1. National Grid Gas Cost Forecasts to 2013 GDPCR Industry Cost Workshop 19 April 2007

2. GDPCR Industry Cost Workshop (FINAL) Page 2 Operating Expenditure We are targeting challenging performance improvements to help mitigate adverse market and workload movements Earnings, contractors & materials Safety related maintenance Emergency Service impact Lower shrinkage and escapes workload

3. GDPCR Industry Cost Workshop (FINAL) Page 3 Capital Expenditure Load growth and asset renewal requirements drive investment back up to the long-run rate Long Run Average Average Allowance Four major LTS schemes and above ground plant Obsolete business systems network control system, front office systems UK-Link (within xoserve) Stable workloads, efficiency improvements. Restricted expenditure in current period

4. GDPCR Industry Cost Workshop (FINAL) Page 4 Mains Replacement Expenditure Increased costs reflect contractor prices and the need to tackle the larger diameter risk mains. Further improvements targeted from our four Alliances Contractor demand-driven 2-4% pa Large mains now pose the highest risk per km. Impact mitigated by recycling and “no-dig” Alliance productivity New selection technique agreed with HSE

5. Mains Replacement Expenditure

6. GDPCR Industry Cost Workshop (FINAL) Page 6 Mains Replacement - background to GDPCR GDNs have achieved the HSE ramp-up and replacement is now the biggest single activity undertaken Safety driven requirement to remove iron mains within 30 metres of property HSE requirement: “as soon as reasonably practicable” Prioritised annually on a risk basis (“20/70/10”) NGGD decommissions further c80km pa. outside the HSE target (e.g. diversions)

7. GDPCR Industry Cost Workshop (FINAL) Page 7 Historic Diameter Mix Smaller pipes have presented the highest risk this period and so the programme has been skewed away from a proportionate 30-year profile

8. GDPCR Industry Cost Workshop (FINAL) Page 8 94 % 89 13/50 % 10 37/50 % 7% of length producing 11% of risk 7% 11% 92 % 83 % 17 % 8% of length producing 17% of risk 8% 17% Large Diameter Mains Larger diameter pipes now represent higher percentage of risk and need to be decommissioned at a proportionate rate (as a minimum) Cavendish Mill. 14/11/01, 15” CI Southall. 22/11/05, 30” CI Newton Heath, 18/11/01, 15” CI June 2006 May 2004 Total Network Length Total Network Risk >12” <=12”

9. GDPCR Industry Cost Workshop (FINAL) Page 9 Future Diameter Mix BPQ moves closer to a proportionate profile in the next price control period This upward shift in diameter mix towards proportionality increases cost compared with first 5 years

10. GDPCR Industry Cost Workshop (FINAL) Page 10 Predominantly Victorian Deep excavations Tend to exist in busy thoroughfares Require specialist tools & equipment 40% operate at medium pressure Restricted to summer window More attention to safety Can require non-standard pipe & fittings Require resources with higher skills Needs investment in training Large Diameter Characteristics Numerous reasons why larger mains require more resources per km to replace than smaller pipes

11. GDPCR Industry Cost Workshop (FINAL) Page 11 Longer Term Demand We do not see evidence for contractor demand softening after 2012/13. Continuing to defer larger mains likely to store up a growing problem 2007200820092010201120122013201420152016 Cross Rail Link and Thameslink £10.5billion Transport for London £10billion London and Barts Hospital and Stratford City Development £5billion Water Industry £16.8billion 201720182006 2019 Investment shows no signs of abating (Water UK) London Airport Expansion and Redevelopment £9.5billion National Grid Gas Replacement £1.9billion Power Generation Replacement £8.1billion Transport 2025 Program and Waterloo station redevelopment £11billion 2012 Olympics Infrastructure £3.3billionPost 2012 Regeneration £1billion Network Rail £8billion M25, M1 and M62 Road Widening £3.7billion Investment projected to continue at approximately £2billion per year National Grid Gas Replacement £1.9billion Year

