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July 2011

SP Transmission RIIO-T1 Business Plan

SP Transmission RIIO-T1 Business Plan July 2011

Context

Executive summary 1

1. Overview 31.1 Energy Market Reform 3

2. Capital investment, deliverability and associated outputs 42.1 Load Related Investment 4

2.2 Non Load Related Investment - refurbishment and replacement of existing assets 6

2.3 Outputs and Associated Incentives 7

3. Deliverability 13

4. The financial case and risk assessment 16Competition for investment

Financial information

Risks impacting base scenario

5. Support from our Stakeholders 19

6. Innovation 21

7. Conclusions 22

Appendices 23

Contents

The world faces two key energy policychallenges: to tackle climate change andensure security of energy supply. TheUK Government committed to a bindingtarget, that 20% of the EU’s energyconsumption must come from renewablesources by 2020. The EuropeanCommission has proposed that the UK’scontribution to this should be to increasethe share of renewables in our energy mixfrom around 1.5% in 2006 to 15% by 2020.This target is equivalent to a seven-foldincrease in UK renewable energyconsumption from 2008 levels: the mostchallenging of any EU Member State. TheDepartment of Energy and ClimateChange, DECC, estimate achieving thesetargets could provide £100 billion worth ofinvestment opportunities and up to half amillion jobs in the renewable energy sectorby 2020. SP Transmission Ltd has anabsolutely essential role to play if thesegoals are to be achieved.

The future of electricity generation andtransmission has to be radicallytransformed to deliver a low carbonsociety. Centralised generation by largenuclear and coal stations will be replacedby smaller diversified sources of renewablegeneration. The grid system built toconnect the large power stations will nolonger facilitate the transmission of powerfrom multiple onshore and offshoresources. In our area new transmissionconnections for 5000MW of renewablegeneration require to be built, and thecapacity of the interconnecting systemshas to be vastly increased from the currentlevel of 2800MW (Scotland) to a minimumof 6600MW (England).

The SP Transmission Licence area liesdirectly in-between the proposed newsources of generation in the North and thehighest areas of demand in the South. This map shows the three key boundaries,B4, 5 & 6 that we must increase in capacityfrom the current levels of interconnectioncapacity or the new world of a sustainable,low-carbon economy will simply nothappen.

Three key boundaries

Ofgem has developed the new PriceControl model RIIO (Revenue fromIncentives Innovation and Outputs) tosupport the necessary investment over thenext Transmission Price control periodwhich runs from 2013-2021. Under RIIOnetwork companies will be set a baselinerevenue stream, with incentives linked todefined outputs, and encouraged to beinnovative. Together this produces aregulatory framework to encouragenetwork companies to meet today‘schallenges: including the transformation toa sustainable energy sector; maintenanceof reliable and secure supply; and theachievement of the above at affordableprices for consumers.

We at SP Transmission Ltd are undertakingthis once in a lifetime opportunity to shapethe transmission network for the future.We have developed an investment planworth £2500m - £3000m covering thePrice Review Period, 2013 to 2021. Webelieve this investment is essential toensure the transmission grid can providesustainable, low carbon electricity for theUK for the foreseeable future.

Context

Boundary B4

Boundary B5

Boundary B6

We recognise the key role we have to playin delivering the sustainable, low carboneconomy of the future and are determinedto rise to the considerable challengesahead.

Our industry regulator, Ofgem, has alsorecognised the challenges facing theelectricity and gas sectors over the nextten years:

“Significant investment is required over the coming yearsand the incumbent transmissioncompanies need to deliver asubstantial build programme in a relatively short time. Thisprogramme is materially greater and more complex than experienced in the recentpast and there is a risk that thecompanies will experienceresource constraints. “

up to

Load Related Expenditure (LRE)

Load-related expenditure comprises allspend in relation to reinforcement of thetransmission system, to accommodatenew generation and demand connectionsor changes to existing customerrequirements. Our plans are based on theindustry, ‘Gone Green’ demand andgeneration scenarios that reflect the latestgeneration developments. Our scenarioplanning includes the following factors:

• High demand for wind farm

development in the south of Scotland

with many proposed generation sites

located in remote, unpopulated areas

where there is little network

infrastructure to support their

connection.

• The majority of load related

expenditure, approximately 84%, is

driven by 11GW of new generation

projects throughout Scotland (up to

6GW onshore and offshore in SPTLs

area). We require to establish a series of

‘collector’ stations to facilitate the

connection of this generation.

Why do we need to Firstly, the evolving generation mix requires new connection orLoad Related Expenditure (LRE), this is where the largest area ofspend is required.

Secondly, the transmission network in south central Scotland waslargely constructed over 50 years ago and is reaching its end of life.The category of spend to refurbish and rebuild our existing assetsis called Non Load Related Expenditure (NLRE).

Wider Reinforcement Works

As the geographic location of renewablegeneration is primarily in the north of theUK, we need to increase the capability ofour interconnected network to deliverenergy to the centres of load in the southof the country.

This involves maximising the capacity ofthe existing interconnection circuitsbetween Scotland and England andconstructing new circuits to cope with thelarge increase in powerflow required.Substantial research has identifiedoffshore DC (Direct Current) links as themost suitable way to achieve this. Avoidingvisual impact and the challenges ofplanning onshore routes, this is the resultof successful engineering innovation.

o £3000m?

Non-Load Related Expenditure(NLRE)

Complex engineering information; assethealth, condition and circuit performanceis analysed to determine necessaryimprovements to our existinginfrastructure to avoid increasing thenumber and severity of faults and loss ofsupply. Industry NLRE is driven by assetreplacement and refurbishmentrequirements to ensure the transmissionnetwork continues to deliver the reliability,security and performance levelsdemanded.

Our proposed NLRE is based on:

• Investment requirements determined

by asset health with schemes prioritised

by a risk assessment driven by our Risk

Policies and utilising a full Network

Outputs Methodology (NOM) to refine

replacement priorities based on health

index and criticality in-line with Ofgem

requirements.

• Asset condition information for the

major asset categories based on generic

or asset family type data. The condition

of ancillary components is less well

defined at this stage, and we have

undertaken further work to inform this

Business Plan submission.

Our assessments have highlighted theneed to increase switchgear replacementdue to greater awareness of conditionissues, and specifically anticipateddeterioration in the supporting civilstructures. The age of overhead lineconductor is also an issue; withapproximately 80% of 275kV conductor ator approaching 50 years old. A controlledramping replacement programme basedon age profile is proposed to avoid apotential future step change inexpenditure.

Our Investment Plan therefore coversrenewal of existing Transmission assets;transformers, overhead lines, switchgear,cables and protection systems, and thedevelopment of networks to facilitate newconnections, including renewablegeneration and progression towards a lowcarbon network.

o spend

The engineering location of load and non load projects

legend

substations load

windfarms

substations non-load

non-load circuits

load & non-load circuits

load circuits

possible load circuit

non-load circuit substitution

circuit removal

As operators the key challenges we face are:

challenges

In terms of deliverystrategy, theinternationalorganisation and oursister companyIberdrola Engineering &Construction (IEC) willbe utilised to bringexperience andcapacity into effect togrow our capability tothe level required tomeet the plannedtransmissioninvestment activity.Detailed stage-by-stagescheme delivery plansare being developedthat address thesignificant challenge ofrenewing our agingtransmission overheadline assets with deliveryof the load driveninvestment schemes.

Key to success is thecontrol andmanagement ofchanges in outageplans. These plans allowus to identify long termplanning activities andoutage requirements todevelop a view of howoutages can bepackaged and workphased to meet thebest achievableoutcome for thesystem stakeholders inthe preparation of ourinvestmentprogramme. Thelikelihood of outagesbecoming a realconstraint on delivery ifnot addressed and theneed to agree MainInterconnectedTransmission System(MITS) constraintoutages earlier hasmeant discussions arealready underway withNational Grid on ourrequirements up to2021.

The procurementcapability to meet ourinvestment plan andour strategy to engagewith the suppliermarkets to enableefficient investmentpurchasing is evolving.It will require a globalpurchasing strategyfocused on drivingvalue through allrelated purchasingactivities. Our strategyis based on using theexperience of the IECmodel and involvesestablishing long termcontracts andcompetitive tenders forlarger value works. In2011 alone we will beissuing up to 40tenders totalling £340Mand this scale ofinvestment will broadlycontinue year on year.

Obtaining all necessaryconsents is dependenton other agencies,providing consentapproval to competentplanning applications inrealistic timescales.Historically securingplanning consents formajor developmentwork can take years andconstitutes a significantrisk to achieving ourplans. The scope andextent of environmentalplanning activities forthis investment planand the requirement forland access andwayleaves negotiation isenormous, and we willrequire to secureadditional resources andsupport to achievethem.

We are working hard toensure we can continueto attract investmentagainst a backgroundwhere the regulatoryregime is tending toincrease the risk borneby the networkoperators. OurInvestment plans,produced by theEngineering team, haveconverted that into thecommon language ofthe investor andhighlight:

• The value of

investment,

• The absolute level of

base-line returns

required,

• The financial

assessment of the

cash-flows in terms

of risk and

sensitivities.

Our negotiations in thisPrice Control with theRegulator must lead toa regulatory settlementthat gives us the rightlevel of funding.

1to build

an optimal delivery strategy

2to manage the

outage impact onexisting customers

3to manage thecapability of thesupply chain

4to meet planning

requirements

5to secureinvestment

SP Transmission RIIO-T1 Business Plan July 2011 1

Our Business PlanIn accordance with Ofgem’s process for theRIIOT1 Transmission price control review,SP Transmission Limited (“SPT”) issubmitting our investment plan outlining arequirement for our shareholders andconsumers to fund between £2-3 Billionpounds sterling (2009/10 prices) ininvestment, creating up to 1,500 newdirectly associated jobs in the SPT licencearea in this period. We estimate that theimpact of our business plan on customers’bills is an increase of thirteen pence in theannual charge per customer in each year ofRIIO-T1.

67% of this investment is aimed ataccommodating a large increase inoffshore and onshore wind generation inScotland (around 11 GW by 2020) inaccordance with the UK’s legally bindingtargets for Renewable Generation anddecarbonisation of the economy. Thistarget requires associated increases in theexport capacity from the SPT transmissionnetwork from 3.3 GW at April 2013 to closeto 7GW by March 2021. Progressionagainst these targets is highlighted asbecoming critical both in terms ofdelivering the targets but also in light ofthermal generation closures scheduled totake place in this period in Scotland.

33% of this investment is required tomodernise the network to ensure that theexcellent security of supply and reliabilityenjoyed in the SPT area is maintained. Thisinvestment is being targeted at an ageingasset base where the majority of the 275kVnetwork is over 40 years old and significantsections of the 132kV network are over 60years old. This ageing asset base is alsoimpacted by higher levels of utilisationarising from the Connect and Managearrangements introduced throughTransmission Access Reform, and by ourfuture network requirements.

By 2021 this Business Plan provides thefollowing high level outputs for thenetwork user and customer:

• 6.6 GW of export capacity and 2.5GW of

import capacity between Scotland and

England,

• Connect an additional 2.5GW of

Renewable Generation in our licence

area and facilitate 6GW in Scottish

Hydro-Electric Transmission Limited’s

(SHETL) licence area, delivering the

target of 11GW for all Scotland,

• Ensure that the UK meets its Renewable

targets under the industry agreed Gone

Green scenario

• Renew and replace over 15% of our

existing substation assets and replace

around 800 km of overhead line to

ensure we continue to deliver excellent

reliability and security of supply.

For an investment plan of between£2 to 3billion pounds, recovery ofwhich is amortised over 20-45years, these outputs will delivervalue to the United Kingdomconsumer as a whole of around£1.7billion cumulative by 2021 inreduced constraint costs and willsupport the delivery of over£2billion in reduced carbonemissions (equivalent to over 45million tonnes of CO2) from theRenewable Generation sector overthis period.

Without this investment thecumulative constraint costs tocustomers would rise to £16billion by 2030.

We are acutely aware of the impact offunding this investment on UK customers,and whilst we do not run the GBtransmission charging model, since that isthe role of National Grid as the NETSO, it isclear to us that the cost to the consumerand to the UK from not undertaking thisinvestment far outweighs the investmentcosts.

