ISLAMABAD: Ahead of its determination of gas prices, the Oil and Gas Regulatory Authority (Ogra) is coming under increasing pressure to allow millions of new connections despite unavailability of additional gas, rising price and circular debt.
Ogra completed the process of public hearing more than a month ago on up to 220 per cent increase in prescribed prices to meet estimated revenue requirements (ERR) of the two gas companies for fiscal year 2021-22 and is expected to come up with its determination in a couple of weeks.
The Sui Northern Gas Pipelines Ltd (SNGPL) has demanded about Rs1,420 per unit (Million British Thermal Unit - MMBTU) increase in its existing price of about Rs645 per MMBTU, to take it to about Rs2,065 per unit to cover Rs365 billion additional ERR, including some previous adjustments. The Sui Southern Gas Company Ltd (SSGCL) has, on the other hand, sought about Rs153 per unit or 20pc increase in its price for the current fiscal year, from about Rs779 per unit to about Rs932 per unit to cover a revenue shortfall of about Rs35bn.
Informed sources said that while the government had not issued a policy directive for additional gas connections on political considerations unlike the previous governments, the gas companies were exerting pressure on the regulator through parliamentarians to allow additional connections. The SNGPL alone has demanded permission to raise funds through the prescribed price for 1.2 million additional connections during current fiscal year.
That would require about Rs45bn to be built into the gas tariff. The problem lies with the gas pricing mechanism under which the gas companies get 17-18pc return on assets. New connections (meters) through new pipelines become an additional asset even if they are unable to pump gas to the consumer.
While the country is facing gas shortage, particularly in winter, as indigenous gas production is on a continuous decline, the gas companies have been reluctant to allocate pipeline capacity to private sector to bring in imported gas, resulting in frequent drop in system pressure, gas loadshedding and load management issues.
On the other hand, the government has not been able to deliver on weighted average cost of gas (WACOG). Resultantly, the supply of expensive imported liquefied natural gas (LNG) to residential consumers in winter months has already increased the SNGPL’s circular debt to about Rs130bn and counting.
An SNGPL official conceded that prudent business model required a ban on extension of transmission and distribution system in new towns and villages until domestic gas production matched the requirement of domestic consumers and existing industrial and commercial gas demand or their affordability levels increased. However, he explained that additional assets even without completion qualified for depreciated return. He said the company’s request for WACOG and subsidy payments had not been addressed by the government.
Sources in Ogra said the regulator could not suddenly allow an increase in the number of new connections when the companies failed to meet previous year’s target. Additional connections not only reduce gas pressure to existing consumers but also increase gas price. They said Ogra had earlier allowed 400,000 new connections but the company could not meet the target and gave about 350,000 connections.
Ogra has already asked the government to formulate an appropriate policy to “award new gas distribution network projects through some competitive mechanism, which facilitates the new entrants and promotes competitive market, brings efficiency and accelerates economic activity with the help of private participation in the gas sector” to extend equal opportunity to all gas market players in a fair a transparent manner.
The regulator has also asked the government to provide “special budgetary support or grant for all new system extensions” and even such additions in assets would not qualify for return allowed to the gas companies. The regulator would “continue to allow new connection for combing mains (main pipelines) within the towns, villages and cities already served by the company” for consideration of prudently incurred expenditure.
In February this year, Ogra had warned the SNGPL that additional connections might be proceeded subject to confirmation that already allowed 400,000 connections were installed and commissioned before June 30 and unutilised limit of sanctioned connections would not spill over for connection in next year.
The regulator had also advised that to minimise the operational and commercial risks adversely affecting the SNGPL, it should explore the option of leasing out and outsourcing of gas distribution network and related services in the unaccounted for gas prone areas of its operation. “However, the company has shown slackness in implementing or even initiating any plan or progress in the matter, which is totally undesirable,” Ogra said, adding this reluctance exposed non-serious approach to resolve issues affecting its sustainability and operations as a going concern.
An Ogra spokesman said the regulator was committed to protect the consumer and public interest and the consumers would have to bear the cost in the shape of higher gas bills if revenue requirements were not stringently examined. “We look into all aspects and the capacity of the gas companies to deliver on ground” before allowing additional costs, he said.
Published in Dawn, August 2nd , 2021