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Transmission

Performance during the year

About the business

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

The external and regulatory environments in which our Transmission business operates are described in External market environment and Regulation, our business drivers are described in Business drivers and our objectives and strategy are set out in Objectives and strategy . Further information relevant to an understanding of our Transmission business is included below.

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 4,479 miles of overhead line, about 420 miles of underground cable and 337 substations at 244 sites.
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 realtime matching of demand and generation output, ensuring the stability and security of the power system and the maintenance of satisfactory voltage and frequency.
Gas transmission owner	We own the gas national transmission systemin Great Britain. This comprises approximately 4,326 miles 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.
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 liquefied 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 daily metered gas supplies can be maintained during prolonged cold conditions.

Electricity transmission system – UK

Map showing National Grid’s electricity transmission system in the UK

Gas transmission system – UK

Map showing National Grid’s gas transmission system in the 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 the Great Britain System Operator, in accordance with the British Electricity Trading and Transmission Arrangements (BETTA). We have a duty under the Electricity Act 1989 to develop and maintain an efficient, coordinated and economical system of electricity transmission and to facilitate competition in the supply and generation of electricity. Charges to users of the transmission networks comprise two principal elements: transmission network use of system charges in respect of the electricity transmission owner activity and balancing services use of system charges in respect of the electricity system operator activity. We collect these charges from all Great Britain transmission network users and make payments to the owners of the Scottish transmission networks for the element of the transmission network use of system charges that relate to their networks.

Through our subsidiary National Grid Gas plc, we hold a gas transporter licence in respect of the gas national transmission system. Detailed arrangements for the gas industry are provided through the Uniform Network Code approved by Ofgem, which defines the obligations, responsibilities and roles of the industry participants. We have a duty under the Gas Act 1986 to develop and maintain an efficient and economical pipeline system for the conveyance of gas. Under the terms of our licence, we receive income in our role as gas transmission owner through charges to shippers for entry and exit capacity and in our role as gas system operator through commodity charges.

Ofgem sets price controls in respect of the amounts that can be recovered by the owners and operators of electricity and gas infrastructure in the UK. The last price controls for our electricity and gas transmission activities ended on 31 March 2007, having respectively commenced as five year price controls for electricity on 1 April 2001 that were extended by one year, and five year price controls for gas that commenced on 1 April 2002. The new five year price control periods for both electricity and gas transmission activities commenced on 1 April 2007.

Our LNG storage business is managed as a separate business from the gas transmission business; however, it is regulated under our gas operators' licence. A portion of LNG storage capacity is set aside to support network operating requirements, with the remaining capacity sold to gas shippers.

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. The French elements of the interconnector are owned by Réseau de Transport d'Electricité (RTE), the French transmission operator.

Price controls

The charges that we can make for access to our UK electricity and gas transmission systems are determined by a formula linked to the retail price index (RPI). Up until 31 March 2007, these were set at RPI -1.5% for electricity and RPI -2% for gas. These formulae are based upon Ofgem's estimates of operating expenditure, capital expenditure and asset replacement together with an allowed rate of return. The rate of return up until 31 March 2007 was set at a real pre-tax rate of 6.25% on our regulatory asset value for both our electricity and gas networks.

Our electricity regulatory asset value as of 31 March 2007 is currently £6.0 billion (£5.6 billion March 2006) and for gas it is £3.3 billion (£2.8 billion March 2006).

In the UK, where our capital investment is determined to be efficiently invested by Ofgem, we obtain a rate of return on that investment. The new price control allows a return of 4.4% posttax real rate of return on our regulatory asset value.

In the UK, we are subject to an incentive scheme based on the reliability of the electricity transmission network in England and Wales. This is based on achieving reliability in excess of 99.9999%. For 2006/07, there was the potential to earn additional revenue up to 1% if loss of supply is less than 248 MWh. For loss of supply in excess of 274 MWh, up to a collar of 653 MWh, we could potentially lose up to 1.5% of revenue. For 2007/08 an identical incentive scheme is in place.

Both our UK gas and electricity system operations have incentive schemes where, if we operate our networks more efficiently than Ofgem's forecasts, we can increase our revenues. For electricity, we have an external cost scheme that covers the costs incurred in balancing the system. We also have an internal cost incentive scheme that covers the internal costs of the system operator function. Our electricity system operator external incentive, the Balancing Services Incentive Scheme (BSIS), has historically been agreed on an annual basis. For the 2006/07 scheme, we decided not to accept Ofgem's proposals for the BSIS target as we considered that neither of Ofgem's external proposals offered an appropriate balance of risk and reward. Normal arrangements for the operation of the system and management of payments continued, but without a financial incentive on National Grid. We are at all times obligated under our electricity transmission licence to operate the system in an economic and efficient manner. For 2007/08, we have accepted a cost target of £430 million to £445 million. We retain 20% of any cost performance under this target deadband, up to a cap of £10 million and we incur 20% of any cost outturn above the deadband, up to a collar of £10 million.

For gas, we have eight incentive schemes covering activities such as cost of investment for additional capacity, managing constraints, market information provision, the cost of purchasing shrinkage gas (gas used in operating the system or lost during transport) and other gas system operation costs.

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 8,600 miles 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 8,500 miles of overhead lines, 89 miles of underground cable and 501 substations.

We are the largest electricity transmission service provider in the northeastern US by reference to the length of these high-voltage transmission lines.

Canadian interconnector

We own and operate a 139 mile direct current transmission line rated at 450 kV that is a key section of an interconnector between New England and Canada.

Transmission network – US

Map showing National Grid’s transmission network in the US

In New England and New York, our transmission business operates within two independent system operators, ISO New England and New York ISO. These non-profit entities are the system operators for the New England and New York networks. The independent system operators are responsible for operating organised wholesale markets for energy, 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.

Rate plans

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

In New York, capital expenditure in the rate plan for transmission was set at historic levels, which are significantly lower than required to maintain a safe and reliable network. For the past three years, we have overspent rate plan levels by a factor of at least two.

This coming year, our plans are to spend at a level similar to 2006/07. The rate plan includes provisions for us to petition the New York Public Service Commission for recovery of incremental investment.

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

In the US, we are subject to reliability penalties if the combined performance of our electricity distribution and transmission networks in New York fails to meet targets associated with the number and duration of disturbances that impact customers.

The New York rate plan is oriented 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 shareholders. 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.

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