In our planning process we have appliedIberdrola’s (among the 5 biggest utilities inthe world) global procurement expertise toensure that the costs that underpin ourprogramme are the most efficient in theUK for the solutions we have proposed. Tofurther minimise costs to customers oursubmission has also been built up from abaseline ex-ante view, involving aminimum investment case, with theflexibility to scale up through the use ofvolume drivers and trigger mechanisms toprovide both our “Best View” of our likelyinvestment plans, and the capability todeliver our upper case view as required.This has the advantage of ensuring that thecustomer only pays for investment andoutputs we undertake but also providesthe company with the necessary cash-flowrequired to maintain this progress indelivering against a business plan thatmust be viewed as being critical against theGovernment’s recently restated policyobjectives and roadmaps.

As we look at the RIIO-T1 years moregenerally, we expect to find that actualWACCs will be higher, and probably morevolatile, than during any other five-yearperiod since privatisation, some twodecades ago. This is because throughoutthe next period, but particularly from 2013,the energy projects required to meet theUK’s 2020 targets will enter the large-scaleconstruction phase.

Executivesummary

Unlike previous Price Control Reviews,Companies have been invited to submit afull, holistic financing package withOfgem providing guidance only in a fewkey areas. As such we are submitting abusiness plan that includes a financingplan which complies with Ofgem’s policyrecommendations and which alsoprovides a fair deal for customers andshareholders alike. Our main financialmetrics are set out in Appendix 1.

As a consequence of the significantincrease in capital expenditure during theRIIOT1 it is inevitable that prices will riseduring the period. We will work withOfgem to ensure that these are smoothedas far as possible as we move from the rollover year of 2012/13 into the RIIO-T1period to avoid unnecessary price shocks.We estimate that the impact of ourbusiness plan on customers’ bills is anincrease of thirteen pence in the annualcharge per customer in each year of RIIO-T1.

Shareholders will be expected to play theirpart. Our business plans require equityinjection of £375m supplementing anincrease in debt of £825m during theperiod. As a consequence we haveincluded within our plans a minimumallowed cost of equity of 7.2% (post taxreal) which we believe will be theminimum necessary to attract theinvestment necessary to fund our capitalexpenditure commitments.

We include within our plans a notionalgearing of 50%, lower than previous pricecontrol reviews but at a level that isappropriate for a company of SPT’s sizefacing such a dramatic increase in capitalexpenditure relative to our current RAV.We also see this as key to facilitate accessfinance at reasonable rates at a time whenfinancial markets remain extremelyuncertain.

Ofgem have proposed a fast trackBusiness Plan process to enablecompanies with robust plans to movemore quickly through the price controlreview process. The key test for this “fasttracking” will be the relative richness ofthe Business Plan submitted by thecompanies. It is also acknowledgedhowever that while companies may wellsubmit rich plans, the relative complexityof the plans required to deliver RIIOT1 willrequire further due diligence meaningthat this option becomes unavailable.Given the level of capex being submittedby all three companies in Electricity

Transmission, the extension of the controlperiod and future uncertainty togetherwith the various scenarios that have totested, it becomes difficult to see how theprocess will work effectively andequitably. None the less we haveendeavoured to build a plan that meets allof Ofgem’s stated requirements.

However, what is perhaps even moreimportant to industry is that Ofgemensure that as well as protecting theconsumer in terms of cost, they send outa strong signal that they support theblueprint laid out by the Government inJuly for Renewables and the requiredinfrastructure to support thisdevelopment. We hope this support willbe underpinned by the Regulatorydirection provided by DECC under theproposals from the Ofgem Review thathas taken place, and that Ofgem willconfirm as early as possible theircommitment in terms of investmentallowances and the key financialparameters (for example cost of equityallowances) that will create a context inwhich this investment can take place.

This is critical to industry since given thetimescales we face we have already begunto work with our supply chains to deliverRIIOT1. SP Transmission and its affiliatecompanies have actively triggered staffrecruitment processes (for example ourengineering and construction businesshas more than doubled its dedicatedTransmission workforce in the lasteighteen months and is continuing toaggressively recruit) and we have also setout our consenting and procurementrequirements. It is vital that unlikeprevious controls where the Regulator’sposition was held back on certain keyparameters until the Final Proposals(scheduled for December next year) thatOfgem set out their position on all the keyparameters of our Business Plans by theend of the second quarter of the nextCalendar year (i.e. June 2012). This in ourview will be a key milestone at which pointwe will look to Ofgem to affirm theirposition on our requirements to allow usthe proper time to complete our duediligence to accept or reject a set of FinalProposals that have perhaps never beenmore critical and over a period which islonger than ever before in terms of theduration of the control period.

This business plan and associateddocuments lay out the basis of oursubmission; our engineering assessments,

our key risk evaluation, the detailedoutputs and incentives we believe areappropriate and highlight the supportiveand enabling framework that we requirefrom Ofgem to allow our Business todeliver Government and European EnergyPolicy.

The United Kingdom is entering aperiod of unprecedentedinvestment in electricityinfrastructure at a time whenfinancial markets are at their mostvolatile for some 80 years. It is vitalif the UK Energy Policy is to bedelivered on schedule that energycompanies and Ofgem workcollaboratively to achieve thisambitious agenda and attract thesubstantial levels of investmentrequired. Key to this will beTransmission as by its very natureit has to lead the way and underpinenergy policy by being ahead ofthe generation curve. SPTransmission has laid out how wecan support this agenda and looksforward to working effectively withOfgem to ensure that UK EnergyPolicy is delivered.



Prior to submitting the SP TransmissionForecast Business Plan for the years 1 April2013 to 31 March 2021 there has been avery stark focus on energy policy,particularly in relation to ensuring thefuture security of supply for all connectedcustomers and naturally the consequentimpact on consumer prices.

Our Business Plan is presented against thiscontext and sets out to establish how atthe very heart of our strategy we haveplaced a very clear aim, that is:

To ensure that SP Transmission is atthe forefront of facilitating theUnited Kingdom’s transition to alow carbon economy and that aspart of the Iberdrola Group we actas a catalyst to the Government’ssuccessful achievement of itslegally binding 2020 targets fordecarbonisation via a transitiontoward renewable generation.

In the following sections, we set out someof the policy and joint industry work wehave undertaken to provide a clearcontext to the significant levels ofinvestment we require to undertakewithin our transmission licence area.

Energy Market Reform

On 12 July 2011 the Secretary ofState for Energy and ClimateChange Chris Huhne announcedhis Energy Market Reforms. At theheart of these was an evenstronger commitment to laying outa supportive framework toencourage a greater balance ofsupply from Renewable Energyresources. This, and associatedannouncements, highlight that theelectricity transmission businessesin Great Britain will have toaccommodate over a four-foldincrease in our level of renewableenergy consumption by the end ofthe decade.

This announcement confirms a leadingrole for Renewables and is particularlysignificant for Scotland, where it isanticipated that around one third of thecontribution required to enable the UnitedKingdom to meet its European targets forrenewable generation will be delivered.

On 12 July the Secretary of State forEnergy and Climate Change, Chris Huhne,whilst announcing his Energy MarketReforms stated that: “We have a Herculeantask ahead of us. The scale of investmentneeded in our electricity system in orderto keep the lights on is more than twicethe rate of the last decade” and that “Anew generation of power sourcesincluding renewables, new nuclear, andcarbon capture and storage, along withnew gas plants to provide flexibility andback-up capacity, will secure ourelectricity supply as well as bring new jobsand new expertise to the UK economy.”

In order to stimulate and bring forwardthe necessary “clean” plant that isrequired to deliver the Governmentsvision Mr Huhne announced a package ofmeasures including:

The announcement in Budget 2011 that

the Government would put in place a

Carbon Price Floor to reduce investor

uncertainty, putting a fair price on

carbon and providing a strongerincentive to invest in low-carbongeneration now;

• The introduction of new long-term

contracts (Feed-in Tariff with Contracts

for Difference) to provide stable

financial incentives to invest in all forms

of low-carbon electricity generation.

• An Emissions Performance Standard

(EPS) to reinforce the requirementthat no new coal-fired powerstations are built without CCS,

• A Capacity Mechanism, including

demand response as well as generation,

which is needed to ensure futuresecurity of electricity supply.

The necessary legislation which willunderpin this package of measures forreform is aimed to reach the statute book

by spring 2013 which also marks the startof the new RIIOT1 price control. In theintervening period the Government isputting in place effective transitionalarrangements to ensure there is no hiatusin investment while the new system isestablished.

On the same day DECC also published thefinal report of the Ofgem Review, followingpublication of the Summary of Conclusionsin May. This report provides further detailon how the Government will seek tostrengthen the regulatory framework,bringing greater clarity and coherence tothe distinct roles of government and theenergy regulator.

Also at this time the UK Government andthe Devolved Administrations publishedthe Renewable Energy Roadmap settingout a comprehensive programme oftargeted, practical actions to tackle thebarriers to renewables deployment,enabling the level of renewable energyconsumed in the UK to grow in line withour ambitions for 2020 and beyond. Thiswork identifies eight technologies thathave either the greatest potential to helpthe UK meet the 2020 target. Energy fromwind, biomass and heat pumps are theleading contributors, including offshorewind – where the UK has abundant naturalresource.

The Government underlined its intentionto ensure the full economic and energysecurity benefits of offshore windresources come to the UK rather than itscompetitors.

This series of announcements in Julyconfirms a leading role for Renewables andis particularly significant for Scotland,where it is anticipated that around onethird of the contribution required toenable the United Kingdom to meet itsEuropean targets (from contributions bothfrom onshore and offshore wind) will bedelivered. The associated documentsimply that the electricity GB electricitytransmission businesses will have toaccommodate over a four-fold increase inour level of renewable energyconsumption by the end of the decade.

Overview

2.1 Load Related Investment

Against the policy blueprintannounced by the UK andDevolved Governments SPT faces amajor challenge to connect andfacilitate the boundary flowsassociated with connectingbetween 10 to 15GW of renewablegeneration across the whole ofScotland. This level of generationhas been identified through a jointindustry working group referred toas the Electricity Networks StrategyGroup (ENSG) which is chaired byOfgem and DECC.

There is a requirement to providenorth to south transmission exportcapacity for this renewablegeneration (above the 6GWScottish demand) through theSHETL and SPT licence areas to themajor demand centres in Englandand Wales. This is a key aspect ofour underlying business plan; thismust be met while also addressingthe major technical challengerelated to the significant reductionin the conventional generationportfolio in Scotland, creatingissues in terms of system stabilityand the underlying security ofsupply.

The Current Generation Background

The existing transmission network incentral and southern Scotland has amaximum demand of around 4GW (totalScotland 6GW). This demand hashistorically been provided by a generationportfolio of nuclear and coal capacity,supported by pumped storage, industrialgas CHP and small scale hydro andembedded generation, with furthercapacity being available throughinterconnection with the north ofScotland, England and Northern Ireland.Over the past 5 years this has beensupplemented by a growing portfolio ofdirectly connected wind generationplanned to reach over 1.8GW by the endof 2011/12.

By the end of RIIO-T1 we anticipate theSPT area demand will not be significantlydifferent to the existing position.However, there are various conflictingdrivers at play that drive this position, forexample:

• Demand and consumption may drop

due to the availability of feed in tariffs

encouraging the development of micro

generation along with Government

initiatives to improve efficiency.

• On the converse side, rising gas and oil

prices will encourage further usage of

electric heating, and to

de-carbonise the transport sector a

shift to electric vehicles could be

anticipated which could lead to an

increase in electricity demand.

What is also clear is that conventionalgeneration will reduce by 2GW, due to theexpected closure of Hunterston andCockenzie power stations, therebycreating a gap in base load generationcapacity in Scotland..

Electricity Networks Strategy Group(ENSG)

Through stakeholder engagement, andworking jointly with NGET and SHETLthrough the ENSG chaired by DECC andOfgem, we have developed threescenarios reflecting possible changes inthe generation portfolio and associatednetwork capacity to plug this gap. Thesescenarios ensure that the transmissionnetwork is developed to play its part intransporting Renewable energy fromScotland, a Renewable rich area of GreatBritain, with a clear commitment to windpower, is hence play a significant role inachieving the targets set out by Europe.

