CEEE (6.51%).  The plant is operated by ENERCAN under CPFL Geração’s supervision.  This plant increased our installed capacity by 428.8 MW.  We sell our participation in the assured energy of this joint venture to affiliates in our group.

Foz do Chapecó.  We own a 51.0% interest in Chapecoense, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in November 2001 to construct, finance and operate the Foz do Chapecó hydroelectric facility.  The remaining 49.0% interest in the joint venture is divided among Furnas, which holds a 40% interest, and CEEE, which holds a 9.0% interest.  The Foz do Chapecó hydroelectric plant is located on the Uruguay River, on the border between the states of Santa Catarina and Rio Grande do Sul.  The first generating unit started commercial operations on October 14, 2010, the second one on November 23, 2010, the third one on December 30, 2010 and the fourth one on March 12, 2011.  The Foz do Chapecó hydroelectric plant has added 436.1 MW to our installed capacity.  Of our 51% share in the assured energy of this project, we sell 40% to affiliates in our group and 11% through CCEARs.

Luis Eduardo Magalhães Power Plant.  We own a 6.93% interest in the Luis Eduardo Magalhães power plant, also known as UHE Lajeado.  The plant is located on the Tocantins river in the state of Tocantins, and became fully operational in November, 2002 with a total installed capacity of 902.5 MW and assured energy of 4,613 GWh per year.  The plant was built by Investco S.A., a consortium comprised of Lajeado Energia, EDP (Energias de Portugal), CEB (Companhia Energética de Brasília) and Paulista Lajeado (which we acquired in 2007).  We sell our participation in the assured energy of this plant to affiliates in our group.

Small Hydroelectric Power Plants.  We operate 34 small hydroelectric power plants.  Since 1988, we have been investing in their renovation and automation to increase their output.  The program principally involves the replacement of existing turbines and upgrade of peripheral equipment and automated systems, as well as restoring infrastructure.  Through these initiatives, we hope to increase these plants’ assured energy and electricity production and reduce operational costs.

The automation of these power plants allows us to carry out control, supervision and operations remotely.  We have established an operational center for the management and monitoring of our power plants in Campinas, making it possible for the entire production cycle of the power plants to be remotely controlled in real time.

The costs of operation and maintenance of CPFL Geração’s plants decreased from R$26.47/MWh in 1997 to R$13.93/MWh in 2010.  The rate of availability of our power generation equipment increased from 82.0% in 1997 to 90.7% in 2010.  Through 2013 we expect to begin projects to refurbish two power plants:  Andorinhas and Guaporé.

In 2004, modernization projects were presented for Gavião Peixoto, Chibarro and Capão Preto.  The Gavião Peixoto project was approved by ANEEL in July of 2004 and the new assured energy level was approved by the Ministry of Mines and Energy, Ministério de Minas e Energia (“MME”) in June 2005, increasing from 19.3 GWh per year to 33.5 GWh per year.  Work on this project began in August 2005.  The first generator began commercial operations in June 2007 and renovation projects were completed in July 2007.  The renovation projects at the Capão Preto and Chibarro plants were approved by ANEEL in August and September 2005, respectively.  The MME approved an increase in assured energy at Capão Preto from 8.7 GWh per year to 19.9 GWh per year, and at Chibarro from 6.1 GWh per year to 14.8 GWh per year.  The modernization and renovation of these plants began in October 2006.  Chibarro and Capão Preto were completed in February 2008.

CPFL Bioenergia.  In partnership with Baldin Bioenergia, we have constructed a co-generation plant in the city of Pirassununga, in the state of São Paulo.  The total cost of the thermoelectric power plant was R$104 million, of which we were responsible for R$52 million.  The construction began in October 2008 and commercial operations started on August 27, 2010.  This co-generation plant has added 45.0 MW to our installed capacity.  All of this electricity has been sold to CPFL Brasil.

Thermoelectric Power Plants.  We operate three thermoelectric power plants.  The Carioba facility has an installed capacity of 36 MW and was constructed in 1954.  As of 2002, the Carioba facility was operating with 100% fuel‑subsidized oil.  Beginning in 2003, this subsidy was gradually reduced and contracted electricity was simultaneously decreased by 25.0% per year.  By the end of 2006, the subsidy was phased out entirely and, as a result, all assured energy at Carioba is now available to be contracted pursuant to PPAs.  Termonordeste and Termoparaíba are powered by fuel oil from the EPASA complex, with total installed capacity of 342 MW and assured energy of 2,169.0 GWh.  We own an aggregate 51.0% interest in Termonordeste and Termoparaíba.  The Termonordeste and Termoparaíba thermoelectric power plants are located in the city of João Pessoa, in the state of Paraíba.  The total cost of construction was R$627 million, of which we were responsible for R$320 million.  The construction of these plants began in October 2009.  Termonordeste started commercial operations on December 24, 2010, and Termoparaíba on January 13, 2011.  The electricity of these power plants was sold in CCEARs, and part of this energy was bought by our own distributors.

