While city gas distribution companies have done a good job of expanding the network across the country, a lot still needs to be done in terms of increasing penetration, says Gajendra Singh, Member of the Petroleum and Natural Gas Regulatory Board (PNGRB).
"We are seeing that continuously their PAT (profit after tax margin) is more than 20%; it appears that they are not putting a capex in their areas. Reasonable returns, normally, what we say, it should be either 12% or 15% because infrastructure companies keep on deploying the capex. So, 15% we consider is reasonable."
However, there are no intentions of intervening in their day-to-day activities or pricing, he stated.
Shares of gas distribution companies' stocks such as Indraprastha Gas (IGL) and Mahanagar Gas (MGL) have been under pressure due to concerns over potential regulatory changes.
Read the verbatim transcript of the interview below:
Q: Can you tell us what this is all about? What is the context? We heard from the Oil Minister and then, of course, we heard from you as well. This is a sector where all of this was given out by competitive bidding. So, are we now talking about some sort of regulation coming through?
A: No, the entities who are involved in building a city gas distribution (CGD) network all across the country - now we have covered all cross country - they are putting a best effort into putting a distribution network to all the consumers and all the demand centres. So they are doing an excellent job. We don't have any issue on that part. Only the entities who have like Indraprastha Gas (IGL) and Mahanagar Gas (MGL) - are the pioneers. And if you see IGL and MGL - they are the entities who have accepted and by seeing them people have put a lot of capex (capacity expenditure) in the different CGD sectors.
What we are saying in IGL and MGL, their penetration level needs to increase. If you see in Delhi, the penetration level for Piped Natural Gas (PNG) is 35%. We want that that should go up to at least 50-60% in all houses. So the kind of comfort the PNG provides should be given to all the consumers.
Secondly, what the Minister said - so it's not something negative against these companies, they are doing an excellent job.
Q: You said that they are making supernormal profits, what makes you think that they're making supernormal profits? They have distribution costs, etc as well. So on what basis does one conclude that they're probably making supernormal profits?
A: Number one, I have not said that they are making a huge profit. Particularly in infrastructure companies and these kinds of companies normally what we are seeing is their profit after tax (PAT) is 20% and above continuously. What we are saying they have to deploy more capex in building a distribution network in their area so that the penetration level increases. I think that was the intention of the Minister also. It is not something they are doing wrong. The only thing we want that this PNG penetration should increase in cities and towns.
Q: So just to clarify, you're saying normal PAT levels that's a profit after tax margin of 20% is what you consider normal. That's right?
A: What we are seeing continuously is the CGD entities who have been working for so many years now, we are seeing that if continuously their PAT is more than 20%, it appears to be that they are not putting a capex in their areas. Reasonable returns normally what we say is that it should be either 12% or 15% because infrastructure companies keep on deploying the capex so 15% we consider is reasonable.
Q: When these bids were put out, they would have bid for these sectors for laying out the distribution network etc, based on some assumptions etc. But now in a way, you're saying you're comfortable with these companies making 12-15% PAT margins and not 20%. Doesn't that kind of sort of throw things haywire?
A: No. They have won this bid on a competitive basis but they have given the target. minimum work programme (MWP) targets are there. And they are far behind on PNG targets. Their target one is for Compressed Natural Gas (CNG) station, which they are complying with almost 100% or they are going ahead - some entities are doing more than 100%. We are okay there because gas users are increasing through CNG. They are connecting industrial and commercial customers because currently 58,000 industrial and commercial customers CGD entities are connected which is also good for increasing gas usage. Our concern was PNG target - what they have given, they are not up to our expectations.
Q: You are saying 12-15% is acceptable 20% is not. Am I correct in paraphrasing you that way?
A: You can say that way - infrastructure company if they are making a reasonable return, we normally say that it is 12% is something that is good.
Q: Will you take measures to ensure that it gets to that level? It does come down to that level PAT margin and in what shape and form? Are you discussing measures within the ministry – the Oil Minister made comments. So is there a framework, and some measures being taken to ensure that?
A: Maybe it is a coincidence. In one of our programmes, we did mention that the concern is that the penetration level of PNG needs to be increased because the administered price mechanism (APM) gas is being supplied for that purpose. And that is up to 105%.
Q: Just to clarify, we've seen price cuts both in Mumbai and in Delhi in the last 24 hours, should we tie this in with the thought process that you just shared that the price cuts happening now because the thought processes that PAT margins need to be somewhat capped at around 15%, should not go by 15%?
A: No, we are not saying that and we are not going to intervene in their day-to-day activities. Our role is whether the consumers are protected if they are getting APM gas, particularly for CNG, we are saying they are getting 105% -whether those advantages are going to be translated into consumers or not. Secondly, in regulation, particularly, we want orderly development all across the country. We are not looking that in a particular area where they are making a business, they will do the thing in other areas, which perhaps may not be that lucrative, they are not putting a capex there. So we want the regulation, we are not going to do something negative and we are not seeing any negative against IGL, MGL or any entity. There should be orderly development.
Q: What I wanted to understand is what changed in last one year because April 2023, is when we were talking about changing the gas pricing formula itself in order to ensure that these companies go ahead and make normal margins. One year past that we are talking about them making margins higher than what was stated for them. So what changed for you to look at the margins of these companies, because since that there have been price cuts taken by IGL or MGL for Gujarat Gas as well. And secondly, you spoke about MGL’s exclusivity ending in 2021 and you put out that notice yesterday on the PNGRB's website, why was that delay? What was the reason of putting that notice after the exclusivity already ended in 2021?
A: There are two parts. One is that why the prices are lower. That could be the reason because the spot prices, because if you see for CNG, the prices they have lowered is for CNG. If you see in CNG, government is assuring APM gas up to 68% - they buy the re-Gasified Liquefied Natural Gas (RLNG) and they add into their kitty to making 100% CNG. Now the thing is if the spot prices has gone to $8 currently, so they may be getting a cheaper RLNG mixing in their APM for CNG purpose. So that could be the one reason.
Because the spot prices which was earlier at $12 has come down to $8. And they are using 40%. When I'm saying 68%, they are using almost 40% RLNG in their business. So that could be the one reason.
Another part of notice - the exclusivity was given for say 25 years. Now, these companies who have completed their 25 year, either they have to come forward with a PNGRB that they need some extension of this thing, because if they are meeting a service obligation, we don't have any issue for extending their exclusivity, but they have to come to the PNGRB.
Q: I'm asking you this question, because MGL is a listed company since this was put up on PNGRB’s website yesterday, the stock fell, because the confusion was maybe the biggest geographical area is seeing ending of the exclusivity. So trying to understand - did you put it out to remind the players that yes, you can come up and take up this area? Or was it just put it because you wanted to remind MGL that you can come for an extension because they're already working or operationalizing in that area already?
A: It's both. Right now it is only three entities what we have, in our notice mentioned. But there are number of entities who are going to complete their 25 years, maybe in a subsequent period. So now whosoever have completed if they have the valid reason for exclusivity extension and if they are meeting complying with our service obligation, yes, we are here. The regulator is here to facilitate them.
For more, watch the accompanying video
(Edited by : Shweta Mungre)
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