Looking forward, the ENSG Group hasidentified that based on the centralplanning scenario Renewable windgeneration will increase to around 5GW by2020 and Carbon Capture and Storage(CCS) will start being applied to theremaining coal generation in SPT’s licencearea. Further, renewable generation willincrease to around 6GW in SHETL’s area inthe north of Scotland. This is in addition totheir existing 2GW of capacity providedthrough hydro, pumped storage and gasgeneration.

The development of our Load Investmentplan has been informed by using theoutput of the generation planningscenario analysis conducted by NGETthrough consultation with SPTL, SHETLand through ongoing dialogue withindustry partners, project developers andother relevant stakeholders as part of ourbusiness as usual processes. Thesescenarios are referenced throughout ourLoad Related submission. However, wehave additionally considered stakeholderdialogue, other local sources ofintelligence and data to develop our plans,which have developed into a lower(baseline) plan, a best view plan and anupper plan.

The planning scenarios seek to alignfuture network requirements withrecognised Government targets. Threescenarios were identified these being:

• Slow Progression

• Gone Green, and

• Accelerated Growth

These scenarios were developed toprovide a robust context to plan against ina period of quite considerable uncertainty.Only slow progression fails to meet theRenewable targets (by a minimum ofaround 5-years) and the industry, DECCand we believe Ofgem have agreed thatthe blueprint we must build towardsprudently is the Gone Green scenario.


Capital investment & associated outputs

It would be imprudent not to recognisethat many industry commentators andobservers, and possibly even Regulatorsmay well question the UK's ability to meetthe targets in aggregate. Howeveraccurate or otherwise those thoughts maybe industry does not have the luxury ofbeing able to continuously debate thesescenarios. We have been challenged todeliver a blueprint for RenewableGeneration that sees the UK succeed inmeeting its targets and we thereforewould be unable to accept a lowerscenario which we believe wouldemphatically contribute to us missing thetargets.

However, much uncertainty does stillsurround the plans, particularly as Ofgemhave moved price controls to cover 8-yearperiods. Therefore in order to minimisecosts to customers our submission hasbeen built up from a baseline ex-anteview, involving a minimum investmentcase built on solid engineering andplanning progress, with the flexibility to


CAPEX £m

Upper Case£2.76bn

Best View£2.14bn

Lower Case£1.10bn

LocalEnabling

- Exit£56m

Widerworks- entry

(specific majorreinforcements)

£32m

RPE’s£79m

Non-loadinvestment

£626m

LocalEnabling- Entry

Up to 3.5GW(cum)

£193m

LocalEnabling- entry

Up to 4GW(cum)

£45m

SP OHL& Substation

Projects£71m

Wider works(sp. major

reinforcement)£919m

= forecast and outputs for IQI

Ex-Ante Allowance



Localenabling-entry

>4.4GW to 7GW(cum)

£221m

SP OHL& Substation

Projects£114m

Volume driver at£50k/MW

RevenueTrigger

TIRG works£116m

TIRGOncosted (net) 2009/10 real prices

Funding Mechanism

In summary our Load RelatedGeneration Investment plansdeliver:

- An additional 3GW of renewablegeneration, in our Best View,connecting by 2021 giving a totalof circa 5 GW of directlyconnected renewable generationin our area for £239m.

- In addition, our upper casescenario, established by theactive dialogue and commitmentshown by developers, reflects afurther 6.9GW of predominantlywind connecting by 2021 for afurther £221m that would befunded via a revenue drivermechanism.

To fund our planned ‘Best View’investment we will require:

- A minimum baseline ex-anteallowance of £43m to fund H1Sole Use infrastructure toconnect 1.62GW generationcapacity.

- Development of a revenue drivermechanism based upon£50k/MW to fund constructionof those projects to have thecapability to meet both our “BestView position” and to be scalableto meet the upper case scenario

- Capital investment in electricityinfrastructure, for collectors, of£117m

- In addition we expect, as anexcluded service, to invest in£58m of sole use customerwork, either directly funded bythe customer £25m, or paidthrough annual charges.

A summary of our load investmentis set out below with a mapdetailing specific load schemes inAppendix 2. More information isprovided in our business plan inAppendix 1.

350

300

250

200

150

100

50

2013

/14

2014

/15

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

2020

/21

£m

RIIO-T1 Load related expenditure(including TIRG)

scale up through the use of volumedrivers and trigger mechanisms toprovide both our “Best View” of our likelyinvestment plans, and the capability todeliver our upper cases as required. Thelevels of investment falling into thesecategories is summarised in the diagramshown below.

In our Best view Plan the two keyinvestment areas involving £427m(61% of the non load investmentprogramme) are:

- Overhead Lines£309m (44% of non loadprogramme). To minimise endof life risk, we plan to replace519km (44%) of the largepopulation of 1960s ACSRconductor on the 275kV and400kV network, with a further671km (56%) in RIIO-T2. Inaddition, a further 359km (44%)of the 132kV network will bereconductored

- Switchgear£118m (14%). We will replace 81circuit breakers (50%) of thelarge population of 1950s and1960s Air Blast and Bulk Oilcircuit breakers which havebecome less reliable anddifficult to maintain due to alack spares and manufacturersupport, plus the significantcost and outage time associatedwith maintenance. A further 62circuit breakers will be replaced(39%) in RIIO-T2 to manage endof life risk with this equipment.

- Other Areas: Protection Control & Telecoms£80m (11%). Transformers£54m (8%) - we will continue toaddress end of life Bulk SupplyPoint transformers, and ourstrategy of replacing unreliableBruce Peebles transformers.Cables£16m (2%) - this is a smallprogramme as we havecompleted the replacement of the unreliable gascompression cables.

A summary of our non-loadinvestment is set out below with amap detailing specific non-loadschemes in Appendix 3. Moreinformation is provided in ourbusiness plan in Appendix 1.


350

300

250

200

150

100

50

2013

/14

2014

/15

2015

/16

2016

/17

2017

/18

2018

/19

2019

/20

2020

/21

£m

RIIO-T1 Non-load related expenditure

The investment strategy for the 132kV,275kV and 400kV transmission networkaims to ensure an optimum level ofinvestment by adopting a level ofprioritised, targeted project specific,investment necessary to effectivelymanage the business risk and ensure longterm sustainability of this key UK asset,utilising appropriate engineeringinterventions and risk management.

Our investment plan for RIIO-T1 involves£696.5m for non load related investmentassociated with the replacement of assetswhich are at their end of life. Theinvestment plan has been developedutilising our Asset Risk Managementpolicies and procedures, which reflect thenationally agreed Network OutputMeasures methodology. It has beendeveloped using extensive current assetcondition information, contextualisedwith our asset replacement age basedmodelling. Utilising condition andmodelling data, along with site criticality,has ensured our plans reflect the keyinvestment priorities. Our prioritiseddetailed work programmes are developed,at a circuit or substation site specific level.To minimise costs to customers, we havebuilt our non load related investment inRIIO-T1 in the following manner:

• Lower plan (baseline ex ante) totalling

£626m

• Best View plan totalling £697m

(including baseline)

• An Upper Case plan totalling £811m


2.2 Non Load Related Investment(The refurbishment and replacement of existing assets)

In our full report we haveconducted a detailed analysis ofthe output and incentive proposalsbased on the incompleteinformation that remains to bedeveloped beyond the BusinessPlan submission (for exampletargets and other similarparameters alongside otherinherent risks). Our initial analysisleads us to believe that the overallskew towards penalties means thaton average the package tendstowards -80 to -90 basis points ofdownside risk in RoRE. This is afactor we will return to in theFinancial Strategy section.

For planning purposes our base casesubmission is assumed to be neutral interms of outputs, given we expectultimately Ofgem will set stringent targetsas previous experience would suggest.

We also strongly hold the view that thebase Business Plan must be adequate forthe investor to undertake the criticalinvestment, and that incentive rewardsand penalties are additional factors whichdifferentiate companies from that basecase. That is, they reward excellent orexceptional performance, i.e. above goodor expected performance, or alternativelypenalise below average performance.These mechanisms do not provide anadditional means of achieving theexpected returns for investors for a giveninvestment programme as was proposedto be the case at DPCR5.

Our high level assessment of these iscontained in the table overleaf and ourimpact analysis is referred to in theFinance Strategy section.


SP Transmission fully supports theneed for output measures. Werecognise that this provides theconsumer and the company alikewith a transparent regulatorycontract, enabling a clearstatement of the value that we arecreating in a business that canoften be taken for granted becauseof its historical success indelivering security of supply andsound engineering progress anddelivery.

However, we do believe these must bemeaningful and value adding and take fullaccount of the physical engineeringattributes of the networks andcircumstance across the UK.

Outputs are at the core of the RIIOregulatory framework, and are intendedto support the transition to a sustainableenergy sector. Clearly at the heart of thatmust be an output related to theconnection of Renewables itself since thisis perhaps the single most valuable andmaterial output that the Networkbusinesses can help facilitate. Contrastthat in our estimation that the outcomefrom the package of incentives associatedwith outputs proposed by Ofgem will lie ina range of plus 100, minus 150 basispoints of Return on Regulated Equity(RoRE) (100 basis points equals £12M perannum) and yet the cumulative savings inconstraint costs we highlighted in theopening paragraph run to over £1.7billion, and before any credit forreductions in carbon are included. It istherefore surprising that no explicitrecognition of this has been included inoutput measures, especially given strongstakeholder feedback from someparticipants to this effect.

Another important principle should be toensure that outputs be within the controlof the transmission company. It is also important we have full access toinformation on which any incentive isbased, and there must not be conflictingincentives.

2.3 Outputs and Associated Incentives

Rather than focus on every measure(which is analysed in detail in our sectionon Outputs), in the following commentarywe consider some of the key outputmeasures and associated incentives.



Area Output Forecast Comments

measure

Safety Compliance n/a No financial incentive

with

HSE safety

legislation

Reliability Energy +£2m Penalty collar proposed at -3% of

not supplied to -£9m allowed revenue proposed. Given

(ENS) potential impact, we believe the current

rate of 1% should be maintained

Reliability Asset health & n/a Expect penalty mechanism similar to

replacement DPCR5. Penalty for non-delivery applied

priorities to RIIO-T2 revenues.

Reliability Constraints +£10m Penalty applicable if fail to comply with

and outage to -£10m Network Availablity Policy.

management Potential rewards available if actions

beyond Policy reduce constraints.

Currently no clarity on how this will work

Reliability Delivery of £0m Penalty only for late delivery of

wider works to -£10m boundary increases. Penalty could be

- boundary linked to associated constraint costs.

capability

Environment SF6 leakage +£0.1m Assumed variation of ±80kg around

to -£0.1m target, financial strength only £1.2 per kg

Environment Broad +£0.5m Reputational incentive.

environment to £0m Ofgem also to consult on incentive

measure measure.

Environment Business n/a Reputational incentive based on

Carbon reported data, losses based on

footprint network model output

and losses

Customer Customer +£3m ±1% revenue available based on

Satisfaction survey performance in customer survey -

likely to be no incentive in 1st year

Customer Stakeholder +£1.5m Reward only mechanism, requires

Satisfaction engagement to £0m various hurdles to be overcome which

may prove difficult to achieve.

Connections Pre- £0m Penalty if connection offer provided

connections to -£1.5m later than 90 days from request.

Unlikely to receive penalty

Reliability - Energy Not Supplied

We agree that Energy Not Supplied (ENS) isan appropriate primary measure of theperformance of the transmission network,and it should be recognised that thismeasure is not directly within the controlof Scottish TOs. In Scotland, the SO hasmore control over this measure than theTOs. We therefore believe that the rulesset a collar with a maximum penalty of1%, rather than Ofgem’s proposed 3%.

Based on our historic performance overthe last 10 years, as set on in the graphbelow, and taking into account projectimprovement in performance we proposea target for SPT of 225MWh unsuppliedenergy per annum, with a linear incentivebased on a slope of £16k/MWh. That is,we would be in penalty if we exceed225MWh unsupplied energy in any givenyear, subject to the agreed ENSFramework.

It is also essential that companies are notat risk from exceptional events (as per theDistribution scheme) since it would beunfair to penalise a TO for the full extentof a severe weather occurrence forexample. We believe that more workneeds to be done to calibrate thisincentive appropriately but that thefollowing principles should be adopted (asdiscussed and justified in more detail inour full submission):

• Events lasting three minutes or less

should be excluded. This would allow

weather related events that are

resolved by network protection to be

excluded.

