National Grid 2008 Annual Report Download - page 565

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 55731
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 46
Description: EXHIBIT 15.1
0/4242.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/242/4*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 55731
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 46 Description: EXHIBIT 15.1
0/4242.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/242/4*
Table of Contents
54
Gas Distribution continued
National Grid plc
networks are also used to deliver
g
as on behalf of customers
who have purchased
g
as from independent suppliers or
direct from gas producers.
Regulation
Gas Distribution UK
We hold a single gas distribution transporter licence in the
UK, which authorises us to operate the four gas distribution
networks we own. Detailed arrangements for transporting
gas are provided through the Uniform Network Code. This
defines the obligations, responsibilities and roles of industry
participants and is approved by Ofgem.
Our four regional gas distribution networks each have a
separate price control which determines the prices we can
charge to gas shippers for our gas delivery service. These
maximum prices are based on Ofgem’s allowances for
operating, capital and replacement expenditure, together
with depreciation of, and a return on, Of
g
em’s allowances for
our regulatory asset value.
The price controls that applied to our UK gas distribution
networks during the year ended 31 March 2008 were an
extension of our previous price controls, based on an
allowed rate of return at a real pre-tax rate of 6.25% on our
regulatory asset value.
The next full price control period came into force on 1
April 2008 and covers the period up to 31 March 2013. This
review allows for capital expenditure of £0.7 billion and
mains replacement expenditure of £2.2 billion over that
period, together with an allowed rate of return of 4.3% on a
post-tax basis. These allowances are expected to grow our
asset base by almost 25% over the next 5 years.
As at 31 March 2008, our re
g
ulatory asset value is estimated
at approximately £6.5 billion.
In the UK, the price control formulae specify a maximum
allowed revenue assigned to each network. Each formula
consists of a fixed core revenue, cost pass-through items, a
mains replacement adjustment mechanism and shrinkage
and exit capacity incentive terms. Transportation char
g
es are
set broadly to recover allowed revenue but in any year
collected revenue can be more or less than allowed. Any
difference is carried forward and our charges are adjusted
accordingly in future periods.
Replacement expenditure maintains the safety and reliability
of the network, by replacing older gas pipes with modern
pipes. Ofgem treats 50% of projected replacement
expenditure as recoverable during the price control period
and 50% as recoverable over future years. Each network is
subject to its own mains replacement incentive mechanism
and retains 33% of any outperformance against Ofgem’s
annual cost targets as additional return or, alternatively,
bears 50% of any overspend if it underperforms.
Ofgem has established standards of service we are required
to meet that apply to our operations. These include: overall
standards of service, for example answering 90% of all calls
to the national gas emergency number within 30 seconds of
the call being connected and attending 97% of reports of a
gas escape or other gas emergency within the required
timescale; connections standards of service that require us
to provide connections to customers to agreed timescales
after an unplanned interruption;
and guaranteed standards of service for our other
transportation services. Compensation is payable for any
failures to meet both these and the connections standards of
service.
Gas Distribution US
Gas Distribution US operates under franchise agreements
that provide us with certain rights and obligations regarding
gas facilities and the provision of gas service within each
state in which we operate. In addition, there are federal and
state laws and regulations covering both general business
practices and the gas business in particular, especially with
respect to safety, energy transactions, customer sales and
service, levels of performance, rates, finances and
environmental concerns. The jurisdictions include, but are
not limited to: the US Department of Transportation, the US
Environmental Protection Agency, the US Federal Energy
Regulatory Commission (FERC), several state utility
commissions, departments of transportation, and
environmental agencies. Local building departments, fire
departments and departments of transportation also impose
regulations upon our operations. A number of these
agencies issue licences and permits governing activities
under their jurisdiction.
The prices we set in the US for our customers are based on
a cost of service model, whereby the prices that we agree
with our re
g
ulators are desi
g
ned to recover the costs we
incur in providing services to customers, together with a
return on equity invested. Customer bills typically comprise a
commodity rate to recover the cost of gas delivered and a
delivery rate to cover our gas delivery service. Delivery rates
comprise a combination of a per customer charge and an
additional price per therm of gas delivered. The allocation
between these components varies by jurisdiction, type of
customer and size of customer.
Depending on the jurisdiction, prices are set either by actual
sales volumes and costs incurred in a historical test year or
by rate plans based on estimates of costs and our return and
estimates of volumes expected to be delivered, which may
differ from actual amounts. Gas purchases for supply to
customers, which represent a substantial proportion of our
costs, 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 with
interest. As a consequence, we have no economic exposure
to such costs assuming they were prudently incurred.
However, as prices are typically established based on
estimates of costs and volumes, 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 rate plans include sharin
g
arran
g
ements, 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.