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IPA Special

Will a gas seller's fine upend a promising industry?

IGL has run afoul of the industry’s regulator because it refuses to disclose vital numbers used to compute the price charged to the end-user
NEW DELHI: Indraprastha Gas Ltd, or IGL, was sitting pretty with a monopoly over the sale of compressed natural gas (CNG) and piped natural gas distribution in Delhi and planning to expand further. That momentum has been temporarily quashed by the oil industry regulator Petroleum & Natural Gas Regulatory Board (PNGRB), which issued a recent tariff order that retroactively slapped a Rs 1,000 crore bill on IGL. This amount is supposed to adjust the excessive tariff the company may have charged its consumers.
Now, considering that IGL—a publicly-listed company and promoted by government-owned GAIL as well as BPCL—has made a profit of Rs 874 crore since the fiscal beginning April 2008 to date, funding that bill could prove to be a gigantic headache. Others seem to think so since IGL’s stock price has nosedived by 37 per cent since the tariff ruling. IGL has appealed it and chose not to interact with Business Standard, saying that the matter was sub judice.
Here’s how the problem began. Before the existence of PNGRB, there was no regulation on how much IGL and other city gas providers could charge their consumers. For most gas companies, the end-price to the consumer is dictated by three things: The cost of natural gas; cost of compressing it; and finally, the cost of transporting it. When PNRGB was finally notified—in other words, officially began operations—it asked all gas companies to submit proposals that in effect would list how much these companies had been computing as costs of compression and transportation for all the years they had been in existence. If it deemed those figures too high, it would ask the company to cough up the difference as well as cut prices to consumers immediately.
This is when things began to heat up. IGL submitted its proposal, but did not share with the board the actual charges levied in these two categories since April 2008. The only detail IGL included was how much they intend to charge customers in the future. The board declared IGL’s practices as opaque and decided that since it wasn’t forthcoming with its past numbers, it would consider the compression and transportation costs stipulated for the future as de facto figures for the past several years. Its findings: IGL’s current price, at Rs 35.45 per kg of CNG, is Rs 7.07 per kg too high, hence the Rs 1,000 crore bill.
You can be sure that companies like Reliance Industries, Indian Oil, Oil India, HPCL, Essar, Lanco, who are eagerly waiting in the wings to enter this sector are watching IGL’s misadventures keenly. City gas is an exciting, emerging business opportunity and dominated by success stories like IGL, Gujarat Gas and Adani. Their robust profitability and strong demand growth fuelled by the favourable cost-economics of gas versus competing fuels has made the natural gas business come into its own recently. The question is, does the recent tariff ruling against IGL ruin things for the sector?
Most industry executives say no, that the IGL order is one of its kind and will not impact other companies in the sector, primarily because many of them have emerged after the formation of PNGRB in October 2007. “Tariff calculation is a standard practice and is also followed in electricity distribution sector,” said Rajeev Sharma, CEO (Gas Distribution) at Adani Group, which operates city gas network in Ahmedabad, Baroda and Faridabad. “Having said that, the technical, commercial and financial data vary for each company and therefore the tariffs for each company would be different and specific to that company. IGL tariffs, therefore, do not reflect the tariffs for other companies or the industry,” he added.
This kind of fracas is not likely to happen with projects going ahead. According to regulations, all new CGD projects will be awarded through a bid process and will follow bid tariffs. “This order, therefore, does not impact new projects. However, the regulations need a fresh look in view of the sustained high inflation over the last few years and general economics of this business,” argues Sharma.
Yet, industry experts also believe that the process of retroactive tariff determination should involve greater consultation. “There is a need for enhancing the stakeholders’ consultation while determining the charges that have been typically seen in the power sector. We believe that such a regulatory process is still evolving for the nominated CGD projects and is expected to settle down in due course”, said Rakesh Jain, associate director (energy) at Feedback Infra.
And what about the issue of fair treatment meted out to IGL? L Mansingh, former PNGRB chairman, during whose tenure the process of tariff determination started, said the board has been more than fair to IGL. “The tariff rate determined by the board assures a 14 per cent rate of return. This is higher than the 12 per cent tariff offered by pipelines. In a competitive economy, no one should expect even a 14 per cent return,” he said.
Moreover, bidders have quoted much lower tariffs and compression charges to win bids than what IGL would have charged. Mansingh recalls that during the bidding round for Ghaziabad, the IOC-Adani JV had offered to supply gas at zero tariff. However, after IGL disputed the award, stating that it had started work in Ghaziabad even before PNGRB was set up, the ministry awarded Ghaziabad to IGL. Mansingh says the board specifically warned companies that if they do not give the break-up being requested, the tariffs and other charges proposed by the company will officially be considered as charges levied since April 2008.
Is asking IGL for a more detailed disclosure too onerous? Mansingh points to Washington Gas, a 160 -year-old company engaged in distribution of natural gas to customers in districts of Columbia, Maryland and Virginia, which gives details of its tariff charges in the web site. Mansingh said Washington Gas undergoes a regulatory audit every month. “If the regulator there finds out that the company has procured gas at a higher price than what it could have, it directs the company to make refunds,” he said. “In India, IGL got APM gas at a throwaway price for several years, but it did not pass on any benefits to the consumers. It is only recently that it started procuring gas from the spot market,” he added.

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