Expansion of Installed Capacity

Demand for electricity in our distribution concession areas continues to grow.  To address this increase in demand, and to improve our margins, we are expanding our installed capacity.  We are building the CPFL Bio Formosa, CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra co-generation plants and Santa Clara and Campo dos Ventos wind farms, which together will have an installed capacity of 553 MW.  By the end of 2013, we expect that the total generating capacity from these facilities will become fully operational.

The following table sets forth information regarding our current hydroelectric generation projects as of April 30, 2011:

Project CPFL Bio Formosa.  In 2009, CPFL Brasil established the Baia Formosa power plant (CPFL Bio Formosa), with an installed capacity of 40 MW.  The construction of CPFL Bio Formosa plant began in March 2010 and the plant is expected to begin operations in the third quarter of 2011.  The total estimated cost of construction is R$127 million.  In 2006, our consulting group helped the Farias Group to sell approximately 11 MW in the A-5 auction (an auction held five years before the initial delivery date, see “Auctions on the Regulated Market”).  The success of the auction helped CPFL Brasil to establish Usina Baia Formosa (currently CPFL Bio Formosa) in 2009.

Project CPFL Bio Buriti, CPFL Bio Ipe and CPFL Bio Pedra.  In addition, on March 23, 2010, our subsidiaries CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra (which we formed to develop electric energy generation projects using sugar cane bagasse) executed a partnership agreement with Grupo Pedra Agroindustrial to develop three new biomass generation projects.  The aggregate potential installed capacity of these three projects is 145 MW and the investment is approximately R$366 million.  Operations are scheduled to start between June 2011 and April 2012.

Project Santa Clara Wind Farms.  During 2009, CPFL Geração developed and planned a number of wind power generation projects and, in September 2009, acquired a complex of additional wind farms.  The Santa Clara wind farms I, II, III, IV, V, VI and Eurus VI will have installed capacity of 188 MW and assured energy of 666 GWh.  The construction of the wind farm has already started and operations are scheduled to start in the third

Project Campo dos Ventos Wind Farms.  In 2010, CPFL Geração acquired Campo dos Ventos I, II, III, IV, V and Eurus V wind farms.  Our project for construction of Campo dos Ventos II in the city of João Câmara and Parazinho, in the state of Rio Grande do Norte, is in progress.  We have also started the process of obtaining the respective licenses.  Operations of Campo dos Ventos II are scheduled to start in the third quarter of 2013.  The total estimated cost of construction is R$127 million.  This wind farm will have installed capacity of 30 MW and assured energy of 123 GWh.  The electricity from Campo dos Ventos II was sold through an auction, through CCEARs.  Construction of Campo dos Ventos I, III, IV, V and Eurus V wind farms is waiting for ANEEL’s authorization and operations are scheduled to start in the third quarter of 2013.  The total estimated cost of construction of these five wind farms is R$600 million.  They will have installed capacity of 150 MW and assured energy of 543.1 GWh.  We plan to sell the electricity from Campo dos Ventos I, III, IV, V and Eurus V wind farms in the next ANEEL auction, though CCEARs or in the free market.

Electricity Commercialization and Services

Commercialization Operations

Our subsidiary CPFL Brasil carries out our electricity commercialization operations.  Its key functions are:

·         procuring electricity for commercialization activities by entering into bilateral contracts with energy companies (including our generation subsidiaries and third parties) and purchasing electricity in public auctions;

·         reselling electricity to Free Consumers;

·         reselling electricity to distribution companies (including CPFL Paulista, CPFL Piratininga and RGE) and other agents in the electricity market through bilateral contracts; and

·         providing electricity-related services and consulting to Final Consumers and other agents.

