Corporate Governance

• The Combined Code on Corporate Governance
• The Board
• Role of Chairman and Chief Executive
• Role of Senior Independent Director
• Management of the Board
• Internal control and risk management
• Board member training and development
• Board effectiveness
• Board Committees
  • Audit Committee
  • Executive Committee
  • Finance Committee
  • Nominations Committee
  • Remuneration Committee
  • Risk & Responsibility Committee
  • Board and Board Committee attendance
• Communication with shareholders
• Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards
• Disclosure committees
• Information assurance

The Combined Code on Corporate Governance

National Grid Transco is subject to the Combined Code on Corporate Governance, updated in 2003. The Combined Code sets out principles and provisions relating to the good governance of companies. The aim is to provide guidance on how companies should be directed and controlled.

The Company fully complied with the provisions set out in Section 1 of the Combined Code throughout the year. The following statements explain how the Company has applied the principles set out in Section 1 of the Combined Code.

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The Board

The Board currently consists of 14 Directors comprising the Chairman, six Executive Directors (including the Group Chief Executive) and seven Non-executive Directors, (including the Senior Independent Director). Short biographical details of each of the Directors are included in Board of Directors.

Mike Jesanis joined the Board as Group Director responsible for US Distribution in July 2004, following the retirement of Rick Sergel. John Allan was appointed as a Non-executive Director by the Board on 1 May 2005, following his recommendation by the Nominations Committee.

All Directors are required to be re-elected by shareholders at the Annual General Meeting following their appointment by the Board and then at least once every three years. This ensures regular approval of Director appointments by shareholders.

The Board, based on proposals from the Nominations Committee, assesses the independence of each of the Non-executive Directors using the guidelines set out in the Combined Code and considering the main question of whether the Director is independent in character and judgement. This opinion is based on current participation and performance on both the Board and Board Committees including consideration of the length of service at National Grid Transco together with that at either Lattice Group plc or National Grid Group plc prior to their merger. Based on this assessment the Board has determined that each of the Non-executive Directors is independent.

Whilst John Grant has now served on the Board since November 1995, exceeding the nominal nine year guideline, his continued participation is valued. His extensive business experience allows useful input as an independently minded Non-executive Director. The Board has also agreed that he remain as chairman of the Remuneration Committee where continuity for at least a further year post-merger is desirable. In line with guidelines he will seek annual reappointment by shareholders.

Professor Paul Joskow has now served on the Board for five years under the criteria set out above. He is considered by the Board to be an independent Director as his period as a director of New England Electric System is not considered to impact his independence given it now represents a minority part of the total operations of the Group. In addition, Professor Joskow is considered by the Board to be a world authority on utility regulation and to have a broad knowledge of the US utility scene.

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Role of Chairman and Chief Executive

The respective roles of the Chairman and Chief Executive are set out and approved by the Board. The Chairman's priority is the management of the Board and its governance while the primary role of the Chief Executive is the management of the Company.

The main duties outside the Group of the Chairman, Sir John Parker, are included in his biography. During the year, the Chairman stepped down as Non-executive Chairman of RMC Group plc following its sale to Cemex of Mexico. In February 2005 he took up his post as Senior Non-executive Director of the Court of the Bank of England, and that of Chairman of Peninsular & Oriental Steam Navigation Company in May 2005. The Chairman continues to comply with the Combined Code requirement that no individual act as chairman for more than one FTSE 100 company. His contractual commitment to the Company is two days per week, but in practice this is often exceeded.

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Role of Senior Independent Director

A key responsibility for the Senior Independent Director is to be available to shareholders in the event that they may feel it inappropriate to relay views through the Chairman or Chief Executive. In addition the Senior Independent Director takes the lead when the Non-executive Directors assess the Chairman's performance and when the appointment of a new chairman is considered.

Ken Harvey assumed the role of Senior Independent Director following the retirement of James Ross in October 2004.

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Management of the Board

In order to ensure effective control of the Group, the Board restricts a range of decisions to itself. The principal matters reserved to the Board include:

• approval of the Group's business plan;
• overall Group business strategy;
• approval of Group financial policy;
• matters of strategic importance likely to impact the Group;
• approval of matters reserved to the Board and the delegations framework;
• establishing Board Committees, setting their terms of reference, reviewing their activities and, where appropriate, ratifying their decisions;
• internal control and risk management arrangements; and
• results announcements to stock exchanges where National Grid Transco shares are traded and the approval of the Annual Report and Accounts (in conjunction with the Audit Committee).

