National Grid 2008 Annual Report Download - page 574

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 64119
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: 54
Description: EXHIBIT 15.1
0/4250.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/250/4*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 64119
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: 54 Description: EXHIBIT 15.1
0/4250.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/250/4*
Table of Contents
62
Electricit
y
Distribution & Generation continued
National Grid plc
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
purchasin
g
that were in place at the time of restructurin
g
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 throu
g
h a special rate char
g
ed 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 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.
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 chan
g
es
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.
Equity Equity to Sharing
Rate plan return debt ratio arrangements
Upstate New York 10.6% 47/53 100% to 11.75%,
50% to 14%,
25% to 16%,
10% above 16%
Massachusetts * * Not s
p
ecified
Rhode Island 10.5% 50/50 50% from 10.5-11.5%,
25% above 11.5%
New Ham
p
shire 9.67% 50/50 50% above 11%
* Massachusetts returns are based on the average of a peer group of utilities until 31
December 2009