October 29, 2014

Understanding Commodity Rate Changes

2

Marcy L. Reed

President, Massachusetts

Massachusetts

3

Introduction to Webinar

Webinar designed to help participants better understand the forces that are driving energy costs

Also participating in the presentations:

Timothy F. Horan, President, Rhode Island

Edward White, Vice President, Customer Strategy & Environmental

Elizabeth C. Arangio, Director, Gas Supply Planning

Margaret M. Janzen, Director, Wholesale Electric Supply

An International Energy Company with

Deep New England Roots

4

One of world’s largest utilities with 24,000 employees, 19 million

customers and 1 million shareholders

In Massachusetts, from Lee to Nantucket:

We serve 172 electric cities and towns with 1.3 million

customers

We serve 116 gas cities and town with 876,000 customers

4,800 employees (in top 25 of state’s largest employers)

Regulated by the Massachusetts Department of Public Utilities

Commodity Rates

5

New commodity rates in effect

November 1st

Gas customers will see a

1-3% reduction

Electric customers will see a

37% increase

6

Timothy F. Horan,

President, Rhode Island

Rhode Island

In Rhode Island

872 employees

486,000 electric customers

257,000 natural gas

customers

6,000 miles electric

distribution lines

3,200 miles gas mains

Regulated by the Public

Utilities Commission

Gas and Electric Rate Changes

Electric rates

Mid-Nov. filing proposed rates for January – June 30, 2015

Likely increase for our customers

Increase is related to power generation costs

Gas rates

Reduction of approximately 8% for the average customer

Reduction is the result of a credit from last year and

reduced gas supply costs

We help customers manage their energy use through offering

a broad spectrum of energy efficiency programs

8

9

Gas Supply

Elizabeth C. Arangio

Director, Gas Supply Planning

10

National Grid’s

Gas Supply Portfolios

Massachusetts

Boston Gas Company (Essex)

Colonial Gas Company

Downstate New York

KeySpan Gas East Corp.

The Brooklyn Union Gas Company

Upstate New York

Niagara Mohawk Power Corporation

Rhode Island

The Narragansett Electric Company

11

How Does Gas Get to National Grid:

US Natural Gas Pipeline Network

12

National Grid’s Gas Supply

Planning Obligations

Ensure gas supplies are adequate today and into the future to

reliably meet the projected peak requirements of all National Grid

gas customers

Average daily temperature of : -3 °F

Minimize gas costs to the extent possible without compromising

supply reliability

Maintain a diversified portfolio of firm pipeline capacity,

underground storage, and peaking assets (LNG) with access to a

diverse mix of supply basins and liquid market hubs

Employ hedging strategies to reduce price volatility

13

New England Gas

Resource Portfolio

In order to meet customer requirements in a least-cost, reliable manner, National Grid relies on a portfolio of assets including interstate pipeline capacity, underground storage capacity and LNG

MA & RI peak day: 1,668,800 Dth

MA & RI peak season: 120.4 Bcf (Nov-Mar)

1%

8%

31%

16%

4%

40%

Peak Day Resources

Gulf Canadian Market Area Storage Peaking LNG

1%

7%

71%

15%

1%

5%

Peak Season Resources

Gulf Canadian Market Area Storage Peaking LNG

14

Pricing Terms

NYMEX

New York Mercantile Exchange

Many commodities traded on the NYMEX such as corn, coffee, metals, oil, natural gas

The benchmark for the natural gas (NG) industry

The physical location is the Henry Hub in Louisiana.

Basis

The pricing differential between a trading point and the Henry Hub

Citygate (Market Area) Delivered Price Index

A reference to short-term purchases and sales of natural gas in the market area (i.e. New

England)

Industry publications report spot market prices

Daily Index – typically Platts Gas Daily Daily Price Survey

Algonquin, citygates and Tennessee, zone 6 delivered

Monthly Index – typically Inside FERC or Platts Gas Daily Price Guide

15

New England City-gate Prices: Last

Four Winters and Upcoming Winter

IFERC AGT City-gate:

Nov Dec Jan Feb Mar 5-month avg.

2010-11 $3.73 $6.00 $7.45 $7.42 $4.72 $5.86

2011-12 $4.26 $5.95 $5.28 $4.97 $3.05 $4.70

2012-13 $4.55 $10.10 $9.84 $9.16 $8.71 $8.47

2013-14 $5.12 $14.80 $21.75 $35.05 $15.17 $18.38

2014-15 $5.42 $14.22 $18.86 $18.31 $10.20 $13.40

IFERC TGP City-gate:

Nov Dec Jan Feb Mar 5-month avg.

