Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 32

Supplementary memorandum by National Grid

WRITTEN QUESTION FROM THE SECOND CLERK TO THE COMMITTEE—13 DECEMBER 2001

    "It has been put to us that it is possible that speculative international investments by either of the transmission monopolies could in theory, affect the economic stability of these companies and their ability to fulfil their statutory obligations in the UK, in that they may not have the ability to invest at a level necessary to maintain and develop the transmission infrastructure. The Committee would be grateful for your observations about such a claim and a note on how your company ensures it is capable of fulfilling its statutory obligations".

SUPPLEMENTARY ANSWER FROM NATIONAL GRID

  1.  Provisions in the Transmission Licence held by The National Grid Company plc (NGC), first with respect to financial ring-fencing, and second, with respect to the design and operation of the electricity transmission system impose a robust regulatory framework such that it is difficult to envisage circumstances in which any of National Grid's non-transmission activities, whether inside or outside the United Kingdom, would compromise investment in the transmission system in England and Wales.

  2.  The detailed Licence provisions are as follows:

    (a)  The NGC Transmission Licence contains financial ring-fencing conditions, specifically Special Conditions AA6-AA11. These conditions include restrictions on the activities which can be undertaken by NGC itself (and its affiliates and related undertakings in which NGC holds shares or other investments), and, on the transfer of financial resources from NGC to other parts of the National Grid Group.

        The conditions have been attached for information. In summary, however they can be seen to include safeguards such as certificates to be provided to GEMA under AA7 regarding the availability of resources and ring fencing compliance, a requirement to maintain an investment grade credit rating (AA9) and the reassurances to be given to GEMA by NGC's Ultimate Controller (NGG) by way of undertakings under AA8 and AA11.

    (b)  In addition to the conditions above NGC also has other Licence obligations, including those (e.g. Standard Condition 7 attached) relating to the design and operation of the transmission system.

  3.  The combined effect of these requirements is that:

    (a)  NGC is prevented by the Transmission Licence either from undertaking material activities, other than those covered by the Licence (unless these activities have been explicitly approved by GEMA, the Gas and Electricity Markets Authority) or from transferring excessive financial resources to other parts of the National Grid Group.

    (b)  Not least as a result of financial ring-fencing conditions in NGC's Transmission Licence, any other activities undertaken by National Grid Group will not impact on the capability of NGC to fulfil its statutory and licence obligations.

    (c)  The activities which NGC is obliged to undertake include design and operation of the transmission system to high standards. Our written memorandum explains in detail (paras 4-6 and 11) how these standards work in practice to ensure a transmission network which provides suitable levels of security.

  4.  As indicated in our memorandum of 2 November 2001 (para 8), National Grid has invested significantly in the transmission system in England and Wales at just over £3 billion in the past ten years. Furthermore, an additional £1.3 billion, at today's prices, will be invested over the five-year period to March 2006.

  5.  It is, of course, true that NGC requires sufficient revenue to enable it to fulfil its obligations and it would be possible for some combination of actions by GEMA and the Competition Commission to prevent this requirement from being fulfilled. However, under the Electricity Act 1989 (as amended by the Utilities Act 2000), the Secretary of State and GEMA, in carrying out their functions, are obliged to have regard to the need to secure that licence holders are able to finance their statutory and licence obligations.

  6.  Additionally, as indicated in National Grid's written memorandum (para 10) and oral evidence (Q 705) to the Committee on 4 December, there are a number of issues to address going forward about the economic regulation of the networks and their efficient incentivisation for long-term investment. However, these matters are quite distinct from those raised by this supplementary question.

National Grid

January 2002


SPECIAL CONDITION AA6: RESTRICTION ON ACTIVITY AND FINANCIAL RINGFENCING

  1.  Save as provided by paragraphs 3 and 4, the licensee shall not conduct any business or carry out any activity other than the transmission business and the interconnector(s) business.

