NEW DELHI: The Petroleum and Natural Gas Regulatory Board (PNGRB) on Friday announced an independent criteria for determining tariffs for the petroleum product pipeline owners in the country, replacing the current method based on railway freight. The move is intended to encourage investments in infrastructure, according to the Board.
“This was really required by the industry because the railway freight itself was not increasing whereas the cost for pipelines, be it manpower, operational cost, or utility cost, was increasing,” said Sanjay Sah, Partner, Deloitte India. “Now more capex can come in, more pipelines can be set up and the movement of petro products via road and in railways will also decline.”
The new tariff should be determined based on the Discounted Cash Flow method through consideration of a reasonable rate of return.
Anil Kumar Jain, Chairperson PNGRB said that this reform aims to provide the financial stability and attractiveness needed to boost pipeline infrastructure growth in India. “By prioritizing pipelines, the most efficient transportation mode, this initiative will help alleviate road congestion, minimize accident risks, and reduce pollution from road transport,” he said.
He also highlighted that the new tariffs will benefit consumers by offering a more economical alternative to road transportation for moving goods enabling a more efficient future for petroleum transportation in India.
Currently, the Board classifies petroleum product pipelines in three categories – non-bid pipelines commissioned before the notification of PPPL tariff regulations 2010, non-bid pipelines commissioned after the PPPL tariff regulations 2010, and bid-out pipelines authorized prior to PNGRB Amendment in PPPL authorization Regulations, 2023.
“Currently the product pipeline tariff is linked to the railway freight charges. We want to offer them new formula, like for gas pipeline tariffs,” a member of the Board had earlier told FE. “We realise that whoever is putting a pipeline should get some money and get some reasonable returns.”
The Board member had noted that railway freight charges don’t change much often and stagnant railway tariff has resulted in maintaining pipeline tariff constant although the operational expenses of running the pipelines have increased.
Under the new regulations, in the case of bid-out pipelines, the transportation tariff for the first ten years of operation is as quoted by the authorized entity.
“These companies were losing money. They were not getting adequate returns at all. Now they will get an assured return and will help them positively. Consumers may bear the brunt of this increase a little bit in the shorter term but the supply will also become consistent,” Sah said.
For petroleum product pipeline commissioned before the notification tariff regulations in 2010, transportation tariff for petroleum products (other than LPG) shall be 75% of basic railway freight and for LPG 100% of basic railway freight with a one-time escalation of 17% effective from the date these regulations come into force till March 31, 2025.
Thereafter, FY25 onwards, an annual escalation at 3.4% shall be considered based on compound annual growth rate of the WPI (wholesale price index) of ten years on rolling basis unless there is change in the said WPI by 0.5% on either side.
Additionally, these pipelines have been provided with a one-time option to get the tariff determined based on Discounted Cash Flow method through consideration of a reasonable rate of return, in case they incur capex on its replacement, expansion or augmentation.
For the pipelines commissioned after the tariff regulations of 2010, the transportation tariff shall be determined based on the DCF methodology with 12% post tax returns on capital employed over economic life of the pipeline similar to the methodology of natural gas pipelines.
The bid-out pipelines will have their transportation tariff determined based on the DCF methodology with 12% returns over remaining economic life of the pipeline considering the Net Fixed Asset (NFA) as at the beginning of the 11th year of operations. “Post PNGRB authorization amendment regulations, bidders have to quote tariff for the entire life of 25 years,” it said.
FE had earlier reported that PNGRB is seeking to revise the tariff policy for the product pipelines laid out by the state-owned oil marketing companies and private refiners based upon the capacity utilisation, capex, and the internal rate of return (IRR) of the pipeline. The new rules are expected to make pipeline investments more remunerative.
Source: The Financial Express
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