2010-11 $3.72 $6.06 $7.40 $7.32 $4.70 $5.84

2011-12 $4.28 $5.98 $5.44 $5.01 $3.06 $4.75

2012-13 $4.60 $10.20 $9.59 $9.05 $8.57 $8.40

2013-14 $5.07 $13.37 $21.35 $26.56 $14.47 $16.16

2014-15 $5.39 $13.60 $18.53 $18.03 $9.91 $13.09

2014-15 NYMEX $3.623 $3.698 $3.787 $3.782 $3.723 $3.72

Prices as of 10/27/14

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Last Winter

The record breaking cold weather from last winter led to record high demand for natural gas, challenging our gas system, and driving up commodity prices.

Despite the obstacles,

National Grid was been able to provide uninterrupted service to all of our firm customers; and

National Grid was been able to significantly mitigate natural gas supply cost increases to customers as a result of our diverse gas supply portfolio, as well as our hedging strategies.

Post –Winter Opportunities:

Cold weather allowed us to test our models and incorporate Lessons Learned

17

2014/15 Winter Readiness

All supplies needed to serve customers this winter will be under contract before November 1st

Underground Storages will be full for December 1st

LNG Storages will be full for December 1st

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Electric Supply

Margaret M. Janzen

Director, Wholesale Electric Supply

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National Grid’s Northeast Network

• Electricity

Purchases

31,000 GWh of

electric

commodity

procured in 2013

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Typical MA Residential Electric Customer(Basic Service rates beginning November 1, 2014)

Commodity & RPS

16.3¢

67.1%

Distribution

4.5¢

18.6%

Transmission

2.3¢

9.5%

Renewables,

Energy

Efficiency

1.1¢

4.3%

Total:

24.2¢ kWhMassachusetts Electric Company

Residential Rate R-1

(500 kWh)

Transition

0.1¢

0.4%

For Customers

taking Basic Service

for their commodity

needs

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Basic Service Rates

Customer Group Last Winter’s Rate (¢ per kWh, 6 months fixed)

Current Rate (¢ per kWh, 6 months fixed)

New Rate (¢ per kWh, 6 months fixed)

(Nov ‘13 - Apr ‘14) (May ‘14 - Oct ‘14) (Nov ‘14 - Apr ‘15)

Residential 10.025 8.277 16.273

Commercial (G-1, S-1)

9.448 7.758 15.228

Last Winter’s Rate (¢ per kWh, 3 months fixed)

Current Rate (¢ per kWh, 3 months fixed)

New Rate (¢ per kWh, 3 months fixed)

Industrial (G-2, G-3)

(Nov ‘13 - Jan ‘14) (Aug ‘14 - Oct ‘14) (Nov ‘14 - Jan ‘15)

Southeast MA 9.895 8.052 17.414

West-Central MA 9.804 7.900 17.488

Northeast MA 9.960 8.173 17.922

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Wholesale Electric Procurement in MA

Entire commodity load is supplied by wholesale suppliers

Competitively procure “full requirements service” (load following)

contracts at a fixed monthly price

Contract has a fixed monthly price for a bundled product of all

electricity needs for each hour for a specific customer group in a

geographic zone

Purchase 100% of Industrial supply every three months

Every six months, procure 50% of Residential and Commercial

supply for next twelve months

National Grid does not make a profit on commodity costs

Commodity rates are filed with the MA DPU for approval

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Typical RI Residential Electric Customer(Current Standard Offer Service Rates, effective through Dec 2014)

Commodity

8.2¢

47.4%

Distribution

5.2¢

29.9%

Transmission

2.3¢

13.4%

Renewables,

Energy

Efficiency &

RES

1.5¢

8.8%

Total:

17.3¢ kWhNarragansett Electric Company

Residential Rate A-16

(500 kWh)

Transition

0.1¢

0.6%

For Customers taking

Standard Offer

Service for their

commodity needs

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Standard Offer Service Rates

Customer Group Last Year’s Rate (¢ per kWh, 6 months fixed)

Previous Rate (¢ per kWh, 6 months fixed)

Current Rate (¢ per kWh, 6 months fixed)

(Jul ‘13 - Dec ‘13) (Jan ‘14 - Jun ‘14) (Jul ‘14 - Dec ‘14)

Residential (A-16 and A-60)

6.567 8.527 7.879

Commercial (G-02, C-06, S-06, S-10, S-14)

6.950 8.733 8.801

Last Year’s Avg Rate(¢ per kWh, 3 months)

Previous Avg Rate(¢ per kWh, 3 months)

Current Avg Rate (¢ per kWh, 3 months)

(Oct ‘13 - Dec ‘13) (Jul ‘14 - Sept ‘14) (Oct ‘14 - Dec ‘14)

Industrial (G-32, B-32, G-62, B-62, X-01)

6.227 7.506 8.830

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Wholesale Electric Procurement in RI

