Case No. OGRA-6(2)-2(3)/2012 IN THE MATTER OF SUI SOUTHERN GAS COMPANY LIMITED REVIEW PETITION FOR ESTIMATED REVENUE REQUIREMENT, FY 2012-13 UNDER OIL AND GAS REGULATORY AUTHORITY ORDINANCE, 2002 AND NATURAL GAS TARIFF RULES, 2002 DECISION ON NOVEMBER 30, 2012 Before: Mr. Saeed Ahmad Khan, Chairman Mr. Sabar Hussain, Vice Chairman / Member (Oil)
TABLE OF CONTENTS SECTIONS PAGE NO. 1. Background... 1 2. Petition... 1 3. Proceedings... 3 4. Interveners / Participants Views... 4 5. Authority s Jurisdiction, Determination Process and Discussion about Related Points... 9 6. Operating Fixed Assets... 10 6.2. RLNG projects / LNG Pipeline Infrastructure:... 10 6.3. Plant & Machinery... 11 6.4. Furniture, Equipment including Computers & Allied Equipments... 12 6.5. Vehicles... 12 6.6. Fixed Assets Determined by the Authority... 13 7. LPG Air-Mix Subsidy... 13 8. Operating Expenditure... 14 8.1. Cost of Gas... 14 8.2. Un-accounted for Gas (UFG)... 15 8.3. Transmission & Distribution Cost:... 15 8.3.1. Natural Gas Efficiency Project (NGEP) related Expenditure:... 15 Repair & Maintenance & Others... 15 8.3.2. Revenue Expenditure relating to RLNG:... 17 9. Revenue Shortfall of FY 2011-12... 17 10. Notional Income on IAS-19 Provision... 17 11. Workers Profit Participation Fund (WPPF)... 18 12. Determination... 18 13. Public Critique, Views, Concerns, Suggestions... 19 ii
ANNEXURE I. Computation of Estimated Revenue Requirement for FY 2012-13... - 22 - II. Provisional Prescribed Prices for FY 2012-13... - 24 - TABLES Table 1: Component-wise Breakup of Requested Increase in Average Prescribed Price... 3 Table 2: Summary of Asset Addition Determined by the Authority... 13 Table 3: Comparative of NGEP Revenue Expenditure... 16 APPENDIX Written submissions of the interveners iii
1. Background 1.1. Sui Southern Gas Company Limited (the petitioner) is a public limited company, incorporated in Pakistan, and listed on the Karachi, Lahore and Islamabad stock exchanges. The petitioner is operating in the provinces of Sindh and Balochistan under the license granted by the Oil & Gas Regulatory Authority. It is engaged in construction and operation of gas transmission and distribution pipelines, sale of natural gas, Air-mix LPG, gas condensate (as a by-product), and manufacture and sale of gas meters. The petitioner is planning to enter the Liquefied Natural Gas (LNG) transportation business by providing access to its pipeline network for supplying Re-gasified LNG (RLNG) to the end consumers. 1.2. The petitioner had filed a petition under Section 8(1) of the Oil and Gas Regulatory Authority Ordinance, 2002 (the Ordinance) for determination of Estimated Revenue Requirement (ERR) for FY 2012-13 (said year) on November 30, 2011, which was subsequently amended by it on March 22, 2012. The Authority, vide its decision dated May 18, 2012 determined a shortfall of Rs. 12,748 million (the amounts have been rounded off to the nearest million here and elsewhere in this document) translating into a decrease of Rs. 34.34 / MMBTU in average prescribed price w.e.f July 01, 2012. 1.3. Being aggrieved by the determination, the petitioner challenged issues of UFG, non operating income, Human Resource (HR) cost benchmark and provision for doubtful debts in Sindh High Court (SHC). The Honorable Court granted interim relief to petitioner and directed OGRA to determine revenue requirement till the next date of hearing as per the final revenue requirement determination for the year FY 2009-10. The Authority, accordingly, allowed Unaccounted for Gas (UFG) at 7% and treated Late Payment Surcharge (LPS), Meter Manufacturing Profit (MMP), Royalty from Jamshoro Joint Venture Limited (JJVL), and income from sale of gas condensate as non-operating incomes. The Authority, based on said decision, revised the revenue requirement at Rs. 155,421 million translating into a decrease of Rs. 15.41 per MMBTU in average prescribed price w.e.f July 01, 2012. 2. Petition 2.1. The petitioner has submitted this review petition on October 16, 2012 (petition), under Section 8(2) of the Ordinance, projecting a shortfall of Rs. 3,849 million, translating 20