  2.  The licensee shall not without the prior written consent of the Authority hold or acquire shares or other investments of any kind except:

    (a)  shares or other investments in a body corporate the sole activity of which is to carry on business for a permitted purpose; or

    (b)  shares or other investments in a body corporate which is a subsidiary of the licensee and is incorporated by it solely for the purpose of raising finance for the transmission business or the interconnector(s) business; or

    (c)  investments acquired in the usual and ordinary course of the licensee's treasury management operations, subject to the licensee maintaining in force, in relation to those operations, a system of internal controls which complies with best corporate governance practice as required (or in the absence of any such requirement recommended) from time to time for listed companies in the United Kingdom.

  3.  Subject to the provisions of paragraph 2, nothing in this special condition shall prevent:

    (a)  any affiliate in which the licensee does not hold shares or other investments from conducting any business or carrying on any activity;

    (b)  the licensee from holding shares as, or performing the supervisory or management functions of, an investor in respect on any body corporate in which it holds an interest consistent with the provisions of this licence;

    (c)  the licensee from performing the supervisory or management functions of a holding company in respect of any subsidiary; or

    (d)  the licensee from carrying on any business or conducting any activity to which the Authority has given its consent in writing.

  4.  Nothing in this special condition shall prevent the licensee or an affiliate or related undertaking in which the licensee holds shares or other investments (a "relevant associate") conducting de-minimis business as defined in this paragraph so long as the limitations specified in this paragraph are complied with:

    (a)  For the purpose of this paragraph "de-minimis business" means any business or activity carried on by the licensee or relevant associates other than the transmission business and the interconnector(s) business.

    (b)  The licensee or a relevant associate may carry on de-minimis business provided that the relevant associate carries on no other business and neither of the following limitations is exceeded, namely:

      (i)  the aggregate turnover of all the de-minimis business carried on by the licensee and all its relevant associates does not in any period of twelve months commencing on 1 April of any year exceed 2.5 per cent of the aggregate turnover of the transmission business and the interconnector(s) business as shown by the most recent audited accounting statements of the licensee produced under paragraphs 3(b)(i) and (c) of standard condition 5; and

      (ii)  the aggregate amount (determined in accordance with subparagraph (d) below) of all investments made by the licensee and all its relevant associates in their de-minimis business or de-minimis businesses does not at any time after 31 March 2001 exceed 2.5 per cent of the sum of share capital in issue, share premium and consolidated reserves of the licensee as shown by its most recent audited historical cost financial statements then available.

    (c)  For the purpose of subparagraph (b) of this paragraph, "investment" means any form of financial support or assistance given by or on behalf of the licensee or a relevant associate for the de-minimis business whether on a temporary or permanent basis including (without limiting the generality of the foregoing) any commitment to provide any such support or assistance in the future.

    (d)  At any relevant time, the amount of an investment shall be the sum of:

      (i)  the value at which such investment was included in the audited historical cost balance sheet of the licensee or a relevant associate as at its latest accounting reference date to have occurred prior to 31 March 2001 (or, where the investment was not so included, zero);

      (ii)  the aggregate gross amount of all expenditure (whether of a capital or revenue nature) howsoever incurred by the licensee or a relevant associate in respect of such investment in all completed accounting reference periods since such accounting reference date; and

      (iii)  all commitments and liabilities (whether actual or contingent) of the licensee or a relevant associate relating to such investments outstanding at the end of the most recently completed accounting reference period.


SPECIAL CONDITION AA7: AVAILABILITY OF RESOURCES

  1.  The licensee shall at all times act in a manner calculated to secure that it has sufficient management resources, financial resources and financial facilities to enable it:

    (a)  to carry on the transmission business and the interconnector(s) business; and

    (b)  to comply with its obligations under the licence and such of its obligations under the Act as apply to the transmission business and the interconnector(s) business.

  2.  The licensee shall submit a certificate to the Authority, approved by a resolution of the board of director's of the licensee and signed by an Authority of the licensee pursuant to that resolution. Such certificate shall be submitted in June of each year. Each certificate shall be in one of the following forms:

    (a)  "After making enquiries, the director's of the licensee have a reasonable expectation that the licensee will have available to it, after taking into account in particular (but without limitation) any dividend or other distribution which might reasonably be expected to be declared or paid, sufficient financial resources and financial facilities to enable the licensee to carry on the transmission business and the interconnector(s) business for a period of 12 months from the date of this certificate."

