THE saga surrounding the CNG price cut has once again brought to the limelight an old debate whether or not the judiciary should venture into economic policy making issues.

While the Supreme Court’s intervention into the issue provided an immediate and substantial relief to consumers at least for an interim period, it also exposed the government’s inability to tackle long-term economic issues in an orderly and legal fashion despite serious challenges being faced by the nation.

In background discussions, a key federal minister conceded that the federal government had been caught on the wrong foot by the apex court but purely on legal points. In civilised societies, the apex courts have the right to interpret laws and play a role of legal and constitutional watchdog but at the same time, however, judicial intervention in matters of commodity prices could cause more harm than real benefit as had happened in the case of sugar prices a couple of years ago, he argued.

“Running the government and making policy adjustments is a day- to -day business in the light of fast changing ground realities”, said the minister who declined commenting publicly on the issue until the matter was finally disposed off by the Supreme Court of Pakistan. In policy adjustments, it should be left to the electorate to judge the performance of sitting governments, he said.

Under the existing laws, the Oil and Gas Regulatory Authority (Ogra) is required to determine gas prices for different consumer categories twice a year i.e. with effect from July 1 and January 1. Under this law, the Ogra determined the price of natural gas for sales to CNG stations at Rs618.50 per MMBTU on July 1, 2102 that works out at Rs31.09 per kg for Khyber Pakhtunkhwa, Balochistan and Potohar and Rs28.40 per kg for Sindh and Balochistan.

Through a subsequent government decision, the CNG price was linked to petrol price maintaining a price differential of about 40 per cent. As the government moved to weekly pricing of petroleum products, it kept on changing CNG prices as well to ensure this price differential. This practice, however, could not be given legal cover even though it was adopted as a policy tool to discourage gas consumption in the transport sector.

The government believed that compressed natural gas, initially introduced as a cleaner fuel in 1995 had turned into a major energy challenge as its share in gas consumption increased to about 17 per cent with stagnant gas supplies. To cope with the challenge, the government started scaling up CNG prices to discourage its use in transport sector but failed to catch up with legal requirements with the changing circumstances.

In fact, the government now seemed to have made up its mind to cash in on apex courts’ intervention to discourage CNG business by making it practically difficult for plant owners to continue their business so that natural gas could be diverted to domestic and industrial sectors. This is evident from the fact that Ogra, following the Supreme Court’s interim order determined a net profit of about Rs6.22 per kg and Rs5.68 per kg for two regions. But before the new pricing mechanism could be presented to the apex court, the ministry of petroleum prevailed over Ogra to treat CNG stations at par with petrol pumps by allowing a fixed margin of Rs2.95 per kg.

It may be recalled that CNG prices for private stations was initially determined on the basis of CNG sales by state-owned Hydrocarbon Development Institute of Pakistan (HDIP). The CNG price for the private sector was kept about Rs1 per kg higher than HDIP rates on the premise that a plot for HDIP station was free of cost, its machinery was donated by USAID and it did not have overhead costs like the private sector.

But a subsequent mistake in announcement of gas prices by Shah Mahmood Qureshi, the then petroleum minister in 2009, led to signing of a memorandum of understanding between a committee of federal secretaries and the CNG pump owners.

An examination of the costs build up of CNG prices apparently explains how generously the CNG retailers were rewarded. Based on 2009 MOU, the cost of gas to CNG stations was worked out at Rs35.19 per kg prior to October 25 price as CNG sale price to consumers was built up to Rs92.54 per kg.

This included CNG compression cost of Rs8.99 per kg. On top of that about seven overheads were made part of operating expenses for the calculation of retailers’ margin. This included 65 paisa per kg of cost of maintenance for machinery, 89 paisa per kg as cost of lubricants, 65 paisa per unit for cost of maintenance for civil works, Rs1.30 per kg as depreciation of machinery, rental or commission for oil marketing companies at Rs3.67 per kg, labour costs at Rs3.65 per kg and various government fees at Rs1.05 per kg.

As a result, the total cost of gas was calculated at Rs55.98 per kg. On the basis of this cost of gas, the retailer margin or net profit at 20 per cent was worked out at Rs11.20 per kg. In addition, the government imposed a fixed gas infrastructure development surcharge of Rs13.25 per kg, another 25 per cent general sales tax was calculated at Rs12.11 per kg, taking the end-product at Rs92.54 per kg.

As the government unilaterally suspended the impugned MOU on October 25, the entire operating expenses were disallowed by the Ogra that also renamed compression cost being charged at Rs8.99 per kg as CNG production cost and fixed it at Rs5.75 per kg.

The subsequent correction in cost of sales to CNG stations from Rs700.55 per MMBTU to Rs618.50 per MMBTU (the price approved by Ogra in July this year) reduced the per kg sale price to CNG stations from Rs35.19 per kg to Rs31.69 per kg and the end price was fixed at Rs61.64 per kg, a reduction of over 30 per cent.

The revised formula presented by Ogra to the Supreme Court is yet to be made public. However, a copy available with Dawn suggests that consumer-end CNG price has been proposed to be fixed at Rs64.12 per kg for KPK, Balochistan and Potohar and Rs55.68 per kg for Sindh and Punjab. This includes cost of gas at Rs31.09 and Rs28.40 per kg for two regions respectively, followed by a fixed production cost of Rs5.75 per kg. The retailer margin has been fixed at Rs2.95 per kg for both regions.

On top of that, the GIDC has been protected at Rs13.25 per kg for region-1 and Rs9.18 per kg for region-II as it existed before October 25. The 25 per cent GST has, however, been brought down from Rs12.11 per kg to Rs11.08 per kg for KPK, Balochistan and Potohar and from Rs10.33 per kg to Rs9.40 per kg for Sindh and Balochistan. Meanwhile, Ogra has warned the government that GIDC being charged on CNG was higher than the maximum limit approved by the parliament under the GIDC law which should be corrected.

The entire exercise, however, raises a more serious question that needs to be properly investigated through an independent audit of previous CNG price formula. On what basis, over Rs20 per kg price buildup was allowed in the name of overheads or operating expenses and if Ogra has found these overheads as non-prudent now, who should be held responsible for such windfalls to CNG owners at the cost of consumers.

On top of that, the government needs to review the entire energy pricing policy in a holistic manner to provide gas to different consumer sectors on the basis of acceptable level of political compulsions and maximum economic output of scarce gas resources under a transparent formula.