Regulatory Update

Moving towards a unified tariff mechanism

The Petroleum and Natural Gas Regulatory Board (PNGRB) has in its Vision 2030 document estimated that the gas transmission pipeline in India would expand to 32,727 km with a pipeline design capacity of 815 million metric standard cubic metres per day (mmscmd) by 2030. At the same time, the board is planning to expand the city gas distribution (CGD) network in the country. To this end, it has identified 223 geographical areas, which are expected to come up for bidding in the next two to three bidding rounds. However, the board is facing multiple challenges with regard to the timely completion of pipeline projects that have become economically unviable and tariff determination for the legacy pipelines under operation. It is therefore considering a unified tariff mechanism, under which a single tariff would be charged for transporting gas throughout the country. The issue of aggressive bidding has also cropped up in the recent rounds. This poses a long-term risk for CGD entities given the stringent minimum work programme and service standards set by the PNGRB.

A unified tariff mechanism

Under the current tariff mechanism, natural gas consumers have to pay a variable tariff based on the distance between the point of supply and the point of consumption. Thus, consumers in remote locations have to pay a higher tariff than those located near the point of supply. As per the new mechanism, consumers located near the point of consumption would compensate consumers located far away from the point of supply. The proposal is currently at the discussion stage and the PNGRB has invited comments from industry stakeholders for the same. The key decisions that need to be taken are as follows:

  • Unify the tariff at the entity level, that is, determine separate tariffs for GAIL (India) Limited, Gujarat State Petronet Limited (GSPL) and Reliance Gas Transportation Infrastructure Limited (RGTIL), or to unify across all pipelines.
  • Include or exclude pipelines already allocated through competitive bidding.
  • Provide a unified rate of return of 12 per cent or adopt the power sector model of a debt-equity ratio of 70:30 with a higher rate of return of 15.5 per cent allowed on the equity part.
  • Adopt a common carrier-based model or deploy dedicated pipelines under which the pipeline from the trunk line to the industry gate could be laid either by the pipeline operator or by consumers themselves.

Tariff fixation for legacy pipelines

The PNGRB is revising the tariff fixation mechanism for legacy pipelines as well, as some of the older tariff orders are facing litigation issues. For this, the PNGRB has set up an industry committee with representatives from GAIL (India) Limited, GSPL, RGTIL, and power and fertiliser industries. The committee needs to decide whether it will fix the tariff on the basis of the actual amount of gas passed through the pipeline or on a normative basis (where the operator has to reach a capacity utilisation of 60 per cent in the first year and then increase it by 10 per cent each year to reach 100 per cent in the fifth year). Other issues such as transit losses and the rate of inflation are also being considered.

Meanwhile, there are certain pipelines that were previously allocated on a competitive bidding basis but have become economically unviable in the current industry scenario. The Ministry of Petroleum and Natural Gas (MoPNG) has constituted a committee to review these projects. The committee comprises representatives from the MoPNG, PNGRB, GAIL and Indian Oil Corporation Limited. The issues being considered are the demand from the entities for a viability gap funding (VGF) model and the allocation of CGD areas on a nomination basis to compensate for the increase in project costs. Under the VGF model, the government will provide a one-time capital subsidy to the pipeline developer to cover the increase in costs during project development for projects that were allocated through competitive bidding. Alternatively, the government can allocate CGD blocks to developers on a preferential basis in lieu of the increase in costs. It can also adopt both the mechanisms.

Revision of parameters for the ninth round of CGD bidding

The PNGRB is currently considering a revision of the bidding parameters for the ninth round of CGD bidding. This is being done as the previous round of bidding saw bidders quoting near-zero network tariffs (that had 40 per cent weightage) to win the project. The revised bidding criteria would take into consideration:

  • The number of CNG/PNG connections the entity would provide during a particular period.
  • The gas volume sold by the entity.
  • A signature bonus to be provided to the PNGRB for the allocated CGD blocks.

Conclusion

While the CGD and pipeline segments are witnessing sluggish growth and facing a number of challenges, the good news is that the government recognises these issues and is taking steps to address them. Going forward, to promote the use of natural gas in the country, PNGRB aims to increase the share of natural gas in primary consumption from 6.5 per cent at present (the global average for the same is about 24 per cent) to 15 per cent by 2030. The board is also expected to play a key role in the creation of a gas trading platform as proposed by the government.

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