Current and future developments
External market developments
Market structure and ownership
There have been no significant changes in the structure of the UK energy infrastructure market since 2005, when we sold four of our regional gas distribution networks to other operators. The most significant changes in ownership during the year were the takeover of Scottish Power (owner of one of the Scottish transmission networks that we operate) by Iberdrola, a Spanish utility in April 2007 and the sale by United Utilities of its electricity distribution network to North West Electricity Networks in December 2007.
In the northeastern US, there have been no significant structural changes although the market continues to evolve, while the most significant ownership changes have been our acquisition of KeySpan in August 2007 and the proposed acquisition by Iberdrola of Energy East, a utility operating in New York, Connecticut, Massachusetts and Maine.
Energy market developments
In both the UK and the US, high energy prices have been a key feature during the last 12 months and this has led to significant increases in bills to consumers for their energy supplies.
Both the UK and the US continue to be in a period of changing energy supply patterns, as more reliance is placed on imported gas and on new sources of electricity generation, including renewables. In the UK, the decline in UK continental shelf gas reserves and the UK government’s emphasis on combating climate change and encouraging renewable generation mean we continue to see a trend toward greater use of imported gas for both consumption and use in power generation. In the US, declines in conventional gas supplies are expected to be replaced from other sources, including liquefied natural gas (LNG). Furthermore, there is significant interest in the development of renewable power generation.
As a consequence of the decline in gas production from the UK continental shelf, our latest forecast is that the UK will import around 50% of its gas requirements by the end of the decade.
Gas supply projections
billion cubic metres per annum
These changes are expected to impact all our electricity and gas transmission networks. In particular, significant investment is planned in our UK electricity and gas transmission networks and gas distribution networks to link new power plants and gas import facilities with domestic, business and industrial consumers, while in the US asset replacement and renewable power developments will require increasing investment in our US electricity transmission and distribution networks.
Activity to increase the UK’s import capability has involved the development of new import infrastructure by National Grid and other market participants. During the year, a number of significant infrastructure projects were commissioned, including a major gas pipeline in south Wales, linking the Milford Haven LNG import terminals to our gas network.
In addition, we continue to invest in our own LNG import facility on the Isle of Grain and have commenced work in conjunction with TenneT on the construction of BritNed, an electricity interconnector which will link the UK and the Netherlands electricity markets. We are also investigating the feasibility of constructing a Belgian electricity interconnector in conjunction with Elia.
In the US, there has also been a significant increase in applications for the construction of new gas pipeline and LNG import terminal capacity, focused on the northeastern, midwest and southeastern US. This includes an offshore LNG import terminal in Massachusetts Bay, near Boston, that will provide additional gas supply capacity to New England gas consumers.
Regulatory developments
UK and European regulatory developments
During the year ended 31 March 2008, there were no significant changes in the legislative and regulatory framework in the UK.
In September 2007, the European Commission published a third package of legislative proposals for energy markets within the European Union. The key areas include unbundling of transmission and distribution of energy from customer supply and generation activities, the creation of a European regulatory agency for energy and the establishment of a European network of transmission system operators for gas and electricity respectively to facilitate cooperation and coordination at both a European and regional level. While there are many complex issues for which resolution is required, there is a strong desire for political agreement to be reached during 2008.
This was complemented in January 2008 by a number of environmental proposals focusing on renewable energy, emissions trading, carbon capture and energy efficiency.
In April 2008, Ofgem announced a review into the operation of the energy markets in the UK and how the regulatory model in the UK is functioning.
US regulatory developments
The principal US regulatory policy developments have been an increased focus on reducing carbon emissions, involving the need for significant increases in energy efficiency and the development of renewable generation.
State regulatory commissions and other policy makers in the various jurisdictions are taking different approaches to achieve this focus, including the establishment of targets for reductions in electric load growth, utility energy efficiency programmes, and renewable generation. There is also an ongoing debate about the potential for revenue decoupling mechanisms to address disincentives to implementing energy efficiency programmes.