The Board manages these matters at its regular meetings and strategy days. It receives reports and presentations from each of the Executive Directors responsible for the Group's operating businesses and key central functions. It also receives minutes and/or oral reports of Board Committee meetings. This ensures that all Directors are aware of, and are in a position to monitor effectively, the overall performance of the Group, its development and implementation of strategy and its management of risk.

To enable Directors to carry out their duties, they are able, where necessary, to seek outside independent legal advice at the Company's cost.

The Chairman met separately with the Non-executive Directors twice during the year in formal session (once with the Group Chief Executive present) and three meetings are scheduled for 2005/06. These meetings and other regular informal discussions create the opportunity for valuable input from the Non-executive Directors.

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Internal control and risk management

The Board is ultimately responsible for the Group's system of internal control and for reviewing its effectiveness along with the review of risk management processes. National Grid Transco's system of internal control and embedded risk management, which has been in place throughout 2004/05, helps to safeguard the Group's assets and is designed to manage, rather than eliminate, material risks to the achievement of the Group's business objectives. These reviews recognise that any such system can provide only reasonable, and not absolute, assurance against material misstatement or loss.

The Board, together with the Executive, Audit and Risk & Responsibility Committees, is central to the internal control process. Throughout the year the Board receives reports from each of these Committees and as part of the year-end process receives the Group Chief Executive's Letter of Assurance. This process seeks to confirm compliance with all major internal and external requirements along with the existence of appropriate controls and processes to manage risks and to provide details of material risks and control weaknesses. The Board additionally conducts a formal review of the effectiveness of internal controls based on the information and assurances provided to it directly and via the Committees mentioned.

The Board has adopted a Code of Ethics for senior financial professionals. This code is available on the Group website at www.ngtgroup.com (where any amendments or waivers will also be posted). There were no amendments to, or waivers of, our Code of Ethics in 2004/05.

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Board member training and development

Upon appointment each Director receives material and presentations to provide an induction to the Company and its businesses and is provided with detailed information relating to the operation and management of the Board. Site visits and meetings with senior and middle managers and the Company's advisors are also arranged. Major shareholders are also invited to meet new Directors.

The Group Company Secretary and General Counsel monitors Director attendance at meetings and the presentations that they receive to ensure that the Company is aware whether or not all Directors are in receipt of up-to-date information about the Group. Directors are also encouraged to attend relevant external courses to ensure that they are fully equipped to serve as effective Directors. For example, external courses attended during the year by Non-executive Directors included: 'Continuing Professional Development for Non-executive Directors' (including attendance at a Remuneration Committee Workshop) and 'The Non-executive Directors Seminar'.

Significant attention has also been given to the development programme for each of the Executive Directors, established following in-depth personal appraisals with the assistance of external specialists. Development programmes include external and internal mentoring support, attendance at relevant business schools and experience of other boardrooms through serving as Non-executive Directors.

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Board effectiveness

The effectiveness of the Board, its Committees and individual Directors is vital to the overall success of the Group. A formal Board and Committee evaluation process in the form of a confidential questionnaire to each Director from the Group Company Secretary and General Counsel is used as the basis to assess the effectiveness of the Board, the Chairman and each of the Committees. The questionnaire is supplemented by one-to-one meetings between the Chairman and each of the Directors where individual performance is openly discussed along with any particular knowledge gap or the need for external training. Based on an analysis of the output of the questionnaire and the one-to-one meetings, an action plan is drawn up. This is discussed by the Nominations Committee before being recommended to the Board for action in the forthcoming year. During the last year actions included greater exposure of the Board to the next layer of management, improving the balance of strategic versus operational debate and improving the linkages between Board Committees. The aim is to ensure continuous improvement in Board processes and procedures. The Non-executive Directors also meet separately, under the chairmanship of the Senior Independent Director, to discuss the performance of the Chairman and provide him with collective feedback.

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Board Committees

The Board Committees comprise the Audit, Executive, Finance, Nominations, Remuneration and Risk & Responsibility Committees. The developing roles of Board Committees have led to them carrying out increasingly important work. This ensures that issues of policy and oversight are given time for detailed debate outside the main Board, where the time available is required to embrace a wide range of issues. To ensure the whole Board is updated, the Committee chairmen provide a summary of key issues debated and recommendations formulated at each Board meeting.

