EUROPEAN COMMISSION C(2017) 1908 final PUBLIC VERSION To the notifying parties Subject:Case M.8358 – Macquarie / National Grid / Gas Distribution Business of National Grid

Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/2004 and Article 57 of the Agreement on the European Economic Area Dear Sir or Madam, (1)On 9 February 2017, the European Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 by which National Grid plc ("National Grid", United Kingdom) and Macquarie Infrastructure and Real Assets (Europe) Limited (“MIRAEL”, United Kingdom) which is part of Macquarie Group Limited ("Macquarie"), acquire within the meaning of Article 3(1)(b) of the Merger Regulation joint control of the gas distribution business of National Grid that comprises four distribution networks ("Target", United Kingdom) by way of acquisition of shares ("the Proposed Transaction"). National Grid and Macquarie are designated hereinafter as the 'Notifying Parties' or the 'Parties'. 1.The parties (2)MIRAEL focuses on the management of infrastructure and other real assets, including real estate, energy and agriculture. MIRAEL is part of Macquarie which is a global provider of banking, financial, advisory, investment and funds management services. Macquarie controls companies which have the following activities in the gas sector in the UK: (i) Energetics, an independent gas transporter which provides gas connections; and (ii) Corona Energy, a company supplying gas and electricity primarily to commercial, industrial and public sector clients in the UK. (3)National Grid's principal operations are the ownership and operation of regulated electricity and gas infrastructure in the United Kingdom. (4)The Target comprises four regulated gas distribution networks (GDNs) across parts of the UK that encompasses the East of England, North London, the North West of England and the West Midlands. The Target is a licensed gas transporter under the GB Gas Act 1986 and is regulated by the Office of Gas and Electricity Markets (“OFGEM”). 2.The operation and the concentration (5)The Target is currently indirectly controlled by National Grid through its wholly owned subsidiary GasD Opco. Pursuant to the acquisition agreement signed on 8 December 2016, Macquarie, through MIRAEL, will indirectly acquire negative sole control over 61% of the issued share capital of a newly established holding company ("GasD Holdco") that will ultimately control the Target. The remaining 39% of the shares in GasD Holdco will be held by National Grid. Macquarie's control over TIL

(6)For the purpose of the Proposed Transaction Macquarie together with other investors formed a Consortium. The Consortium members entered into an agreement, whereby each Consortium member will subscribe to different proportions of the debt and share capital of Tellsid Holdings Limited ("Topco") and its wholly owned subsidiary, Tellsid Investment Limited ("TIL"). TIL will ultimately acquire shares in GasD Holdco. (7)Macquarie, through MIRAEL, will be the largest shareholder in Topco (with a stake of […]%). Other shareholders include: CIC Capital ([…]%), ACP ([…]%), QIA ([…]%), Britel ([…]%), Dalmore ([…]%), INPP (Amber Infrastructure) ([…]%) and Hermes ([…]%). (8)TIL was created as an investment vehicle for the Consortium and as a holding company for GasD Holco. It is not intended that TIL would have any other activities. Macquarie will be able to control TIL via its parent company Topco. Macquarie, through MIRAEL, will be the only Consortium member who would be in a position to exercise negative sole control over TIL by virtue of its right to veto certain strategic decisions in Topco's Board related to the Target's business plan, financing plan and budget. Joint control of Macquarie and National Grid over the Target (9)National Grid and Macquarie will exercise decisive influence over certain strategic decisions of the Target and, consequently, they will jointly control the Target. (10)In particular, National Grid and Macquarie will have veto rights on, among other things, the approval of the initial business plan for GasD Holdco. The gas distribution business is a regulated activity subject to price controls by OFGEM. The current price control framework referred to as RIIO-GD1 covers the period from 1 April 2013 to 31 March 2021. The initial business plan must be set in line with RIIO-GD1 and submitted to OFGEM for approval. Once approved by OFGEM the initial plan becomes the prevailing business plan for the price control period. With any future price control period, National Grid and Macquarie will have to agree on a new business plan before submitting it to OFGEM for approval. The initial financing plan as well as the budget must also be agreed by both National Grid and Macquarie. (11)National Grid's and Macquarie's veto rights will also apply to any changes which are "materially adverse" to the prevailing business, financing or budget plans. The Parties submitted that, as they have not agreed on the exhaustive list of what changes would be considered as 'materially adverse', each of National Grid and Macquarie will have, in practice, discretion in deciding when to exercise their veto right. (12)The Proposed Transaction therefore constitutes a concentration pursuant to Article 3(1)(b) of the Merger Regulation. 