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On September 23, 2020, the Petroleum & Natural Gas Regulatory Board (PNGRB) has released a draft regulation for determination of transportation rate for City Gas Distribution (CGD) companies, which came into being before the regulator PNGRB was set up. Earlier, in Jun 2019, the PNGRB had floated a concept paper mentioning two options for determining transportation rates 1) Cost of service method considering a post-tax project return of 14% on the capital employed of each geographical area (GA) or 2) Online bidding process with annual escalation. In this draft regulation, the PNGRB has selected the cost of service method, but based on a 12% post tax RoCE (16% pre-tax), which is similar to the rate at which transmission tariff is decided for the transmission pipelines of GAIL/GSPL.
However, as highlighted by ICRA post the June 2019 concept paper as well, this regulation is likely to face legal challenges with respect to the powers of the Board to determine such a tariff in light of a past Supreme Court judgement. Moreover, for open access and third party competition to emerge, separate regulations on declaring a particular GA as being exempted from marketing exclusivity and common carrier principles are imperative, which are being challenged in Delhi High Court by IGL.
According to Ankit Patel, Vice President and Co-Head, Corporate Ratings, ICRA, “Based on the fine print of the regulation, because the total volume in the service in the GA would be the divisor for determination of tariff, GAs with high volume concentration would have significantly different tariff compared to other GAs with low volume.
Further, in terms of the real threat of open access assuming that the regulation is actually implemented, still there will be significant entry barrier for new players since the transportation tariff calculated as the formula proposed of [12%/(1-tax rate) * (Avg Net block + working capital)+ Depreciation + Opex)]/volume] is ranging between 50-70% of the reported Gross margins/scm for various players. Thus, any third party marketed wanting to market gas in a GA would be required to have a strong advantage on sourcing over the existing authorized entity to be profitable. Further, there is lack of clarity on the determination of surplus capacity of network operators (~access code regulations) for making 25% available for open access, which PNGRB is expected to notify in the near term.”
Even if the proposed regulations were to be finally implemented, ICRA is of the opinion that credit profiles of legacy CGD operators would not be impacted by this regulation. According to K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, “Overall, ICRA believes that the step is indicative of the fact that the competitive landscape in the CGD business, where existing players have been enjoying a monopolistic position, could intensify over the medium to long term. However, legal and operational challenges, such as determination of surplus capacity and access code will require resolution for actual materialisation of third party competition in the CGD business.”