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Heavy cost of incompetence

July 15, 2012

WHILE vacating a stay order against gas price determination by the Oil and Gas Regulatory Authority about two weeks ago, Justice Ayesha Malik of Lahore High Court re-articulated an old adage ‘justice delayed is justice denied”.

She observed that gas companies cannot be run on stay orders for years by undermining the regulator and compromising their own efficiency.

The fact, however, remains that the two utilities — SNGPL and SSGCL — have been denying their consumers the benefit of fair gas pricing for three years on the basis of stay orders granted by different high courts. Justice Malik decided to club together three different cases and conduct detailed hearing on gas SNGPL pricing during three financial years — 2010-11, 2011-12 and 2012-13 — on August 28.

This year the OGRA had determined reduction of Rs47.5 per MMBTU (million British Thermal Unit) by reducing the line loss limit from seven per cent to 4.5 per cent for the two utilities. Both the companies were able to secure stay orders against the Ogra determination separately in the Lahore High Court and Sindh High Court. The previous stay orders for the last two financial years are also to be decided yet.

On account of the failure to achieve loss reduction targets, the consumers are estimated to have lost Rs38 billion in two years and Rs70 billion in three years. On the other hand, the Supreme Court of Pakistan has directed the National Accountability Bureau to recover these amounts from those involved in denying the tariff benefit to consumers.

While an Ogra member was in NAB custody for more than two months, the politically appointed former Ogra chairman is currently absconding.

But more than the loss to consumers in the form of tariff, the two gas utilities, according to a Planning Commission estimate, are causing a cumulative annual loss of about Rs350 billion to economy as higher gas system losses result in utilisation of expensive alternate fuel that, in most of the cases, is furnace oil. These system losses are almost five times larger than the combined Wapda’s distribution losses as gas shortage now extrapolates into civil unrest, affecting businesses, transport and household.

This colossal loss has so far remained off the public eye because gas shortage affects the public life only for three months in winter and gas companies are paid at least 17 per cent guaranteed return on assets even if they continue to make losses. If these losses are controlled, about 700 million cubic feet of natural gas per day could be added to the overall supply, reducing the current shortfall by almost half.

The transmission and distribution losses — described in the official jargon as unaccounted for gas — of the two utilities that go up to 13 per cent were resulting in wasteful consumption of 350 million cubic feet per day (MMCFD). Given the fact that furnace oil is used as replacement fuel for power generation and industrial use, every million British Thermal Unit costs the economy an additional burden of $20 per MMBTU.

As such, the daily additional cost on import of furnace oil comes to about $7000, translating into annual additional burden of $2.55 billion.

Likewise, the domestic gyzers are described as gas guzzlers whose efficiency could be increased by 20 per cent by putting in a small conical baffle costing Rs500 per piece in every gyzer while the gas efficiency could be further improved up to 45 per cent by installing instant gyzers. These two measures alone could provide another saving of 250 mmcfd, reducing import bill by $450 million in three winter months.

In comparison, transmission and distribution losses of Wapda’s power companies currently stand at about 22 per cent which translates into an annual loss of about Rs60 billion. The power losses at about 10-12 per cent were globally acceptable compared with 2-3 per cent losses in the gas distribution system.

Ogra in consultation with the gas companies in 2004-05 had set a target of reducing system losses to 4.5 per cent by financial year 2010-11 when actual losses stood at about seven per cent but have since been increasing.

Ogra had successfully brought down the gas distribution losses to 4.5 per cent through mandatory one per cent loss reduction every year until 2008 but the previous Ogra chairman appointed on political basis and sacked following the orders of the Islamabad High Court and then the Supreme Court of Pakistan raised these benchmarks to about 11 per cent.

These additional gas losses were also resulting in tariff increase for all consumers because of overstretched distribution system in the wake of politically motivated village gasification as the 70 per cent cost of the fresh gas connections in villages was borne by the gas utilities.

This additional cost estimated at over Rs78 billion in last four years has not only created an additional gas demand of about 500 mmcfd but also translated into higher gas tariff as the two utilities are guaranteed 17 per cent and 17.5 per cent return on assets.

From the companies’ point of view, one per cent system loss translates into direct loss of 45 million cubic feet per day (MMCFD) or about Rs5 billion per annum. But economic loss in value chain is even higher than Rs300 billion per annum if calculated on the basis of increased production cost.

It is in this background that the World Bank has signed a $200 million loan agreement with the SSGC for loss reduction and would be starting formal negotiations with the SNGPL for a similar loan in a couple of weeks.

After studying the gas system for two years, the World Bank said it “sees no reason why Pakistan …. should not be able to reach international standard for UFG at 1-2 per cent”. It reported that since the Bank started technical discussions with the SSGC in February 2010, the magnitude of UFG problem has risen from 33 billion cubic feet per year to an estimated 40 BCF for fiscal year 2011-12. “Increase in gas prices have exacerbated the cost of UFG to approximately $160 million (Rs15 billion) for that year”.

The disturbing aspect of the issue is that while SSGC had been able to improve its UFG data over the last two years, it was not yet clear what portion of losses could be attributed to leakages, accounting and other errors.

Key to success would be to attack the UFG problem by segmenting the distribution grid, bringing UFG in renovated segments down to below one per cent and keep it at that level. This would involve replacement and repair of several hundred kilometers of distribution pipes, remaking of several hundred thousand connections between underground mains and customer premises besides replacement of existing meters along with design change of meters that do not have open-able outer body.