Creative gas tariffs

February 17,2019

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High gas bills have created a frenzy in a section of consumers. It appears that there are two parts of the problem; one of erroneous billing and the other the new gas tariff.

he issue is more serious in SNGPL areas where there is an increase in consumption due to the winter. In this space, we will restrict ourselves to the gas tariff issue only. We will also examine the gas tariff situation in other countries of the region and see what policy lessons we can draw from their experience.

The residential sector consumes some 34 percent of gas supplied by the two gas companies, SSGC and SNGPL. In Pakistan, Piped Natural Gas (PNG) is being supplied since 1950s and a network spread over more than 100,000 kms has been laid. There are 8.5 million domestic consumers as against around 10,000 industrial consumers which reportedly are showing a negative trend, reflecting our de-industrialisation which has contributed to our increasing current account deficit. Only one industrial connection was given by SNGPL in the year 2016-17 and 30 by the SSGC. Gas supply to residential consumers has contributed to better living conditions in homes through a clean and convenient and affordable cooking fuel. The jury is, however, still out as to where lies the majority of gas theft, the residential or industrial or CNG sector – or all.

There are a number of sources of pressure on gas companies and their tariff. First, high UFG losses which are increasing; second, the sudden devaluation of the rupee; and third, the low gas prices afforded to the fertilizer and export sector.

If we compare the current tariff (Sept 2018) with the last one of Dec 2016, we find that a tariff increase of 15-30 percent has been made in the slabs of small consumers and of 143 percent in the large consumer slab of 500 M3 and above consumption of gas per month. It is this latter group which is protesting, whose monthly bill of Rs10, 000 per month has inflated to Rs25000 or even more. The problem is that in this category, some middle-class families may have also come, who live in a joint family system. It should be noted, however, that the increase is over a period of two years.

To the poor lifeline consumer, gas is being given at Rs121 per MMBtu. This is virtually free since Rs121 is the distribution cost alone. This used to be done in Iran, Saudi Arabia and Venezuela for petrol and HSD prices, but no more. It feels good to provide free things to the poor, but the question is: is it sustainable? Price has to have some relevance with cost. As a consequence, already there are proposals to stop expansion of the gas network and new connections in the residential sector. No more poor consumers will be added as a consequence. One has to consider the welfare consequences of a larger number of beneficiaries. Already, gas is supplied only to 20 percent of the population.

Some gradual revision of the slab price of poor gas consumers is in order. This is not to suggest that if there is an advantage to the poor, it should be taken away. But there should be some adjustment reflecting the exchange rate difference at a minimum. It would be politically very difficult as almost seven million families are involved and this is already quite an inflationary year due to devaluation.

Let us compare the gas tariff in Pakistan with other countries in the region. In Bangladesh, it is Taka 750 per month for one gas burner home and Taka 800 for two burners home. In this category, there are no meters there. This means an average of Pakistan Rs1300 per month (at PkRs138 per USD and 83.81 Taka). In Pakistan, the corresponding family pays Rs250 per month.

In India, there is a flat rate in Gujarat of Pak Rs1460 per MMBtu, which is equal to the highest domestic tariff in Pakistan. However, in India there is an LPG subsidy scheme for the poor; a subsidy of IRs200 per cylinder per month is given. Various gas tariffs in Pakistan are Pak Rs121, 127, 264, 275, 780 and 1460 per MMBtu. For comparison sake, LNG price these days is Pak Rs1656 per MMBtu, while local gas is produced at half the LNG rate or less.

It appears that it is the large consumers in the category of 500 M3 and above who have been affected by high bills. There are only 120-150,000 consumer families (or slightly more). An abnormal and abrupt increase in tariff has been levied, from Rs600 to Rs1460 per MMBtu in one go. Interim reduction of bringing this tariff to Rs1000 per MMBtu may not be that disturbing, as hardly 120-150000 consumers may be involved in this category. It may cost a reduction in gas revenue of Rs1.5 billion per year. It would reduce the bill of a typical large consumer (500 M3) by Rs10, 000 per month – cooling down the uproar.

There is another problem with the current system, in which the privileged may benefit from the subsidy and the lower economic classes may not. The assumption is that the poor and lower middle classes consume lesser gas. This may not always be true. The subsidy should be directed towards those who need it. It is proposed that one single rate at cost-plus rates be introduced for the affluent class. A plot size of 500 square meters and above in a posh locality can be an index. While this is slightly complicated, it can be done. Property taxes are based on a differential system, which can be reviewed for assistance. A large number of free riders of the system can be eliminated and quite some revenue can be generated. The IMF and World Bank would be happy; and we need their happiness at the moment.

Finally, many slabs have been introduced in the residential categories in the new gas tariff. They may be reviewed and a reversion to the earlier slabs may reduce some of the problems that have arisen.

There are difficult issues of resource cost vs affordability by a largely poor populace. Creativity and innovation is required to deal with it. Also the reduction of theft and technical losses should receive attention.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.



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