It also moves the proposed $3 billion (£2 billion) merger into the final approval stage. Subject to approval by the US Securities and Exchange Commission, the merger is expected to be completed early in the new year.
The rate settlement plan is the first of this duration to be agreed by the New York regulatory body. Among the parties who negotiated and endorsed the merger plan filing were the staff of the NYPSC, State agencies, businesses, consumers and environmental groups.

The major benefits for Niagara Mohawk customers are:

• an 8% reduction in delivery rates upon completion of the acquisition (equivalent to $152 million a year)
• delivery rates then fixed for 10 years, subject to limited adjustments
• commitment to an agreed service plan, ensuring improved customer service and reliability
• extension of Niagara Mohawk's current gas rate settlement by 16 months, until the end of December 2004.

For National Grid shareholders, the key benefits are:

• an allowed 10.6% post tax return on equity after equal sharing of the merger savings attributable to New York
• retention of 100% of outperformance up to a post tax return on equity of 11.75%
• sharing with customers of further savings above 11.75%
• continuation of full pass through of commodity cost charges to customers.

Roger Urwin, Chief Executive of National Grid Group said, "We are delighted with this news. The New York rate plan provides a decade of regulatory stability with incentives for us to outperform. It means that we can be confident of delivering the benefits of the Niagara Mohawk acquisition for customers and shareholders alike and that the acquisition remains well on track for completion by early next year."

The agreement is based on the assumption of total annual savings of $190 million. Of this, $60 million a year is carried forward from Niagara Mohawk's existing PowerChoice agreement, which reflected efficiency gains following divestiture of its generating business.

The remaining $130 million a year arises from merger-related savings. This is an increase from the annual savings of $90 million estimated when the acquisition was first announced and represents 13% of the enlarged US business controllable cost base. The agreement assumes that the savings are achieved within four years of completion with half of these savings anticipated in the first year.

The customer rate reductions are achieved both by sharing the merger and efficiency savings attributable to New York operations and through extending the period during which Niagara Mohawk's stranded costs are recovered.

Upon completion, National Grid will double the scale of its US operations. More than 60% of Group's electricity operating profits will then come from the US, compared to around 35% at present. National Grid has confirmed its confidence of earning a 10.5% pre-tax return on its enlarged US business by March 2005.