into an increase of Rs. 10.43 / MMBTU effective July 01, 2012. The petitioner has further requested to grant interim relief under Rule 5(7) of Natural Gas Tariff Rules, 2002 (the Rules) to compensate for sharp increase in cost of gas and other components of the petition. 2.2. Earlier, petitioner had submitted a review motion on June 16, 2012 under Rule 16 of Natural Gas Tariff Rules, 2002 (NGT Rules) against determination of ERR for said year. The Authority observes that the said petition is under its consideration, and decision in the matter has not yet been announced. The Authority also observes that petitioner has included all its claims per the said motion for review in instant petition as well, along-with request to treat review motion as part of instant petition. The Authority, in view of request of petitioner, decides to treat said review motion as part of instant petition. 2.3. The petitioner has projected an increase of Rs. 10.43 per MMBTU w.e.f July 01, 2012 based on following claims for said year: i. Projected Weighted Average Cost of Gas (WACOG) at Rs. 331.15 per MMBTU taking into account latest actual/estimated oil prices in international market, devaluation of rupee against US $, revised projection of gas purchase volume based on actual gas availability for months of July and August, 2012 and latest indications. ii. RLNG related capital and revenue expenditure of Rs. 1,064 million and Rs. 127 million in order to implement and complete the said project on fast track under Government of Pakistan (GoP) directives. iii. Capitalization of operating fixed assets amounting to Rs. 800 million claimed under the heads of Plant & Machinery, Vehicles and Furniture, Equipment including Computers and Allied Equipments. iv. UFG at 7%. v. Exclusion of notional income on IAS 19 from tariff working. vi. Transmission and Distribution Cost Natural Gas Efficiency Project (NGEP) related Repair & Maintenance expenditures & Others. 2.4. The petitioner has submitted that FRR for FY 2011-12 is already under consideration of the Authority. It has therefore requested to include revenue shortfall as determined by the Authority for FRR FY 2011-12 after adjusting the available Gas Development 2
Surcharge (GDS) amounting to Rs. 1,663 million, in the revenue requirement for the said year. This increase will be over and above the average prescribed increase claimed by the petitioner, effective July 01, 2012. Table 1: Component-wise Breakup of Requested Increase in Average Prescribed Price Rs./MMBTU A Increase in revenue due to Sales Mix 1.66 Decrease in other income due to the exclusion of Notional Income on IAS 19 (0.64) Adjustment on account of change in sales volume 0.05 Total increase in Revenues 1.07 Increase in Cost of gas sold due to increase in WACOG 12.40 Increase in UFG Disallowance owing to revised WACOG and sales volume (2.62) Impact of increase in T&D cost,depreciation and GIC 1.31 Impact of subsidy on account of Air-mix LPG 0.07 Increase in Rate of Return 0.34 B Total Increase in Expenditures 11.49 C=B-A Total Increase in Revenue Requirement w.e.f. 1st July, 2012 10.43 Total Increase in Revenue Requirement w.e.f. 1st January, 2013 20.39 2.5. The Authority admitted the petition for consideration, as a prima facie case for evaluation existed and it was otherwise in order. 3. Proceedings 3.1. A notice inviting interventions / comments from consumers, general public and other interested / affected persons, and intimating time and place of the public hearing, was published on November 15 and 16, 2012. The Authority received applications to intervene in the proceedings from the following persons / entities: (i) (ii) CNG Dealers Association, Karachi All Pakistan Textile Processing Mills Association (iii) Mr. Arif Bilwani, Consumer. 3.2. Written submissions were also received from some of the interveners, which are appended to this order. 3
3.3. The Authority admitted all the above intervention requests. 3.4. The Authority held public hearing at Karachi on November 28, 2012, during which following persons addressed the Authority: Petitioner: (i) (ii) SSGCL s team led by Mr. Zuhair Siddiqui, Managing Director, the petitioner. Legal counsel, Mr. Mirza Mehmood Ahmad. Interveners / Participants: (i) Mr. Abdul Sami Khan, Chairman, CNG Dealers Association, Karachi, (ii) Mr. Malik Khuda Buksh, Chairman CNG Station Owners Association, (iii) Mr. Ghyias Abdullah Paracha, Chairman, Supreme Council, All Pakistan CNG Association, (iv) Dr. Qazi Ahmed Kamal, Advisor KCCI and Member, Managing Committee S.I.T.E Association of Industry, Karachi, (v) Mr. Samir Gulzar, Member Executive Committee of Federation of Pakistan Chamber of Commerce & Industries. 3.5. The petitioner was provided opportunity to present its petition. The petitioner made submissions in detail with help of multi-media presentation. Thereafter, the above interveners / participants addressed the Authority. 