National Grid 2008 Annual Report Download - page 267

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 53232
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: 61
Description: EXH 2(B).6.1
0/2665.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/665/2*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 53232
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: 61 Description: EXH 2(B).6.1
0/2665.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/665/2*
returns excludes half of the syner
g
y savin
g
s from the NMPC acquisition, net of the cost to achieve them, that were assumed in
the rate plan.
The NMPC rate plan also allows for subsequent recovery of specified costs and revenue items that have occurred since the
rate plan was established, once these amounts involved exceed U.S.$100 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, includin
g
storms, environmental remediation costs, and certain rate discounts provided to customers,
to
g
ether with costs and revenues from chan
g
es in tax, accountin
g
and re
g
ulatory requirements. In 2007, a stipulation of the
parties was filed and approved by the NYPSC on 19 July 2007 in which NMPC a
g
reed to a net reduction in the deferral account
balances allowed under its rate plan of approximately U.S.$127 million excludin
g
chan
g
es in actuals to that date. The NYPSC
authorised the collection of U.S.$300 million in calendar year 2006 and 2007 already a
g
reed to by the NYPSC, and the
continued deferral of the balance above that amount. NMPC, in accordance with its rate plan filed its third deferral account filin
g
on 1 Au
g
ust 2007 for deferral balances as of 30 June 2007 and projected deferrals throu
g
h 31 December 2009. The deferral
account recoveries proposed in the third deferral reset are approximately U.S.$136 million per year over the two years
(approximately U.S.$272 million over the two year period). This represents a reduction of U.S.$64 million per year over the
U.S.$200 million per year currently bein
g
collected under the second deferral reset. These deferral recoveries are subject to
audit by the staff of the NYPSC and further updates and adjustments in the proceedin
g
. Any differences in the deferrals from
this approved recovery level would be reflected in the next deferral reset that takes effect after 2009.
As part of the NYPSC National Grid/KeySpan mer
g
er order dated 17 September 2007, there are new rate plans, which are
being put into place for both KEDNY and KEDLI. Effective on 1 January 2008, the two KeySpan gas utility companies’
g
as
adjustment clauses would be increased to recover, on a prospective basis, estimated gas commodity-related costs of
U.S.$68.6 million and U.S.$28.7 million, respectively, which would no lon
g
er be included in base rates. In addition, base
delivery rates would be increased by U.S.$60 million for KEDLI and would be maintained at current levels for KEDNY. The base
delivery rates would then be frozen for five years. The proposed rate plans contemplate an allowed return on equity of 9.6 per
cent. for each entity. Cumulative earnin
g
s above 10.6 per cent. (includin
g
a 10 basis point incentive) would be shared between
gas sales customers and the KeySpan companies over the rate plan period.
The Issuer owns the Ravenswood Facility, which operates in the New York City wholesale electricity market. The Issuer
believes that the New York City market represents a stron
g
capacity market due to, amon
g
other thin
g
s, its local reliability rules,
increasin
g
demand and the time required for new resources to be constructed. The Issuer anticipates that demand will increase
and that the high cost to construct capacity in New York City will result in favourable In-City Unforced Capacity prices.
Therefore. on 18 January 2006, the Issuer, throu
g
h its KeySpan subsidiary, entered into an International SWAP Dealers
Association Master Agreement for a fixed for float unforced capacity financial swap (the “Capacity Swap Agreement”) with
Morgan Stanley Capital Group Inc. (“Morgan Stanley Inc.”). The Capacity Swap A
g
reement has a three year term which
commenced on 1 May 2006. The notional quantity is 1,800,000kW (the “Notional Quantity”) of In-City Unforced Capacity and
the fixed price is $7.57/kW-month (the “Fixed Price”), subject to adjustment upon the occurrence of certain events. Cash
settlement will occur on a monthly basis based on the In-City Unforced Capacity price determined by the relevant NYISO Spot
Demand Curve Auction Market (the “Floating Price”). For each monthly settlement period, the price difference will equal the
Fixed Price minus the Floatin
g
Price. If such price difference is less than zero, Mor
g
an Stanley Inc. will pay KeySpan an
amount equal to the product of (i) the Notional Quantity and (ii) the absolute value
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