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Ahmedabad: The recently proposed mechanism for tariff determination of city gas distribution (CGD) networks by the Petroleum and Natural Gas Regulatory Board (PNGRB) has met with a stiff opposition from market experts and CGD companies like Gujarat Gas Ltd (GGL), Adani Gas Ltd (AGL), Indraprasth Gas Ltd (IGL), Mahanagar Gas Ltd (MGL) and GAIL (India) Ltd among others.
They have pressed the panic button saying that the new move can hit investments badly in the country’s sunrise sector.Gujarat being the most developed market is likely to be hit the hardest in this case. The earnings of CGD companies can be impacted from 10-25%, according to the industry experts. The CGD stocks of CGD companies have performed well even in the last few months even amid Covid-19 crisis, but the share prices of companies like Gujarat, IGL and MGL have taken a hit in the range of 10-30% in the last two months.
While the draft proposal PNGRB (Determination of transportation rate for CGD and CNG) Regulations, 2020 was made public by the natural gas regulator in the last week of September, the market seemed to have already factored in the negative impact of the decision a month ahead in anticipation, according to stock market experts.
Experts and industry watchers feel it’s too early to bring in competition as India has only 6% of its geographical area covered under the CGD network. Of this, Gujarat contributes almost 80% of the infrastructure network.
Morgan Stanley raised concerns about bringing the open-access regulation too early and that a similar regulation in case of transmission pipeline had dried up investments in the sector.The New York-headquartered financial services firm along with other CGD companies raised their issues at the open house held by the PNGRB on October 16 on the draft tariff regulation pertaining to CGD open access.
“Any regulation imposed that can impact the cash flows and restrict further investment should always be avoided. Competition is good in any sector but the timing does not seem right especially when CGD entities are expected to invest about Rs 80,000 crore over the next few years,” said Harsh Vardhan Dole, IIFL Securities.
Some CGD incumbents have highlighted in their submissions at the open house that certain matters related to the regulation are sub-judice.The government, through the PNGRB, has licensed out more than 136 new geographies during the past few years to cover half of the country’s population in an attempt, among others, to alleviate India’s astronomical pollution.
It is imperative that CGD companies are offered a reasonable return, failing which nearly Rs 1 trillion of upcoming CGD infra investments would not materialize, according to a recent report by Edelweiss titled ‘Moving towards CGD deregulation’.Adani Gas Ltd has sought 14% return on capital investment instead of the 12% proposed in the draft policy.
“In the CGD business, there are no long term contracts. There is extra effort required to take care of receivables. There is additional long term commitment made for connecting maximum domestic PNG customers and establishing network in all charge areas. Customer contracts may not have Minimum Guaranteed Offtake (MGO) provision and there is always the dynamics of competition from the emerging fuels as well as alternative fuels,” the company gave this rationale in its submission to the PNGRB. Mahanagar Gas Ltd has, in its submission, questioned the powers of the PNGRB to determine such a tariff in view of a past Supreme Court judgment.