Each Committee has established terms of reference, agreed by both the Committee and the Board. The terms of reference for each of these Committees are published on the Group website at www.ngtgroup.com.

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Audit Committee

The current members of the Audit Committee are John Allan, John Grant, Maria Richter and George Rose, who is the chairman of the Committee. John Allan and Maria Richter were appointed to the Committee with effect from 1 May 2005, replacing Ken Harvey and Paul Joskow.

Each of these Non-executive Directors is regarded by the Board as independent. The Board has determined that George Rose is an 'audit committee financial expert' as required by the Audit Committee terms of reference (biographical details).

The Chairman, Group Chief Executive, Group Finance Director, external auditors, Group Head of Audit, and Group Company Secretary and General Counsel are invited to attend most meetings.

The Audit Committee's main responsibilities are:

• reviewing and reporting to the Board on the effectiveness of the Group's financial reporting and internal control policies (including risk and compliance management);
• approving the terms of reference of the internal audit function and ensuring its resource requirements are adequate for effective performance;
• subject to necessary shareholder approval: approving, appointing, setting the compensation for and the oversight of the Group's external auditors;
• reviewing the integrity of the Group's financial statements; and
• reviewing the Annual Report and Accounts, Annual Review, Annual Report on Form 20-F and other reports filed with the SEC containing financial statements and reviewing reports of, and discussing issues raised by, the National Grid Transco Disclosure Committee in connection with these disclosures.

During the year ended 31 March 2005 the Committee met on five occasions. At meetings during the year the Committee reviewed the Company's pre-close trading statements and results before publication and received regular reports from the internal audit function and external auditors. The Committee also received reports on risk and compliance management within the Company and, since the introduction to UK employees of the Code of Business Conduct in April 2004, regular updates on the implementation of the Code. It also considered the actions being taken by the Company to address compliance with Section 404 of the Sarbanes-Oxley Act 2002 and the introduction of International Financial Reporting Standards.

With effect from 1 May 2005, the Audit Committee has undertaken a new role in relation to securing adequate separation between Transco plc's transmission and distribution businesses. The aims are to ensure that the governance arrangements required by the business separation licence conditions in Transco plc's licences are observed and to oversee the activities of Transco plc's Business Separation Compliance Officer.

During the year, the Audit Committee met separately with the external auditors, without management being present, on a number of occasions.

The Committee is responsible for overseeing the relationship with the external auditors which includes
(but is not limited to):

• ensuring the independence and objectivity of the external auditors and the adequacy of the audit procedures;
• consideration of the audit fees paid and the approval in advance of all non-audit fees paid to the external auditors; and
• discussions with the external auditors concerning compliance with accounting standards.

At its meeting in May 2005, the Committee reviewed the independence and objectivity of the Company's external auditors, PricewaterhouseCoopers, including the policy on the employment by the Company of PricewaterhouseCoopers staff for senior positions. At this meeting, the Committee also evaluated the external audit process and considered the re-appointment of the external auditors.

All non-audit work is subject to pre-approval and total non-audit fees are reviewed by the Committee on a quarterly basis. Details of both the audit and non-audit fees paid to the auditors during the year are set out in note 3 to the accounts.

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Executive Committee

The Board has essentially delegated the day-to-day running of the Group to the Executive Committee which is made up of each of the Executive Directors and the Group Company Secretary and General Counsel. The Executive Committee is chaired by the Group Chief Executive.

The Executive Committee manages and safeguards the interests of the Group. Its responsibilities include Group strategy, the annual business plan, capital allocation programme, annual operational budgets and other targets established by the Board.

The Executive Committee's key tasks also include keeping under review the adequacy of reporting arrangements and the effectiveness of internal control and risk management. At its regular meetings it considers safety and environmental performance reports and operational business performance reports.

On behalf of the Board the Executive Committee receives and considers half-yearly certifications and due diligence reports from the operating businesses, and corporate centre functions in connection with the completeness and accuracy of financial statements and associated disclosures. The Committee also receives regular reports on the results of internal audits (allowing appropriate and timely management follow-up) and, on an exception basis, reviews safety and environmental audits and occupational health reviews.

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Finance Committee

The Finance Committee is chaired by Paul Joskow, the other members being Roger Urwin, Steve Lucas, Stephen Pettit and Maria Richter.

The Finance Committee is responsible for:

• setting policy and granting authority for investment and financing decisions, bank accounts, credit exposure, hedging and foreign exchange transactions, guarantees, indemnities and parent company support;
• setting and reviewing treasury management parameters; and
• considering and making recommendations to the Board on tax, pensions and insurance strategy.