• The exclusion for severe weather, seven

faults in 24 hours, remains appropriate.

• The proposed approach for exclusion of

third party damage, and other

exceptional events, where transmission

companies would be required to

demonstrate that they meet

exceptionality requirements, is

appropriate.

• Planned outages affecting demand

customers should continue to be

excluded. In principle interruptions to

demand customers should be

incentivised to reflect the

inconvenience however planned

outages affecting demand customers

on the transmission system are only

taken with the agreement of

customers. The process of the SO

agreeing the planned outage with

customers provides them with advance

notice of outages and minimises their

inconvenience.

Secondary Measures

The proposed secondary deliverablesrelated to this primary output cover awide range of variables covering AssetHealth, Criticality, ReplacementPriority/Risk, Circuit Unreliability, SystemUnavailability, System Faults and AssetFailures. We believe that Asset Health,Criticality and Replacement Priority arethe main secondary deliverables whichshould be considered as output measures.Our non load related investment plan hasbeen aligned therefore to these specificoutputs.


800

600

400

200

Overall ENS

Reportable ENS

SP Transmission Historic Energy Not Supplied

P&L 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010/02 /03 /04 /05 /06 /07 /08 /09 /10 /11

Overall ENS 179.2 159.89 202.2 102.27 20.53 19.81 97.71 478.96 162.7 885.8

Reportable ENS 178.35 158.88 200.78 102.27 19.65 19.81 96.31 478.26 103.75 885.8

Constraints and outage management

Avoiding constraints both within and fromScotland are best resolved by reinforcingthe wider transmission system throughundertaking reinforcements to the widersystem as quickly as possible. Thisprinciple is at the heart of our plan and we hope is evident from the significantreductions in forecast congestion costs of £1.7billion by 2021 and £11billion by 2030.

We believe that Ofgem’s approach to foreach transmission company to prepare aNetwork Availability Policy is a pragmaticand sensible solution. We prepared ourdraft Policy and took the lead inconsulting on it with the other TOs andthe NETSO and it has been revised as aresult of this consultation process. This isincluded as an appendix in our section onDeliverability. We have included a draft,rather than final, policy as we are keen tocontinue the consultation process withrelevant stakeholders to ensure the policyis robust.

In terms of deliverability our plans arecritically dependent on an efficient andcertain outage plan. Cancellation carries asignificant direct and indirect cost uponSPT and the customer alike. A constraintincentive has the potential to compromisethe essential asset replacement andrefurbishment required to maintainquality of supply, and our concern is thatthe operation of this incentive must notcompromise or access to the system toundertake essential asset replacementand refurbishment which we believeshould take precedence over constraintminimization.

We understand that what is proposedunder the scheme is that a penalty wouldonly apply if a company fails to complywith Network Availability Policy. Inpractice this should not happen given theexisting outage planning and agreementprocesses.

For actions taken beyond the Policy theproposal allows for rewards where theseactions reduce constraint payments. Onface value this seems to be reasonable butin practice the opportunities, givenultimately the price control agreedinvestment plans should be efficient bothin terms of cost and delivery (i.e.including outage management) we wouldnot expect these benefits to besignificant. It is positive that Ofgem

acknowledge that the TransmissionOwners can positively influence this areain addition to the SO.

This has not been the practice in the past.In the last couple of years SPT led aninnovation to upgrade the OperationalIntertrip on the Anglo-ScottishInterconnector as part of TIRG. In thiscase conventional devices and signallingequipment could not satisfy the verystringent operating time requirementsand with such complexity. To achieve theoperating time requirement and tomanage the complexity, SPT havepioneered the use of IEC61850 technologywhich replaces conventional wiring withan optical Ethernet system. It is believedthat when commissioned in 2008, it wasthe first installation in the UK to employthis technology in a fully operationalsystem. The scheme bettered theoperating time by a considerable marginand had a number of additional benefits.In addition to the high performance andflexibility of the scheme, it was extremelycost-effective and has proved its value inoperation. The cost of the scheme was inthe order of £700k. Using data from theNETSO associated with the impact of arecent outage related to the schemeidentified that the benefit provided bythis scheme was approximately £1 millionpounds per week in constraint costs.

This ground breaking scheme is presentlybeing extended to include the EasternInterconnector circuits and thisdeployment will be commissioned inAugust 2011. SPT have also proposed anextension of the scheme in response to aproposal from SO for the rapid post-faultmanagement of reactive compensationacross the Anglo-Scottish Boundary.

Unfortunately SP Transmission was unableto share in any of the benefits whichmight accrue within the SO Incentivescheme. Going forward however givenour recent focus on these areas there isless opportunity and while we think this isa positive step forward the opportunitymay be much diminished.


Wider works - arrangements to encouragetimely delivery

As Ofgem acknowledges in their Strategyconsultation, transmission companies arealready incentivised to complete widerworks as early as possible. Not only isthere a business driver in increasing thebusiness RAV as quickly as possible, butthere is also a reputational driver giventhat the wider system reinforcements arekey to supporting Government energypolicy. However, Ofgem intends to alsointroduce a penalty-based financialincentive for those projects fundedthrough uncertainty mechanisms withtarget delivery date for wider works.

Given the scale of investment, and the riskassociated with these projects in terms oftechnology, environment, consents andNETSO interactions, we question ifpenalties are reasonable. We agree that ifpenalties are to be introduced then theremust be clear and transparent guidelinesaround their application, and whichaddress “exclusions”. For example,outage changes caused by the NETSO inorder to minimise constraint costs, delaysdue to obtaining consents (where there isclear evidence demonstrated that thelicensee has been pro-active in obtainingconsents), and other exceptionalcircumstances should be taken intoaccount.


Environmental - SF6 leakage

Sulphur Hexafluoride gas (SF6) is used inthe electricity industry as a gaseousdielectric medium for high-voltage circuitbreakers, switchgear, and other electricalequipment. However, SF6 is one of themost potent greenhouse gases, with aglobal warming potential of over 22,000times that of CO2. Transmission assetswhich make use of SF6 have variousbenefits; for example SF6 basedswitchgear help minimize substationfootprint, and the SF6 gas insulatedtransformers being installed at DewarPlace are essential from a safetystandpoint.

Currently we have over 40 tonnes of SF6gas equipment installed on ourtransmission network and by the start ofRIIO-T1 this will have increased to over 55tonnes. Over RIIO-T1 we will install newSF6 equipment as part of our load andnon-load capital expenditure programmesand in so doing significantly increase ourinventory of SF6 to around 90 tonnes by2020/21. We are therefore very aware ofthe essential requirement to manage ourSF6 inventory in accordance with industrygood practice.

The adjacent table shows the leakage ofSF6 from SPTL equipment over the lastfour years. Through focussed operationalefforts we have driven reductions in thekg of SF6 leakage from the 2007/08levels. However, in 2010/11 the leakageincreased back to 2008/09 levels and webelieve that this level represents theexpected background level of leakagewhich cannot be improved withoutsignificant investment.

Currently almost all transmission assetshave been purchased and installed to IECspecifications which vary up to 3% leakageas design rating. Our current leakage rateat over 1.8% of total installed SF6 gas ison, if not below design standards. Ineffect, our operating regime is alreadyperforming much better than theequipment specification and we havedetermined that it is not possible toimprove the performance further. Theonly effective method of reasonablyoperating at a significantly lower targetwould be a substantial capital programmeof asset replacement. Therefore our plansfor a flat background leakage profile areappropriate and we believe there islimited scope for further reductions.


1000

900

800

700

600

500

2007

/08

2008

/09

2009

/10

2010

/11

SF6 Leakage (kg)

2.5%

2.2%

1.9%

1.6%

1.3%

1.0%

SF6Leakage

(%)

SP Transmission SF6 leakage programme

Out of our current inventory of 40 tonnesgas SF6 gas, around 50% is located atTorness. In order to reduce our inventoryand actual loss of gas, one solution wouldbe to replace this site with a modernequivalent with a lower designed leakagerate. However, based on the current non-traded value of carbon the cost benefit ofthe saving through reduced SF6 leakagedoes not justify a £30m assetreplacement. This would not be e valuefor money for customers, as this site isgenerally in good condition.

We have forecast our leakage performanceover RIIO-T1 based on our existingperformance and our planned networkinvestments. For all new assets we haveapplied the design rating leakage rateswhich are 1% for indoor equipment and1.5% for outdoor equipment. Ofgem’sintention to introduce an output toprompt transmission companies to takeinto account the environmental costs ofSF6 equipment that have different leakagerates does not appear to take account ofthe physical realities of the assets.

Our strategy for SF6 emissions thereforehas been aligned to Ofgem’s view,although we believe that convergencetowards Ofgem’s proposed best practiceleakage of 1% is impossible unless weundertake significant investment, such asat Torness, at sites which are in generallygood condition. Ofgem would like tointroduce a symmetric incentive based oncarbon equivalent emissions and we havetherefore assessed the impact of anincentive based on the prevailing non-traded annual carbon price recommendedby DECC. We recommend that a neutralposition should be based on the agreedtargets by weight, as set out in ourBusiness Plan, and we believe that thislevel sets the right risk balance as itmaintains background performancedespite an ageing asset base which has anincreasing leakage rate.

In terms of Business Carbon Footprint andLosses, Ofgem appear to have reached asensible conclusion in their final Policydocument and the output of this work isfactored into our plans.

Finally, at the time of submission we areawaiting the conclusion of a consultationprocess in respect of the BroadEnvironment measure and as yet thisremains unclear.


Customer satisfaction -connections

SP Transmission has a good track record indelivering timely grid connections. Theadjacent graph shows the growth inrenewable grid connections connectedduring TPCR4 – a performancesignificantly ahead of any of the otherlicensees. Obviously there are manyexternal factors which impact on projecttimescales but we still believe that ourproject delivery performance is very goodreflecting our extensive transmissionproject delivery experience over manyyears.

Our experience is that any changes fromthe originally contracted dates are due tofactors out with our control; usually dueto planning consent delays and changesto developer requirements.

Obtaining all necessary consents isdependent on outside agencies,such as local authorities, providingconsent approval to competentplanning applications in realistictimescales. Also, the advent ofconsiderable onshore wind inScotland has led to Scottishlandowners becoming much moreaware of the value of landnecessary to connect wind henceagreement of landowner consentscan take some time, particularly ifwe are to ensure that connectionsand associated infrastructure aredelivered cost-efficiently.Consenting has been a key area offocus within our assessment of thedeliverability of our plans.

In terms of RIIO-T1 outputs, we note thatOfgem believes that it is imperative thattransmission companies give due priorityto ensuring timely connection to theirnetwork, and Ofgem have reached thedecision that the primary output forconnections should be related tocompliance with current obligations, andtherefore on the licence requirement tomake connection offers.

Since the start of BETTA we have workedwork closely with both National Grid anddevelopers during the connectionapplication process to agree connectiondates that take a realistic view of theconsent, construction and commissioningprocesses. At this stage of the process,

we will advise the developer ofconnection options that will improve theirchances of obtaining timely consent suchas, for example, consideration of woodpole single circuit overhead lines orundergrounding. In our experiencebefore and since BETTA, we are not awareof ever missing licence deadlines forconnections. This business priority willnot change over RIIO-T1.

We find it perplexing however that Ofgemare seeking to introduce a penalty onlyincentive regime around the currentmandatory licence obligations. Again thishas been factored into our riskassessments.

Stakeholder Feedback

SP Transmission welcomes Ofgem’s focuson customer satisfaction and stakeholderengagement as integral to their RIIO-T1strategy. The extensive stakeholderconsultation we conducted in support ofour RIIO-T1 submission has alreadyresulted in real outputs. The details ofthe process we undertook, who weengaged with and their feedback is laidout fully in our section in the BusinessPlan on Stakeholder Engagement.

We have reviewed all our stakeholderinteractions in respect of Transmissionrelated activities, identified keystakeholder groupings, developed acontact database, and determined thestructure of customer satisfaction andstakeholder engagement surveys on anongoing basis and to deliver consistentimprovements to our customersatisfaction levels we will developstakeholder engagement strategiesspecific to each stakeholder group.

