ISLAMABAD, Oct 2: The federal government has decided in principle to replace the existing formula to compute natural gas tariff with the market-based Karachi Inter Bank Offer Rate (Kibor), a government official told Dawn on Monday.

While the current pricing formula is based on the cost of service, under the new mechanism, the gas utilities would be given a variable return on their investments on the basis of six-monthly Kibor plus eight per cent, instead of a guaranteed 17 to 17.5 per cent return on assets. It will increase prescribed gas prices by about 1.5 per cent in case Kibor rates go up by one per cent, from 10 per cent to 11.

The official said the changes were envisaged on the recommendations of the Oil and Gas Regulatory Authority (Ogra) and were expected to be approved by the federal cabinet soon for implementation at the time of next gas tariff review in December 2006.

He said the existing tariff methodology was being changed on the basis of a uniform system of accounts for gas utilities under which the Ogra wanted to allocate separate costs to transmission and distribution activities in the overall tariff setting.

Simultaneously, the depreciation cost of these transmission and distribution assets would be calculated at the rate of four and five per cent respectively.

The official said the government and the Ogra had been under criticism at almost all forums, particularly at public hearings, on the grounds that fixed return on assets under the World Bank covenants was not resulting in any incentive to the gas utilities to control their losses and non-development expenditures. It’s because they were getting a guaranteed rate of profit through gas tariff.

According to sources, currently the tariffs are being computed in an all-inclusive manner. With both Sui Northern and Sui Southern utilities buying and reselling gas exclusivity in their regional markets, prices can be segregated at most at the injection point in the transportation system. This means that an implicit transmission-distribution tariff could be calculated by subtracting the average price from the prescribed tariff to the consumer.

The sources said based on the same methodology, the computation of a transportation tariff was used by Ogra recently in the case of Zamzama gas field where SNGPL was shipping gas through the SSGCL transportation network under Zamzama Gas Transportation Agreement (GTA).

This precisely means that every consumer would have to pay, at a later stage, slightly different rate for natural gas on the basis of its distance from the main distribution point.

The new changes, the government and Ogra believe, are meant to reflect location costs or distance from the gas fields in the retail tariff. They believe that consumer pay the same price without regard to their consumption location on the basis of volumetric charge. The change would remove cross subsidies as currently these tariffs reflect political and social considerations, for instance, in case of first two slabs of residential consumers and fertiliser sector, thereby resulting in distorted rate structure.

Since tariffs do not reflect costs appropriately, services do not reflect either the quality or the responsibility of consumers, in the costs of providing those services. Thus no distinction is made between firm and interruptible services, says an official document. One paradox, it adds, is that some consumers such as power plants pay a higher price for the interruptible service they receive than other consumers which are assured the gas supply on a firm basis.