Gas companies told to cut tariff, lower revenue targets

Published March 16, 2020
SNGPL, SSGCL asked to seek approval of their boards. —Dawn/File
SNGPL, SSGCL asked to seek approval of their boards. —Dawn/File

ISLAMABAD: In a major policy shift, the government has formally directed the board of directors and managing directors of the two gas utilities to give up major revenue streams to provide relief to consumers through lower tariff.

In a letter, the petroleum division has asked the chairpersons and managing directors of the Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) to seek approval of their boards for lower revenue requirements in the consumer tariff.

In the letter, seen by Dawn, the companies have been asked to reduce their benchmarks of unaccounted for gas (UFG) from 6.3 per cent allowed by the Oil & Gas Regulatory Authority (Ogra) to 4pc. This will cut gas companies’ revenue by Rs10bn a year.

Secondly, the gas companies have also been asked to reduce their rate of return from 17 and 17.5pc allowed by Ogra to 15pc with a revenue loss of about Rs5bn a year.

SNGPL, SSGCL asked to seek approval of their boards

Third, the instructions also demand one per cent reduction in rate of depreciation on assets with financial impact of another Rs5bn. On top of that, the two gas companies have also been asked to rationalise and reduce their overall transmission and distribution costs to create another fiscal space of about Rs5bn.

The letter, written by petroleum secretary Asad Hayauddin, has conveyed to the boards and managements of the two companies that these areas have been identified through a review of “various options to decrease the gas sales prices with a view to providing relief to the gas consumers”.

The letter also put on record that on the advice of the Prime Minister Office preliminary consultative sessions had already been held with the SNGPL, SSGCL and Ogra on the four identified areas for consideration and desired action by the companies.

Informed sources said that the regulator had expressed its views clearly during those consultations, saying such demands could not be considered under the existing laws in the country because all benchmarks in the tariff had been set through a regulatory process, public hearing, expert studies and petitions. The actual losses (UFGs) in the gas companies were higher than 13-16pc while the permissible UFG for next year was 6.3pc

Also, such demands in meetings and letters could not be entertained under the regulatory mechanism as the policy guidelines acceptable to a regulator have to come after proper approval by the federal cabinet in extreme circumstances. In any case, the benchmarks proposed by the PM Office would convert the two gas utilities into loss-making entities because these were currently operating on a thin margin of profitability.

It was, therefore, decided to direct the chairpersons of the board of directors and the managing directors of the two gas companies to present comprehensive analyses on the proposed items to their respective boards of directors “seeking their approval for filing of petitions with Ogra for determination of revenue requirements for FY2020-21 while following the above areas identified for consideration”.

An official said that in case of petitions by the two gas companies themselves seeking lower revenue would compel the regulator to oblige given the fact that the regulator could not at its own increase tariff or offer higher revenues than demanded by the petitioners.

High losses

The informed sources said proposals for reduction in regulatory benchmarks originated from the Prime Minister’s Inspection Commission (PMIC) and its consultants from Frontier Works Organisation expressed concern over high losses in the gas supply chain. A special team led by Usman Akhtar Bajwa, additional secretary in the PM Office, and assisted by Dr Shazia and Moeen Abbas of CPEC team at the PM Office then engaged with the stakeholders.

A senior official of the petroleum division said it would have been more practical to work out a technical plan to force the gas companies to reduce their overall losses from 13-16pc to 5-6pc and link the emoluments of the work force of the gas companies to such performance indicators instead of cutting down on revenue streams.

He said as the directives were coming directly from the PM Office and that senior officers of the petroleum division, the directorate general of gas, special assistant to the prime minister on petroleum, energy minister were not on board, such decisions could bring the gas companies in financial losses.

When Special Assistant to the PM on Petroleum Nadeem Babar was asked if he was on board the fresh proposal for reducing benchmarks for gas companies and if the companies would remain float, he declined to comment.

“Both the gas companies would be taking a financial hit of over Rs25bn and soon there would be an addition of two more companies in the list of loss-making public sector entities,” an official close to the SAPM said, adding this would also jeopardise the RLNG supply chain and could lead to possible sovereign default in respect of RLNG imports since these companies will no longer be able to borrow and pay for RLNG.

Also further borrowing will not be possible for system expansion and distribution development schemes. The government had been relying on these companies for putting up majority funding for new development schemes.

The move comes at a time when the government has already put on hold a 15pc increase in gas tariff approved by Ogra to generate Rs35bn additional revenues for the two gas companies during the current fiscal year.

Officials said that the arrears of two gas utilities had already increased to about Rs380bn. These included Rs270bn on account of indigenous gas supplies and another Rs110bn on account of RLNG sold to various sectors, including to domestic consumers at cheaper rates.

Published in Dawn, March 16th, 2020

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