4. Interveners / Participants Views 4.1. The substantive points made by the interveners / participants are summarized below: (i) (ii) In an energy deficient country such as Pakistan, gas worth over $2 billion in terms of import of furnace oil is leaked or stolen due to average 10% UFG of both utilities. This gas leakage translates into 1.9 BCF, which if controlled can reduce the shortage and fulfill the gas demand. In simpler terms, the control of UFG is the key to survival of the country s industrial strength. It was vehemently criticized that Federal Cabinet decided to recover Rs. 10 billion gas theft charges from honest gas consumers. It was enquired that whether OGRA 4
is performing its role for the protection of gas consumers in this regard as per its charter, constitution and laws. (iii) The petitioner, in the instant petition, has projected its UFG at 8.75% as against 11.23% in its un-audited financial results for the nine months ended March 31, 2012. This difference shows that the Company is hiding the facts from OGRA as well as its stakeholders. (iv) Internationally UFG is under 2-3% as against 7% allowed to the petitioner company per the Court Order. It was questioned as to why the common man is paying for the inefficiencies of the Company, which is unfair and can not be justified under any law. (v) OGRA has been allowing sufficient spending on system augmentation, along with maintenance and repair of the system for several years as and when demanded by the petitioner. Therefore, the responsibility of deteriorating lines, leaking pipes and ageing network lies on the petitioner alone. In addition, meter related issues including sticky meters, under recording meters, etc also contribute to the losses. (vi) Addition of one gas connection exposes the system to up to 12 leaking points. The high domestic growth rate of around 250,000 connections per year increases the leakage chances. As a rule of thumb, with every 1,000 kilometers of distribution network the UFG increases by 0.002% due to underground leakages and aging of network. OGRA, in 2002, set the UFG levels after extensive consultation with all stake holders and experts, which remained unachieved after 2005 owing to increase in number of connections. (vii) The demand and supply gap is increasing due to high UFG. The petitioner has not been able to curtail the expenses, and also losing more and more revenues every year. The petitioner has taken hundreds of millions of dollar loan to reduce UFG, which it was doing quite impressively till 2005. The illogical and politically motivated decisions of extension in system to far flung areas with limited revenues and deteriorating lines is also contributing to UFG. Rs 15 billion has been lost by the petitioner in one year alone based on high UFG. As a result, there is tariff hike as well as load shedding. 5
(viii) In USA, natural gas prices have fallen below US $2 /MMBTU, which is around one sixth of the price of gas that Pakistan has agreed to pay to Iran. Four years ago it was at US $13 /MMBTU. This has happened even in the face of the fact that the oil prices have doubled. In fact, the exploration of shale gas has created a huge new supply which made the gas abundant and reduced the prices. The gas prices in USA will remain 50-70% cheaper than Europe and Japan due to this strategy. Shale gas was 2% of USA production in the year 2000, and now it has increased to 37% in 2012. (ix) Pakistan buys crude oil from Middle Eastern sources at a reduced price and on credit but quotes the New York and London prices for gas calculations. This is totally illogical as local product should not be linked to international commodity. (x) Gas utilities have sought the tariff increase to finance parliamentarians schemes in their respective constituencies, which is a violation of rules and that too at a time when the companies have failed to provide gas to existing consumers. Currently 90% gas schemes are in pipeline under the directives of Prime Minister, while National Assembly Standing Committee on Petroleum and Natural Resources, parliamentarians from different political parties had criticized OGRA for stopping work on their schemes. As a result, the MP&NR succumbed to the pressure and had also written a letter to OGRA to allow work on schemes under the Prime Minister s directive. In the face of acute shortages, an expansion of the transmission and distribution network will ultimately reduce gas supply to all consumers and will also