The Petroleum and Natural Gas Regulatory Board’s (PNGRB) draft regulations relating to unified tariff and allowing competition in City Gas Distribution (CGD) areas appear to favour the new entrants over incumbents and thus Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) are likely to hit the most, analysts said.
In its draft regulations, PNGRB has opted for unified tariff for all interconnected pipelines of all entities whereby consumers pay the unified tariff, but each pipeline entity continues to get the same tariff as earlier.
As per the draft regulations issued on September 29, 2020, the tariff that incumbents can charge for use of their network would be fixed by PNGRB at cost plus 12 percent post-tax return on capital employed and capacity allotted to new entrants would be on first-come-first-served basis. The other option PNGRB considered was fixing a base tariff and incumbent allotting capacity to the highest bidders. “Thus, PNGRB has opted for cost plus tariff option, which favours new entrants over the incumbents,” ICICI Securities said in a report.
As per stakeholder comments published by PNGRB, all entities except GAIL India are in favour of a unified tariff for all interconnected pipelines of all entities. GAIL is in favour of a separate unified tariff for each entity.
The unified tariff calculated by PNGRB for 13 interconnected pipelines of seven entities is Rs 56.84/mmbtu. It is based on volume weighted average tariff of these pipelines. Consumers would pay the unified tariff on these pipelines while each pipeline entity like GAIL and Gujarat State Petronet (GSPL) would continue to get the same tariff as earlier.
“Unified tariff may boost volumes on the pipelines on which unified tariff is substantially lower than the current tariff; unified tariff is lower than current tariff by 10% for GAIL’s 16 mmscmd capacity Jagdishpur-Haldia-BokaroDhamra pipeline (JHBDPL), by 13-29% for East-West pipeline (current volume 18.3 mmscmd) and by 41% for Shahdol-Phulpur (0.9 mmscmd) pipeline,” ICICI Securities said in a report.
Moreover, comments to PNGRB on the CGD draft regulations by the three OMCs, which have authorisation for 77 CGD areas, suggest that they are keen to foray in to large-volume CGD areas like Delhi, Mumbai and Pune when competition is allowed, the brokerage noted.
They would be formidable competitors given that they would require only small additional investment to dispense CNG given their extensive petrol station networks and the fact that they house majority of CNG stations of IGL and MGL, it said.
ICICI Securities is of the view that IGL and MGL would be more hit by competition than Gujarat Gas. It reiterates Add on Gujarat Gas, Sell on IGL and HOLD on MGL and GAIL.
Further, as per the draft regulations issued by the PNGRB, while calculating net fixed assets to determine transportation tariff, the refundable security deposit collected by the CGD entity would be deducted from the capital expenditure on last mile connectivity in case of residential piped natural gas (PNG) consumers.
Gujarat Gas has in its comments proposed that the security deposit should not be deducted. Security deposits constitute 12-18 percent of total gross block and 16-28 percent of total net block of the three listed CGD players, ICICI Securities noted. Therefore, whether security deposits are deducted or not would significantly impact the computation of transportation tariff.
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