The National Grid Experience

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

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

3. How we got here - our heritage National Grid NGT rebrands to National Grid - a consistent identity in the UK and the USA Energis Acquired UK operations of Crown Castle and rebranded to NGW NGC Public flotation Acquired Niagara Mohawk Electricity Privatisation Acquired NEES/ EUA 1990 1995 2000 2002 NATIONAL GRID TRANSCO NATIONAL GRID 2005 2006 1990 1995 2000 1986 2002 Acquiring Keyspan and Rhode Island in US Privatisation of British Gas(1986) Demerger Centrica (1997) DemergerLattice Lattice

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

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

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. 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 Weighing up the materiality All these have required innovation across the SO/TO interface

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

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.com