May 15,2009

National Grid today filed a proposal with the Massachusetts Department of Public Utilities that would lay the foundation for the company to make critical investments in its infrastructure that will continue to strengthen reliability, reduce carbon emissions, and meet the changing needs and expectations of its customers and communities.

In its proposal, the company requests approval to set new distribution rates that would add approximately 5.5 percent or $4.25 to the monthly bill of a typical residential customer who uses 500 kilowatt hours of electricity. If approved, the new rates would take effect on January 1, 2010. This marks the first time the company has requested a full rate review since 1995.

According to Tom King, president of National Grid’s U.S. business, while the company has not sought comprehensive distribution rate relief in well over a decade, its costs have steadily increased and the landscape in which it operates has changed dramatically.

“We understand that the current state of the economy has created a very difficult time for many of our customers, which makes the timing of this request unfortunate,” King said. “However, this filing is absolutely critical to our ability to continue to upgrade and replace aging infrastructure and provide safe, reliable service while simultaneously responding to and supporting the progressive energy policies outlined in the Commonwealth’s Green Communities Act.”

It is important to note that distribution rates are separate and distinct from the commodity, or supply portion of customer bills. While distribution rates have remained stable, commodity costs have fluctuated wildly over the past decade because they are linked to the global market prices of oil and natural gas. National Grid does not profit from commodity costs, which are passed through to customers from suppliers without any markup. On May 1, National Grid lowered commodity costs for typical Massachusetts residential customers by 23%.

Infrastructure Investment

Since 2000, National Grid has invested more than $900 million to upgrade and expand its Massachusetts distribution system. This includes a significant effort to improve reliability and achieve the standards contained within the company’s stringent customer service quality plan. This investment has begun to yield tangible results. In 2008, the company’s reliability performance improved for the third consecutive year in terms of the frequency of outages, which declined cumulatively by 33% during that time period. The duration of outages has been reduced as well. King acknowledged that while the company is very pleased with this progress, a tremendous amount of work lies ahead. He also noted that while the company has sharply increased its investment over the past several years, it has not been able to recover a large portion of these costs.

Revenue Decoupling and the Green Communities Act

The company’s filing also contains the first electric revenue decoupling ratemaking plan in Massachusetts. The Green Communities Act requires National Grid and the state’s other utilities to play a much more aggressive role in pursuing energy efficiency measures than in the past to help customers lower their overall energy bills, reduce the overall cost of energy in the state’s economy, and usher in a new era of more sustainable energy production and use. The proposal would change the way that the utility recovers its costs by severing the tie between revenues and kilowatt hour sales, thereby removing an obstacle to aggressive pursuit of energy efficiency, demand response and distributed generation programs.

Other Significant Costs

In the filing, the company also sets forth a series of proposals that collectively will address factors that make it difficult for National Grid to maintain rate stability over time. These factors include increasing costs of pensions and other post-employment costs and costs incurred by the company as a direct result of uncollectible expense related to the commodity portion of customer bills. The company also is requesting recovery of the remaining costs stemming from the devastating December 2008 ice storm.

In an effort to offset all of these spiraling costs, National Grid has instituted a broad range of cost-control and efficiency measures in the areas of work practices, procurement, facilities consolidation, and new technologies and systems. The company also achieved significant synergy savings from its merger with KeySpan. However, all of these efforts have been dwarfed by the sheer volume of capital that has been and will continue to be required to maintain a safe and reliable system.

King stressed the importance of National Grid’s ability to recover these significant costs in a timelier manner.

“Historically we have been unable to recover an increasingly large portion of our costs, especially those that are beyond our control,” he said. “But we are no longer able to do that in today’s highly competitive financial climate. Many people may not realize that our investors provide the up-front funding we use to invest in the system, which we then request permission to recover from customers.” King concluded, “It is vital that our Massachusetts business is seen as an attractive company in which to invest so that we can continue to deliver electricity safely and reliably to our customers. Now is the time to build the utility of the future so we can continue to meet our customers’ ever-changing energy needs.”

National Grid is an international energy delivery company. In the U.S., National Grid delivers electricity to approximately 3.3 million customers in Massachusetts, New Hampshire, New York and Rhode Island, and manages the electricity network on Long Island under an agreement with the Long Island Power Authority. National Grid is the largest power producer in New York State, owning 6,650 megawatts of electricity generation that provides power to over one million customers on Long Island and supplies roughly a quarter of New York City’s electricity needs. It is also the largest distributor of natural gas in the northeastern U.S., serving approximately 3.4 million customers in New York, Massachusetts, New Hampshire and Rhode Island.