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Transmission

Performance during the year

Current and future developments

In addition to the current and future developments described earlier, 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 next price control period covers the period from 1 April 2007 to 31 March 2012.

We have accepted in principle Ofgem's final proposals in respect of our role as owner of electricity and gas transmission networks. The key elements of these proposals are 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. 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. This process should complete during the first half of 2007.

We have accepted Ofgem's final proposals for the system operator schemes to apply for one year from 1 April 2007 for both gas transportation and electricity transmission.

Other UK developments

We continue to work with the UK Government and Ofgem to make possible the necessary investments in the electricity transmission network to support the development of renewable energy projects. The final proposals from Ofgem for transmission investment for renewable generation recognised the need to invest in our networks to accommodate renewables and, together with the transmission price control, funding costs for £350 million of investment will be allocated to our electricity transmission owner activity allowable revenue for the upgrade of our Anglo-Scottish interconnector and associated works (conditional on the satisfactory outcome of key planning consents). At this time, access is being sought by approximately 12 GW of renewable generation consisting of 165 projects, each with connection agreements in Scotland. For England and Wales connection offers have been made to an additional 5 GW of renewable generation.

A number of gas pipeline and compressor projects are being progressed to respond to new import pipelines and gas import facilities. Around 90 miles of gas pipeline has been constructed from Ganstead to Asselby in the region of Humberside and from Pannal in North Yorkshire to Nether Kellet in Lancashire to enable increased imports at Easington. Around 200 miles of new pipeline is being built in South Wales and Gloucestershire to cater for the Milford Haven importation facility. Following the decision of the High Court to set aside the planning consent granted by Neath Port Talbot Council for Cilfrew pressure reduction installation on the Milford Haven pipeline, work on the installation was suspended. On 10 April 2007, National Grid issued a force majeure notice, under our contract with the shippers, as this event, which was outside our control, may result in us not being able to provide, or to be delayed in providing, the full amount of capacity that has been allocated to gas shippers using the Milford Haven facility. On 15 May 2007, Neath Port Talbot Council voted again on our planning application, which was then approved. National Grid is now assessing the actual delay (if any) of providing the full amount of capacity that has been allocated to the shippers.

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, but FERC has yet to determine its response to several parties which have sought to appeal this approval.

We have been pursuing a regional planning process with the New York ISO to identify regional reliability and economic transmission needs. Progress has been made and the New York ISO is in its second year of its reliability planning process implementation. We will be proposing a regulated transmission solution to reliability needs identified by the New York ISO. In addition, as part of FERC's recent open access transmission tariff reform, the New York ISO is developing a process to address economic planning.

Emissions trading

The second year of Phase 1, from 1 January 2005 to 31 December 2007, of the European Union emissions trading scheme commenced on 1 January 2006. Its purpose is to reduce the level of carbon dioxide emitted by placing a financial incentive on participants to reduce their emissions of this greenhouse gas. Allowances are granted to participants in accordance with a national allocation plan and any shortfall or surplus can be traded with other participants.

Our total carbon dioxide emissions between 1 January and 31 December 2006 in the UK, for installations captured by the scheme, were below our allocation and so the scheme did not have a significant financial effect on our results in 2006/07. We similarly do not expect the scheme to have a significant impact on our results in 2007 or 2008. The national allocation plan detailing installation level allowances for Phase 2 of the European Union emissions trading scheme, covering the period from 1 January 2008 to 31 December 2012, has now been published by the UK Department of the Environment, Food and Rural Affairs. Our allocation of allowances for Phase 2 of the scheme is lower than for Phase 1 of the scheme but in line with expectations.