1. The National Grid Experience Chris J Murray Network Operations Director Reforming the Electricity Industry in Saudi Arabia

2. Developing role - BETTA Scottish Power GB System Operator Scottish Hydro Electric Transmission Transmission Owners

3. How we got here - our heritage 1990199520002002 199019952000 2002 National Grid Lattice Electricity Privatisation Energis Acquired NEES/ EUA NATIONAL GRID TRANSCO NGC Public flotation Acquired Niagara Mohawk Privatisation of British Gas (1986) Demerger Centrica (1997) Demerger Lattice 2005 Acquired UK operations of Crown Castle and rebranded to NGW NATIONAL GRID NGT rebrands to National Grid - a consistent identity in the UK and the USA 1986 Acquiring Keyspan and Rhode Island in US 2006

4. New Group Organisation Transmission Nick Winser UK Electric T UK Gas T US Electric T US Gas T Gas distribution Mark Fairbairn UK Gas D US Gas D Electric distribution Cheryl LaFleur (acting) US Electric D US Generation Finance & Shared Services Steve Lucas UK Shared Services US Shared Services Core Financial Functions FDs/CFOs Group HR Global IS SHE and Corporate Responsibility Co. Secretary / General Counsel Strategy Public affairs Internal audit CEO Steve Holliday Business development & non regulated Edward Astle Wireless Metering Grain, Property US Wireless Basslink Advantica Business Development

5. National Grid’s Regulatory Framework Electricity Act Grid Code / BSC / CUSC/SQSS/STC Elec.Transmission Licence Utilities Act Competition Act (OFT) Electricity Safety, Quality & Continuity Regulations Energy Act

6. Legislative Framework – Electricity  Regulator’s duties under Electricity/Utilities Act:  Protect interests of consumers wherever appropriate by promoting effective competition;  Having regard to:  Need to secure all reasonable demands for electricity are satisfied  Need to secure license holders can finance authorised activities  The interests of disadvantaged individuals

7. Legislative Framework – Electricity  Transmission Licensees duties under Electricity/Utilities Act:  Develop & maintain an economic, efficient and co-ordinated transmission system  Facilitate competition in generation & supply  Have regard for environmental impacts.

8. The case for separation:  Separation of SO from generation, retailing and network ownership ensures non-discriminatory selection of system services.  In particular, separation of SO & TO:  Improves confidence of generators that network investments are not selected in preference to generation services  Removes potential for bias between alternative transmission owners and potentially facilitates competitive appointment of transmission owners for new assets

9. The case for integration:  Facilitates innovation across the SO to TO interface:  Simple to align incentives on joint SO/TO and internalise network externalities of SO & TO activities on congestion, losses & reliability  No need to separate energy balancing from network management costs (the reserve/constraint interaction)  No transaction costs from SO/TO interface nor overhead of adapting such an interface to develop new processes  Avoids barriers to innovation due to information constraints between SO & TO

10. Weighing up the materiality  Potential for distortion if SO & generation affiliated  Potential for distortion if SO & transmission ownership affiliated  Materiality of SO/TO innovation & effective incentivisation  High – potential distortion of competitive energy market  Low – SO & TO both subject to monopoly regulation & controls  Med/High (in experience of National Grid)  Tx costs fallen by 50% in real-terms since privatisation in 1990 due to:  Substation de-manning & remote operation  Condition & risk based maintenance  Balancing costs have been reduced by:  Focused & adaptive tx maintenance scheduling  Development & use of dynamic equipment ratings (e.g. use of cable temp monitors)  Implementation of live-line working  Development of relocateable reactive compensation All these have required innovation across the SO/TO interface

11. 1320 1900 2010 2180 2420 3100 0 500 1000 1500 2000 2500 3000 1974 400 ACSR 1985 500 AAAC 1992 500 AAAC 1993 570 AAAC 1998 570 AAAC 2000 GAP CONDUCTOR MVA @ 400kV 134% improvement over base Increased utilisation of existing assets Overhead lines

12. Conclusions  Separate SO & TO:  Facilitates important separation of SO & generation in vertically integrated utilities (without difficulties and delays associated with transmission asset divestment)  Gives theoretically ideal non-discriminatory framework for SO purchase of generation, supplier and transmission services (but sufficient non-discrimination by SO given affiliation with TO can be achieved through regulation)  Introduces significant challenges in establishing incentives and a framework for innovation (which in many material cases requires development of the SO/TO interface)

13. Conclusions continued  Do separate SO from integrated generation & TO  Avoid separation of SO & TO if both already separate from generation

14. National Grid  Brings value from excellent asset management as a transmission owner  Brings value from excellent system operation  Has scope to bring the most value when integrating both SO & TO responsibilities

15. Thank you Chris J Murray Contact: chris.j.murray@uk.ngrid.comchris.j.murray@uk.ngrid.com

16. Reducing the cost of congestion – Efficiency through innovation  Planning and operating the system to reduce the requirement for balancing services  innovative substation re-switching  short-term refinement of outage plan  maximising thermal ratings on circuits  increasing circuit capability through reconductoring  investment to minimise constraints

17. NGET controllable cost performance (03/04 prices) NETA Total TO SO

18. System Operator Incentive Schemes  Initial post-privatisation pass-through of ‘external’ costs of operating transmission system:  congestion costs  reserve & frequency response  losses  reactive power  Subsequent sharp rise in these costs  Resulting series of ‘incentive’ schemes on NGET to reduce the costs  sliding scale shares costs & benefits with customers  usually of short (1 or 2 year) duration  sharing factors + caps/collars limit risk of externalities