    (b)  "After making enquiries, the director's of the licensee have a reasonable expectation, subject to what is said below, that the licensee will have available to it, after taking into account in particular (but without limitation) any dividend or other distribution which might reasonably be expected to be declared or paid, sufficient financial resources and financial facilities to enable the licensee to carry on the transmission business and the interconnector(s) business for a period of twelve months from that date of this certificate. However, they would like to draw attention to the following factors which may cast doubt on the ability of the licensee to carry on the transmission business and/or the interconnector(s) business."

    (c)  "In the opinion of the director's of the licensee, the licensee will not have available to it sufficient financial resources and financial facilities to enable the licensee to carry on the transmission business and the interconnector(s) business for a period of 12 months from the date of this certificate."

  3.  The licensee shall submit to the Authority with that certificate a statement of the main factors which the director's of the licensee have taken into account in giving that certificate.

  4.  The licensee shall inform the Authority in writing immediately if the director's of the licensee become aware of any circumstance which causes them no longer to have the reasonable expectation expressed in the then most recent certificate given under paragraph 2.

  5.  The licensee shall use its best endeavours to obtain and submit to the Authority with each certificate provided for in paragraph 2 a report prepared by its auditors and addressed to the Authority stating whether or not the auditors are aware of any inconsistencies between, on the one hand, that certificate and statement submitted with it and, on the other hand, any information which they obtained during their audit work.

  6.  The director's of the licensee shall not declare or recommend a dividend, nor shall the licensee make any other form of distribution within the meaning of section 263 of the Companies Act 1985, unless prior to the declaration, recommendation or making of the distribution (as the case may be) the licensee shall have issued to the Authority a certificate complying with the following requirements of this paragraph.

    (a)  The certificate shall be in the following form:

    "After making enquiries, the director's of the licensee are satisfied:

      (i)  that the licensee is in compliance in all material respects with all obligations imposed on it by special condition AA11 (Provision of Information to the Authority), special condition AA6 (Restriction on Activity and Financial Ring-fencing), special condition AA7 (Availability of Resources), special condition AA8 (Undertaking from ultimate controller), special condition AA9 (Credit Rating) paragraph 1 of special condition AA10 (Indebtedness) of the licence; and

      (ii)  that the making of a distribution of [ ] on [ ] will not, either alone or when taken together with other circumstances reasonably foreseeable at the date of this certificate, cause the licensee to be in breach to a material extent of any of these obligations in the future."

    (b)  The certificate shall be signed by an Authority of the licensee and approved by a resolution of the board of director's of the licensee passed not more than 14 days before the date on which the declaration, recommendation or payment will be made.

    (c)  Where the certificate has been issued in respect of the declaration or recommendation of a dividend, the licensee shall be under no obligation to issue a further certificate prior to payment of that dividend provided such payment is made within six months of that certificate.


SPECIAL CONDITION AA8: UNDERTAKING FROM ULTIMATE CONTROLLER

  1.  The licensee shall procure from each company or other person which the licensee knows or reasonably should know is at any time an ultimate controller of the licensee a legally enforceable undertaking in favour of the licensee in the form specified by the Authority that that ultimate controller ("the convenantor") will refrain from any action, and will procure that any person (including, without limitation, a corporate body) which is subsidiary of, or is controlled by, the convenantor (other than the licensee and its subsidiaries) will refrain from any action which would then be likely to cause the licensee to breach any of its obligations under the Act or this licence. Such undertaking shall be obtained within seven days of the company or other person in question becoming an ultimate controller and shall remain in force for as long as the licensee remains the holder of this licence and the convenantor remains an ultimate controller of the licensee.

