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Revenue requirement of gas companies: government to issue guidelines to Ogra

The federal government is to issue guidelines to Oil and Gas Regulatory Authority (Ogra) with regard to revenue requirements of Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL), well informed sources in Petroleum Ministry told Business Recorder. The sources said, both gas utility companies, are engaged in gas purchase from Exploration and Production (E&P) Companies and transmission, distribution and sale thereof to various categories of consumers.

They are operating on cost plus return on assets formulae under licenses from Ogra. Prior to the establishment of Ogra, Ministry of Petroleum and Natural Resources (MPNR) was determining the revenue requirements of both gas utility companies in accordance with the covenants stipulated in the loan agreements of SNGPL with the World Bank and SSGCL's with ADB. After the establishment of Ogra, the mandate of determination of revenue requirements was transferred to Ogra under section 8 of Ogra Ordinance, 2002.

Section 6(2)(t) of the Oil and Gas Regulatory Authority Ordinance, 2002 inter alia provides as under: "[t]he Authority shall in consultation with the Federal Government and licensees for natural gas determine for each such licensee a reasonable rate which may be earned by such licensees in the undertaking of its regulated activity pertaining to natural gas, keeping in view all the circumstances;"

However, the Cabinet Division conveyed an order under Section 47 of the Ogra Ordinance 2002, for the removal of difficulties in the transitional period, allowing OGRA to determine the revenue requirements of both the gas companies on the basis of the loan covenants as mentioned above, till such time an appropriate rate of return is determined by the Ogra. (Cabinet Division's letter No 6/6/2002-RA-OGRA dated 11.10.2002). Under this regime, prescribed price which is retained by gas utilities is an aggregate of (i) well head gas price (ii) Transmission & Distribution cost and (iii) Profit margin (presently 17-171/2 percent return on assets before financial charges and taxes). The said tariff regime is still in force.

Since 2003-04, OGRA has introduced a gradually declining Unaccounted for Gas (UFG) benchmark which allows a certain percentage of UFG as part of revenue requirements while the value of UFG above the benchmark is not allowed. A brief rundown of actual UFG vis-à-vis allowed under benchmarks along-with financial impact is given hereunder: For FY 2009-10, Ogra allowed a UFG benchmark of 7% as against initial benchmark of 5% as well as some other incomes accruing from non core business of gas companies were treated as non-operating incomes taking them out of regulatory framework. However, for FY 2010-11 and FY 2011-12, the UFG benchmark was reduced to 4.625% and 4.50%, respectively, while the other incomes were again treated as operating incomes.

The companies approached respective high courts against Ogra's decisions and obtained stay orders under which the UFG benchmark was determined at 7% for the said two years and other incomes were treated as non-operating incomes. However, after detailed hearings, the Lahore High Court upheld the process adopted by Ogra in the determination of revenue requirements in respect of SNGPL against which SNGPL has filed a petition (CPLA) in the Supreme Court of Pakistan. SSGC's revenue requirements are still being determined under a stay order issued by the Sindh High Court. The issue is also being investigated by NAB/FIA on the allegation of corruption in re-determination of UFG targets by Ogra mainly in the context of the case of Tauqir Sadiq, ex-Chairman of Ogra. After vacation of stay orders issued by Lahore High Court (LHC) in terms of final decision of the court, Ogra has to adjust the said Rs 13 billion in revenue requirements of SNGPL for FY 2010-11 and FY 2011-12. A decision of final revenue requirements for FY 2012-13 is also pending with Ogra which will have an impact of over Rs 8 billion having a cumulative impact of Rs 21 billion which will wipe out the entire equity of SNGPL.

Copyright Business Recorder, 2014