National Grid 2008 Annual Report Download - page 262

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 41482
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-2.B.6.1, Doc: 6, Page: 56
Description: EXH 2(B).6.1
0/1660.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/660/1*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 41482
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-2.B.6.1, Doc: 6, Page: 56 Description: EXH 2(B).6.1
0/1660.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/660/1*
and NEC, with customers that include domestic homes and small and lar
g
e commercial and industrial enterprises. The Issuer is
one of the leadin
g
electricity distribution service providers in the northeast of the United States, as measured by ener
g
y
delivered, and one of the lar
g
est utilities in the United States, as measured by the number of electricity distribution customers.
National Grid USA’s United States electricity distribution business, excluding KeySpan’s mana
g
ement and operation of LIPA
described below, serves approximately 3.4 million electricity customers over a network of 71,000 circuit miles in New En
g
land
and New York.
National Grid USA’s primary business drivers are the long-term rate plans with state regulators for the Issuer’s utility
subsidiaries. These plans provide incentive returns and shared savin
g
s allowances, which allow us an opportunity to benefit
from efficiency gains that the Issuer may identify and achieve within the operations of its subsidiaries.
The Issuer recovers its costs of providin
g
electricity to customers throu
g
h delivery rates approved by applicable re
g
ulators,
which are based on historical or forecasted costs, and which include a return on the Issuer’s assets. The cost of the electricity
supplied is passed through to customers. The Issuer’s businesses are also subject to service quality standards in New York,
Massachusetts, and Rhode Island with respect to reliability and certain aspects of customer service and safety.
Long Island Power Authority
LIPA is a corporate municipal instrumentality and a political subdivision of the State of New York. On 28 May 1998, certain of
the Long Island Lighting Company’s (“LILCO’s”) business units were merged with KeySpan and LILCO’s common stock and
remaining assets were acquired by LIPA. Also effective on that date, KeySpan and LIPA entered into three major long-term
service a
g
reements that (i) provide to LIPA all operation, maintenance and construction services and si
g
nificant administrative
services relating to the Long Island electric transmission and distribution (“T&D”) system pursuant to a Mana
g
ement Services
Agreement (the “1998 MSA”); (ii) supply LIPA with electric
g
eneratin
g
capacity, ener
g
y conversion and ancillary services from
the Issuer’s Long Island generating units pursuant to a Power Supply Agreement (the “1998 PSA”) and other long-term
agreements through which the Issuer provides LIPA with approximately one half of its customers’ ener
g
y needs; and
(iii) manage all aspects of the fuel supply for the Issuer’s Lon
g
Island
g
eneratin
g
facilities, as well as all aspects of the capacity
and energy owned by or under contract to LIPA pursuant to an Energy Management Agreement (the “1998 EMA”). The Issuer
also purchases energy, capacity and ancillary services in the open market on LIPA’s behalf under the 1998 EMA. The 1998
MSA, 1998 PSA and 1998 EMA all became effective on 28 May 1998 and are collectively referred to as the “1998 LIPA
Agreements”.
KeySpan sells to LIPA all of the capacity and, to the extent requested, energy conversion services from the Issuer’s existin
g
Long Island based oil and gas-fired
g
eneratin
g
plants. Sales of capacity and ener
g
y conversion services are made under rates
approved by the FERC in accordance with the 1998 PSA. The original FERC-approved rates, which had been in effect since
May 1998, expired on 31 December 2003. On 1 October 2004 the FERC approved a settlement reached between KeySpan
and LIPA to reset rates which became effective on 1 January 2004. The settlement a
g
reement reflects a cost of equity of 9.5
per cent., as well as updated operatin
g
and maintenance expense levels and recovery of certain other costs as a
g
reed to by
the parties.
On 1 February 2006, KeySpan and LIPA entered into (i) the 2006 MSA, pursuant to which KeySpan will continue to operate
and maintain the electric T&D System owned by LIPA on Lon
g
Island; (ii) a new Option and Purchase and Sale A
g
reement (the
“2006 Option Agreement”), to replace the Generation Purchase Rights Agreement (as amended, the “GPRA”), pursuant to
which LIPA had the option, through 15 December 2005, to acquire substantially all of the electric generating
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