As the regulator determined consumer end gas prices for both Sui companies – analysts were quick to link it to the IMF and more importantly a step towards an end to the gas sector circular debt. Only the prescribed price increase does little to address the bulk of the circular debt, the government will have to find ways to clear the circular debt stock, and also find a way to keep the flow from rising. The Ogra price increase does not take care of that, quite contrary to popular perception.
Perspective often goes missing, especially when it comes to energy sector pricing in Pakistan. The same seems to be the case this time around, where positions are taken based on political leanings, and generalized (and often lazy) observations in the guise of analysis end up deviating from the focus. First things first – the price increase was long overdue and is a continuation of Ogra’s November decision, which was reviewed by the Sui companies, on new ground realities.
The average price for SNGPL has been prescribed at Rs952/unit – higher than 29 percent from the existing average price and not 75 percent, as a number of media outlets, have been reporting. The onus still rests with the federal government which has 40 days to finalize consumer end prices for different categories and consumption slabs.
A failure to do so would mean the average price of Rs952/unit applies to all categories – meaning a massive increase in lower-end domestic slabs and fertilizer sector, and a significant decrease for most other users. The likelihood of this happening is next to none. Expect the government to continue with the cross-subsidy currently in place, and the recent statement from the finance minister very much assures that domestic consumption will continue to be subsidized by other users, who will pay more than the cost of gas.
In terms of the financial health of the sector, it should be a zero-sum game as long as the companies are getting the cost plus the required return – regardless of who pays how much. For anyone pinning hopes on this exercise even moving a needle on the circular debt is best advised to thoroughly go through the regulator’s price determinations.
It is often what is missing and not what is included in the final price – that is the cause of concern. Ogra has maintained its earlier stance of continuing to exclude the prior year’s shortfall, which makes up for nearly one-third of what is now called the gas sector circular debt. In SNGPL’s case alone, the prior year's shortfall stands at Rs295 billion – all of which is disallowed. The shortfall stands at Rs973/mmbtu at today’s indigenous gas consumption – more than the average prescribed consumer end price.
Ogra maintains that the federal government has been asked, time and again, to devise appropriate policies to address the issue via direct disbursement and settlement instead of making it part of the consumer tariff. Remember that all governments of the past are culpable in this regard – having passed on less than prescribed price increases in yesteryears. Any attempt to include this in final consumer tariffs as a cost will invite litigation – that could go on for decades and would be counterproductive.
The second reason why this price increase, though inevitable, does nothing to address the circular debt stock or the flow is that it excludes RLNG volume in revenue requirement calculations. Mind you, for FY23, RLNG volumes for SNGPL are estimated to be higher than that of indigenous gas. The regulator referred the matter to the Ministry of Energy for policy formulation. The same was submitted to the ECC, which sent it back to the Ministry for resubmission. The prices will be revised if and when there is a clear policy directive on this matter. Given the pace at which things generally move in the energy sector’s bureaucracy, don’t hold your hopes high.
The usual shenanigans of UFG disallowances, asset estimation, return requirement (allowed 16.6% vs an ask of 19.99%), and unrealistic estimation of costs during petition are always present. The Late Payment Surcharge also continues to be disallowed as Ogra recommends Sui companies approach the federal government, this being a circular debt matter.
All in all, gas sector financial woes are far from over.
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