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Gas price hike

September 19, 2018

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IT is easy to oppose fuel price increases. At the same time, it is difficult to implement the latter. The previous government was unable to accept the reasoning proposed by the gas-sector bureaucracy for why a large increase in the price of gas was needed to ensure the liquidity requirements of the public-sector companies that dominate this area. It is, therefore, a little surprising to see the ease and speed with which the new PTI government took the step, even though it modified the proposal sent by the Oil and Gas Regulatory Authority. The original determination that was drawn up by Ogra asked for a massive price increase to meet the revenue needs of the two gas distribution companies, and placed the largest burden of this increase on the poorest consumers. This was a bizarre choice, though undoubtedly the bureaucrats responsible for making this decision would have had some justification for it.

The federal cabinet did the right thing to modify the determination to ensure that the poorest consumers are protected from the burden of the price increase, and that the largest share of the burden falls on the biggest consumers in the household category. It was also wise to keep the export-oriented sectors away from the price increase, though for many of them in Punjab, this is of limited utility because the majority of their gas needs are met with imported LNG, the price of which has been left untouched.

And now comes the hard part. With the price increase to be notified within days, the government must now demonstrate that it has ideas beyond simply what the bureaucrats are proposing. In the matter of gas pricing, this clearly means a direction for reforms that allows a greater role to the market forces in setting the rates. If the government allows the bureaucrats to call the shots in the critical matter of policy direction, then this will be the first of many more price increases it will be asked to administer. Gas prices need to reflect all the right incentives: efficiency for the supplier and conservation for the consumer. This will only happen when the price is not set by the government, and the management of the companies has private-sector boards to report to. At the moment, the price mechanism being used by the regulator gives the distribution companies a 17pc return on assets, for which there is little to no justification. What is needed is a price that rewards recoveries and strengthened billing, as well as reduced system losses. Without creating such incentives, the companies will be back in a few years asking for yet another price increase as the current one would have been properly digested by their balance sheets — this is almost certain if the government continues to look to the bureaucrats for policy direction.

Published in Dawn, September 19th, 2018