Our feedback through our RIIOstakeholder engagement is that we –working with National Grid - shoulddeliver sustainable low carbon energythrough fair, clearer and more accessibleprocesses. Our stakeholder strategy inthis area includes a commitment to reviewthe current connection process withNational Grid to look to provide moreclarity on the connection processparticularly for new, smaller developers.

2000

1500

1000

500

2004

2005

2006

2007

2008

2009

2010

2011

MW

0

TPCR4 target 1734MW

SP Transmission Connected Generation



It has been recognised by SP Transmission that significantinvestment in assets and change tonormal patterns of system use is expectedto increase and continue throughout thereview period in order to meetgovernment energy policy objectives.These must also take place while the needto deliver increased levels of assetmodernisation is becoming a significantdelivery issue.

Our delivery plans are therefore set withinthe context of a longer term deliverystrategy which will ensure the investmentrequirements of asset stewardship can beintegrated with new connections andcapacity reinforcements.

We will deliver the significant levels ofinvestment proposed via a high degree ofprogramme management structure andcontrol designed to ensure that theinteractions between issues can bemanaged.

We have also retained a degree offlexibility within our plans to allow us toresolve conflicts arising within theprogrammes. Our overall approach is todevelop the non load programme in sucha fashion that it can be linked and codelivered alongside the projects driven byreinforcement and generation needswhich are envisaged over the price review.

• To ensure that required volumes are

achieved it is considered that more

modernisation projects must be pre

engineered and available within a

delivery window than will actually be

worked upon.

• The consequences of external issues,

such as planning consent, outage

availability etc, will then be managed by

choosing which individual scheme

elements can proceed within the

available outage opportunities.

• Non load schemes can therefore flex

around changes in the reinforcement

programmes within the review period.

• Additionally a significant volume of

transformer replacement and 132kV

substation renewal projects need to be

overlaid on the investment programme.

• A degree of smoothing has also been

considered within these programmes

to manage the sensitivity around

supply chain and resource

dependencies, for example in the area

of overhead lines.

Procurement

SPT will purchase its equipment, goodsand services efficiently throughIberdrola’s Global PurchasingOrganisation. While the level ofinvestment proposed in RIIO-T1 is asignificant increase in volume over TPC4.When considered within the Globalmarket within which Iberdrola GroupProcurement operates the relative volumeincreases are much less dramatic and SPTis confident that efficient investment canbe procured in line with its proposedbusiness plan.

A detailed description of the way in whichProcurement will be used to secureefficient and sufficient levels ofinvestment is set out in the Deliverabilitysection of our Business Plan.

Iberdrola support and delivery model

SPT considers that there is an opportunityfor a fundamental change in deliverywhich will take advantage of the improvedleverage available via a global purchasingorganisation, with is described more fullyunder the Procurement heading below.

SPT has, and intends to maintain, anestablished and formal relationship withIberdrola Engineering and Construction(IEC). IEC was created in 1995 and is nowone of the leading energy engineeringcompanies in the world with a presence inover 30 countries across Europe, MiddleEast, America and Africa. Its current

Deliverabilityproject portfolio is in excess of 2.5 billionEuros, with a turnover in excess of 1.4billion Euros in 2009. Although thecompany is headquartered in Spain, 87%of its project portfolio is abroad and morethan 80% of its sales are from outside theIberdrola Group. The current worldwideworkforce stands at more than 2400people of 48 different nationalities, morethan 80% of which are professionallyqualified in engineering/ project deliverydisciplines. This organisation is currentlyincreasing its UK capacity to support SPTin managing the delivery of transmissioninvestment.

The expertise available within IEC, and theassociated delivery methodology meansthat work elements within projects can bedisaggregated and supply of materials andservices re-aggregated under appropriateprocurement strategies. By this means itis possible to open up new deliveryoptions and introduce fresh andcompetitive capacity from the supplychain incorporating local, national andglobal suppliers as required and wherecompetent and cost effective. Throughthis approach the technical andcommercial risks are managed andcontrolled in house by IEC engineeringteams and project managers.Standardisation is more readily achievablethan historically where different maincontractors have to be engaged directly toEngineer Procure and Construct theirindividual projects. SPT believe that thisnew approach is more appropriate wheremajor programmes of work have to beintegrated and delivered onto a systemwhich is heavily utilised in supportingestablished users and is subject to highlevels of depletion when key outages aretaken. A significant level of control isachieved through this approach andincreased levels of activity andinteractions between projects can bereliably managed.


Outage delivery

Key to success is the control andmanagement of changes in outage plans.Earlier outage certainty will allow keysensitivities to be robustly monitoredthrough project and programme levelgovernance reports and corrective actionagreed with the key parties which willensure critical outage windows areadhered to by all parties. SPT will seek tosecure a greater level of certainty both inthe delivery aspects of site work and insystem access.

SPT has scoped its investment plans indetail during the preparation of thisbusiness plan. By having an establishedview at an early stage several benefits willbe realised. In addition to identifyingopportunities for standardisation whichwill reduce the scale of the procurementtask and this will also lead to higher levelsof consistency and drive generic solutionsto problems identified throughconstruction and commissioning. Thesefactors will reduce the likelihood ofoverruns in the medium term andimprove confidence levels amongstakeholders.

SPT is now therefore able to plan morecarefully and accurately the outagerequirements.

By bundling modernisation projectstogether and into outage plans necessaryfor other works, SPT believes it will be ableto secure agreement from otherstakeholders through improved forwardplanning and formal mechanisms toresolve issues.

SPT has engaged with the NETSO andshared its overall vision of the extent ofthe modernisation plans and is continuingto develop the forward programmethrough to a stage by stage outage planwith emphasis on key interactionsbetween the various modernisation worksand proposed load driven schemes.

Consenting

Consenting is key to the criticalpath for any major project and hasbeen a major area of focus withinour assessment of the deliverabilityof our plans.

Obtaining all necessary consents isdependent on outside agencies, such aslocal authorities, providing consent

approval to competent planningapplications in realistic timescales. Also,the advent of considerable onshore windin Scotland has led to Scottish landownersbecoming much more aware of the valueof land necessary to connect wind henceagreement of landowner consents cantake some time, particularly if we are toensure that connections and associatedinfrastructure are delivered cost-efficiently.

The common theme is that a considerableportion of the consenting process isoutwith the immediate control of SPT, e.g. Local Authorities, Landowners,Statutory Consultees and the Public.Building on our experience of the likelydelays, greater certainty can only beoffered by early engagement andmonitoring progress against set‘timelines’ that must include ‘critical’ and‘tactical’ milestones to ensure deliveryimprovement. Hence, for every type ofmajor project scenario we typicallydeliver, Consenting and Wayleavetemplates have been developed which setout the optimal process for obtaining thenecessary consents across our schemes.They also lay out key metrics andmilestones that will be monitored on anongoing basis.

As part of the building of our investmentplan, the consenting process has featuredheavily. A resource management studyhas been undertaken to manage all futureload and non load projects against therolling programme for RIIOT1.

The main outcomes from this studyare to:

• Increase resource levels, especially

within Wayleaves, to ensure that each

project can be managed efficiently,

• Introduce improved monitoring of

programme ‘critical path’, and

• Utilise compulsory powers if and when

reasonable offers are not being

accepted, or when negotiation is used

merely as delay tactics

In terms of implementing these changes,recruitment from within the SPENbusiness is our preferred option andshould provide approximately 50% of therequirement. The remainder in theshorter term will be contracted, with thepreferred option being additionalwayleave staff from our contractedchartered surveyors.

Overall staffing

Like most established ESI organisations inthe UK, SP Transmission has an ageingworkforce and we recognise that tosuccessfully meet the challenges of RIIO-T1 we must have an HR strategy thatreflects the need to increase capability todeliver future growth in transmissionworkload and which also addresses therequirement to maintain our currentworkforce skills and experience takinginto account current age profiles andexpected attrition.

Incremental increase in resource demand

Against this Business Plan up to 1,500 newand incremental directly associated jobswill require to be created in the SPTfranchise area during this period.Approximately 53 of these roles will bewithin SPT’s business directly,approximately 160 within our principalcontractor IEC and approximately 1,200 to1,300 across our full contractor base. Thisexcludes any clerical or business supportrequirements.

Workforce renewals

Also during this period because ofattrition and retirement, SP Transmissionwill need to recruit a further 107 staffbringing our total projected recruitmentrequirement of 160 staff. The total costassociated with ensuring we have therequired skills to deliver RIIO-T1 includedin our plans is around £3m (with asignificant proportion of this cost incurredprior to the start of RIIO-T1).

Recruitment plan

The table opposite sets out the projectedrecruitment for SP Transmission over RIIO-T1, taking account of the factors setout above.

Deliverability

FTE 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021/11

Engineering 133 132 143 166 176 186 188 189 186 183 184staff (start)

- less -1 -5 -7 -4 -4 -3 -3 -7 -7 -3 -3retirements

- less -3 -4 -4 -4 -4 -4 -4 -4 -4 -4attrition

- intake from 9 18 18 18 9 8 8 8 8 8market

- graduate 10 16intake

Engineering staff net 132 143 166 176 186 188 189 186 183 184 185(close of year)

Non-engineering 60 60 60 60 60 60 60 60 60 60 60staff

Industrial 32 32 32 36 41 46 45 42 40 36 33staff (start)

- less -2 -1 -2 -1 -3 -2retirements

- less -1 -1 -1 -1 -1 -1 -1 -1 -1 -1attrition

- intake from market

- apprentice 1 7 7 6programme intake

Industrial 32 32 36 41 46 45 42 40 36 33 32staff (close)

FTE 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021/11

TOTAL 224 235 262 277 292 293 291 286 279 277 277


We have built our initial manpowerprojection against the programme ofworks required during RIIO-T1 (i.e. up to2021 and not beyond). Planning overeffectively a 10-year horizon means that itis very difficult to make accuratepredictions about attrition rates andmanpower requirements toward the endof this period. This future workforcerequirement will also be influenced by therelative success of our IEC delivery modeland the future programmes we developover this Control period. This uncertaintyis also a result of moving to longer pricecontrol periods. At this stage, and theinterests of prudence, we have nottherefore included any manpowerrequirements for RIIO-T2.

In order to address this we see threepotential options for Ofgem to consider:

1. Similar to the approach taken toequity issuance costs at TPCR4,Ofgem make an allowance available

upon application under the licence for

companies to fund Work Force Renewal

(WFR) requirements for RIIO-T1. This

allowance could be based on the level

required during the early stages of

RIIO-T1 (for example the [£3m] we have

referred to upon our case). Companies

would be required to evidence their

plans and provide supporting

independent corroboration before

accessing this allowance through a

licence condition.

2. Provide a specific reopener clausewithin the Licence for WFR. This reopener would be dealt with at

the year 4 review of progress that

Ofgem have highlighted they intend to

take place

3. An agreed log up mechanism couldbe provided which would be “truedup” at RIIO-T2

We require some certainty from Ofgem

that they will consider the issue of

future workforce renewal through

either one of these mechanisms (or a

similar variant) within the RIIO-T1

process. We are happy to work with

Ofgem on this as we progress

discussions towards agreeing the new

price control but at this stage our

preference would be option 2 outlined

above.


As we look at the RIIO-T1 yearsmore generally, we expect to findthat actual WACCs will be higher,and probably more volatile, thanduring any other eight-year periodsince privatisation, some twodecades ago. This is becausethroughout the next period, butparticularly from 2013, the energyprojects required to meet the UK’s2020 targets will enter the large-scale construction phase.

As we look ahead to the period covered byRIIO-T1, we see the early stagescharacterised by extreme economicuncertainty, where opinion varies starklyover the predicted course of domesticand international recovery in light of thesovereign debt crisis affecting theEurozone.

Companies are not simply exposed acrossthe debt and equity markets butcommodities present a significantchallenge in managing our cost base. Inthe last couple of years a tighteningbalance of copper supply/demand hasresulted in a rapid rise in the red metal’sprices. Furthermore, there has also been arise in interest in copper as an wealthasset similar to the impact on gold so oftquoted in the popular press, in addition tothe traditional, physical demand. Copperis deemed a strategic asset in China andprovides a way to diversify from the USdollar and US treasuries.