12. GDPCR Industry Cost Workshop (FINAL) Page 12 Zonal (‘postcode’) Selection BPQ assumes continued productivity improvements (plus customer and environmental benefits) from a move to zonal selection From this (20/70/10 design for Sheffield) To this (zonal design for Sheffield) Key Seed Pipe Sector pipes Productivity delivers c£110m Lost productivity could impact c£60m BPQ submission targets 4% productivity in 2007/8, falling to 1% pa from 2010/11 Continuation of 20/70/10 would lead to reducing productivity as project size deteriorates 0.49 Larger project lengths bring efficiency and customer benefits… Larger scale site operations with dedicated supervision Demonstrable safety improvements Better co-ordination with other utilities and agencies Overall lower environmental impact Proportionally lower mobilisation and demobilisation costs

13. GDPCR Industry Cost Workshop (FINAL) Page 13 Zonal Now Right for NGG The optimal strategy for smaller mains depends on where a networks’ assets lie on the risk curve Average Risk Score Time top down National Grid “free” zonal High risk and steep risk gradient favours schemes which remove highest risk pipes (“seeds”) Reducing risk levels and gradient results in moderate risk penalty from grouping over five years Efficiency ‘Seeds’ become a progressively redundant concept as the limits of the model are reached zonal & reduced seeds Reducing difference between pipes enables further grouping into sectors zonal & seeds 20/70/10

14. GDPCR Industry Cost Workshop (FINAL) Page 14 Conclusions Risk dictates that large diameter replacement should ramp-up to be at least proportional to the overall population No benefit in further “holding off” - apart from risk considerations, resource constraints are not expected to ease National Grid’s mains risk profile enables further efficiencies through zonal replacement Short and medium term benefits to consumers We see no reason why condition and customer diversion work should not contribute to the annual total (but will need HSE agreement)

15. Additional Background Information [Not intended for presentation at the workshop]

16. GDPCR Industry Cost Workshop (FINAL) Page 16 Industry Timeline Completed Work in progress 2002200320042005200620011999199819971996199520072000 2008 Transco Response Merger Savings Network Sales The Way Ahead Shared Services Org Alliances Global Line of Business Cont. Improvement Transco Formed MMC Inquiry Centrica Demerger BG Demerger Lattice Accepts Final Proposals Domestic Supply Competition Larkhall Explosion NTS Separated 1 Operation 8 Asset Businesses 8 Networks 90 Districts 13 LDZs 32 Districts Connections Unbundled RESTRUCTURING GROWTH CONTINUAL IMPROVEMENT 25% manpower reduction

17. GDPCR Industry Cost Workshop (FINAL) Page 17 The 2002 Settlement - Arguably the toughest regulatory targets ever  Capex allowances well below the long term average Average

18. GDPCR Industry Cost Workshop (FINAL) Page 18 Po cut of 16% Underlying costs 3.7% annual reduction New Safety costs NGGD has broadly achieved underlying opex, but… Average NGGD network

19. GDPCR Industry Cost Workshop (FINAL) Page 19 Costs in excess of 2001/2 allowance … significant external costs have adversely impacted overall NGGD performance Po cut of 16% Underlying costs 3.7% annual reduction New Safety costs Average NGGD network

20. GDPCR Industry Cost Workshop (FINAL) Page 20 Concentrations of replacement work in National Grid M1 Corridor Alliance West Midlands Alliance North London Alliance NW Gas Alliance

21. GDPCR Industry Cost Workshop (FINAL) Page 21 Dronfield, near Sheffield Environmental challenges – pipes replaced in 5-year period under 20/70/10 Red pipes = not replaced Many streets across the town are not replaced, despite NGGD working throughout the town - impact on all

22. GDPCR Industry Cost Workshop (FINAL) Page 22 Dronfield, near Sheffield Environmental challenges - zonal approach leaves a better legacy Red pipes = not replaced North of town largely complete South of town largely unaffected

23. GDPCR Industry Cost Workshop (FINAL) Page 23 GDPCR issues - increasing workloads, challenging resource environment and numerous uncertainties Traffic Management Act EU Legislation Legislation Exit / Interruptions Reform Indexation Regulatory Incentives Emergency Service Funding Comparative Regulation Rolling Incentives NGGD PCR Environment Contractor Supply / Demand Ageing Workforce Resourcing Major Maintenance Asset Management Plant Renewal Mains Risk Reduction Safety & Environmenta l Work Contractor Prices Metering Competition Market Factors Key Uncertainties