IN its annual report for 2011-12, Oil and Gas Regulatory Authority has reiterated its Mission Statement “to safeguard public interest through efficient and effective regulation in the midstream and downstream petroleum sector.”

Looking at the monopolistic situation — such as the transmission and distribution of natural and petroleum gas — the regulator acts as the arbiter between a potentially exploitative supplier enjoying a monopolistic status, and consumers with no feasible alternative sources of supply. So has Ogra safeguarded public interest satisfactorily?

There are two notified prices for the sale of natural gas: the sales price at which gas supplies are billed to consumers, and the prescribed price which represents the utilities’ share as guaranteed revenue requirements.

These comprise three constituents: (a) reimbursement of cost of gas purchases and of (b) transmission and distribution costs including depreciation, and (c) a return ranging between 17 and 17.5 per cent of the cost of fixed assets (net of depreciation) in operation.

This return is expected to be sufficient for meeting financial charges, corporate taxes, a reasonable return to shareholders and retention of profits adding to revenue reserves.

Included in the cost of gas purchases (which is said to be approximately ‘over 80 per cent of prescribed price’) is an element of ‘unaccounted for gas’ (UFG). This is defined in the report as “the total volume of gas purchased by the licensee during a financial year and volume of metered gas supplied to its consumers excluding metered gas used for licensee’s self consumption.”

Natural gas is a volatile substance, and its volume undergoes changes during transmission and distribution that result from variations in ambient temperatures, pressures, changes in altitude, etc. These losses are deemed unavoidable, and hence ‘uncontrollable’. There are other causes of UFG that are, however, not inevitable, and thus ‘controllable’. These result from (a) underground leakages from corroded, rusting pipes (b) theft of gas (c) measurement and billing errors and (d) leakages from meters and above-ground installations.

The report quotes a recent World Bank study which found that UFG in the OECD countries ranges typically between one and two per cent. It also quotes the example of Titas Gas Transmission and Distribution Company Limited, Bangladesh, that had achieved UFG during 2008-09 of 0.8 per cent. From 2003-04 Ogra started setting benchmarks for UFG to  serve as ‘caps’ on their allow-ability in setting prescribed prices.

The benchmark rate fixed by Ogra for 2007-08 was six per cent with a gradual reduction year-wise to 4.5 per cent by 2011-12. While utilities bear losses over the benchmark rates, conversely an incentive designed for utilities to reduce UFG rates to below the benchmark rates allows utilities to retain any such reductions as a ‘bonus’ over and above the revenue requirements actually determined.

However, as the annual report notes the actual performance has been ‘dismal’ despite Ogra having “always allowed substantial amount of expenditure sought by the gas utility companies on UFG control-related activities and security expenses on continuous basis.” Actual UFG during this 5-year period shot up from six per cent to eight per cent in the case of SSGCL, and from eight per cent to over 11 per cent in the case of SNGPL.

Another criterion for the determination of revenue requirements is the categorisation as operating income of various heads of income such as late payment surcharge, sale of condensate, meter manufacturing plant income, etc., to be included in operating revenues.

For all the above years, Ogra determined the revenue requirements of both SSGCL and SNGPL in accordance with the stipulated UFG benchmark and operating revenue criteria. But both utilities went to court challenging the Authority’s notifications and obtained stay orders. As a result Ogra, instead of having the stay orders vacated, revised revenue requirements by determining UFG at seven per cent and treating various heads of income previously considered operating income as non-operating income.

Details of the year-wise excess revenue requirements allowed to each utility that allegedly total over Rs80 billion are not available from the report. But some indication of the magnitude of Ogra’s largesse is evident from SNGPL’s revenue requirements for 2012-13. On June 29, 2012 the Authority managed vacation of interim stay order earlier granted to SNGPL in respect of 2012-13, thereby lightening the additional burden on SNGPL’s consumers for the year by a whopping Rs7.58 billion. Why timely vacation of previous stay orders was not obtained by Ogra remains a mystery.

It has been disclosed that one per cent UFG of the two gas utilities at an average price of gas in FY 2011-12 translated to a revenue loss of Rs3.23 billion per year that is ultimately borne by all consumers proportionately. Both utilities have ambitious plans for reducing UFG. SSGCL seeks RS 30 billion spread over five years for its Natural Gas Efficiency Project (NGEP).

SNGPL has a three -year plan with a budget of Rs5.856 billion that is expected to result in curtailing losses by 16,502 million cubic feet of gas. How successful these are going to be is anybody’s guess.