ICRA: Challenges Await Implementation Of PNGRB’s Concept Paper On Tariff Determination For CGD Network Post Marketing Exclusivity Period
The Petroleum and Natural Gas Regulatory Board (PNGRB), had granted exclusive marketing rights to certain pre-existing CGD networks, post its formation, for a limited period. These CGDs have reached the end of the timeframe for exemption from the purview of a common contract carrier. Hence, PNGRB has formulated a concept paper to determine a process to open up these CGD networks to competition with the intention of promoting fair competition and efficient use of resources while also protecting the interests of the consumers. This regulation will not be applicable to entities that have pre-determined transportation rates as part of the PNGRB bidding process for authorisation, carried out in the ten rounds of bidding till now. The concept paper talks about two options for determining the transportation rate – 1) The Cost of Service methodology allowing for a post-tax normative return on equity of 14%. Or 2) A transparent online bidding process based on a fixed reserve price or based on a self-determined reserve price by the company concerned.
According to Mr. Ankit Patel, Vice President and Co-Head, Corporate Ratings, ICRA, “We have analysed the impact of the above regulation on the incumbents if the Cost of Service methodology is implemented for major incumbents. The findings indicate that about 65%-75% of the contribution of these entities can be met from the recovery of the network tariff. The rest of the contribution is generated from marketing/commodity margins.”
ICRA believes that the impact of third party competition to existing operators could be more pronounced in the PNG (Industrial) segment as the larger absolute volumes and the ease of tying up directly with a group of industrial customers would be relatively easier compared to the CNG segment, where domestic gas allocation needs to be sought having a number of end-consumers. For the PNG industrial volume, large single location opportunities (Morbi, Ankleshwar-Bharuch, Ahmedabad) with high penetration of gas are attractive for competition. Nonetheless, the CNG segment too could be vulnerable in cities where there are bulk consumers such as State Transport Corporations, which can be weaned away at a lower tariff. Key operational challenges will be the strong promoter backing of authorised players (transmission network owned by GSPL/GAIL in case of GGL, IGL, AGL and MGL) and the complexity involved in giving access to the third party in terms of the variation in gas demand, requirement of multiple contracts to be signed and determination of idle capacity in different parts of the city/region, etc.
Mr. Patel added, “The oil marketing companies (OMCs) would be the most immediate interested entities for third party marketing as they have access to gas as well as an already existing network of retail outlets. The OMCs would especially be interested in direct sales of CNG in metro areas if they find it a large enough opportunity with reasonable margin. Nonetheless, as a key risk mitigant, many of the incumbent CGD operators have signed medium to long-term agreements with the OMCs for co-locating their CNG stations at attractive marketing margins; moreover, some of the OMCs are also either the majority or the minority shareholders in these CGD entities”.
As regards the overall impact of the concept paper and its implementation over the long term, Mr. K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA said, “We believe that while PNGRB has rolled out this concept paper and invited comments from the public, the PNGRB Act, 2006 itself may require amendments in light of the Supreme Court order dated July 1, 2015 in IGL Vs PNGRB case on the powers of the Board to fix tariffs. There is also a possibility that the existing players may challenge the final regulation in courts, which could delay it further. Hence, credit profiles of authorised entities would not be immediately impacted. While competition could intensify over the medium to long term,, operational challenges, such as determination of surplus capacity and access code will require resolution for actual materialisation of third party competition in the CGD business.”