  2.  The licensee shall:

    (a)  deliver to the Authority evidence (including a copy of each such undertaking) that the licensee has complied with its obligation to procure undertakings pursuant to paragraph 1;

    (b)  inform the Authority immediately in writing if the director's of the licensee become aware that any such undertaking has ceased to be legally enforceable or that its terms have been breached; and

    (c)  comply with any direction from the Authority to enforce any such undertaking;

    and shall not, save with the consent in writing of the Authority, enter (directly or indirectly) into any agreement or arrangement with any ultimate controller of the licensee or of any of the subsidiaries of any such corporate ultimate controller (other than the subsidiaries of the licensee) at a time when,

      (i)  an undertaking complying with paragraph 1 is not in place in relation to that ultimate controller, or

      (ii)  there is an unremedied breach of such undertaking; or

      (iii)  the licensee is in breach of the terms of any direction issued by the Authority under subparagraph (c).


SPECIAL CONDITION AA9: CREDIT RATING OF LICENSEE

  1.  The licensee shall use all reasonable endeavours to ensure that the licensee maintains at all times an investment grade issuer credit rating.

  2.  In this special condition and in special condition AA10 (Indebtedness):

    "investment grade issuer credit rating" means:

    (a)  an issuer rating of not less than BBB—by Standard & Poor's Ratings Group or any of its subsidiaries or a corporate rating of not less than Baa3 by Moody's Investors Service, Inc or any of its subsidiaries or such higher rating as shall be specified by either of them from time to time as the lowest investment grade credit rating; or

    (b)  an equivalent rating from any other reputable credit rating agency which, in the opinion of the Authority, notified in writing to the licensee, has comparable standing in the United Kingdom and the United States of America.

SPECIAL CONDITION AA10: INDEBTEDNESS

  1.  In addition to the requirements of standard condition 10 (Disposal of relevant assets), the licensee shall not without the prior written consent of the Authority (following the disclosure by the licensee of all material facts):

    (a)  create or continue or permit to remain in effect any mortgage, charge, pledge, lien or other form of security or encumbrance whatsoever, undertake any indebtedness to any other person or enter into any guarantee or any obligation otherwise than:

      (i)  on an arm's length basis;

      (ii)  on normal commercial terms;

      (iii)  for a permitted purpose; and

      (iv)  (if the transaction is within the ambit of standard condition 10) in accordance with that Condition.

    (b)  transfer, lease, licence or lend any sum or sums, asset, right or benefit to any affiliate or related undertaking of the licensee otherwise than by way of:

      (i)  a dividend or other distribution out of distributable reserves;

      (ii)  repayment of capital;

      (iii)  payment properly due for any goods, services or assets provided on an arm's length basis and on normal commercial terms;

      (iv)  a transfer, lease, licence or loan of any sum or sums, asset, right or benefit on an arm's length basis, on normal commercial terms and made in compliance with the payment condition;

      (v)  repayment of or payment of interest on a loan not prohibited by subparagraph (a);

      (vi)  payments for group corporation tax relief or for the surrender of Advance Corporation Tax calculated on a basis not exceeding the value of the benefit received; or

      (vii)  an acquisition of shares or other investments in conformity with paragraph 2 of special condition AA6 made on an arm's length basis and on normal commercial terms.

    (c)  enter into an agreement or incur a commitment incorporating a cross-default obligation.

    (d)  continue or permit to remain in effect any agreement or commitment incorporating a cross-default obligation subsisting 31 March 2001 save that the licensee may permit any cross-default obligation in existence at the date to remain in effect for a period not exceeding twelve months from that date, provided that the cross-default obligation is solely referable to an instrument relating to the provision of a loan or other financial facilities granted prior to that date and the terms on which those facilities have been made available as subsisting on that date are not varied or otherwise made more onerous.

    (e)  the provisions of paragraph 1 (c) and (d) shall not prevent the licensee from giving any guarantee permitted by and compliant with the requirements of paragraph 1 (a).