lead to economic distortion of the country. (xi) Government is directly responsible for shortage of gas since it could not bring 300 MMCFD additional gas supplies into the system owing to its various pending litigations. There is ample gas available that can be tapped in the system, if GoP serious wants to resolve this issue. There are countless fields awaiting exploration, including Manzalai field having reserves of 2.4 TCF and Kohlu gas field with estimated reserve of 25 TCF. Main hurdle is law and order situation, which is sole responsibility of the Government. GoP must resolve dispute with local people in gas producing areas to facilitate the producers to inject more gas in the system. Also, circular debt is another hindrance for local companies for further exploration. 6
(xii) Billing systems must be revamped and made simplified. It was also complained that almost 25% of customers are receiving inflated and provisional bills. (xiii) Cost of domestic gas is linked to international price of Crude and HSFO and consequently payments to producers are dollar based. Depreciation of rupee has direct effect on price of gas as well. The existing pricing system of cost of gas needs to be totally revamped in order to provide national resource at affordable price. Linkage of indigenous gas with international oil prices is irrational and unjustified. Increase in oil prices is resulting in windfall gains for gas exploration companies as there is no increase in their cost structure, their fields have been in production for quite some time. (xiv) GoP, being the partner in many of the gas explorations companies, earns at the cost of its nationals. It is also the receiver of duties and levies. The consumers should not, therefore, take hit on account of dollar rupee parity. GoP should itself bear impact of foreign exchange as it is sole responsible for monetary policies through State Bank of Pakistan (SBP). (xv) GoP s new petroleum pricing policy was criticized wherein capping of US $ 36 per barrel crude was removed and revised capping has been enhanced to US $ 100 per barrel, which will result in increase in consumer price of natural gas. (xvi) Government has crippled the gas industry in pricing and exploration activities. The average numbers of exploratory wells have decreased thereby increasing the gas shortages. (xvii) Existing system of 17% return on assets of company regardless of profitability, (xviii) under loan covenant of ADB, was done long time back. This must be removed/ replaced with a more workable and practical system. Subsidy for use of gas as fertilizer feed-stock, at the cost of the industry, should be abolished. GoP should give direct subsidy to domestic and fertilizer consumers, through budget allocation, instead of the prevalent cross-subsidy mechanism of gas pricing. (xix) The petitioner has projected Rs. 9.2 billion financial charges in its Profit & Loss Account as compared to Rs. 7.5 billion last year, however the SBP has reduced the 7
markup rate by 30%. At the current markup rate the said charges of petitioner should not have increased by Rs. 2 billion. Therefore, the additional amount of Rs. 4.0 billion is baseless and engineered. (xx) The petitioner s paid up capital is Rs. 8.8 billion against projected debt of Rs. 40 billion, which reflects that the petitioner is projecting to become a highly debt burdened company with an additional debt burden of 4.55 times of its paid up capital. (xxi) The statement of gas sales indicates that CNG consumes 7.81% and generates revenue of 11.61% which shows commendable performance by the CNG sector. (xxii) The petitioner has projected loss of 1519 MMCFD i.e; 0.42% of total gas sold due to (xxiii) (xxiv) sabotage activity and law & order situation, which is unjustified. The petitioner has never ever shared this data with the share holders, media and consumers through other medium. Authenticity of such high figures is questionable. The petitioner has projected unprecedented increase of Rs.10.931 billion in distribution system as against the last year actual expenditure of Rs. 4.6 billion. It seems that some additional gas has been made available, which requires extraordinary additional investment. There is a need for investigation of such massive irregularity. Keeping in view the above, the petitioner s cost should decrease by Rs. 27 / MMBTU against their demand of increase. It was stressed that the petitioner is providing gas under Gas Load Management Program by putting CNG stations 48 hours closure in Sindh and 24 hours for Industry. The stepmother treatment to this sector is not understandable in view of the fact that CNG sector consumes 7.8% gas and generates high revenues to the tune of 11.6%. (xxv) It was objected that the petitioner has increased its supply to KESC despite the fact that it is the single largest defaulter of the petitioner. KESC s default to the Company is over Rs. 38 billion as against the its total paid up Capital of Rs. 8.8 billion. It is unjustified that the entire nation pay for such preference towards KESC by the petitioner. 8