Changes in price controls, rate plans and other agreements
UK price controls
In the UK, five year price controls for our electricity and gas transmission networks in the UK came into operation on 1 April 2007, together with one year system operator price controls. Our UK gas distribution networks were also subject to a one year price control review during 2007/08, the principal impact of which was to increase prices by approximately 11% and to reduce the seasonality of revenues.
We have accepted Ofgem’s final proposals for new price controls with respect to our role as owner and operator of four of the eight gas distribution networks in Great Britain, covering the period from 1 April 2008 to 31 March 2013. The key elements are a 4.3% post-tax real rate of return on our regulatory asset value, a £2.9 billion baseline five year capital expenditure allowance and a £1.9 billion five year operating expenditure allowance. We have also accepted system operator price controls for our electricity and gas transmission operations for 2008/09.
US rate plans
In the US, in conjunction with our acquisition of KeySpan, we agreed rate plans with the New York Public Service Commission with respect to our gas distribution operations in New York City and Long Island. Under these plans, base delivery rates for our New York City operations increase by $5 million (£2.5 million) for calendar year 2008, with further increases of $5 million (£2.5 million) each year up to 2012. For our Long Island operations, base delivery rates increase by $60 million (£30 million) for calendar year 2008, with increases of $10 million (£5 million) each year up to 2012. Both rate filings allow for increases in taxes and environmental remediation costs to be deferred and recovered in future periods.
We have also filed, or are planning to file, rate plan applications that would increase gas distribution rates in upstate New York, Rhode Island and New Hampshire and decrease electricity distribution rates in New Hampshire. We have also applied for deferred recovery of incremental investment in upstate New York.
Other agreements
In conjunction with the acquisition of KeySpan, revised agreements were entered into with the Long Island Power Authority (LIPA) for the period until 2013 with respect to our role as operator of their electricity transmission and distribution network on Long Island, an option for LIPA to purchase two generation plants that we own, and the provision of energy procurement and management services.
During the year we also entered into a joint venture arrangement with TenneT to construct an electricity interconnector between the UK and Netherlands and an agreement with Elia to explore the feasibility of constructing an electricity interconnector with Belgium.
We have entered contracts with E.ON, Iberdrola and Centrica for a further 6.7 billion cubic metres of long-term LNG importation capacity at our Isle of Grain LNG import terminal in the Thames Estuary, this being Phase III of our development of this facility. Work commenced during 2007 and a contract has been awarded to CB&I to deliver the second jetty, an additional 190,000m3 storage tank and associated works. National Grid is planning to invest £310 million in this additional development, which is expected to bring total planned investment in Grain LNG to approximately £830 million.
Legal and related matters
Metering competition investigation
On 25 February 2008, Ofgem announced it had decided we had breached the UK Competition Act 1998 with respect to the development of term contracts with gas suppliers entered into by our UK metering services business in 2004 and imposed a fine of £41.6 million, which has been suspended pending our appeal to the Competition Appeal Tribunal. We believe that we have never been anti-competitive and that we will be successful in appealing this decision. We have therefore not provided for this fine in our financial statements.
Environmental remediation
In last year’s Annual Report and Accounts we noted that, together with the Environment Agency, we had sought judicial review to clarify the legal position with regard to the remediation of a site in Bawtry, Yorkshire. This former gas site was not part of the assets that formed part of the gas privatisation in 1986 and therefore had never been owned by National Grid. In June 2007, the House of Lords announced that it was allowing our appeal, and confirmed that National Grid has no legal liability with respect to the site in Bawtry, nor for other former UK gas sites which did not form part of the assets we acquired at the time of privatisation.
KeySpan Department of Justice investigation
In May 2007, KeySpan received a civil investigative demand from the Antitrust Division of the United States Department of Justice, requesting the production of documents and information relating to its investigation of competitive issues in the New York City electricity capacity market prior to our acquisition of KeySpan. The civil investigative demand is a request for information in the course of an investigation and does not constitute the commencement of legal proceedings, and no specific allegations have been made against KeySpan. In April 2008, we received a second civil investigation demand in connection with this matter. We believe that KeySpan’s activity in the capacity market has been consistent with all applicable laws and regulations and will continue to cooperate fully with this investigation.