While copper demand has risen, supplieshave not kept pace. This is resulting inspeculation that we are on the path topeak copper prices across RIIO-T1.

Aside from these direct influences on ourcost base, there is also much uncertaintyabout what early impact of globaleconomic turmoil could have on thefinancing of our sector. For example, thecurrent Eurozone crisis affecting Greece,Portugal, Italy, Spain and Ireland is

characterized as to have the potential tobe greater than the impact of the collapseof Lehmans at the height of the bankingcrisis.

The distortion of current marketparameters is being compounded as themarkets wait for a clear signal from theECB and the most influential of Europe’spoliticians, but the combination of thebanking collapse together with Europeanmember state failure to take action hasinevitably lead to unprecedented levels ofnational debt. We do not know preciselywhen, or by how much, these factors willultimately impact our cost base orfunding costs but at this stage we canalready see the impacts on more recentdebt issuances that have taken place inour own company. With an increase to 8-year price control periods this risk andvolatility is viewed as being significant byour investors.

Competition for investment

As we look at the RIIO-T1 years moregenerally, we expect to find that actualWACCs will be higher, and probably morevolatile, than during any other eight-yearperiod since privatisation, some twodecades ago. This is because throughoutthe next period, but particularly from2013, the energy projects required tomeet the UK’s 2020 targets will enter thelarge-scale construction phase.

Investment to support significant cash-outflows across RIIO-T1 will requirecompanies to be accessing the markets forvery large sums of money. Estimates ofthe spend in the UK electricity energymarket, directly attributable to meeting2020 targets, such as for on-shore andoffshore transmission upgrades, smarterdistribution networks, new conventionaland nuclear generating plant, andrenewables, is estimated to be around£200bn in the RIIO-T1 period.

Competition for funding will be stiff given£110 billion of this investment, by thegovernment’s estimates; will be in new

generation plant and equipment which islikely to attracting far higher returns thanthe infrastructure investment upon whichit depends. Combined with seriouseconomic uncertainty all of these factorswill affect the price of debt and thereturns expected by equity investorsfaced by the Transmission businesses.

Given the experience of the past threeyears since the banking collapse and theemergence of the latest crisis, our owncompany is acutely aware of the benefitsand importance of managing creditratings and we think that this will be asustained strategic goal in most UKboardrooms.

We believe that the high number ofenergy projects coming to market,combined with the practicalities ofmanaging the operational delivery of sucha major programme of critical investmentmust be taken account of within the keyfinancial parameters that Ofgemultimately decide upon.

Financial information

Unlike previous Price Control Reviews,Companies have been invited to submit afull, holistic financing package withOfgem only providing guidance in only afew key areas. As such we are submitting abusiness plan that includes a financingplan which complies with Ofgem’s policyrecommendations and which alsoprovides a fair deal for customers andshareholders alike.

As a consequence of the significantincrease in capital expenditure during theRIIO-T1 it is inevitable that prices will riseduring the period. We will work withOfgem to ensure that these are smoothedas far as possible as we move from the rollover year of 2012/13 into the RIIO-T1period to avoid unnecessary price shocks.We estimate that the impact of ourbusiness plan on customers’ bills is anincrease of thirteen pence in theannual charge per customer in eachyear of RIIO-T1.

Financial case& risk assessment


Shareholders will be expected to play theirpart. Our business plans require equityinjection of £375M supplementing anincrease in debt of £825M during theperiod. As a consequence we haveincluded within our plans a minimumallowed cost of equity of 7.2% (post taxreal) which we believe will be theminimum necessary to attract theinvestment necessary to fund our capitalexpenditure commitments.

We include within our plans a notionalgearing of 50%, lower than previous pricecontrol reviews but at a level that isappropriate for a company of SPT’s sizefacing such a dramatic increase in capitalexpenditure relative to our current RAV.We also see this as key to facilitate accessfinance at attractive rates at a time whenfinancial markets remain extremelyuncertain.

The first three ratios comfortably meet orexceed the A- targets. PMICR is below theA- target for all years except 2013/14 and2014/15. RCF/Capex is significantly belowthe A- target. However, Moody’s believethat utilities undergoing a large capexprogramme that do not benefit fromaccelerated depreciation are expected toscore this metric in the range 0.5 – 1.0.

Overall we consider this base scenario toprovide A- quality ratios and thereforesufficient comfort to protect against arange of risk factors.

Financial consequences of base assumption

Based on the regulatory financial model assumptions our total modelled revenuesamount to £2.5 billion (2009/10 prices) over the eight years of RIIO-T1.

2013 2014 2015 2016 2017 2018 2019 2020/14 /15 /16 /17 /18 /19 /20 /21

RIIO-T1 revenues 248 277 303 319 329 339 348 355(£m 2009/10 prices)

Summary statutory financial statements (all Nominal)

The following tables show the forecast statutory financial position of SP Transmissionwhich can be found in greater detail within the submitted model and in the Financialtemplates. The highlights over the eight years of RIIO-T1 are:

• Total Turnover £3,274m

• Average turnover £409m

• Capital Expenditure £2,597m “Best Case” (excluding Related Party margins)

• Equity Issue £375m

• Debt increase £825m

P&L 2013 2014 2015 2016 2017 2018 2019 2020/14 /15 /16 /17 /18 /19 /20 /21

Turnover 292 335 376 407 431 454 478 501

Operating profit 209 239 268 296 313 323 345 361

Cashflow 2013 2014 2015 2016 2017 2018 2019 2020/14 /15 /16 /17 /18 /19 /20 /21

Increase/ Decrease -177 -193 -233 -119 37 -109 -85 54in Debt

Regulatory asset value

Closing RAV is shown in the following table

Regulatory 2012 2013 2014 2015 2016 2017 2018 2019 2020Asset Value /13 /14 /15 /16 /17 /18 /19 /20 /21

Closing RAV 1486 1832 2217 2502 2676 2847 3019 3174 3186

Financeability

The target financial ratios for assessing our financeability are set out in the table below.We have targeted A- in our base position before considering the impact of incentivemechanisms.

The financial ratios that result from our plan are shown in the following table.

Financeability 2013 2014 2015 2016 2017 2018 2019 2020 AverRatios /14 /15 /16 /17 /18 /19 /20 /21 -age

FFO interest cover (x) 4.2 3.9 3.5 3.4 3.6 3.8 3.8 3.8 3.8

Net Debt / RAV (%) 50.0 50.0 53.6 54.6 50.0 50.8 51.0 49.1 51.1

FFO/ Net Debt (%) 26.0 24.2 22.0 22.4 24.9 24.0 24.2 25.4 24.1

PMICR using RAV 2.1 1.8 1.6 1.6 1.7 1.7 1.7 1.7 1.7depreciation (x)

RCF / Capex (x) 0.3 0.3 0.4 0.6 0.6 0.6 0.7 1.4 0.6

Regulated Equity 3.8 4.0 3.7 3.5 3.8 3.8 3.7 3.7 3.7/EBITDA

Regulated Equity 3.1 3.3 3.1 3.0 3.3 3.3 3.3 3.2 3.2/Earnings


P&L 2013 2014 2015 2016 2017 2018 2019 2020/14 /15 /16 /17 /18 /19 /20 /21

Turnover 279 321 361 393 417 440 463 487


Cashflow 2013 2014 2015 2016 2017 2018 2019 2020/14 /15 /16 /17 /18 /19 /20 /21

Increase/ Decrease -175 -190 -244 18 -121 -113 -96 45in Debt

Financeability 2013 2014 2015 2016 2017 2018 2019 2020 AverRatios /14 /15 /16 /17 /18 /19 /20 /21 -age

FFO interest cover (x) 4.0 3.7 3.4 3.5 3.7 3.7 3.6 3.6 3.6

Net Debt / RAV (%) 50.0 50.0 54.2 50.0 51.3 52.2 52.7 51.1 51.4

FFO/ Net Debt (%) 24.9 23.3 21.0 23.8 23.1 23.2 22.8 23.9 23.3

PMICR using RAV 1.9 1.7 1.5 1.5 1.6 1.6 1.6 1.5 1.6depreciation (x)

RCF / Capex (x) 0.3 0.3 0.4 0.6 0.6 0.6 0.7 1.3 0.6

Regulated Equity 4.0 4.2 3.8 3.9 3.9 3.8 3.7 3.7 3.9/EBITDA

Regulated Equity 3.3 3.4 3.2 3.4 3.3 3.3 3.2 3.2 3.3/Earnings

Financial case and risk assessment

19

Financial consequences after risk and incentives

Summary Statutory Financial Statements

The following tables show the forecast statutory financial position of SP Transmissionafter reflecting the impact of the incentive mechanisms.

Financeability

The financial ratios that result from our plan are shown in the following table.

Risks impacting base scenario

It is our belief that the RIIO frameworkitself is likely to present certain riskswhich we have been conscious of whencalibrating our overall financing bid. Webelieve that extending the regulatoryperiod to eight years from five necessarilyincreases ‘regulatory risk’ despite Ofgem’sbest efforts to mitigate this effect. Onesuch policy has been to introduce amechanism to index the allowed cost ofdebt such that this will flex during theregulatory period. In the very long termthis may well meet the objective ofproviding an allowed cost of debt equal toCompanies’ actual debt costs however inthe short term there is a high risk , if notvirtual certainty, that companies will be‘out of the money’ against the benchmarkduring RIIO-T1. We have recognised thislikelihood in our base financing strategyto by targeting A/ A- financial ratios.

In addition Ofgem are seeking to extendregulatory asset lives to somethingapproximating to their useful economicasset life. The existing policy is todepreciate assets over a fixed 20 yearperiod. We understand the attraction ofmoving to useful economic lives andwelcome Ofgem’s recognition that theresulting ‘cliff face’ reduction in revenuesaccruing from the depreciation allowancemay require to be mitigated. Our plansinclude such a transitional arrangementwhich increases the lives of new assetsgradually from 20 to 45 years over theperiod of RIIO-T1.

Separately we believe that the package ofincentives currently under developmentpresent us with significant downside risk(including the interest allowance gapdiscussed above) of between 80-90 basispoints of return on regulatory equityarising from certain penalty-onlymechanisms and some where targetsbeing discussed currently appearunachievable or are capped but have nocollar.

In aggregate after taking into account allof the above risk factors and financingassumptions our modelling suggests thatthe package provides SPTL with A-/ BBBgrade financial ratios with other financialmetrics also less favourable than thosequoted above under our baseassumptions.

The first three ratios comfortably meet orexceed the A- targets. PMICR is below theA- target for all years except 2013/14.RCF/Capex is significantly below the A-target.

Overall we consider that the ratios provideonly borderline investment grade after allthe risks and uncertainties are taken intoaccount.


We understand that effective stakeholderengagement is essential to ensurecustomer satisfaction, as well as to thedelivery of our strategic objectives andoperational goals. This ongoingengagement, and the specific RIIO-T1stakeholder engagement, has significantlyinfluenced our Business Plan which webelieve balances stakeholderrequirements and delivers a sustainable,efficient transmission network for ourexisting and future customers andsignificantly contributes to a low carbonsociety.

Historically, we have always looked toengage effectively with those direct andindirect customers that we provide aservice to or are affected by our activities.For example, with respect to Ofgem andgovernment, we actively participate andsupport the setting of regulatory andenergy policy. In particular, we respond toregulatory and industry consultations andensure we are represented on industrybodies and trade associations.

Under the SO-TO Code we are currentlycontracted with National Grid as theSystem Operator to construct over thirtygrid connections for various developers.This involves significant stakeholderengagement in tri-partite meetings, andresponding to stakeholder contact andrequests directly, throughout the entireprocess of offer, construction andconnection. In addition, as part ofconnection and wider system griddevelopment we undertake continualstakeholder engagement with strategicplanning authorities and a broad range ofinterested parties such as HistoricScotland, National Trust, SEPA, NationalFisheries Scottish Natural Heritage, theCrown Estate, Forestry Commission,Scotland Scottish Water, Coal Authority,RSPB, etc.

Major construction programmes aresupported by an appropriate stakeholderengagement. Key stakeholders areidentified and assessed for their interestand influence in the delivery of a project.Different communication mechanisms aredeveloped as appropriate to thestakeholder. For example in the BeaulyDenny project, a database was establishedfor tracking all contacts and managingeach response through to close out.

