National Grid 2008 Annual Report Download - page 400

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 14430
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-2.B.7.1, Doc: 8, Page: 57
Description: EXH 2(B).7.1
0/3811.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/811/3*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 14430
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-2.B.7.1, Doc: 8, Page: 57 Description: EXH 2(B).7.1
0/3811.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/811/3*
57
unfair commercial advantage or cross-subsidy on the other. This is backed up by specific requirements on the manner in which
the NTS and DN businesses must interact with one another.
The Gas Act provides that GEMA may impose le
g
ally enforceable orders or financial penalties on National Grid Gas for
contravening conditions of the Licences or contravening a relevant requirement of that Act or the Utilities Act 2000.
The level of revenue which each of the NTS and DN transportation business may receive from the supply of
g
as transportation
services is set out in the price control conditions contained in the respective Licences. These are
g
enerally set for a period of
five years by GEMA, either with the a
g
reement of National Grid Gas or after referral to the Competition Commission. Each price
control is set taking account of, among other things, an assessment of National Grid Gas’s operatin
g
costs, capital expenditure,
cost of capital and transportation volumes. Details of the price controls currently applicable to National Grid Gas are
g
iven
below.
Recent Develo
p
ments
On June 2005, Ofgem announced that certain aspects of National Grid Gas’s meterin
g
business were to be investi
g
ated by it
under the Competition Act 1988. In May 2006, Of
g
em issued a statement of objections settin
g
out why it believes National Grid
Gas’s conduct is in breach of Chapter II of that le
g
islation. National Grid Gas responded to this and a further statement of
objections issued by Of
g
em in April 2007 maintainin
g
that, in its view, it was not in breach. However, on 25 February 2008,
Of
g
em announced it had decided National Grid plc breached Chapter II of the Competition Act 1998 and Article 82 of the EC
Treaty and fined it £41.6m. National Grid plc has announced it continues to believe it has not breached competition law and
intends to a
pp
eal Of
g
em’s decision to the Com
p
etition A
pp
eal Tribunal.
The price control arrangements for National Grid Gas’s NTS operations put in place in 2002 ceased on 31 March 2007. On 15
January 2007 National Grid Gas accepted in principle Ofgem’s final proposals for the price control to apply to its NTS
operations coverin
g
the period from 1 April 2007 to 31 March 2012. The key elements of these proposals are a 4.4 per cent.
post-tax real rate of return on National Grid Gas’s regulatory asset value, a £824 million baseline five year capital expenditure
allowance (in 2004/5 prices) and a £688 million five year operatin
g
expenditure allowance (in 2004/5 prices). The amendments
to the licence which applies to its NTS operations required to put these final proposals into effect were implemented in part in
April 2007, with the remaining elements implemented on 5 September 2007 with retrospective effect from 1 April 2007.
National Grid Gas has also acce
p
ted Of
g
em’s final
p
ro
p
osals for the incentive schemes coverin
g
:
(i) the external costs of its system operation role to apply for one year from 1 April 2007; and
(
ii
)
the internal costs of s
y
stem o
p
eration to a
pp
l
y
for the five
y
ears from 1 A
p
ril 2007.
These proposals have been implemented through licence changes to National Grid Gas’s
g
as transporter licence in respect of
its NTS operations.
Ofgem extended the price control applicable to National Grid Gas’s DNs ori
g
inally set in 2002 for a further one year until 31
March 2008. The outcome of that formal review was an increase of 11 per cent. in allowed revenues for 2007/08. In addition,
the balance between fixed and variable elements has chan
g
ed, which will reduce the impact that volume chan
g
es, includin
g
weather, have on this business in 2007/08.
National Grid Gas has also accepted Ofgem’s final proposals for the price control applicable to the DNs for the five years from 1
April 2008. The key elements of these proposals are a 4.94 per cent. post-tax real rate of return on National Grid Gas’s
regulatory asset value, a £0.6 billion baseline five year capital expenditure allowance (in 2005/6 prices), a £1.8 billion five year
operating expenditure allowance (in 2005/6 prices) and £1.8 billion for its mains replacement activities over the five years.
National Grid Gas