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Nominations Committee

The members of the Nominations Committee are John Grant, Ken Harvey, Paul Joskow and George Rose, each of whom is regarded by the Board as independent. Sir John Parker chairs the Committee. Each of these Directors was a member of the Committee throughout the year, other than Paul Joskow who was appointed with effect from 1 May 2005.

The main responsibility of the Nominations Committee is to keep under review the size, structure and composition of the Board. When necessary it is the responsibility of the Committee to identify and nominate to the Board for appointment Board Directors and direct reports to the Group Chief Executive. The Nominations Committee must also consider the annual reappointment of Directors, proposing Directors for reappointment by shareholders, having first considered the effectiveness and independence of any Non-executive Directors.

Clearly defined processes for the appointment of a Chairman, Chief Executive, Executive Director, Non-executive Director and Company Secretary are detailed and reviewed annually by the Committee. In addition the Committee has oversight of Boardroom succession planning and the development programme for each Executive Director.

As an on-going process the Nominations Committee considers succession planning for the Board over both the short and long term. The Nominations Committee also receives regular reports from the Group Chief Executive and Group Human Resources Director on succession planning for senior positions within the Group. The Nominations Committee has overall responsibility for reviewing the leadership needs of the Group and co-ordinates the review of the Board and Board Committees' effectiveness. The Nominations Committee also assesses the independence of each Non-executive Director annually prior to making recommendations to the Board.

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Remuneration Committee

The Remuneration Committee members are John Allan, Ken Harvey, Stephen Pettit and George Rose. The Committee chairman is John Grant. Each of these Non-executive Directors is regarded by the Board as independent and they all served throughout the year, other than John Allan who was appointed with effect from 1 May 2005.

The Group Human Resources Director provides advice on remuneration policies and practices and is usually invited to attend meetings along with the Chairman and the Group Chief Executive. No Director or other attendee participates in any discussion on his or her own remuneration.

The Remuneration Committee is responsible for developing Group policy on executive remuneration, and for determining the remuneration of the Executive Directors and the executives below Board level who report directly to the Group Chief Executive. It also monitors the remuneration of other senior employees of the Group and has oversight of the operation of all the Group's share and share option plans.

The Board has accepted all the recommendations made by the Committee during the year.

The Remuneration Committee has authority to obtain the advice of outside independent remuneration consultants and is solely responsible for their appointment, retention and termination and for approval of their fees and other terms. The Committee retained Ernst & Young LLP as independent remuneration advisors throughout the year. The Group, with the agreement of the Committee, retained Linklaters to provide advice to the Committee on Directors' service contracts and Alithos Limited was retained to provide calculations relating to performance criteria of various share schemes.

Further details of the Group's remuneration policy and details of Director remuneration can be found in the Directors' Remuneration Report, which the Committee compiles and recommends to the Board for approval.

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Risk & Responsibility Committee

Stephen Pettit chairs the Risk & Responsibility Committee. Its other members are Ken Harvey and Maria Richter. Ken Harvey was appointed to the Committee with effect from 1 May 2005.

The Group Chief Executive, two external specialists (advisors on safety and environmental affairs), the Group Corporate Responsibility Director and the Group Company Secretary and General Counsel are expected to attend meetings.

The responsibility of the Committee is to review the strategies, policies, management, initiatives, targets and performance of the Group and, where appropriate, its suppliers and contractors in the following areas:

• occupational and public safety;
• environment;
• occupational health;
• equality and diversity;
• human rights;
• business ethics; and
• the role of the Group in society.

The Risk & Responsibility Committee is involved in the internal control process as it considers and provides reports to the Audit Committee on the non-financial risks identified above and any reputational risks.

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Board and Board Committee attendance

The following table indicates the number of meetings of the Board and each of its Committees held during 2004/05 and the number of those meetings that each of the Directors attended as a member:

			Board Committees
	Board meetings (i)		Audit	Executive	Finance	Nominations	Remuneration	Risk & Responsibility
Total held	14		5	12	7	7	7	5
Sir John Parker	14		-	-	-	7	-	-
Roger Urwin	14		-	12	6	-	-	-
Edward Astle	14		-	12	-	-	-	-
Steve Holliday	13		-	12	-	-	-	-
Mike Jesanis (ii)	9		-	11	-	-	-	-
Steve Lucas	14		-	12	6	-	-	-
Rick Sergel (iii)	4		-	3	-	-	-	-
Nick Winser	13		-	11	-	-	-	-
James Ross (iv)	9		-	-	-	3	-	3
Kenneth Harvey	14		5	-	-	7	7	-
JohnGrant	14		5	-	-	7	7	-
Paul Joskow	13		4	-	7	-	-	-
Stephen Pettit	14		-	-	5	-	7	5
Maria Richter	14		-	-	7	-	-	5
George Rose	11		5	-	-	6	6	-