    (f)  the payment condition referred to in subparagraph 1 (b) (iv) is that the consideration due in respect of the transaction in question is paid in full when the transaction is entered into unless either:

      (i)  the counter-party to the transaction has and maintains until payment is made in full an investment grade issuer credit rating, or

      (ii)  the obligations of the counter-party to the transaction are fully and unconditionally guaranteed throughout the period during which any part of the consideration remains outstanding by a guarantor which has and maintains an investment grade issuer credit rating.

  2.  In this special condition:

    "cross-default obligation" means a term of any agreement or arrangement whereby the licensee's liability to pay or repay any debt or other sum arises or is increased or accelerated or is capable of arising, increasing or of acceleration by reason of a default (howsoever such default may be described or defined) by any person other than the licensee unless:

      (i)  that liability can arise only as the result of a default by a subsidiary of the licensee,

      (ii)  the licensee holds a majority of the voting rights in that subsidiary and has the right to appoint or remove a majority of its board of director's, and

      (iii)  that subsidiary carries on business only for a purpose within paragraph (a) of the definition of permitted purpose.

    "indebtedness" means all liabilities now or hereafter due, owing or incurred, whether actual or contingent, whether solely or jointly with any other person and whether as principal or surety, together with any interest accruing thereon and all costs, charges, penalties and expenses incurred in connection therewith.


SPECIAL CONDITION AA11: PROVISION OF INFORMATION TO THE AUTHORITY

  1.  Subject to paragraphs 5 and 6, the licensee shall furnish to the Authority, in such manner and at such times as the Authority may reasonably require, such information and shall procure and furnish to it such reports, as the Authority may reasonably require or as may be necessary for the purpose of performing:

    (a)  the functions conferred to it by or under the Act; and

    (b)  any functions transferred to or conferred to it by or under the Utilities Act 2000.

  2.  The licensee shall procure from each company or other person which the licensee knows or reasonably should know is at any time an ultimate controller of the licensee a legally enforceable undertaking in favour of the licensee in a form specified by the Authority that the ultimate controller ("the information convenantor") will give to the licensee, and will procure that any person (including without limitation, a corporate body) which is a subsidiary of, or is controlled by, the information convenantor (other than the licensee and the Licensee's Subsidiaries) will give to the licensee, all such information as may be necessary to enable the licensee to comply fully with the obligation imposed on it in paragraph 1. Such undertaking shall be obtained within seven days of such corporate body or other person in question becoming an ultimate controller of the licensee and shall remain in force for so long as the licensee remains the holder of this licence and the information convenantor remains an ultimate controller of the licensee.

  3.  The licensee shall deliver to the Authority evidence (including a copy of each such undertaking) that the licensee has complied with the obligation to procure undertakings pursuant to paragraph 2, and shall comply with any direction from the Authority to enforce any undertaking so procured.

  4.  The licensee shall not, save with the consent in writing of the Authority, enter (directly or indirectly) into any agreement or arrangement with any ultimate controller of the licensee or, where the ultimate controller is a corporate body, any of the subsidiaries of such a corporate ultimate controller (other than the subsidiaries of the licensee) at a time when:

    (a)  an undertaking complying with paragraph 2 is not in place in relation to that ultimate controller; or

    (b)  there is an unremedied breach of such undertaking; or

    (c)  the licensee is in breach of the terms of any direction issued by the Authority under paragraph 3 of this special condition.

  5.  The licensee shall not be required by the Authority to furnish it under this special condition with information for the purpose of the exercise of its functions under section 47 of the Act.

  6.  This special condition shall not require the licensee to produce any documents or give any information which it could not be compelled to produce or give in evidence in civil proceedings before a court.

  7.  The power of the Authority to call for information under this special condition is in addition to the power of the Authority to call for information under or pursuant to any other special condition.


