THE federal cabinet has surprisingly granted a major relief to gas companies by allowing them to bill consumers with gas losses on account of pilferage and security situation.
The sudden decision has come amid delays by Oil and Gas Authority (Ogra) in determining final revenue requirements for gas utilities and pending adjudication of cases related to unaccounted for gas (UGF) losses by two high courts and the Supreme Court of Pakistan.
What made it more intriguing was the fact that the decision was not publicly announced as was the case with other approvals of the federal cabinet. The timing was also crucial as the gas companies had delayed announcing their financial results and would apparently preempt the oil and gas regulator to cut back on inefficiencies of gas utilities.
In fact, the Ogra would now be required to be overgenerous in allowing better cash stream to gas companies at the cost of honest gas consumers, promising better returns to shareholders. The shares of the two utilities — SNGPL and SSGCL — have since gone up by up to Rs4 per share or almost 20 per cent. The consumers would have to take an additional brunt of about Rs9 billion during the current fiscal year.
Even more mind boggling is the fact that the two gas utilities are currently in the process of implementing over Rs52 billion worth of World
Bank funded programme for loss reduction. The World Bank sees no reason why Pakistan should not be able to reach international standard for UFG at 1-2 per cent. The current UFG losses in the SNGPL and SSGCL ranges between 8.5 to 10 per cent or about 300 MMCFD.
While the two gas utilities had obtained stay orders from Lahore and Sindh High Court against Ogra’s determinations for lower system losses and the Supreme Court of Pakistan was ceased with a case for recovery of over Rs83 billion from some members including former chairman of the Ogra for allowing higher UFG benchmarks in the past, the companies were able to convince the federal cabinet to bypass legal obstacles.
The cabinet decision would allow the two utilities to improve their return on assets that had dropped from 17.5 per cent reportedly to just three per cent owing to their inability to control gas theft and transmission and distribution losses. But the more serious question arises why to penalise the consumers for government’s policy for more village gasification and its failure to control law and order problem.
The gas utilities should be asked to improve their system and punish gas thieves despite a strong legal protection to move against theft. It amounts to an official protection to inefficiencies and mismanagement.
The petroleum ministry officially claims that both SNGPL and SSGCL are purchasing gas from exploration and production companies and selling to various categories of consumers on a cost plus return on asset formula after including transmission and distribution expenses and guaranteed profit margin of 17-17.5 per cent.
Of the total gas production of about four billion cubic feet per day, the two utilities are supplying about 2.9 BCFD to 6.3 million consumers through network of over 140,000 kilometers.
The ministry claims that due to the nature of distribution network, a certain percentage of gas was bound to be lost during the operations because of several factors, some of which were beyond the control of gas companies. The Ogra has fixed a benchmark for the companies, according to which, the cost of UFG beyond a fixed percentage is borne by the companies, adversely affecting their profitability. It says the efforts towards detection of pilferage from non-consumers, gas pilferage in law and order affected areas and limitation of inherent issues in domestic gas meters have not delivered desired results.
Therefore, the federal cabinet has decided to issue directives to Ogra under Section-21 of the Ogra Ordinance to treat volume pilfered by non-consumers but detected and determined by the companies in accordance with the Ogra procedure, the volume against minimum billing amount charged to domestic consumers and volume consumed in law and order affected areas as ‘deemed gas sales’. The total volume of SNGPL and SSGCL has thus been worked at 22,090 MMCF (million cubic feet) and 7,332 MMCF respectively for the current year. The financial value of this gas works out to be Rs6.366 billion for SNGPL and Rs2.215 billion for SSGCL.
The ministry also concedes that gas pilferage by non-consumers was increasing while expanding network because of government’s socio-political agenda was also increasing system losses. The theft cases identified by gas companies hindered recovery of lost money owing to legal complications. The companies now expect some relief owing to recent changes in Pakistan Penal code that allows initiation of criminal proceedings only even though recovery against gas stolen remains a major challenge.
The Ogra Ordinance makes it obligatory for the Ogra to recover the value of pilfered gas from the culprits; however, it has not happened so far. Both companies have categorically stated that the above mentioned volumes have been determined strictly as per Ogra’s relevant procedures. Besides, the sale price of each category of retail consumers, the Ogra also notifies minimum billing charges in consumer price notifications. These minimum charges are calculated on the basis of presumed consumption of 40 cubic meters per month and this practice was in vogue even before Ogra was established, the ministry argues.
Among the 6.3 million consumers being supply gas by utilities, around 35-40 per cent consumers are billed on minimum basis in summer and around 25-30 per cent in winter months by SNGPL. And around 31 per cent consumers are billed in summer on minimum basis and around 21 per cent in winter months in SSGCL system. The unprecedented load management in recent years has taken its toll on the measurement capabilities of gas meters. Thus 40 cubic meters per month gas would now be treated as ‘deemed sale volume’. The ministry says this will not have any bearing on the consumers’ monthly gas bills as they are already paying for the minimum consumption volume of 40 cubic metres per month.
The ministry claims that the gas utilities were also confronted with law and order situation in certain areas which practically made it impossible to carry out their normal operations. Yet the utilities have to continue gas supply to those areas in view of socio-political considerations.
The meter reading in such areas is not possible, rather in most of the cases the consumers have removed their meters. Such losses too have been allowed for the purpose of UFG calculations, thereby parking these volumes in the sales revenue of common consumers.
This is despite the fact that the Planning Commission estimates that the two gas utilities were causing a cumulative annual loss of about Rs350 billion to the economy as higher gas losses result in utilisation of expensive furnace oil.