ISLAMABAD: Amid opposition from consultants, experts and key stakeholders, the Cabinet Committee on Energy (CCoE) will take up on Tuesday a proposal for unbundling of two gas utilities into five smaller companies — one transmission and four provincial distribution firms — on the pattern of ex-Wapda’s 13 generation, transmission and distribution companies.

In a summary to the CCoE, the Ministry of Energy’s Petroleum Division (MEPD) has sought approval of five major initiatives as part of its reforms agenda committed with the lending agencies under the IMF programme.

Independent consultant KPMG, a financial sustainability group and the Oil and Gas Regulatory Authority (Ogra) are against the proposed move for financial and technical viability parameters or broader consultation, including with the provinces.

First, the MEPD wants immediate appointment of a transaction adviser through a competitive process to work out unbundling of Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) into five companies.

Second, it wants the two gas utilities to equally share the cost of transaction adviser and the regulator to allow this cost recovery from consumer end-tariff as part of revenue requirement of the gas utilities. Or else, the government should explore financing from lending agencies.

Interestingly, both companies and their shareholders are not only opposed to their unbundling and thus dissolution but also not in favour of financing their own demise for obvious reasons.

Third, the MEPD has sought permission to create a National Gas Transmission Company (NGTC) to take over transmission system of both gas utilities to operate as a common carrier for existing and newly formed gas distribution companies like National Transmission & Desptach Company (NTDC) in the power sector.

It expects third party access by private firms to Transco or NGTC gas network and will not itself engage in sale and purchase of gas but only transport gas and charge wheeling costs to all suppliers and purchasers of local gas or imported LNG (liquefi ed natural gas). Some influential players with connections at right places are also interested in NGTC shareholding.

Fourth, the distribution network of both would then be divided into multiple gas distribution companies with unifi ed principles by both SNGPL and SSGCL within the area of their jurisdictions for operation of smaller business units or distribution companies.

“The companies would be established on a technical and economical basis, including population, network density, gasdemand, workload and management/supervision and efficiency for the sustainability of newly formed gas distribution companies,”the MEPD recommended.

Fifth, the MEPD has sought an approvalin principle for “a mechanism of weighted average sale price equalisation or any other suitable mechanism (that) would be developed for gas sale pricing and the same would be implemented simultaneously”.

The regulator has opposed the summary and advised that “mechanism/approach of unbundling should first be decided in consultation with all the stakeholders/provincial governments, including approval of the Council of Common Interests (CCI), before the appointment of any consultant since terms of reference (ToR) of such consultant shall depend on the mutually agreed mechanism”.

It said the experience showed no fresh party other than the existing one made any progress despite having licences due to port and pipeline constraints.

Ogra also opposed the bifurcation of two existing companies into five or multiple entities before the completion of advisory task by the transaction adviser, specifically the feasibility of proposed reforms in the first place. It also advised that ToR of transaction adviser should stem from concerted consultations among stakeholders, including the federal and provincial governments, duly approved by the CCI.

The regulator also did not support allowing the additional cost of transaction adviser in revenue requirements of gas utilities, saying it was already part of their return on assets.

The ministries of finance and industriesand production said they supported the overall gas sector reforms, but the CCoE should not jump to conclusive proposals made by the MEPD and advised that while taking a decision on such an important matter, “lessons learned from unbundling of Wapda (Water and Power Development Authority) should be reviewed and considered for an informed decision”.

The Planning Division reminded that the Economic Coordination Committee of the cabinet had advised in 2013 that the provinces should be consulted and the matter be placed before the CCI and wanted to know the status. Interestingly, after more than seven years, the MEPD reported that “the matter would be placed before CCI appropriately”.

The Financial Sustainability Group of experts from various public and private sectors, while reviewing the World Bank roadmap for gas sector reforms, had concluded a few months ago that gas distribution companies (Discos) would become invariably unsustainable and loss-making entities and only NTGC (Transco) would be profi table which would then need to subsidise Discos.

In that case, the very objective of reforms would become counter-productive as had happened in the power sector and the power division or Pakistan Electric Power Company(Pepco) continued to control generation companies (Gencos) and Discos and the federal government continued to provide subsidies while circular debt kept increasing.

Independent consultants — KPMG Taseer Hadi & Co — had found in 2017 that the proposed unbundling of two gas utilities would negatively affect equity value, make the gas distribution companies unviable and increase financial pressure on the government and consumers. It highlighted risks that “unbundling of the gas distribution business could create companies which are not viable”.

It noted that the proposed transmission company would take away large and bulk consumers like those in the industrial sector considered ‘cream’ for generating most revenue and leave behind mostly subsidised small and residential consumers to the four provincial distribution companies to serve.

The provinces would either have to pay higher rates for local gas in the absence of cross-subsidy from industrial and bulk consumers or the government would need to provide higher subsidies.

Published in Dawn, November 9th, 2020