Prospects Improve

Policy and regulatory update on the CGD segment

The Indian city gas distribution (CGD) industry has witnessed several favourable developments over the past two to three years. Uniform allocation of the available domestic gas to CGD players across the country was granted in November 2013. The move instantly benefited some of the CGD players that had no allocation of domestic gas at that time. Later, in February 2014, the government changed the priority of gas allocation and accorded highest priority to the compressed natural gas (CNG) and piped natural gas (PNG) domestic segments of the CGD sector ahead of core sectors like power and fertilisers. This meant that CGD players would be allocated 100 per cent domestic gas for their sales volumes in these two segments.

Role of PNGRB

The government established the Petroleum and Natural Gas Regulatory Board (PNGRB) under the Petroleum and Natural Gas Regulatory Board Act, 2006. The PNGRB is the statutory authority to grant licences for the development of the CGD network. Various state governments submit re-

quests from time to time for the development of the CGD network. Based on these requests, the PNGRB considers the entire district as a geographical area (GA) for CGD development so that PNG/CNG services can be made available in the cities and other parts of the district. The authority grants licences through a competitive bidding process. The GAs are included in the bidding

rounds in a phased manner, depending on the natural gas pipeline connectivity/natural gas availability and feasibility for the grant of authorisation. The PNGRB has envisaged a phased roll-out for the development of CGD networks in several GAs.

Bidding route

So far, the PNGRB has carried out six rounds of bidding for the award of GAs for the development of CGD networks in different parts of the country. In the sixth round, bids were invited for licences to provide retail CNG for automobiles in 34 cities. Of these, 20 cities received bids from 18 companies including Indian Oil-Adani Gas, GAIL Gas Limited, Gujarat Gas, and Bharat Petroleum Corporation Limited (BPCL). The tender closed in January 2016. The PNGRB has postponed the seventh round of bidding for granting licences to retail CNG in 11 cities.

The bidding parameters include the overall unit network tariff, compression charges, the inch-km of steel pipelines and the minimum work programme (MWP). However, the fifth parameter, “nearest to the internal rate of return (IRR)”, has been excluded. This has led to the bidding and winning of GAs by many non-serious players. In order to prevent irrational bidding, the regulator has included provisions for bank guarantees in the form of performance bonds, which could be a substitute for the “nearest to IRR” parameter. These bonds provide security against failure to develop CGD operations as per the agreed MWP in an authorised area. In case of failure to achieve the committed MWP, the bank guarantee could be encashed partially or fully.

The PNGRB plans to increase CGD penetration to 240 cities by 2022 from 67 in 2016. However, there are some areas that need immediate attention. These include offering commercially feasible GAs for bidding, judicious implementation of regulations, timely monitoring of authorised GAs and undertaking action against defaulters. The regulator too can auction GAs, which may attract more investors and contribute higher revenues to the exchequer.

Termination of exclusivity period

A number of state-run gas distribution companies have strongly objected to the PNGRB’s proposal to end their exclusive right to distribute gas in their respective cities and declare the existing infrastructure a common carrier. However, some rival companies and gas consumers have supported this move, which would trigger competition and bring down costs for consumers. Players such as Indraprastha Gas Limited, the Assam Gas Company, Maharashtra Natural Gas Limited, Central UP Gas Limited, Sabarmati Gas Limited, Gujarat Gas Limited, Sanwariya Gas Limited and Bhagyanagar Gas Limited have opposed the proposal.

The majority of them have raised objections because a quick termination of exclusivity would be financially disastrous for the incumbents, while many have challenged the regulator’s authority to undertake such an exercise without first devising a relevant regulatory framework. The move has been censured on the ground that the PNGRB has not formulated any regulations that would provide certainty regarding the tariff. This will cause more uncertainty regarding future investments and adversely affect the revenue of these entities.

Pricing

The domestic natural gas price is fixed by the Petroleum Planning and Analysis Cell based on a formula notified in October 2014. Typically, the natural gas prices are linked with long-term crude oil prices and follow the latter’s price trajectory with a lag. This is why gas prices did not fall as quickly as crude oil prices did in 2015. As a result, many small industrial consumers switched from natural gas to cheaper fuel oil in India. However, since February 2016, the trend is beginning to reverse. This is reflected in the 34 per cent rise in the purchase made by CGD companies that supply to small industrial units,

households and the transport sector. This is because of a downward revision in domestic natural gas prices for the period October 1, 2015 to March 31, 2016. The price is expected to decline further in the latest revision. The move will benefit CGD companies the most as the segment gets 100 per cent allocation of cheap domestic gas, which will enhance their margins.

Under consideration

At present, there is no legal clarity on the setting up of CNG stations by CGD entities in areas not falling under any GA. The Ministry of Petroleum and Natural Gas (MoPNG) is mulling over the matter and consulting legal experts on the possibility of setting up a CNG station outside the GA through a third entity.

The ministry is also grappling with the issue of prescribing a fixed restoration charge. Reportedly, there are no regulations that permit the MoPNG to fix such charges. Therefore, it is currently working on the matter and trying to resolve other issues to get the right mix of regulations.

The way forward

The Ministry of Urban Development has asked the states and urban local bodies to provide for PNG supply and CNG stations in the cities selected for development as smart cities. As of November 2015, 3 million PNG connections have been provided in 67 cities including 35 smart cities, and the remaining smart cities need to be covered by piped gas supply. About 2.5 million vehicles are running on CNG. The PNGRB has urged urban local bodies to ensure speedy approvals for laying CGD pipelines in smart cities and set up CNG stations as a part of the Smart Cities initiative. Going forward, the share of natural gas will increase by ensuring higher domestic gas production, smart sourcing of cheaper gas from the international market, building a national gas grid and optimising pipeline capacity utilisation.

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