Decision time: Print notes or cut subsidies

Electricity tariffs should be going down pretty soon. Whether or not they actually will, is another debate. The Economic Coordination Committee (ECC) had earlier approved for consideration the Ministry of Petroleums plea of revising the gas tariffs for power consumption down from Rs613/mmbtu to Rs400/mmbtu.

Ambiguity remains whether the ministrys advice has been approved in principal or was just taken up for consideration. But this newspaper reported that the government has decided to slash the gas tariffs for power consumption by a massive 35 percent. The view taken by the ministry is that this will result in providing relief to electricity consumers across the board.

Some math will help understand the massive potential impact this decision could have on gas companies, power tariffs, and the fiscal side. Power sector is the single largest consumer of natural gas with a share of 30 percent. Natural gas has a 27 percent share in electrify generation mix. Share of natural gas in overall fuel cost has hovered around 40 percent. A 35 percent reduction in the component would mean roughly 14 percent reduction in overall generation cost.

Whether the government decides to pass it on to the end consumer, or use the savings to slash subsidy on power bills, remains to be seen. Another dimension to it is the impact it would have on gas distribution companies. Recall that, not so long ago, the government had rejected Ogras advice of increase in gas tariffs for both SSGC and SNGPL.

Now with such a sharp cut in revenues on account of gas consumption by power sector, both companies stand to lose around Rs77 billion. The number is based on annual average gas consumption of 371,562 million cubic feet by power sector. At the revised rate of Rs400/mmbtu, revenues from power sector are likely to drop from Rs222 billion to Rs145 billion. Not to mention that the government has not adjusted this via cross pricing for any other consumption category.

That the fiscal side is under immense pressure is known to all. Inviting an unwanted burden to the tune of over Rs77 billion does not sound rational. If only the government decides not to pass on the benefit to the end user, then it could well plug the gap. But, if tariffs are revised downwards or passed through fuel cost adjustment mechanism, it spells trouble.

Given the mood the government is in, it may well decide to pass on the benefit and absorb Rs78 billion on its own book. With no such provision made in the budget, the easy way out appears to be some note printing. And Dar and company many not need a second invitation to go to the printing press as there is no IMF to keep a vigilant eye.