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Non-regulated businesses and other

• Introduction
• Highlights
• UK
  Property
• About non–regulated
  businesses and other
• Performance against
  our objectives
• Financial
  performance

Our non-regulated businesses and other operations are located principally in the UK. For reporting purposes, they are not treated as a segment, but are instead reported within other activities.

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

• Metering

  National Grid Metering and OnStream provide installation, maintenance and meter reading services to gas and electricity suppliers in the regulated and unregulated markets respectively.

  Our metering businesses provide services on behalf of gas suppliers for an asset base of approximately 20 million domestic, industrial and commercial meters.

• Grain LNG

  National Grid Grain LNG is the first new LNG import terminal constructed in the UK for some 30 years, involving planned investment of approximately £830 million for Phases I, II and III.

• UK Property

  National Grid Property is responsible for managing all our major occupied properties in the UK, and for the management, clean up and disposal of surplus properties, largely comprising former gas works.

• BritNed

  BritNed is a joint venture between National Grid and TenneT, the Dutch transmission system operator, to build and operate a 260 kilometre 1,000 MW subsea electricity link between the Netherlands and the UK.

• US non-regulated businesses

  Includes LNG storage, LNG road transportation, unregulated transmission pipelines, West Virginia gas fields and home energy service activities that were acquired as part of the KeySpan acquisition.

In addition to our non-regulated businesses above, other activities comprise the following other operations and corporate activities.

• xoserve

  xoserve delivers transportation transactional services on behalf of all the major gas network transportation companies in Great Britain, including National Grid.

• Fulcrum

  Fulcrum is the leading provider of gas connections and associated design services operating across the whole of the mainland UK. As an independent gas transporter, Fulcrum owns and operates gas distribution networks. Fulcrum also operates as an installer of electricity and water distribution infrastructure.

• Corporate activities

  Corporate activities comprise central overheads, insurance and expenditure incurred on business development.

 

Business drivers

The principal business drivers for our non-regulated businesses and other operations include the following:

• Multi-year contractual arrangements

  The majority of National Grid Metering’s domestic meters are covered by long-term contracts with gas suppliers.
  
  OnStream has a seven year contract with Centrica for the provision of gas and electricity meters.
  
  Phase I of Grain LNG is underpinned by a long-termcontract with BP/Sonatrach. Similarly, Phase II, anticipated for completion in 2008, is underpinned by long-term contracts signed with Centrica, Gaz de France and Sonatrach.
  
  Phase III, for which construction began in June 2007, also has long-term contracts for capacity with E.ON, Iberdrola and Centrica.

• Competition

  OnStream and Fulcrum operate in competitive markets and their revenues are therefore determined by how successful they are in obtaining business from customers.

• Capital investment

  We are investing in technology such as smart metering and automated meter reading systems to grow our metering businesses and in infrastructure projects such as Grain LNG and BritNed.

• Efficiency

  Efficiency in delivering capital programmes and in operating our businesses and corporate activities result in driving improved financial performance.

 

External market and regulatory environment

The majority of our non-regulated businesses and other operations either operate in markets related to those of our principal businesses or provide support to our own businesses.

With the exception of National Grid Metering, our non-regulated businesses and other operations are only indirectly affected by the relevant regulatory regimes. National Grid Metering is regulated by Ofgem as it was the incumbent provider of meters to gas suppliers and retains a large share of the legacy installed base of gas meters in the UK. It is subject to price controls, although the pricing for the majority of meters is instead specified by long-term contracts which provide gas suppliers with the flexibility to replace our meters while reducing the risk of asset stranding.

OnStream is a participant in the competitive market that now exists in the provision of new meters to gas and electricity suppliers who wish to install or replace meters as required. Grain LNG has been granted exemptions by Ofgem from the regulated third party access provisions for Phases I, II and III of its development. These exemptions introduced certain obligations to put in place effective measures to allow third parties to access unused capacity and are similar in nature to those in place at other new gas supply infrastructure projects in the UK.

Current and future developments

Metering competition investigation

On 25 February 2008, Ofgem announced a decision that National Grid Metering had infringed the Competition Act in relation to development of term contracts entered into with gas suppliers in 2004. A fine of £41.6 million was imposed, but has been suspended pending appeal.

We are convinced that the contracts do not infringe competition law and therefore believe that they should remain in full effect. We also believe that the £41.6 million fine is wholly inappropriate. An appeal has been lodged with the Competition Appeal Tribunal.

Property and environmental matters

As described in Current and future developments, an appeal went before the House of Lords in May 2007 regarding a former gas site which was not included in the assets that formed part of the gas privatisation in 1986 and had therefore never been owned by National Grid, but for which liability for remediation had been determined by the High Court to be partly our responsibility.

In June 2007, the House of Lords unanimously allowed our appeal, upholding the argument that liability for contamination caused by the nationalised gas industry was not one which transferred to the privatised gas industry. As a consequence, we have no primary liability under Part IIA of the Environmental Protection Act with respect to this or other former UK gas sites which did not form part of the assets we acquired at the time of privatisation.