ISLAMABAD: Amid rising political pressure owing to prevailing price hike, the Prime Minister Office is seeking a drastic cut to revenue requirements of the two gas utilities for current fiscal year to minimise increase in gas rates.

The move is likely to cast negatively on the ongoing talks with the International Monetary Fund (IMF), embarrass Oil and Gas Regulatory Authority (Ogra) that had determined the prescribed gas prices and affect the financial position of the Sui Northern Gas Pipelines Limited and Sui Southern Gas Company Limited.

A senior government official told Dawn that the PM Delivery Unit (PMDU) has opposed repeated requests from the Petroleum Division to increase gas tariff by up to 15 per cent in line with requirements of the IMF programme and Ogra law. Prime Minister himself is seeking a freeze on gas and electricity rates for at least remaining period of the current fiscal year.

A senior official at the Petroleum Division said a set of three measures would together cause a financial loss of Rs18 billion to the gas utilities this year while the Petroleum Division had been advocating an increase in gas tariff to generate Rs35bn in additional revenue in line with tariff determinations by the Ogra.

Special Assistant to the Prime Minister on Petroleum Nadeem Babar did not respond to request for comments when approached on whether the Petroleum Division under his administration supported the PMDU initiative. Finance ministry’s spokesperson was also not available to comment if this would affect talks with the IMF.

To comply with the Prime Minister’s directives, the PMDU has ordered a decrease in the rate of return for the two gas utilities from 17-17.5pc at present to 15pc. A petroleum ministry official said the 15pc rate of return did not even meet the cost of financing the gas utilities currently dependent on commercial banks owing to huge amounts stuck up with the government.

The reduction in rate of return to 15pc would dent the gas utilities by Rs4bn during the current fiscal year.

Secondly, the PMDU has also sought a decrease in the unaccounted for gas (UFG) losses from 6.9pc approved by Ogra to 4pc which would cause a further loss of Rs10bn to the two utility companies. Interestingly, the gas utilities have been seeking much higher UFG in gas tariff but Ogra had set these losses at 6.9pc on the recommendations of independent consultants appointed under the World Bank financed programme as part of energy sector reforms.

Thirdly, the PMDU has also advised change in depreciation of regulated assets of the gas companies from 6.8pc to 5.8pc. This will have another Rs4bn worth of revenue impact on gas companies.

A Petroleum Division official agreed that public appeasement move could have serious long-term implications for the sustainability of the energy sector. “We have now created even more dangerous gas circular debt instead of getting rid of the power sector circular debt”, he said bemoaning that Economic Coordination Committee took up the matter at least for three weeks without a decision.

He said the arrears of two gas utilities had increased to about Rs360bn. These included Rs260bn on account of indigenous gas supplies and another Rs100bn on account of re-gasified liqueified natural gas (RLNG) sold to various sectors including to domestic consumers at cheaper rates.

The official said about Rs20bn subsidy payment from the federal government was still outstanding to the gas utility companies. This is resulting in holding of payments to gas producers and circular debt was resultantly increasing at a very rapid pace.

The situation instead of getting resolved through rationalisation of the gas prices in respect of fuel parity pricing had now been further compounded by the PMDU’s instructions to cut revenue requirement of gas companies. The PMDU has no legal authority to override Ogra law and become the elite gas pricing organisation in the country, an Ogra official said but explained that it was up to the government how it planned to meet finances of the gas companies.

The government had given an undertaking to the IMF to ensure timely update gas tariffs and had committed to “adjust tariffs by end-December 2019 based on Ogra’s mid-year decision on tariffs”.

The IMF mission had left Islamabad on Feb 14 after inconclusive talks because of unfinished agenda on electricity and gas rates and revenue shortfalls.

Published in Dawn, February 27th, 2020