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Transmission

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  Transmission
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  our objectives
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  performance

Our Transmission business operates in both the UK and the US. As a consequence of the differences in economic and regulatory environments, we report the results of Transmission as two segments: Transmission UK and Transmission US.

This section should be read in conjunction with the rest of this Operating and Financial Review, in particular our vision, strategy and objectives, business drivers and risks and external and regulatory environments.

Principal operations

Transmission UK

Our transmission operations in the UK encompass both electricity and gas transmission, comprising the following principal activities:

Electricity transmission owner

We own the electricity transmission system in England and Wales. Our electricity assets comprise approximately 7,200 kilometres of overhead line, about 675 kilometres of underground cable and 337 substations at 244 sites.

Gas transmission owner

We own the gas national transmission system in Great Britain. This comprises approximately 7,400 kilometres of high pressure pipe and 26 compressor stations, connecting to 8 distribution networks and to third party independent systems for onward transportation of gas to end consumers.

Electricity system operator

We are the Great Britain System Operator, responsible for managing the operations of both the England and Wales transmission system that we own and also the two high-voltage electricity transmission networks in Scotland. Day-to-day operation of the Great Britain electricity transmission system involves the continuous real-time matching of demand and generation output, ensuring the stability and security of the power system and the maintenance of satisfactory voltage and frequency.

Gas system operator

We operate the gas national transmission system. Day-to-day operation includes balancing supply and demand, maintaining satisfactory system pressures and ensuring gas quality standards are met.

French interconnector

We own and operate the UK assets, and a portion of the subsea cables, that comprise the electricity interconnector between England and France as part of a joint arrangement with the French transmission operator.

LNG storage

We own and operate four liquified natural gas (LNG) storage facilities in Great Britain.

 

As electricity transmission owner and gas transmission owner, we own and maintain the physical assets, develop the networks to accommodate new connections and disconnections, and manage a programme of asset replacement and investment to ensure the long-term reliability of the respective networks.

As electricity system operator and gas system operator, we undertake a range of activities necessary for the successful, efficient delivery, in real-time, of secure and reliable energy. In the case of electricity, this involves the continuous real-time balancing of supply and demand, and balancing services that include commercial arrangements with market participants that enable electricity demand or generation output to be varied. In the case of gas, we ensure the system is balanced with supply and demand at the end of each day. We are also required to maintain levels of short-term gas reserves to ensure domestic and other non-interruptable gas supplies can be maintained during prolonged cold conditions.

Transmission US

In the US, we are involved in electricity transmission and our Transmission US segment has the following principal activities:

Electricity transmission owner

We own and operate an electricity transmission network of approximately 13,800 kilometres spanning upstate New York, Massachusetts, Rhode Island, New Hampshire and Vermont. Our US electricity transmission facilities operate at voltages ranging from 69 kV to 345 kV, utilising nearly 13,700 kilometres of overhead line, nearly 160 kilometres of underground cable and 501 substations. We are the largest electricity transmission service provider in New England and New York by reference to the length of these high-voltage transmission lines.

Canadian interconnector

We own and operate a 224 kilometre direct current transmission line rated at 450 kV that is a key section of an interconnector between New England and Canada.

 

In New England and New York, our transmission business operates within two independent system operators, one in New England and one in New York. These non-profit entities are the system operators for the New England and New York networks and are responsible for operating organised wholesale markets for energy, for operating reserves and capacity, for maintaining the operating reliability of the New England and New York networks, for coordinating the activities of the transmission owners, and for managing transparent transmission expansion planning processes.

We are one of several transmission owners operating within each of these independent system operators. The transmission owners are responsible for certain aspects of the operation of the facilities they each own, such as maintenance, equipment restoration and switching operations.

National Grid works closely with the independent system operators in New England and New York to support efficient market and network operations and transmission investment.

Regulation

Transmission UK

Through our subsidiary, National Grid Electricity Transmission plc, we are the sole holder of an electricity transmission licence for England and Wales. This licence also covers our role as system operator for the transmission networks in Great Britain. Under the Electricity Act 1989 we have a duty to develop and maintain an efficient, coordinated and economical system of electricity transmission and to facilitate competition in the supply and generation of electricity. Under the Energy Act 2004, the holder of a transmission licence is prohibited from operating an interconnector and so the elements of the interconnector assets that we operate were transferred to a new subsidiary on 14 August 2006, the date at which the relevant part of the legislation came into force.

Through our subsidiary, National Grid Gas plc, we hold a gas transporter licence in respect of the national transmission system in Great Britain. Under the Gas Act 1986 we have a duty to develop and maintain an efficient and economical pipeline system for the conveyance of gas. Our LNG storage business is managed as a separate business from the gas transmission business; however, it is regulated under our gas transporter licence.

Ofgem sets price controls in respect of the amounts that can be recovered by the owners and operators of electricity and gas network infrastructure in the UK. These controls are reviewed every five years and the current price control for both electricity and gas transmission activities covers the period 1 April 2007 to 31 March 2012.

The key elements of the current price control for both gas and electricity transmission are that we earn a 4.4% post-tax real rate of return on our regulatory asset value, a £4.4 billion baseline five year capital expenditure allowance and a £1.2 billion five year operating expenditure allowance.

The charges that we can make for access to our UK electricity and gas transmission systems are determined by formulae linked to the UK retail price index (RPI). These formulae are based upon Ofgem’s estimates of operating expenditure, capital expenditure and asset replacement, together with an allowed rate of return. In addition, we are subject to a number of incentives that can adjust our transmission network revenue.