Customers with a generation and/ordemand connection to our transmissionsystem have a connection agreement withNational Grid. However, our activities inrespect of operating, maintaining andextending the network impact thesecustomers and a formal communicationroute exists through National Grid, butthis is supplemented by informal contactwith our operations centre at Kirkintilloch.

In the area of innovation and research anddevelopment, we work with suppliers andacademic institutes to carry out a range ofresearch projects. These include:

• National Grid and SHETL for

collaboration and sharing learning;

• Academia; to ensure that the

transmission network is taking

advantage of R&D activity and steering

this where necessary for the benefit of

the network;

• Other research and policy makingbodies including EPRI, ENTSOE and

Eurelectric in order to inform and keep

abreast of developments in

transmission technology and policies;

• Technology providers to assist with

the development of new products; and

• Transmission customers, to ensure

the network meet their changing needs.

Support from our stakeholdersSPT is proud of the nature and extent of the stakeholderengagement conducted by our businesses on a daily basis.


Support from our stakeholders

the current connection process withNational Grid to look to provide moreclarity on the connection processparticularly for new, smaller developers

The key messages from our stakeholderengagement have been considered andgrouped to identify specific areas forfocussed improvement as follows:

1. Communication to Stakeholders:better, targeted, relevant.

2. New connections:Deliver sustainable low carbon energy

through fair, clearer, more accessible

processes.

3. Operations:Maintain security of supplies and

maximise long term value for end-users

through improved network availability

and reliability processes.

4. Delivery:minimise environmental impact and

mitigate consenting and planning

challenges through better stakeholder

engagement

We are already considering appropriateresponses in these areas and will developthese to become the basis of ourstakeholder engagement strategy that willlead to our submission for the Stakeholderengagement discretionary incentiveavailable during the RIIO-T1 period.

The stakeholder review for RIIO-T1 alsoprovided the information to baseline thesurveys that we will establish to provideeffective monitoring and measurement ofour customer satisfaction and stakeholderengagement. The challenges todeveloping effective surveys because ofour small stakeholder pool and range ofstakeholder engagement are significantbut can be overcome. We will do this byworking with National Grid and ScottishHydro to identify stakeholders who maybe benefit from a shared survey and withstakeholders themselves to developquestions and arrangements appropriateto each stakeholder group. We intend todevelop, test and baseline performance ofour surveys in time for the start of theRIIO price control in 2013.

For example, ScottishPower has had astrong relationship with University ofStrathclyde and other institutes throughour IFI programme and distributionactivity.

The extent of our stakeholderengagement and strength of relationshipwith our customers gives us confidencethat we perform well in this area and wetherefore welcome Ofgem’s focus oncustomer satisfaction and stakeholderengagement as integral to their RIIO-T1strategy.

However, we currently do not formallymonitor or measure transmissionstakeholder engagement or customersatisfaction. We recognise this presents anopportunity to improve and we arecommitted to developing appropriatesurveys and a formal stakeholderengagement strategy for the start of theRIIO price control in 2013.

The first step to developing these outputscame with the stakeholder consultationconducted in support of our RIIO-T1submission. This consultation prompted areview of our entire stakeholderinteractions in respect of Transmissionrelated activities, and achieved immediatebenefits in three areas:

• Increased awareness of RIIO-T1 and our

business plans with key stakeholders

• Clear messages from Stakeholders of

their priorities and expectations for our

business.

• A good foundation for developing our

customer satisfaction surveys and

stakeholder strategy

We have reviewed all our stakeholderinteractions in respect of Transmissionrelated activities, identified keystakeholder groupings, developed acontact database, and determined thestructure of customer satisfaction andstakeholder engagement surveys on anongoing basis and to deliver consistentimprovements to our customersatisfaction levels we will developstakeholder engagement strategiesspecific to each stakeholder group.

Our feedback through our RIIOstakeholder engagement is that we –working with National Grid - shoulddeliver sustainable low carbon energythrough fair, clearer and more accessibleprocesses. Our stakeholder strategy inthis area includes a commitment to review


Innovation is an essential part of all ourfuture plans for the transmission network.As the generation mix changes from coaland nuclear to renewables, this will createmany pressures on the transmissionnetwork. These pressures will require tobe addressed using new technology,techniques and commercialarrangements. Furthermore, the ageingasset base and the pressures of extensiveasset replacement will require an inherentlevel of innovation to ensure that installedassets are future proof and the doors arenot closed on future opportunities.

Changing load patterns through theuptake of new technology such as electricvehicles, heat pumps, micro-generationand energy efficiency will create achallenging landscape for transmissionnetworks which will require innovationthroughout.

We recognise three areas for theapplication of the various innovationmechanisms:

• For existing customer expectations: to maintain security of supply through

improving existing asset availability and

utilisation i.e. using condition based

plant monitoring, enhanced system

monitoring and dynamic rating etc.

• For future customer expectations: to have capabilities to accommodate

network users future requirements with

sustainable developments that

minimise the use new assets in shorter

connection time-scales.

• To deploy alternative and SMARTtechnologies that will change the way

the network is planned and operated

i.e. HVDC technology, SMART

Transmission Zones and energy storage

etc.

We welcome the inclusion of the NetworkInnovation Competition (NIC) andInnovation Allowance (IA) for funding ofresearch, development anddemonstration of new technology andtechniques associated with the electricitynetwork which will span these categories.In order to deliver SPT’s innovationprogramme, partnership withstakeholders will be vital.

Innovation allowance

The Innovation Allowance (IA) will createan environment whereby incrementalinnovation, which may have a slightlyhigher risk than business plan activities,can be progressed. Further, it has beenidentified that the Innovation Allowancewill allow SP Transmission the opportunityto pursue developments as and whenthey arise throughout the RIIO-T1 period,as many of these cannot yet beanticipated. We believe it is vital that theInnovation Allowance can be used for arange of purposes including thepreparation for the Network InnovationCompetition as has been permitted in Tier1 of the Low Carbon Network Fund, aswell as training and dissemination of stafffor the adoption of new technology andtechniques into business as usualprocesses. We see this approximate splitas set out below.

Network innovation competition

In terms of radical innovation, SPTransmission has already held initialdiscussions with National Grid to discusspotential projects to progress under theNIC as well as the IA. Given the nature ofthe transmission system, SP Transmissionbelieves it is key that these areundertaken collaboratively with NationalGrid as the system operator as well asSHETL.

Some of the key themes include:

• Energy storage: understanding the

opportunities and implications of

storage technologies on the network.

This may lead to improved usage of

renewable generation as well as

creating arbitrage opportunities to help

the electricity market.

• DC technology: development of

technology including voltage source

convertors and network configuration

strategies. Developments in DC

technology will greatly aid the

transmission of electricity and reduce

costs through research of the

equipment.

• DSM and visibility of aggregated

demand/embedded generation: to

understand the implications on

network flows and possible reverse

power flows, impacting DNOs.

SP Transmission will look to develop thesevarious themes under the Innovationstimulus, with key partners in order toimprove the transmission network, aidingthe transition to a low carbon economyand helping to deliver value for money tocustomers. We believe it is vital thatnetwork companies; both transmissionand distribution companies, are at thecore of any of these projects.

Innovation

Research activityi.e. SPARC

20%

Knowledgedissemination

and training

10%

Technology trials and demonstrations

50%

Preparationand set up for

NIC and IA

20%

20%

10%50%

20%


We recognise that we have an absolutelykey part to play in meeting UK climatechange targets, and thereby facilitatingthe transition to a low carbon economy. We must connect large quantities ofrenewable generation to our network andalso ensure that we provide sufficienttransmission capacity across central andsouthern Scotland to support the highlevels of renewables connecting innorthern Scotland. This challenge comesat a time when our high voltagetransmission network needs significantinvestment to replace and refurbish keynetwork assets in order to maintain thecurrent high level of quality of supply thatwe provide to our customers.

We believe we have submitted a fullyjustified, financeable Business Plan whichdelivers investment grade credit ratings.This is in large part achieved by moving toa notional gearing level of 50% alongside asizeable equity injection of close to£375m during the period. Our plansinclude an assumed cost of equity at thetop of Ofgem’s recommended range torecognise various risks within the overallpackage, some generic features of RIIO-T1and some specific to SPT. We have alsoproposed a transitional arrangement tomitigate the negative short term cash flowimplications of the move to anapproximation of useful economicregulatory asset lives and preserve anelement of regulatory consistency.

ConclusionsIn summary, we believe that this Planensures that SP Transmission is at theheart of facilitating the United Kingdom’stransition to a low carbon economy andthat as part of the Iberdrola Group we actas a catalyst to the Government’ssuccessful achievement of its legallybinding 2020 targets for decarbonisationvia a transition toward renewablegeneration.


Appendices


Appendix 1 Business plan

This appendix sets out the key financialschedules for SP Transmission, coveringboth the Base Case before risks andincentives, and similarly the Base Caseafter risks and incentives.

We have also set out our proposedfunding arrangements making use of abase line ex ante allowance anduncertainty mechanisms.

Finally our forecast operating costs aredetailed.

RIIO-T1 financial schedules - SP Transmission

1. Statement of policy assumptions

Model Assumption Value/Approach Bespoke feature

Cost of equity 7.2% n/a

Cost of Debt Indexation n/a

Gearing 50% n/a

Asset lives 45 New assets only after RIIO-T1period with interim ‘stepped’transition from 20 years to 45

Note:These statements are not adjusted to provide a smoother revenue profile

2. Financial Schedules - base case before risks and incentives

Income statement

3. Statement of key risk factors

• Delivery/output risk

- up to 90bps of downside risk

• Debt indexation gap (between allowed

and actual expected rates)

- estimated 27bps of downside

• Real price effects

- symmetrical +/- 27bps

• Increased emphasis upon negatively

skewed incentives

- around 100bps upside,

150bps downside

• Duration of the RIIO framework

- 50bps downside from extended asset

lives, 70bps from expected increase in

risk free rate

NB. Estimated values are in some cases

interdependences and are not

necessarily additive.


P&L 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /14 /15 /16 /17 /18 /19 /20 /21

Turnover 292 335 376 407 431 454 478 501


Interest -56 -69 -84 -96 -99 -97 -103 -104

Tax -37 -39 -42 -46 -49 -52 -55 -59

Dividend -43 -52 -61 -64 -68 -78 -82 -85

Retained profit 73 79 81 90 97 96 105 113

Balance sheet 2012 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /13 /14 /15 /16 /17 /18 /19 /20 /21

Fixed assets 1533 1916 2347 2682 2914 3147 3383 3603 3680

Working capital & tax -87 -100 -105 -101 -98 -101 -103 -105 -97

Debt -739 -916 -1109 -1342 -1461 -1424 -1533 -1618 -1564

Deferred tax -138 -157 -180 -205 -231 -258 -287 -315 -341

Net assets 569 743 953 1034 1124 1364 1460 1565 1678

Cash flow 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /14 /15 /16 /17 /18 /19 /20 /21

Operating cash flow 253 285 312 346 375 390 416 426

Tax paid -15 -17 -16 -18 -21 -23 -26 -30

Captial expenditure -417 -471 -384 -287 -293 -301 -290 -153

Interest & dividend -99 -121 -145 -160 -167 -175 -185 -189

Cash flow before financing -278 -324 -233 -119 -106 -109 -85 54

Equity issue 101 131 0 0 143 0 0 0

(increase)/decreasein debt -177 -193 -233 -119 37 -109 -85 54

Financeability 2013 2014 2015 2016 2017 2018 2019 2020ratios /14 /15 /16 /17 /18 /19 /20 /21

FFO interest cover (x) 4.2 3.9 3.5 3.4 3.6 3.8 3.8 3.8

Net debt/RAV (%) 50.0 50.0 53.6 54.6 50.0 50.8 51.0 49.1

FFO/Net debt (%) 26.0 24.2 22.0 22.4 24.9 24.0 24.2 25.4

PMICR using RAV depreciation (x) 2.1 1.8 1.6 1.6 1.7 1.7 1.7 1.7

RCF/Capex (x) 0.3 0.3 0.4 0.6 0.6 0.6 0.7 1.4

Regulated equity/EBITDA 3.8 4.0 3.7 3.5 3.8 3.8 3.7 3.7

Regulated equity/Earnings 3.1 3.3 3.1 3.0 3.3 3.3 3.3 3.2

Our overall assessment is that these ratios provide an A/A- Rating


4. Financial schedules - base case after risks and incentives

Income statement

P&L 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /14 /15 /16 /17 /18 /19 /20 /21

