Regulation Report United Kingdom Regulatory body : OFGEM Regulated company: NGET Regulatory periods: 3 years: 1991- 1993

4 years: 1993- 1997 1997-2001 5 years: 2001- 2006

TPCR1 TPCR2 TPCR3 The last price control period for our electricity transmission operations ended on 31 March 2007 and had been in place for one year, the previous five year control having ended on 31March 2006. A new price control period commenced on 1 April 2007 and is planned to last until 31 March 2012. TPCR4

2007-2012 From 2013: 8 years (RIIO Model)

Form of the control: price control mechanisms that restrict the amount of revenue that can be earned by regulated businesses.

Average revenue cap RPI-X TPCR1 - total revenue cap under which the price control was based on aggregate revenues. The RPI-X allowance is based upon Ofgems estimates of efficient operating expenditure (opex) and capital expenditure (capex), together with an allowance for depreciation and an allowed rate of return on capital invested in our businesses. These are used, together with the regulatory asset base value (RAV) to calculate the allowed revenue.

Transmission price caps in NGET April 1990-March 1993 RPI-0 April 1993-March 1997 RPI-3 April 1997-March 2001 Po=20% Then RPI-4 from April 1998 April 2001-March 2006 RPI-1.5 April 2006- March 2007 April 2007 March 2012 RPI 1.5 RPI +2 Real pre tax rate of return 6.25% Post tax real rate of return 4.4%

3.5 billion capex 0.9 billion controllable opex

Incentives to adjust the transmission network revenue: incentives for network reliability, sulphur hexafluoride losses, efficiency and balancing services Opex efficiency incentive: Under RPI-X regulation the electricity TOs are provided with a strong incentive to reduce costs below the assumed level, as they earn the profit until the regulatory control shares the saving with consumers. The savings are shared with consumers at the start of each price review period by setting opex allowances based on expected efficient costs. The value of the benefit to the company therefore depends on when the saving was made and the extent to which expected efficient costs for the next period are linked to actual historic costs.

The RIIO model Ofgems revised RIIO regulatory framework will be implemented in the next round of electricity transmission price controls, which will start in April 2013. RIIO refers to the formula: Revenue = Incentives + Innovation + Outputs To attract the efficient investment needed for the industry, Ofgems RIIO model is intended to incentivise network companies to deliver the outputs demanded by consumers and network users in an efficient and innovative way.