The transmission network reliability incentive scheme is based on the reliability of the electricity transmission network in England and Wales. For 2007/08, there was the potential to earn additional revenue of up to 1% if loss of supply was less than 237 MWh. For loss of supply in excess of 263 MWh, up to a collar of 619 MWh, we could potentially have lost up to 1.5% of revenue. For 2008/09, an identical incentive scheme is in place.

The SF₆ incentive, a reward-only scheme, is based on reducing SF₆ gas emissions. The 2007/08 target was for SF₆ losses to be below 3%, with a sliding target over the regulatory period, with the 2011/12 target of 2%.

Both our UK electricity and gas system operation activities are subject to financial incentive schemes to promote efficiency. If we operate our networks more efficiently than Ofgem’s forecasts, we can increase our revenues, with penalties for reductions in performance.

For electricity transmission, we also have a balancing services incentive scheme that covers the external costs incurred in balancing the system. For 2008/09, we have accepted an incentive scheme with a cost target between £529 million and £544 million, such that we retain 25% (up to a cap of £15 million) of any savings below £529 million, and we lose 25% (down to a collar of £15 million) of any costs in excess of £544 million.

For gas transmission, we have a number of incentive schemes covering activities such as cost of investment for additional capacity to facilitate new connections to the system, managing constraints, the provision of market information, the cost of purchasing shrinkage gas (gas used in operating the system) and other gas system operation costs.

Transmission US

Revenue for our transmission business in New England and New York is collected from transmission customers, including from our Electricity Distribution & Generation business, pursuant to tariffs approved by state utility commissions and by the Federal Energy Regulatory Commission.

In New York, our rates allow for capital expenditure on our transmission network based on historic levels, which are significantly lower than required to maintain a safe and reliable network. Over the past few years, we have overspent rate plan levels by a factor of around two. We are permitted to petition for additional revenues with respect to capital expenditure, which we have done with respect to the 2008 calendar year. We anticipate that we will also petition for deferred recovery of qualifying incremental investment for calendar years 2009 to 2011.

In New England, the tariff allows for recovery of, and a return on, capital expenditures as new investment enters service, bringing immediate revenue benefits.

In New York, Massachusetts and Rhode Island, we are subject to penalties if the reliability of our electricity distribution and transmission networks fails to meet specific targets related to customer impacts.

The New York rate plan is orientated around efficient operations. To the extent that we perform necessary activities and spend less than the forecast operating costs set in the rate plan, it equates to increased income for us. Part of the rate plan deals with forecast energy delivery. To the extent that more energy is delivered, we increase revenue. Conversely, if we deliver less than forecast, our revenue goes down. In New England, efficient operations are also key. However, the rate structure is such that network availability, energy delivery and operational expenditure are all pass-through items.

Current and future developments

In addition to the current and future developments section, the following developments are relevant to the Transmission business.

UK price controls

The previous price control arrangements for our electricity and gas transmission networks in the UK ceased on 31 March 2007 and the current price control period covers the period from 1 April 2007 to 31 March 2012.

Following our acceptance in principle of the proposals, we have worked closely with Ofgem to agree the necessary licence amendments to enact the final proposals.

We also accepted Ofgem’s final proposals for the system operator schemes that applied to 2007/08 for both gas transportation and electricity transmission and their proposals for the one year period from 1 April 2008.

Other UK developments

Following the price control allowances of approximately £350 million for transmission reinforcement works to accommodate the growing impact of renewable energy from Scotland, works are underway. In particular, the upgrade of the two double circuits connecting Scotland and England and associated works will be undertaken over the price control period. At this time, network access is being sought by approximately 10 GW of renewable generation projects in Scotland consisting of over 100 projects, each with connection agreements with National Grid. For England and Wales, connection offers have been made to an additional 7 GW of renewable generation.

The 316 kilometre pipeline connecting the new LNG importation terminals at Milford Haven has been completed on time and in advance of the terminals. The pipeline has been delivered to a very challenging timetable. It was formally opened by UK Energy Minister Malcolm Wickes in November 2007.

The pipeline will initially have to operate at 70 bar pressure rather than its design pressure of 94 bar because, following a public inquiry, planning permission has been refused for a pressure reduction installation at the end of the pipeline at Tirley in Gloucestershire. The effect of this is to reduce the pipeline’s capacity by approximately 25% and a force majeure notice for this shortfall has been issued under our contracts with gas shippers. Work is progressing towards the submission of revised planning applications in autumn 2008.

Major pipelines have also been completed and commissioned from Nether Kellett in Lancashire to Pannal in North Yorkshire as part of works to import gas from Norwegian gas fields at Easington and in south west England to meet increased demand requirements.

US regulatory developments

In the US, consistent with the Federal Energy Regulatory Commission’s (FERC) transmission pricing policy, we applied for an increased rate of return on our investment in transmission assets in New England. FERC approved our application in October 2006. In March 2008, FERC also approved incentive returns for new transmission investment completed and in service between 1 January 2004 and 31 December 2008. Incentives applicable to transmission investments in service after 31 December 2008 require a separate petition filing with the FERC. Opposing parties may seek appeal of these FERC determinations.

We have been pursuing a regional planning process with the New York independent system operator to identify regional reliability and economic transmission needs. Progress has been made and the New York independent system operator is in its third year of its reliability planning process implementation. We have proposed a regulated transmission solution to reliability needs identified by the New York independent system operator. In addition, as part of FERC’s recent open access transmission tariff reform, the New York independent system operator has made a filing on a process to address economic planning.

On 21 December 2007 we petitioned the New York Public Service Commission for deferred recovery of incremental investment on major capital programmes for calendar year 2008, as permitted under our rate plan. We anticipate that we will also petition for deferred recovery of qualifying incremental investment for calendar years 2009 to 2011.

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