CONDITION 7. LICENSEE'S GRID CODE

  1.  The licensee shall in consultation with authorised electricity operators liable to be materially affected thereby prepare and at all times have in force and shall implement and comply (subject to paragraph 10) with the Grid Code to be known as the licensee's Grid Code:

    (a)  covering all material technical aspects relating to connections to and the operation and use of the licensee's transmission system or (in so far as relevant to the operation and use of the licensee's transmission system) the operation of electric lines and electrical plant connected to the licensee's transmission system or any distribution system of any authorised distributor and (without prejudice to the foregoing) making express provision as to the matters referred to in paragraph 5 below; and

    (b)  which is designed so as:

      (i)  to permit the development, maintenance and operation of an efficient, co-ordinated and economical system for the transmission of electricity;

      (ii)  to facilitate competition in the generation and supply of electricity (and without limiting the foregoing, to facilitate the licensee's transmission system being made available to persons authorised to supply or generate electricity on terms which neither prevent not restrict competition in the supply or generation of electricity); and

      (iii)  subject to sub-paragraphs (i) and (ii), to promote the security and efficiency of the electricity generation, transmission and distribution systems in England and Wales or Scotland each taken as a whole.

  2.  The licensee's Grid Code in force at the date this condition comes into force shall be sent to the Authority for its approval. Thereafter the licensee shall (in consultation with authorised electricity operators liable to be materially affected thereby) periodically review (including upon the request of the Authority) the licensee's grid Code and its implementation. Following any such review, the licensee shall send to the Authority:

    (a)  a report on the outcome of such review; and

    (b)  any proposed revisions to the licensee's Grid Code from time to time as the licensee (having regard to the outcome of such review) reasonably thinks fit for the achievement of the objectives referred to in paragraph (b) of paragraph 1; and

    (c)  any written representations or objections from authorised electricity operators liable to be materially affected thereby (including any proposals by such operators for revisions to the licensee's Grid Code not accepted by the licensee in the course of the review) arising during the consultation process and subsequently maintained.

  3.  Revisions to the licensee's Grid Code proposed by the licensee and sent to the Authority pursuant to paragraph 2 shall require to be approved by the Authority.

  4.  Having regard to any written representations or objections referred to in sub-paragraph (c) of paragraph 2, and following such further consultation (if any) as the Authority may consider appropriate, the Authority may issue directions requiring the licensee to revise the licensee's Grid Code in such manner as may be specified in the directions, and the licensee shall forthwith comply with any such directions.

  5.  The licensee's Grid Code shall include codes relating to the technical operation of the licensee's transmission system, including:

    (a)  connection conditions specifying the technical, design and operational criteria to be complied with by the licensee and by any person connected or seeking connection with the licensee's transmission system or by any person authorised to generate who is connected with or seeks connection with the licensee's transmission system or any transmission system or distribution system of any third party which is located in Great Britain.

    (b)  an operating code specifying the conditions under which the licensee shall operate the licensee's transmission system and under which persons shall operate their plant and/or distribution systems in relation to the licensee's transmission system, in so far as necessary to protect the security and quality of supply and safe operation of the licensee's transmission system under both normal and abnormal operating conditions; and

    (c)  a planning code specifying the technical and design criteria and procedures to be applied by the licensee in the planning and development of the licensee's transmission system and to be taken into account by persons connected or seeking connection with the licensee's transmission system in the planning and development of their own plant and systems.

  6.  The licensee shall give or send a copy of the licensee's Grid Code (as from time to time revised) to the Authority.

  7.  The licensee shall (subject to paragraph 8) give or send a copy of the licensee's Grid Code (as from time to time revised) to any person requesting the same.

  8.  The licensee may make a charge for any copy of the licensee's Grid Code (as from time to time revised) given or sent pursuant to paragraph 7 of an amount which will not exceed any amount specified for the time being for the purposes of this condition in directions issued by the Authority.

  9.  In preparing, implementing and complying with the licensee's Grid Code (including in respect of the scheduling of maintenance of the licensee's transmission system), the licensee shall not unduly discriminate against or unduly prefer any person or class or classes of person in favour of or as against any person or class or classes of persons.

  10.  The Authority may (following consultation with the licensee) issue directions relieving the licensee of its obligations to implement or comply with the licensee's Grid Code in respect of such parts of the licensee's transmission system and/or to such extent as may be specified in the directions.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 27 August 2002