Company Comments on Proposed Regs on Dividends Deduction for ESOP- Held Stock

National Grid USA is a holding company of predominantly electric and gas transmission and distribution companies located in the northeastern United States. National Grid USA subsidiary companies employ over 8,000 workers throughout New York and New England. National Grid USA is wholly owned by National Grid plc, which owns and operates the electric transmission system in the U.K. as well as several major gas distribution companies located in the U.K. National Grid plc issues ordinary shares on the London Stock Exchange (symbol "NG") and American Depositary Receipts (ADRs) on the New York Stock Exchange (symbol "NGG"). NGG ADRs are included under two employee share ownership plans (ESOPs) sponsored by the National Grid USA companies.

I am writing to express concern regarding proposed IRS/Treasury REG-133578-05 (the Proposed Regulations). Specifically, the Proposed Regulations limit the ESOP dividend tax deduction to the "issuing" company, which effectively eliminates the prospects for a tax deduction for ESOP dividends flowing from a foreign parent issuer like National Grid because a foreign issuing parent is not included in the US consolidated tax return. This result does not seem equitable given (1) the dividend cost relates to the compensation of National Grid USA company employees and (2) the National Grid USA companies' ESOPs serve the same purposes (to the benefit of 8,000 US based employees) that domestic based company ESOPs serve. If finalized in its current form, the Proposed Regulations will likely jeopardize the future of ESOPs established by foreign owned US employers.

Corporation counsel has advised me that the statutory language under Section 404(k) of the Internal Revenue Code and applicable legislative history support the view that the dividend tax deduction should be available to US based sponsoring companies. The purpose of my letter, however, is not to address the legal issues surrounding the Proposed Regulations. Rather, the purpose of my letter is to urge the Department, out of fairness, to modify the Proposed Regulations in a manner that would afford US employers with foreign parents the same ESOP tax treatment as other US employers.

Thank you in advance for your consideration of this request.