3.EU DIMENSION (13)The undertakings concerned had a combined aggregate world-wide turnover of more than EUR 5 000 million (Macquarie: EUR […]million; National Grid: EUR 18 203 million; Target: EUR 2 563 million). In addition, each of them had an EU-wide turnover in excess of EUR 250 million (Macquarie: EUR […]million; National Grid: EUR […]million; Target: EUR […]million), but they did not achieve more than two-thirds of their aggregate EU-wide turnover within one and the same Member State. The notified operation therefore has an EU dimension within the meaning of Article 1(2) of the Merger Regulation. 4.Commission's assessment (14)The Parties' activities overlap horizontally in the provision of (i) one-off gas connections, and (ii) multiple gas connections. In addition, the Proposed Transaction would create a vertical link between the Target's gas distribution activity (the upstream market) and Macquarie's businesses downstream as (i) a provider of gas connections and (ii) as a (wholesale and retail) supplier of gas (the downstream markets). 4.1.Market definition 4.1.1.Gas distribution (15)The Commission has previously identified the distribution of natural gas through low- and medium-pressure pipeline networks as a relevant product market. The geographic market has been defined as the territory covered by each distribution grid. The distribution of gas constitutes a natural monopoly given that the distribution grid cannot be duplicated in any economically viable manner. The Parties do not dispute this market delineation and it is retained by the Commission for the purpose of the present case. 4.1.2.Supply of gas (16)Natural gas in Britain arrives from various sources, including liquefied natural gas (LNG) terminals, storage sites, pipelines from other countries (such as Norway) and through interconnectors with Europe (in Belgium, Holland and Ireland), and it is transported through the national transmission system and the distribution networks by gas shippers. Gas shippers are wholesalers who contract with gas transporters, such as the Target, to move the gas through the grid and they pay transmission and distribution charges for the transportation service. Gas shippers then sell the gas on to suppliers who use it to supply retail gas to end-customers. 4.1.2.1.Wholesale supply of gas (17)The Commission has in the past identified a distinct product market for the wholesale supply of gas which encompasses sales by shippers or suppliers with an upstream gas supply contract (as well as those with domestic production), and which may also include trading on gas hubs, such as the National Balancing point (NBP) in the UK. On the scope of the geographic market, the Commission has in the past considered whether the wholesale supply market should comprise the territory of the UK as well as the Republic of Ireland but it ultimately left the market definition open. The exact delineation of the relevant (product and geographic) market can be left open in the present case as the Proposed Transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition. 4.1.2.2.Retail supply of gas

(18)In previous decisions, the Commission has segmented the retail supply of gas into the following relevant markets: (i) gas-powered electricity plants; (ii) large industrial customers; (iii) small industrial and commercial customers; and (iv) households. The Commission generally held that the geographic scope of retail markets was national in scope. The Parties agree with this market segmentation and it is retained by the Commission for the purpose of the present case. 4.1.3.Gas connections (19)When a housing developer builds new homes, those homes need to be connected to the existing utility networks in order for the residents to receive utility services. There are two main types of gas connections: (i) one-off connections: when consumers require a gas connection for an individual home; and (ii) multiple housing connections: when housing developers require multiple connections, e.g. a large housing development requiring connections to several homes. Housing developers typically require multi-utility connections that may include gas, electricity, water and fibre connections. (20)Historically, gas connections were provided exclusively by the incumbent regional gas distributor. However, since 1995 