The rates at which CPFL Brasil purchases and sells electricity in the free market are determined by bilateral negotiations with its suppliers and consumers.  The contracts with distribution companies are regulated by ANEEL.  In addition to marketing electricity to unaffiliated parties, CPFL Brasil resells electricity to CPFL Paulista, CPFL Piratininga and RGE, but profit margins from sales to related parties have been limited to an average of 10.0% by ANEEL regulations.  Prior to the New Industry Model Law, distribution companies were permitted to purchase up to 30.0% of their electricity requirements from affiliated companies.  The ability to sell electricity to affiliated companies has been eliminated under the New Industry Model Law, with the exception of those contracts approved by ANEEL prior to March 2004.  However, we are allowed to sell electricity to distributors through the open bidding process in the regulated market.

Electricity-Related Services

We offer our consumers a wide range of electricity-related services through CPFL Brasil.  These services are designed to help consumers improve the efficiency, cost and reliability of the electric equipment they use.  Our main electricity-related services include:

·         Electric energy management consultancy:  Our consulting and electrical power management services assist consumers in migrating to the free market.  CPFL Brasil’s contract management consulting services seek to support consumers’ decision-making with respect to electrical power and to strengthen our relation with consumers in the negotiation of price and electricity services;

·         Project design and construction:  CPFL Brasil plans, constructs, commissions and provides electricity to substations, transmission lines, transformer stations, load centers and electrical energy distribution lines, always in line with each consumer’s needs and growth expectations and in accordance with the most rigorous safety criteria, aiming for an optimal use of resources;

·         Management of assets:  In the maintenance arena, CPFL Brasil develops solutions that contribute to the optimal operation of electro-energetic installations for companies of all sizes, ensuring that interruptions to the electrical energy supply, and resulting business losses, are minimized;

·         Energy efficiency:  CPFL Brasil aims to guide and assist its consumers’ businesses with the most energy efficient solutions, leading to reduced energy costs and allowing for greater investments in core business pursuits; and

·         Co-generation:  Energy co-generation is the simultaneous and sequential production of energy from two or more kinds of fuel.  The most common form of co-generation in Brazil is the production of electrical energy from natural gas and/or biomass.  CPFL Brasil offers feasibility studies, project design and installation of co-generation operation systems for companies for which co-generation is an appropriate solution.

Competition

We face competition from other generation and commercialization companies in the sale of electricity to Free Consumers.  Distribution and transmission companies are required to permit the use of their lines and ancillary facilities for the distribution and transmission of electricity by other parties upon payment of a tariff.

Brazilian law provides that all of our concessions can be renewed once with approval from the MME or ANEEL as the granting authority, provided that the concessionaire so requests and that certain requirements related to the rendering of public services are met.  We intend to apply for the extension of each concession upon its expiration.  We may face significant competition from third parties in bidding for renewal of such concessions or for any new concessions.  ANEEL has absolute discretion over whether to renew existing concessions, and the acquisition of certain concessions by competing investors could adversely affect our results of operations.

Our Concessions and Authorizations

Hydroelectric generation projects with a capacity greater than 1,000 kW operated by an independent producer can usually only be implemented through concessions granted by ANEEL through public biddings (and the execution of a concession agreement).  Requests to renew these concessions are examined by ANEEL on a case‑by‑case basis, according to the terms of the related agreement and public bidding note.  However, ANEEL retains the power to deny the request to extend the concession period.

Certain projects such as wind farms, small scale hydroelectric power plants and thermoelectric power plants are implemented through an authorization awarded by the granting authority without the need for a public bidding process (unlike concessions).  Renewal of these authorizations is also at the discretion of ANEEL and is decided on a case-by-case basis.  ANEEL must provide justification for its decisions and any renewal must further the public interest.

For further information about concessions and authorizations, see “The Brazilian Power Industry – Concessions.”

Concessions

We operate under concessions granted by the Brazilian government through ANEEL for our generation and distribution businesses.  We have the following concessions with respect to our distribution business:

The table below summarizes the concessions relative to our generation business.  In addition to these concessions, CPFL Sul Centrais, as an Independent Producer with generating capacity of less than 1,000 kW, operates under a regulatory authorization rather than a concession agreement.

(1)           We have the contractual right to 51.54% of the assured energy of this facility under a 30-year rental agreement, expiring in 2028.  The concession for Serra da Mesa is held by Furnas and expired on May 7, 2040 (subject to MME approval).  On May 5, 2008, Furnas requested renewal of the concession for Serra da Mesa plant for an additional term of 29 years.  On February 15, 2011, ANEEL forwarded Furna’s request to MME, which approval is still pending.

Authorizations