(xxvi) The petitioner & it sister utility are the only two companies in Pakistan having guaranteed return by the GoP. 5. Authority s Jurisdiction, Determination Process and Discussion about Related Points 5.1. The Authority examines, in depth, all applications and petitions in light of relevant legal provisions. The petitions / applications are admitted for consideration, only if they meet pre-admission criteria laid in the NGT Rules. In the process, public notices are issued and all stakeholders are provided full opportunity to intervene / comment upon issues pertaining to determination of revenue requirement, in writing and at public hearings. The Authority gives full consideration to observations and comments of all stakeholders while determining revenue requirement and prescribed prices. As regards policy matters, since Federal Government (FG) is legally competent authority, policy-related pleas, reservations and sentiments of the stakeholders are brought to its specific attention for consideration before deciding retail prices for various categories of consumers. 5.2. The Authority, under Licence Conditions of licence granted to petitioner, determines total revenue requirement of the licencee to ensure that it operates prudently and achieves 17% return on its average net fixed assets in operation for each financial year, subject to efficiency related benchmarks, imposed from time to time. The Authority, may, however, in consultation with GoP and the licencee prescribe revised rate of return or a different basis for determination of a return, pursuant to Licence Condition No. 5.3 of the licence granted to petitioner. The Authority has developed a new tariff regime for regulated natural gas sector of Pakistan, which, in course of legally mandatory consultation process, is with GoP since October, 2005. The proposed tariff regime was similar to the existing tariff regime; however, it had been designed to operate on market based rate of return and excludes some activities from the ambit of regulated activities, presently carried out by the gas utilities. The GoP, during the previous year, had forwarded its comments wherein it was pretty much opting to adhere with existing tariff regime. The GoP had also suggested to fix the return of gas utilities at a floor of 13.5% and cap of 17.5%, as against market based variable rate of return, proposed in tariff study. Also, it suggested no return in respect 9
of GoP funded projects undertaken by the utilities. The Authority, however, is of the view that study was conducted a long time ago and may have lost its utility for most of the part owing to continuous evolution in regulatory best practices. Therefore, a fresh study on tariff regime including rate of return should be instituted. 5.3. The petitioner, in the instant petition, has mainly sought review of cost of gas / WACOG, based on actual changes in well-head gas prices and relevant factors, in petition submitted under section 8(2) of the Ordinance. However, petitioner has incorporated all its claims as per review motion against DERR for the said year, as explained in para 2.2 above, in the instant petition as well. The Authority accepts the petitioner s request as per para 2.2 and decides to treat the review motion filed under rule 16 of the NGT Rules as part of the petition filed under section 8(2) of the Ordinance. 5.4. Well-head gas prices for said year are based on actual prices of crude oil and HSFO as well as exchange rate during the period December, 2011 to November, 2012. Latest trend in recent months is to be taken into account, while determining WACOG to ensure that determination is rational and fair to all stakeholders. 