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Electricity Distribution & Generation

• Introduction
• Highlights
• US map
• About Electricity
  Distribution & Generation
• Performance against
  our objectives
• Financial
  performance

Our Electricity Distribution & Generation business operates in the northeastern US. It is reported as a single segment in our financial statements as Electricity Distribution & Generation US.

We describe below the principal operations, current and future developments and performance of the Electricity Distribution & Generation US segment, however, 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

Electricity Distribution

We are one of the leading electricity distribution service providers in the northeastern US, as measured by energy delivered, and one of the largest utilities in the US, as measured by the number of electricity distribution customers.

Our electricity distribution system spans upstate New York, Massachusetts, Rhode Island and New Hampshire, which, together with the system on Long Island owned by the Long Island Power Authority (LIPA), provides energy to customers that include homes, small and large commercial and industrial enterprises.

We are responsible for building, operating and maintaining our electricity distribution networks in New England and New York, and LIPA’s transmission and distribution networks on Long Island. What we do is essential to the economies of the regions in which we operate and the comfort and well-being of the millions of people who depend on our services.

Our aim is to provide a reliable, high quality electricity distribution network to our customers, and a high level of customer service. In providing these services, we are committed to safeguarding our global environment for future generations.

Through our electricity distribution networks we serve approximately 3.4 million electricity customers over a network of approximately 116,000 circuit kilometres (72,000 miles) in New England and New York.

On Long Island, we are responsible for managing the electricity transmission and distribution system on behalf of LIPA. The LIPA service territory consists of most of Nassau and Suffolk counties on Long Island, together with the Rockaway Peninsula which forms part of Queens county (part of New York City). It covers approximately 3,200 square kilometres, encompassing nearly 90% of Long Island’s total land area. LIPA owns approximately 2,100 kilometres (1,300 miles) of transmission line facilities that deliver power to approximately 170 substations in its electricity system. From these substations, approximately 21,000 circuit kilometres (13,000 miles) of distribution facilities distribute electricity to 1.1 million customers.

Our responsibilities include managing the day-to-day operations and maintenance of LIPA’s transmission and distribution system, providing services to LIPA’s retail customers, purchasing and selling electricity on behalf of LIPA and managing the delivery of the energy that we produce under contract to LIPA.

Generation

We own 57 electricity generation plants on Long Island that together provide 4.1 GW of power under contract to LIPA. We also manage the fuel supplies for LIPA to fuel our plants and purchase energy, capacity and ancillary services in the open market on LIPA’s behalf.

Our plants consist of oil and gas fired steam turbine, gas turbine and diesel driven generating units. The smallest are 2 MW diesel driven units on the eastern end of Long Island and the largest are four 375 MW steam units based at Northport. Any available power not purchased by LIPA is made available for sale in the open market.

Stranded cost recoveries

Stranded cost recoveries capture the recovery of some of our historical investments in generating plants that were divested as part of the restructuring process and wholesale power deregulation process in New England and New York. This includes the recovery of certain above market costs of commodity purchase contracts we are committed to purchasing that were in place at the time of restructuring and deregulation.

We are able, with the approval of the utility commissions in the states in which we operate, to recover most of these costs through a special rate charged to electricity customers.

Pursuant to the settlement and stranded cost recovery agreements in effect in each of the states in which National Grid operates, this revenue stream will decline as the recovery of stranded costs is completed. As a consequence, and because we are returning the cash generated from stranded cost recoveries to shareholders, we do not consider this to be part of our business performance and so this is excluded from adjusted operating profit.

Regulation

The prices we set in the US are based on a cost of service model, whereby the prices established by our regulators are designed to cover the costs we incur in providing services to customers, together with a return on capital invested.

Customer bills typically comprise a commodity rate, covering the cost of electricity delivered, and a delivery rate, covering our electricity delivery service. Delivery rates comprise a combination of a per customer charge, a demand charge and a price per additional kilowatt hour of electricity delivered. The allocation and applicability among these components vary by size of customer.

Prices set by our rate plans are based on estimates of costs and our return and estimates of volumes expected to be delivered, which may differ from actual amounts. A substantial proportion of our costs, in particular electricity purchases for supply to customers, are pass-through costs, in that prices are adjusted on a regular basis to ensure that over- or under-recovery of these costs is returned to or recovered from customers. As a consequence we have no economic exposure to such costs, however, there can be timing differences between the financial period when we incur such costs and the financial period when our prices are adjusted to return or charge for any over- or under-recovery.

Our Long Island generation plants sell capacity to LIPA under a contract, approved by the Federal Energy Regulatory Commission (FERC), which provides a similar economic effect to cost of service rate regulation.

Our rate plans include sharing arrangements, which allow us to retain some of the benefit of efficiency improvements in excess of those built into rate plan assumptions. Typically we retain all the benefits up to a certain level of return on equity, after which we retain only a proportion of the benefits, with the balance returned to customers.

Rate plan	Equity return	Equity to debt ratio		Sharing arrangements
Upstate New York	10.6%	47/53		100% to 11.75%, 50% to 14%, 25% to 16%, 10% above 16%
Massachusetts	*	*		Not specified
Rhode Island	10.5%	50/50		50% from 10.5-11.5%, 25% above 11.5%
New Hampshire	9.67%	50/50		50% above 11%

*Massachusetts returns are based on the average of a peer group of utilities until 31 December 2009

We also have a number of service standards for our operations. These vary among our rate plans, but include such measures as reliability levels, customer satisfaction levels, customer complaints, customer meter reading performance, customer call answering, energy efficiency programmes and other measures. Many of these service standards have penalties if we do not achieve certain specified minimum standards.

The upstate New York rate plan also allows for subsequent recovery of specified electricity related costs and revenue items that have occurred since the rate plan was established, once these amounts exceed $100 million (£51 million). These ‘deferral account’ items include changes from the levels of pension and post-retirement benefit expenses from levels specified in the rate plan, as well as various other items, including storms, environmental remediation costs, and certain rate discounts provided to customers, together with costs and revenues from changes in tax, accounting and regulatory requirements.

Current and future developments

In addition to the current and future developments section, the following developments are relevant to the Electricity Distribution & Generation business.

Acquisition of KeySpan

The acquisition of KeySpan resulted in the expansion of our electricity distribution operations to include the operation, on behalf of LIPA, of the transmission and distribution system on Long Island that serves approximately 1.1 million customers.

In addition, we acquired 57 electricity generation plants on Long Island that supply electricity under contract to LIPA.

Upstate New York capital expenditure rate filing

In New York, capital expenditure in the rate plan for electricity distribution was set at historic levels, which are significantly lower than those currently required to maintain a safe and reliable network. 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.

New Hampshire rate plan

The New Hampshire Public Utilities Commission approved a five year rate plan for our electricity distribution network. The rate plan included a 9% reduction in distribution rates. Over the term of the rate plan any earnings in excess of a return of 11% are shared with customers. In addition, the plan allows for incremental increases in rates for capital expenditure incurred under our reliability enhancement programme.