Ogra determined to roll out market-based tariff regime

KARACHI: Oil and Gas Regulatory Authority (Ogra) is determined to introduce market-based tariff regime for gas utilities, its chief said on Wednesday, emphasising that the reforms would improve the sector’s efficiency.

Chairperson Uzma Adil Khan at Ogra said the new tariff regime was formulated on the demand of stakeholders, especially Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL) and the authority would deliver a regime in line with the international standards.

“We will never opt for a tailor-made regime favouring one or a few,” Khan said, speaking at a consultative session to deliberate on the proposed tariff regime. “The authority believes that fixed rate of return regime would never bring efficiency in the sector.”

Ogra has initiated consultations with the stakeholders to rationalise tariff regime for gas transmission and distribution companies. The authority will hold meeting with SSGC and SNGPL on December 13 to iron out the differences.

Ogra’s chief said the authority has a broader picture in sight, looking after the interests of all the stakeholders, consumers as well as the entire nation. “Based on the input received through these consultative sessions, we will finalise our proposals and submit them to the government for approval,” she said. “If you are unhappy with the proposals, get it shot down at that level.”

Khan added that all the comments would be considered and responded to in the final report. The consultative sessions are being held to seek the input of stakeholders and after completion of the process “there could be a completely different story altogether.”

Earlier, a SSGC’s official said the utility companies were expecting a relief as the government assured them that the new regime would not affect the gas companies. “We are not purely commercial entity and we have to implement government’s social agenda… the regime based on weighted average capital cost is not viable for us,” the official added.

The SSGC’s official said the proposed tariff regime would adversely affect the company’s operations as this would slash its revenue by one billion rupees a year. The official further said it would be better “if we limit our operations to transmission and LPG (liquefied petroleum gas) cylinder business.”

Industry officials and equity investors are also wary of the new tariff regime. They unanimously said it would bite revenue of gas utilities.

The countrywide consultative sessions on Third Party Access Rules 2012, Network Code and Tariff Regime for the gas sector reforms are underway in collaboration with the World Bank. The existing tariff regime operates on the cost transfer pricing mechanism and provides a fixed rate of return on operating fixed assets at 17.5 percent for SNGPL and 17 percent for SSGCL. Ogra proposed that licenced utilities would receive market-based rate of return weighted average cost of capital model on the value of their net regulated fixed assets in operation.

Our correspondent adds

Analysts said SNGPL, the country’s largest integrated gas company, is feared to lose half of its profitability due to the new tariff regime.

“As per the management, SNGPL (existing bundled company) will be worse off by Rs4 billion a year and its profitability could be down by 49 percent to Rs6.95/share as per the proposed scheme,” Umair Naseer, an analyst at Topline Securities said.

“The reduction in rate of return from 17.5 percent to 11 percent will have a negative impact of Rs5.3 billion as per SNGPL whereas disallowance of already allowed debt service charges will have an impact of Rs2 billion,” Naseer said. “Furthermore, other expenses can cost additional Rs700 million. On the other hand, return on deferred credit will stand at Rs572 million, which is lower than earlier estimates.”

Topline analyst said the negative impact suggested by SNGPL is higher due to disallowance of debt service charges and lower absolute return on deferred credit. “This has raised uncertainty regarding the final tariff and its likely impact on the gas companies,” he added.