5.5. Operating revenues, operating expenses and changes in asset base are scrutinized in depth by concerned departments of Finance and Gas of the Authority. Appropriate benchmarks are set in critical areas of operation to ensure that cost of petitioner s inefficiencies and imprudence are not passed on to consumers. Independent audits are also conducted, wherever deemed necessary by the Authority. The operating expenses of the licencee would have been much higher than what they are and so would have been gas prices had there been no such control. 6. Operating Fixed Assets 6.1. The petitioner has requested to allow projected capital expenditure of Rs. 16,615 million as against Rs. 15,814 million provided in DERR for said year in respect of following items:- 6.2. RLNG projects / LNG Pipeline Infrastructure: 6.2.1. The petitioner has submitted that the Authority, at the time of DERR for the said year, had deferred the capital and revenue expenditure relating to RLNG on the 10
grounds that the same will be considered at the time of mid-year review. The petitioner has, therefore, requested the Authority to allow capital expenditure of Rs. 1,064 million and revenue expenditure of Rs. 127 million for the said year. The petitioner has informed that it has revised the expenditures relating to RLNG in the light of ECC decision in the meeting held on September 27, 2012. The petitioner has explained that it has been envisaging 42 dia X 17 KM pipeline from tie-in point-2 to Pakland SMS. This amount will be used for design/engineering, survey, land acquisition and procurement of material, etc. 6.2.2. The Authority notes that the current project is different from the earlier one submitted by the petitioner at the time of DERR for the said year. The Authority, therefore, directs the petitioner to submit a separate comprehensive report describing the project details / working based on the recent GoP directives / initiative for LNG imports. 6.2.3. The Authority also notes that no significant progress has yet been made by the LNG license holders, and the project initiated by the Government has also not matured. The Authority, keeping in view the status of the project, pends the amount claimed under the above head. However, the petitioner is advised to resubmit the claimed capital expenditure as soon as the GoP directives / initiative on LNG imports starts materializing. 6.3. Plant & Machinery 6.3.1. The petitioner has requested to allow Rs. 1,689 million on account of plant & machinery as against Rs. 1,322 million allowed by the Authority in DERR for said year. The petitioner has requested to allow additional amount of Rs. 367 million for construction of new power house at Karachi Terminal (KT) and installation of gas engine generator at Head Office owing to deteriorating electricity conditions. 6.3.2. The Petitioner has emphasized that KT forms the backbone and nerve centre of its core business of natural gas transmission and distribution. Shortage of electricity makes the petitioner vulnerable to operational losses. The petitioner has further asserted that Genset for head office is 14 years old, therefore frequent problems are arising. 11
6.3.3. The Authority notes that request of petitioner for installation of new power house at KT and new gas engine genset for Head Office merit consideration. The Authority, keeping in view the capitalization of last four years, provisionally allows 20% of the additional amount claimed by the petitioner i.e. Rs. 74 million. Accordingly, the Authority provisionally includes Rs. 1,396 million on account of plant & machinery in the rate base for the said year. The remaining amount shall be considered at the time of FRR for the said year. 6.4. Furniture, Equipment including Computers & Allied Equipments 6.4.1. The petitioner has claimed Rs. 280 million on account of above head as against Rs. 130 million provisionally allowed at the time of DERR for the said year. The petitioner has informed that they have to upgrade both CC&B and ERP software versions due to increase in customers. The petitioner has, therefore, requested to allow Rs. 150 million in addition to already allowed capital expenditure of Rs 130 million for the said year. 6.4.2. The petitioner has submitted that it has been facing performance issues on day to day basis due to increase in number of consumers and transactions associated with them. The petitioner has asserted that it shall be able to give better service to its customers by upgrading the CC&B and ERP software version 6.4.3. The Authority, based on the justification submitted by the petitioner, decides to provisionally allow an additional amount of Rs. 60 million based on the capitalization trend of the last four year. The Authority, accordingly, provisionally includes Rs. 190 million on this account for the said year. 6.5. Vehicles 6.5.1. The petitioner has submitted that it has revised its claim and requested to allow Rs. 423 million on account of vehicle for said year as against its earlier claim of Rs. 560 million for the said year. The petitioner has argued that it has projected an addition of 489 vehicles for operational purposes for enhancement of UFG reduction oriented activities, provision of connections to new customers, beefing up surveillance and monitoring, opening of new CFCs and zonal offices, etc. Moreover, the old vehicles have become uneconomical due to frequent break downs and are badly affecting efficiency. 12
