ISLAMABAD: The government has decided in principle to increase gas prices by 5-7 per cent, involving additional revenue of Rs18 billion to cover losses of the two gas utilities — Sui Southern Gas Company Ltd (SSGCL) and Sui Northern Gas Pipeline Ltd (SNGPL) — with retrospective effect from 2012-13.

The forthcoming meeting of the Economic Coordination Committee (ECC) of the Cabinet is expected to issue formal instructions to the Oil and Gas Regulatory Authority (Ogra) to make past adjustments in system losses (commonly called unaccounted for gas-UFG) since 2012-13.

In a summary, the Petroleum Division warned that if the two companies were not given Rs18bn through gas tariff, they would turn negative and the government would have to inject funds from the budget to keep them floating.

The crux of the proposal is to undo the past performance standards set by the regulator for the gas companies over a period of ten years and restart the practice afresh. In the meanwhile, SNGPL be given Rs6.535bn through ‘retrospective application of UFG study’ and SSGCL Rs11.257bn in the same manner.

“This division proposes that Ogra may finalise the provisional benchmarks set from 2012-13 to 2016-17 in line with recommendations of the UFG study ie the benchmark at 7.6pc (fixed rate of 5pc UFG plus 2.6pc for local conditions) so as to ensure that gas companies continue to remain financially viable and sustainable”.

The ministry said Ogra had been advocating the finalisation of provisional UFG benchmarks after an independent study was carried out for the purpose. During the previous decisions of the revenue requirements, the “regulator had categorically conceded that UFG benchmark determinations were provisional and subject to review once a UFG study was finalised by it,” Petroleum Secretary Sikandar Sultan Raja claimed.

He said the ECC in a decision on Nov 20, 2014 had instructed the Ogra to provisionally allow three major volumes as “deemed sales” for the purpose of revenue requirement of gas companies that included gas pilfered by non-consumers but detected and determined by gas companies, gas lost in law and order affected areas and impact of change in bulk-to-retail ratio.

Mr Raja noted that these allowances were linked to the condition that the UFG study would be completed as soon as possible. “Subsequently, Ogra allowed provisional treatment of certain volumes pilfered by non-consumers and loss in law and order affected areas.

The said study was concluded in August 2017, saying the regulator should issue directives to close the provisional revenue requirements as evaluating performance of gas companies for past years may not be practicable. The study conducted by KPMG Taseer & Hadi, in consultation with stakeholders, proposed for the future that a fixed benchmark of 5pc UFG in addition to 2.6pc linked to key performance indicators (KPIs) be allowed.

The gas companies asked Ogra to decide the provisional UFG rates for previous years too but the regulator took the position that rates for past years cannot be made based on current year KMI indicators. Ogra stated in its final revenue requirement that for 2013-13 to 2016-17 the volumes provisionally allowed as per policy decision of the ECC shall be reconciled with the result of UFG study and any variation shall be adjusted accordingly, and that “it will not be practicable to assess the performance of gas companies on KMIs with retrospective effect.”

After taking into account the fact that UFG allowance over and above the 4.5pc benchmark on local challenging conditions, Ogra concluded the revenue requirements on the same basis as was done provisionally.

Such a “treatment is going to cause adverse financial conditions for SSGCL as only Rs2.4bn equity would be left as of Jun 30, 2016 cannot provide sustainability to account for leftover unabsorbed loss of Rs18bn occurred due to the decision of Sindh High Court”.

“If the previous benefit was not allowed to SSGC, then equity would be converted into a huge negative and jeopardise the gas supply operation to millions of customers,” it added.

The ministry claimed Ogra, under former Chairman Tauqir Sadiq, had changed UFG back to 7pc instead of 5pc for 2009-10 but reverted to 4.625pc and 4.5pc for the next two fiscal years that led to a political scandal and the court cases. The Lahore and Sindh High Courts initially stayed the reduction in UFG to 4.6pc and 4.5pc and allowed 7pc as requested by the gas companies but finally upheld the regulator’s revised decision.

It said the companies had challenged the decision of the two high courts in the Supreme Court but in the meanwhile the duration of litigation raised significantly the financial liability of the SSGC to the extent of Rs16.2bn.

Published in Dawn, March 13th, 2018