National Grid procures for its commodity customers using full

requirements service contracts and spot market purchases

Competitively procure contracts with wholesale suppliers

100% of Industrial supply every three months

90% of both Residential and Commercial supply, via dollar cost averaging

Daily purchases of power in the ISO-NE spot market

10% of both Residential and Commercial load

The Company does not make a profit on commodity costs

Commodity rates are filed with the RI PUC for approval

Annual Standard Offer Service Procurement Plan is filed with

the RI PUC every March 1st for approval

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Electric Commodity Components

Electric commodity costs are

composed of:

Energy (kWh)

Capacity (kW)

Ancillaries (kWh)

Energy price forecasts are driven mainly by expected fuel prices (i.e. natural gas, oil and coal) and weather

Capacity prices are set in advance and driven by estimated NE system peak demands and the amount of available generation (reserves)

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The Electricity “Market Players”

Generation

ISO

Load - Utilities

- Competitive Suppliers

SUPPLY DEMAND

Independent System Operator-New England (ISO-NE)

Balances Supply with Demand

at the Market Price

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New England’s Electric Load Zones

ISO-NE Load Zones:

Connecticut

Maine

New Hampshire

Vermont

Rhode Island

Northeastern MA/Boston

Southeastern MA

Western-Central MA

The Hub is considered the official “Internal” price of ISO-NE, which takes into account all zonal prices.

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ISO-New England

At 5-minute intervals, ISO-NE matches supply with demand at the lowest price (real-time)

LMP = “Locational Marginal Price”

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Strong Correlation Between

Natural Gas and Power Prices

New England power prices track underlying natural gas prices

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Forecasted Winter Prices

Forecasted ISO-NE

winter prices are

similar to last year’s

Suggests that

significant system

constraints remain

32

Generation Retirements

In the Northeast, there are announced retirements of

nuclear and coal power plants

This will change the way ISO-NE dispatches generation

to meet demand

ISO-NE, utilities and other market stakeholders must

implement effective solutions to continue to ensure

reliability, especially during high demand periods

33

Regional Issue Identified by ISO-NE

ISO-NE has identified regional gas pipeline constraints

as a factor in increased electricity costs:

“But today, the lack of secure fuel arrangements by generators,

limited on-site fuel storage, and increasing constraints on the

pipeline system are hindering the performance of natural gas

generators, and overly relying on this fuel source is creating

both serious risks to grid reliability and higher electricity prices.“

“In 2013, the region spent 54% more in the energy markets than

the previous year, mirroring higher natural gas prices caused by

pipeline constraints.”

Source: http://www.iso-ne.com/about/what-we-do/todays-challenges

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Increasing Gas & Electric

Interdependencies

Natural gas as a cleaner, cheaper, abundant source of fuel has

potential to reduce dependence on fuel oil in residential and

commercial space and water heating

Electric generation using efficient natural gas units are

replacing less efficient oil and coal power plants, as well as

aging nuclear power plants

ISO-NE depends on quick-start generators, such as natural

gas, to balance demand and intermittent renewable generators

Greater dependence on natural gas likely requires more robust

gas transmission & local gas distribution systems

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Preparing for this Winter and Beyond

National Grid is concerned about this winter’s prices for

electricity, since natural gas transmission constraints

continue to exist

In MA, we have procured and filed Basic Service rates, which

were approved for Nov 1st start

In March 2015 we will begin procuring next winter’s supply

In RI, we continue to procure load-following contracts for Jan

1st start, as well as supply for next winter

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Customer Assistance

Edward White

Vice President,

Customer Strategy & Environmental

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Energy Efficiency for All

Energy efficiency is the best hedge to reduce the impact of energy

costs

National Grid encourages customers to take advantage of EE

services. Information can be found on National Grid’s website and,

for MA customer at www.masssave.com.

National Grid works with EE vendors to help prepare them to meet

an increase in customers wanting services such as home energy

audits.

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What the customers can do

If residential audits can’t be scheduled immediately customers can

still benefit from energy efficiency.

Purchase efficient lighting products at local retailers at discounted prices.

Install programmable thermostats, including wi-fi enabled thermostats to adjust

home temperatures remotely

MA customers can complete an online home energy assessment available on

the National Grid website and on masssave.com to identify energy saving steps

Energy saving tips are available on our websites under Energy Efficiency

Services

If replacing an appliance, buy ENERGY STAR® qualified appliance.

Taking advantage of Boiler and Building tune-ups can generate immediate

savings and provide a big impact for commercial customers

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Working with our Customers

National Grid is working with local Community Action Program

agencies to help income-eligible customers to realize the benefits

of energy efficiency.

These customers may also be eligible for Budget Payment Plans

Customer Contact Center reps are prepared to answer questions at 800-322-

3223 or online under Bills and Payments on our MA & RI websites

National Grid can help business customers and municipalities identify energy

efficiency investments that will help to reduce costs

National Grid is working with government in MA and RI to help customers to

find appropriate solutions to help them to manage their electricity use.

Questions