Turnover 279 321 361 393 417 440 463 487


Interest -56 -69 -83 -92 -91 -99 -105 -107

Tax -34 -36 -39 -44 -46 -50 -52 -55

Dividend -42 -51 -60 -62 -73 -75 -79 -81

Retained profit 65 69 71 84 82 92 94 104

Cash flow 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /14 /15 /16 /17 /18 /19 /20 /21

Operating cash flow 242 271 297 332 354 382 401 412

Tax paid -14 -14 -14 -16 -18 -20 -23 -26

Captial expenditure -417 -471 -384 -287 -293 -301 -290 -153

Interest & dividend -98 -120 -143 -154 -164 -174 -184 -188

Cash flow before financing -287 -334 -244 -125 -121 -113 -96 45

Equity issue 112 144 0 143 0 0 0 0

(increase)/decreasein debt -175 -190 -244 18 -121 -113 -96 45

Financeability 2013 2014 2015 2016 2017 2018 2019 2020ratios /14 /15 /16 /17 /18 /19 /20 /21

FFO interest cover (x) 4.0 3.7 3.4 3.5 3.7 3.7 3.6 3.6

Net debt/RAV (%) 50.0 50.0 54.2 50.0 51.3 52.2 52.7 51.1

FFO/Net debt (%) 24.9 23.3 21.0 23.8 23.1 23.2 22.8 23.9

PMICR using RAV depreciation (x) 1.9 1.7 1.5 1.5 1.6 1.6 1.6 1.5

RCF/Capex (x) 0.3 0.3 0.4 0.6 0.6 0.6 0.7 1.3

Regulated equity/EBITDA 4.0 4.2 3.8 3.9 3.9 3.8 3.7 3.7

Regulated equity/Earnings 3.3 3.4 3.2 3.4 3.3 3.3 3.2 3.2

RIIO-T1 financial schedules - SP Transmission

Balance sheet 2012 2013 2014 2015 2016 2017 2018 2019 2020(£m nominal) /13 /14 /15 /16 /17 /18 /19 /20 /21

Fixed assets 1533 1916 2347 2682 2914 3147 3383 3603 3680

Working capital & tax -87 -99 -104 -99 -96 -99 -101 -103 -95

Debt -739 -914 -1104 -1348 -1330 -1451 -1564 -1660 -1615

Deferred tax -138 -157 -180 -205 -231 -258 -287 -315 -341

Net assets 569 746 959 1030 1257 1339 1431 1525 1629

Our overall assessment is that these ratios provide an A/A- Rating


Investment and funding

Given the scale and uncertainty ofinvestment we require funding through abaseline ex-ante allowance anduncertainty mechanisms. This approachis set out in the adjacent diagram. Fourfunding mechanisms are set out; ex anteallowance, volume driver, revenue triggerand TIRG. We believe that making use ofthese mechanisms will ensure that wehave the right balance of risk while alsoensuring that we have cost-efficientfunding.

The key point is that this approachensures that the customer only pays fornecessary and cost-efficient investmenti.e. “we deliver value for money networkservices for existing and futureconsumers”.

CAPEX £m

Upper Case£2.76bn

Best View£2.14bn

Lower Case£1.10bn

LocalEnabling

- Exit£56m

Widerworks- entry

(specific majorreinforcements)

£32m

RPE’s£79m

Non-loadinvestment

£626m

LocalEnabling- Entry

Up to 3.5GW(cum)

£193m

LocalEnabling- entry

Up to 4GW(cum)

£45m

SP OHL& Substation

Projects£71m



= forecast and outputs for IQI

Ex-Ante Allowance



Localenabling-entry

>4.4GW to 7GW(cum)

£221m

SP OHL& Substation

Projects£114m

Volume driver at£50k/MW

RevenueTrigger

TIRG works£116m

TIRGOncosted (net) 2009/10 real prices

Funding mechanism

Operating costs

Operating costs£m (2009/10 prices) year ending 2014 2015 2016 2017 2018 2019 2020 2021 Total

Direct Opex

Fault repairs 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 7.1

Planned inspections and maintenance 5.1 5.1 5.1 5.2 5.2 5.2 5.2 5.2 41.3

Vegetation management 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 4.3

BT 21 CN teleprotection 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 5.0

Offshore Transmission Project 1.5 1.5 1.5 2.8 2.8 10.0

Total Direct Opex 7.1 7.2 7.2 8.7 8.7 8.8 10.0 10.1 67.8

Indirect Opex

Gross costs before capitalisation 57.1 58.3 53.2 49.2 51.1 51.1 49.4 38.8 408.1

less capitalisation -46.0 -47.2 -41.7 -37.7 -39.6 -39.2 -37.5 -27.0 -315.9

Net indirect costs after capitalisation 11.0 11.1 11.5 11.5 11.5 11.8 11.8 11.8 92.2

Non-controllable costs

Network rates 24.1 24.1 24.1 24.1 24.1 24.1 24.1 24.1 192.8

42.3 42.4 42.8 44.3 44.4 44.7 46.0 46.0 352.8


Best View : baseline's and remuneration

Funding mechanisms 2013 2014 2015 2016 2017 2018 2019 2020 RIIO-T1for ‘Best View’ /14 /15 /16 /17 /18 /19 /20 /21 Total

Funded via ex-ante

Local Enabling (Entry - Sole Use) 10.9 11.5 11.0 10.4 12.3 1.4 0.3 0.0 58.0

Local Enabling (Entry - Sole Use) Contributions -4.6 -4.2 -5.4 -5.1 -5.8 0.0 0.0 0.0 -25.1

Local Enabling (Exit - Sole Use) 0.0 1.3 5.1 3.5 1.9 1.9 1.9 1.6 17.3

Local Enabling (Exit - Sole Use) Contributions 0.0 -1.3 -5.1 -3.5 -1.9 -1.9 -1.9 -1.6 -17.3

Local Enabling (Entry) 64.3 60.7 31.1 2.1 2.1 0.0 0.0 0.0 160.3

Local Enabling (Exit) 6.7 11.1 9.5 4.4 0.1 3.2 11.4 9.9 56.

Wider Works (Entry) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Wider Works (Exit) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Hunterston - Kintyre Link (Preconstruction) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Preconstruction for non baseline wider works projects 5.3 11.4 5.6 0.1 0.4 0.0 0.0 0.0 22.8

Total for Pre-construction cost of wider works projects 5.3 11.4 5.6 0.1 0.4 0.0 0.0 0.0 22.8

Wider Works (General) 20.4 11.9 5.6 0.1 2.1 6.8 6.0 1.8 54.7

Infrastructure - TSS 0.1 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.6

Total LRE funded by ex-ante allowance 97.9 91.5 51.9 11.9 10.9 11.4 17.7 11.7 304.9

Total NLRE funded by ex-ante allowance 70.1 70.6 68.8 78.6 86.2 86.3 91.9 73.2 625.7

RPEs 0.4 5.2 7.5 9.2 12.8 15.9 18.0 10.1 79.1

Total Capex funded via ex-ante allowance 168.4 167.2 128.2 99.7 109.9 113.6 127.6 95.1 1009.6

Funded via Volume Driver


Local Enabling (Entry - Sole Use) Contributions -0.4 -1.6 -1.9 -1.0 0.0 0.0 0.0 0.0 -4.9


Total Load Funded via Volume Driver 3.0 5.3 3.5 1.4 4.9 10.5 11.4 5.4 45.4

Funded via Revenue Trigger

Wider Works (General) 154.0 195.5 162.6 122.5 102.2 90.8 68.6 0.0 896.1

Total Load Schemes funded by Revenue Trigger 154.0 195.5 162.6 122.5 102.2 90.8 68.6 0.0 896.1

Non-Load table 4.20 0.0 0.8 3.5 7.0 16.9 19.0 12.1 11.5 70.8

Total Non- Load Schemes funded by Volume Driver 0.0 0.8 3.5 7.0 16.9 19.0 12.1 11.5 70.8

Funded via TIRG mechanism

Total Funded via TIRG mechanism 46.5 39.4 25.6 4.4 0.0 0.0 0.0 0.0 115.8

Total Capex - Best View (all funding mechanisms) 371.9 408.2 323.3 235.0 233.9 234.0 219.6 112.0 2137.9


Upper Case Funding 2013 2014 2015 2016 2017 2018 2019 2020 RIIO-T1/14 /15 /16 /17 /18 /19 /20 /21 Total

Funded via Volume Driver


Local Enabling (Entry - Sole Use) Contributions -0.1 -0.3 -1.3 -1.3 -0.3 -0.3 -0.6 -0.2 -4.4


Total Load Funded via Volume Driver 9.5 15.1 38.3 58.6 45.7 29.4 19.4 5.5 221.4

Total NLRE subject to Volume Driver 4.2 23.6 46.2 40.2 0.0 0.0 0.0 0.0 114.2

Total NLRE Funded via Volume Driver 4.2 23.6 46.2 40.2 0.0 0.0 0.0 0.0 114.2

Funded via Revenue Trigger

Eastern HVDC Link (SPT/NGET) and Onshore Collector 0.6 10.0 45.6 97.3 110.3 22.5 0.0 0.0 286.2

Total Load Schemes funded by Revenue Trigger 0.6 10.0 45.6 97.3 110.3 22.5 0.0 0.0 286.2

Total Capex - Upper case (all funding mechanisms) 386.2 456.9 453.5 430.9 389.9 285.8 239.0 117.5 2759.7


Appendix 2Load investmentprojects

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B4 3000MW

B5 4050MW

B6 6300MW

Wind farms

Load and Non load circuits

Load circuits

Non Load circuits

Substations - Load

Substations - Non Load

Circuit removal

Possible load circuit

Non Load circuit substitution

RIIO-T1 Outline Plan Load and Non Load 2013 - 2021


Appendix 3Non Load projects

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Bainsford1 x 132kV CB & 2 x 132kV Tx

Dalmally 5 x 275kV CB

Inverkip 7 x 400kV Frame R CB

Windyhill 13 x 275kV & 15 x 132kV CB

Lambhill 8 x 275kV OCB

Johnstone 2 x 132kV TxElderslie 1 x 132kV Tx

Dalmarnock 7 x 132kV CB

Strathaven 4 x 275kV CB

Wishaw 3 x 275kV CB

Chapelcross 9 x 132kv CB

Kaimes 3 x 275kv CB

YW Route154km reconductoringreinforcement275kV 400kV

CL & CK Route 2 x 80km reconductoring

YJ RouteFull Reconductoring 154km

YG Route Reconductoring 8km

XM Route Underground 62km

AB Route Minor Refurbishment 33km

XS Route Reconductoring 37km & Reinforcement

XJ Route Reconductoring 123km

XR Route Reconductoring 31km

XX Route Reconductoring 8km

XQ Route Reconductoring18km

XG Route Full Reconductoring 41km

XZ Route Refurbishment 9.4km

V Route Rebuild OHL 139km

U + AT Route Rebuild 2 x single circuit OHL 61km

ZA RouteReconductoring 66km

XD Route 64km Refurbishment

YX Route16km of 275kV reconductoring

Erskine2 x 132kV Tx

Giffnock 2 x 275kV Tx

Easterhouse1 x 275kV Tx

Grangemouth1 x 275kV Tx

Killermont 1 x 132kV Tx

Kilmarnock Town1 x 275kV Tx

Paisley1 x 132kV Tx

Portobello2 x 275kV Tx

Stirling T1Refurb/Monitoring

Sighthill 1 x 275kv TxSt Andrews Cross

2 x 132kV Tx

Strathleven 1 x 132kV Tx

Bonnybridge19 x 132kV CB

Currie3 x 275kv CB

Wind farms

Load and Non load circuits

Load circuits

Non Load circuits

Substations - Load

Substations - Non Load

Circuit removal

Possible load circuit

Non Load circuit substitution

RIIO-T1 Outline Plan NLRE 2013 - 2021 Non Load Plan

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