The Natural Gas Regulatory Authority (NGRA) was established through a Presidential Ordinance in January 2000. Whereas in South Asia, regulatory authorities for other utilities like power, water etc existed, the formation of NGRA as a regulatory body for natural gas transmission, distribution and sale was the first in the region.
This is not surprising, since in Pakistan, out of the 40 million tons oil equivalent of commercial energy supply 43.8% is supplied by natural gas.
The transmission, distribution and sale of natural gas commenced in 1954 following the discovery of a Sui gas field in Balochistan in 1951.
Pakistan has a well-developed and integrated infrastructure of transporting, distributing and utilising natural gas.
The country has around 8,000 kilometers of transmission pipelines and over 60,000 kilometers of natural gas distribution networks supporting over 3.7 million consumers, developed progressively over the last 50 years.
This is an achievement, which is unmatched in quantum and scale by any other country in the South Asian region.
The natural gas industry in Pakistan started its operations in the early 1950's mainly in the private sector; as a matter of fact with the exception of the Indus Gas Company, a relatively small distribution company, all the other players engaged in the transmission, distribution and sale of natural gas were from the private sector.
In the middle of the 1970's, the state ownership, in the form of equity participation, increased in all the companies. By the mid 1980's, the Federal Government had become the majority shareholder as well as the regulator.
At present, there are two vertically integrated transmission/distribution companies namely Sui Northern Gas Pipelines Limited (SNGPL) having franchise for Punjab and North West Frontier Province, the second ie Sui Southern Gas Company Limited operates in the provinces of Sindh and Balochistan.
RAISON D'ETRE: The above arrangement continued till the early 1990's, however, with the dawn of the era of reforms and emergence of new economic realities it was realised that the natural gas sector of Pakistan needed restructuring.
The expansion of the transmission and distribution capacity and increased efficient management could only be achieved with the greater involvement of the private sector.
To achieve the objective, a comprehensive strategic plan for privatisation of the natural gas sector was developed by the government of Pakistan in 1992.
The strategic plan, along with other recommendations, also provided for the creation of an independent authority.
ESTABLISHMENT OF THE OIL & GAS REGULATORY AUTHORITY AND ITS FUNCTIONS: As explained earlier, regulatory authorities are normally established to regulate public utilities, which have been classified as "natural monopolies," whereas other sectors of the petroleum industry such as oil marketing, refining etc are left to the market forces.
It is arguably felt that competition will itself regulate the prices as well as the quality of service.
However, each country has its own market environments and peculiarities. In Pakistan, for example, all the refineries do not operate in the free market conditions.
In the case of the oil-marketing sector, the government, due to socio-economic compulsions, subsidises certain petroleum products by a complex method of cross-subsides; hence oil-marketing companies too do not operate in free market conditions.
In the light of the above mentioned conditions, the federal government felt that the need existed of economic and technical regulation, to a certain degree, in the mid stream sector ie oil pipelines, refineries, storages, marketing of petroleum products and operations related to the marketing of liquid petroleum gases and compressed natural gas.
In early 2001, work started on the establishment of a new regulatory agency in which all the activities of downstream (natural gas transmission and distribution etc) and mid stream sectors would be brought under an umbrella organisation called the oil and gas regulatory authority (OGRA).
The Oil and Gas Regulatory Authority Ordinance was promulgated on 28th March 2002, after extensive consultations with various relevant government departments as well as the representatives of downstream and midstream petroleum industry.
This made the authority unique in the South Asian region for its functions and responsibilities, as no other regulatory authority regulates such a vast span of activities.
In an endeavour to foster competition, increase private investment and ownership in the midstream and downstream petroleum industry, and to protect the public interest while respecting individual rights, improve the efficiency and availability of natural gas transportation and distribution services in Pakistan, to increase private ownership and improve regulation, a four-member (chairman and three members) Oil and Gas Regulatory Authority was established.
The authority, which is manned by professionals, has been made exclusively responsible for regulating the midstream and downstream petroleum sector, having the following important powers and functions:
-- Grant, issue, and renew licences, modify, amend, extend, suspend, review, cancel and reissue, revoke or terminate any licence for the undertaking of any regulated activity and to prescribe requirements to be satisfied by applicants for the grant of licence;
-- In consultation with licensees, specify performance and service standards and other conditions for undertaking any regulated activity;
-- Prescribe a uniform form of accounts and accounting practices to be complied with by licensees;
-- Administer, enforce and certify standards and other conditions for undertaking any regulated activity;
-- In consultation with licensees specify and review standards for the equipment and materials to be used in undertaking any regulated activity;
-- Promote and ensure the observance of efficient practices, where applicable, in the transmission, distribution, processing, refining, marketing, storage of petroleum and transportation of petroleum by pipelines;
-- Promote effective competition and efficiency in the activities within its jurisdiction of the authority;
-- Resolve complaints and other claims against licensees for contravention of the provisions of this ordinance, rules or regulation;
-- Resolve disputes between licensees, between licensees and any other person regarding a regulated activity;
-- Safeguard the public interest, including the national security interest, of Pakistan in relation to regulated activities in accordance with this ordinance, rules and regulations;
-- Protect the interests of all stakeholders including the consumers and the licensees in accordance with the provisions of this ordinance and the rules;
-- Prescribe, review, approve and regulate tariffs for regulated activities pertaining to natural gas and operations of the licensees for natural gas and marketing of refined oil products;
-- Prescribe procedures and standards for investment programmes, by licensees, for natural gas;
-- Determine the wellhead gas prices for the producers of natural gas in accordance with the relevant agreements or contracts, and notify the same in the official gazette;
-- Enforce standards and specifications for refined oil products as notified by the federal government;
INVESTOR COMFORT AND CONFIDENCE: It is customary in most countries of the world that regulatory regimes are designed mainly to safeguard the interest of the consumers.