(i)	During the year there were 10 scheduled and four ad-hoc Board meetings.
(ii)	Mike Jesanis was appointed to the Board on 26 July 2004. There were nine Board meetings to the end of the financial year following his appointment. He was a member of the Executive Committee for the full financial year, initially in his capacity as Chief Operating Officer of National Grid USA and then as an Executive Director.
(iii)	Rick Sergel retired from the Board on 26 July 2004. There were five Board meetings and four Executive Committee meetings in the period to his retirement.
(iv)	James Ross retired from the Board on 21 October 2004. There were nine Board meetings, three Nominations Committee meetings and three Risk & Responsibility Committee meetings in the period to his retirement.

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Communication with shareholders

During the year, the Group Chief Executive and Group Finance Director hold regular meetings with institutional investors, fund managers and analysts to discuss information made public by the Group. In addition, the Chairman reminds major shareholders, in writing, of his availability (along with that of the Senior Independent Director or Non-executive Directors where required) should there be issues which shareholders may wish to raise.

To ensure that the Board is effectively informed of shareholder views, it receives feedback from the Company's brokers supplemented by the Group Head of Investor Relations. This ensures that all Board members, including the Non-executive Directors, are aware of the views of major shareholders and of any outstanding issues that they may have.

The principal method of communicating with the majority of shareholders is through the Annual Review. All shareholders can attend the Company's Annual General Meeting where they have the opportunity to question Directors on any issues relating to the management of the Company. The Group also has in place a Shareholder Networking Programme, which allows a small number of shareholders to visit operational sites and meet senior managers and Directors. More details of the Shareholder Networking Programme are under the heading Shareholder networking in Shareholder information.

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Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards

The corporate governance practices of the Group substantially conform to those required of US companies listed on the NYSE. The principal differences between the Group's governance practices pursuant to the Combined Code/UK governance practices and the Section 303A Corporate Governance Rules of the New York Stock Exchange are:

• the definition of independence set out under the Combined Code and applied by the Company is broader in scope than that required under SEC standards relating to audit committees;
• there is no requirement for a separate corporate governance committee in the UK, all Non-executive Directors on the Board decide on governance issues; and
• while the Group, as a matter of best practice, reports compliance with the Combined Code in each Annual Report and Accounts there is no requirement to adopt and disclose separate corporate governance guidelines.

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Disclosure committees

National Grid Transco has constituted several disclosure committees across the Group that undertake various duties relating to the material disclosures made by the Company and relevant subsidiaries within the Group.

The Group Finance Director chairs the National Grid Transco Disclosure Committee. This Committee assists the Group Chief Executive and Group Finance Director in fulfilling their responsibility under US securities laws to oversee the accuracy and timeliness of the disclosures made by the Company. This includes the design and implementation of controls and other procedures that are intended to ensure that information required by the Company to be disclosed is recorded, processed, summarised and reported accurately and on a timely basis. The Committee also monitors the effectiveness of the Company's disclosure controls and reviews and considers the preparation of material public disclosures. It undertakes an evaluation of the effectiveness of the Company's disclosure controls at the end of the Company's financial year and considers other matters as necessary.

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Information assurance

Information is an important asset to the business and, like any other asset, it must be fit for purpose.

Critical to demonstrating information integrity is a process of assurance from the business that clearly demonstrates that information is being sourced and managed effectively. The Group recognises that these behaviours are important to achieving necessary standards. The key objective of having accurate and reliable information is supported by a risk-based, holistic approach that deals with information assurance as a business critical function. This approach ensures that accurate and reliable information is available to those who need it in a timely fashion, thus enabling informed decisions that support and further our Group objectives.

We manage a broad range of risks to our information. Key elements in managing these risks are education, training and awareness. These initiatives emphasise the importance of information security, the quality of data collection, and the affirmation process that supports our business transactions, evidencing our decisions and actions.

The Group continues to work collaboratively with a variety of organisations and professional bodies to develop and implement best practice.

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