these activities have been open to competition. Gas connections are either provided by a GDN operator or an independent gas transporter ('IGT'), such as Energetics. (21)The Commission has not previously investigated the market for gas connections. However, this market was analysed by the UK Office of Fair Trading ('OFT'). Although it ultimately left the market definition open, the OFT considered that the market can be segmented (i) by type of connection (gas vs electricity connection), (ii) by customer group (one-off connections vs multiple housing connections) and (iii) by type of customer (domestic vs non-domestic). As the transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition, the exact delineation of the product market can be left open. (22)On the scope of the geographic market, the OFT considered the market to be that of the UK on the basis that competition takes place mainly at national level. The Parties agree with this market delineation and it is retained by the Commission for the purpose of the present case. 4.2.Competitive assessment 4.2.1.Horizontal overlap in the supply of one-off gas connections (23)On the market for one-off gas connections, in 2015 the Target had a share of [30-40]% of the new domestic connections and [10-20]% of the new non-domestic connections. Energetics (controlled by Macquarie) has only a negligible presence in this market (less than [0-5]% of both new domestic and non-domestic connections in 2015). (24)The Parties argue that IGTs, such as Energetics, are not active in the market segment for one-off gas connections to any material extent. This is due to a number of factors, including geographic dispersion and regulatory obligations, which make the market for one-off gas connections unattractive for IGTs. (25)The Commission notes that more than [90-100]% of the one-off gas connections are carried out by GDN operators. Each GDN operator typically installs the vast majority of the new one-off connections to its own distribution grid. For example, on its GDNs the Target accounted for a share of [90-100]% to [90-100]% of all new one-off connections in 2015 while Energetics provided only one connection in the East of England. This suggests that IGTs, including Energetics, exert a limited constraint on GDN operators in the provision of one-off gas connections. (26)In light of the above, the Commission considers that the proposed transaction does not raise serious doubts as to its compatibility with the internal market in relation to the market for the supply of one-off gas connections. 4.2.2.Horizontal overlap in the supply of multiple-housing gas connections (27)On the market for multiple housing connections, the Parties' position is limited, as they have a combined share below 20% of both domestic (Energetics [5-10]%, the Target [0-5]%) and non-domestic connections (Energetics [0-5]%, the Target [10-20]%). (28)In addition to the limited combined market share, the Parties argue that Energetics and the Target tend to focus on different customer groups. Energetics almost exclusively serves multi-utility connections (including gas, electricity and water) which account for approximately [90-100]% of its business, whilst the position of GDN operators, including the Target, in the multi-utility segment is marginal. (29)GDN operators account together for only [5-10]% of the new multiple housing connections. This suggests that GDN operators have limited ability to constrain IGTs in the provision of multiple housing installations. Respondents to the market investigation also clearly indicated that competition in the provision of multiple housing gas connections takes place mostly between IGTs. (30)In view of the above, the Commission considers that the proposed transaction does not raise serious doubts as to its compatibility with the internal market in relation to the market for the supply of multiple-housing gas connections. 4.2.3.Vertical link between gas distribution and (wholesale and retail) supply of gas (31)Macquarie via Corona is active in the wholesale and retail supply of gas in the UK but it holds a limited position in both markets. In the market for wholesale supply of gas Corona's market share is less than 10%. In the retail markets Corona is active in the supply to large and small non-domestic customers with a share of, respectively, 13% and 6%. (32)Gas (wholesale and retail) suppliers rely on GDN operators to transport and deliver gas to their customers. As each GDN operator is a de facto monopolist on its own grid (see paragraph (15) ), the Commission has considered whether post-merger the merged entity might have the ability and incentive to engage in input foreclosure by discriminating (in the provision of access to its GDNs) against Corona's competitors in the (wholesale and retail) supply of gas.