Another round of revision in natural gas prices stares at the consumers for the second time in 2023. The authority’s tariff determination for the two Sui companies will come into effect next month, if the same is not notified by the federal government earlier. The determinations envisage a 30 percent increase in SNGPL’s average prescribed price and 16 percent increase in SSGC’s. This comes at the back of similar increase at the start of this year. Given how slab pricing works, cross subsidy will ensure increase of up to 50 percent more a number of categories including higher bracket of the domestic sector, and industries.
A number of variables have changed since the previous determination leading to a substantial reversal in cost of gas, as revised average fuel prices and effective exchange rates come into play. Significantly altered interest rate environment also means higher weighted average cost of capital for the two Sui companies – as the authority has allowed a required return on net assets in excess of 20 percent - 400 basis points higher than the January 2023 determination.
Disallowances from the petitioned amount are plenty as Ogra continues its practice of disregarding expense allocation to higher UFG requirements, internally consumed gas, Loss Payment Surcharge and others. Most significant is the continuation of Ogra’s practice as regards the treatment of prior year shortfall.
In the case of SNGPL alone, the accumulated prior year shortfall stands at a staggering Rs560 billion, almost 60 percent of which has accumulated just over the last two years. In unit terms, the loss amounts to Rs1600/mmbtu – which is 30 percent higher than the revised average prescribed price for FY24. Mind you, all of this is disallowed by Ogra. Now those thinking that this or the previous tariff increase will take care of the circular debt accumulation in the sector, need to rethink. The Sui companies keep showing the amount in the financials (which come with inexplicable delays) and that becomes part of what is now termed as the “gas sector circular debt”.
Ogra has time and again asked the government to settle the issue with the Sui companies outside of the tariff ambit. It has not happened once in the last ten years. Another issue that will keep the financial health of the overall system deteriorated is the treatment of RLNG diverted to domestic consumption in the final determination. The laws may well be in place but the relevant ministry has been sitting on working out the mechanisms for quite some time. The ECC had asked the Ministry of Energy to work out a plan that spells out financial implications – but if Ogra’s determination is to be believed – nothing of that sort is out there yet.
Whenever the decision to blend the two does take place and is incorporated in the consumer end tariff – the implications will be substantial. The model worked out by the SNGPL showsthat the average prescribed price in case of only the RLNG diversion volume is included in indigenous revenue requirement – average prescribed prices would come out to Rs1861/mmbtu($6.6)–50 percent higher than current prescribed price for FY21. And in the more favorable case of both gases included in one basket for revenue determination – that average prescribed price will be nearly 150 percent higher than current prescribed prices at Rs3069/mmbtu ($11). The price of inaction, bureaucratic delay, litigations, and inefficient management continues to be borne by the taxpayer – and that does not seem to be changing anytime soon.
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