In Britain, "Ofgas," the regulator for natural gas called itself "the watchdog of consumers' interests," whereas its successor "Ofgem" strives "to bring choice and value to all gas and electricity customers by promoting competition and regulating monopolies."
Similar objectives have been in vogue in the emerging regulatory agencies in countries like Argentina and Mexico.
The reason forwarded is that the public utilities are "natural monopolies" and their consumers are "captive customers" ie they do not have a freedom of choice to choose a service provider, it is therefore deemed essential that the utilities be regulated to ensure that they provide quality service at a reasonable price.
In the case of OGRA, efforts have been made to evolve a regulatory system whereby, the interests of the consumers, as well as that of the investors, are protected in a fair and equitable manner.
It is evident that unless the investor is assured a reasonable return, it would be futile to expect any meaningful investment to come into the sector. Currently, SNGPL and SSGCL have been offered a guaranteed rate of return of 17.5% and 17% respectively on the value of their net fixed assets in operation during each financial year.
OGRA is working in developing the systems whereby the rate of return could be linked to effective and efficient operation of the companies.
This will serve as an impetus for investors and in turn would foster competition.
PERFORMANCE OF THE OIL AND GAS REGULATORY AUTHORITY: The authority, which came into existence, on March 28, 2002 has started the regulation of the natural gas, CNG and LPG sectors, since the clauses relating to oil regulation are not in force presently.
However, in this short period of time, the authority has been able to formulate the following important regulatory instruments for its effective performance.
-- Licensing rules.
-- Tariff rules.
-- Budget committee rules.
-- Gas distribution technical standards.
-- Gas transmission technical standards.
-- Service and performance standards for gas companies.
-- Uniform system of accounts for gas companies.
-- Service and financial regulations.
-- Regulations for complaint redressal.
-- Wellhead pricing rules.
The most important aspect of the authority's function is the economic regulation of the two natural gas transmission/distribution companies, which is achieved by determining the "revenue requirement" that ultimately translates into gas tariffs.
The revenue requirement are the funds required by a public utility to purchase gas from the producers of natural gas, to operate efficiently and effectively its transmission and distribution systems and earn the permissible return on its assets.
The revenue requirement, divided by the units of gas to be sold, determines a tariff called the "prescribed price" which the utility is entitled to retain itself.
When the government taxes, levies, development surcharge etc are added to the prescribed price it becomes the "sale price" which the consumers are to pay.
In the determination of the revenue requirement, the authority scrutinises the operating expenses, the line losses, the overall efficiency of the company's operation as well as the prudence of the capital investment and assets created thereby.
The authority can disallow all such expenses, which in its opinion do not meet the criterion fixed by it, and thus reduce the revenue requirement accordingly.
ISSUANCE OF LICENCE: The OGRA ordinance makes it mandatory for any person carrying out a regulated activity ie transmission, distribution or sale of natural gas to obtain a licence from the authority, which has been exclusively authorised to grant such a licence.
The licence is a comprehensive document and an instrument which governs the terms and conditions of the operation of a public utility, spells out the utility's obligation to its consumers, lays downs operating efficiencies, performance standards of consumer service and provides a road map for the interaction between the utility and the authority.
The existing gas transmission and distribution companies, namely Sui Northern Gas Pipelines Limited & Sui Southern Gas Company Limited, under the OGRA Ordinance were obligated to apply for a licence afresh.
The companies had applied for licences in accordance with the procedure specified by the authority.
After going through the process of evaluation of applications, public hearings and participation of all stakeholders, licences were granted to the two gas companies ie SNGPL and SSGCL, on September 3, 2003, for thirty years.
The licences provide limited exclusivity to the companies in distribution, according to which, the licensees would be entitled to distribute and sell gas through their distribution system, within their authorised areas, with an exclusive right till 30th of June 2010, to their existing consumers and such consumers which are to be connected to their distribution system on or before 30th June 2005.
The purpose of granting this limited exclusivity is to protect the investment, which the companies have made in the past.
However, the licences are non-exclusive in transmission, other than their own 'right of way'.
The licences to Man Gas Company Limited and Pakistan Petroleum Limited shall be issued shortly.
The authority, as required by the OGRA Ordinance, holds public hearings in tariff determination as well grant of licences in order to receive interventions, objections, comments and suggestions of all the interested and affected persons, and consumer associations.
The views expressed by the participants are given due weight in the formulation of its decisions.
With the issuance of licences, the authority would monitor and enforce the licence conditions, which is expected to substantially improve the performance of the utilities.
The authority, in the coming years, is determined to continue its efforts even more vigorously to serve the interests of all the stakeholders, ie the consumers, the investors and the government of Pakistan by providing an efficient, impartial and transparent regulatory environment in which all the interested parties participate directly.
(The writer is Vice-Chairman, Oil and Gas Regulatory Authority)
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