6.5.2. The Authority notes that out of total provisionally allowed amount of Rs. 140 million at the time of DERR for the said year, Rs. 57 million has been provided on account of NGEP for UFG reduction related activities. The Authority desires the petitioner to control this menace of UFG and provide better services to its customers. The Authority, however, based on the above justifications and past trend allows Rs. 210 million including Rs. 57 million in respect of NGEP for the said year. 6.6. Fixed Assets Determined by the Authority 6.6.1. The value of additions in assets claimed by the petitioner and provisionally allowed by the Authority for the said year is as under: Table 2: Summary of Asset Addition Determined by the Authority Particulars Rs. in Million Determined by the The Petition Authority FY 2012-13 Plant and machinery 1,689 1,395 Furniture, equipment Computers & 280 190 allied equipments Vehicles 423 210 Remaining Items 14,222 14,222 Gross Addition 16,615 16,018 6.7. Depreciation expense claimed by the petitioner comes down by Rs. 53 million to Rs. 4,075 million as a consequence of reduction in additions to fixed assets for the said year, as discussed above. 6.8. In view of the above, the Authority provisionally determines closing operating fixed assets for the said year at Rs. 75,568 million duly taking into account the adjustment referred in above paras. 7. LPG Air-Mix Subsidy 7.1. The petitioner has submitted that construction work at Surab was completed in December, 2010 and it approached OGRA on January 05, 2011 for pre-commissioning and inspection of the plant. However the 3 rd party inspection has been delayed due to law and order situation and security clearance reasons. The petitioner has sated that 13
now inspection has been conducted and they have already made request to the Authority to grant provisional permission to operate the plant. The petitioner has stated that the plant will soon be fully operational. The petitioner has requested the Authority to allow subsidy of Rs. 25 million pertaining to said LPG Air-Mix plant at Surab. 7.2. The Authority observes that 3 rd party inspectors have pointed out various deficiencies at Surab. As a result, the permission / marketing license for the operation of the said plant has not yet been awarded. 7.3. The Authority, based on the status of the license, decides to pend the subsidy on this account for the said year subject to issuance of the license. 8. Operating Expenditure 8.1. Cost of Gas 8.1.1. The petitioner has projected WACOG to increase to Rs. 331.15 per MMBTU as against Rs. 322.37 per MMBTU, projected at time of determination of ERR for the said year, based on following parameters: (i) (ii) Actual gas purchases for July and August, 2012 and estimates for September, 2012 to June, 2013. Well-head gas prices of various producing fields for the period July 1, 2012 to December 31, 2012, as already notified by Authority. (iii) US $ exchange rate for payment of monthly invoices of gas producers has been assumed at Rs. 94.8530 for period July-December, 2012. (iv) For computation of wellhead gas price for January to June, 2013, in accordance with provisions of existing GPAs between producers and GoP, the petitioner has adopted actual price of crude oil /HSFO for the period June to September, 2012 and estimated the price for October and November, 2012 by applying per month escalation @ 0.62% and 0.49% respectively. 14
(v) US $ exchange rate assumed at Rs. 97.64 for calculation of well-head gas prices as well as for monthly invoicing to gas producers for the period January June, 2013. 8.1.2. On the basis of above parameters, petitioner has estimated average C & F prices of crude oil and HSFO for June-November, 2012 at US $ 108.88 per barrel and US $ 650.61 per ton respectively, and has used them for computation of well-head prices for January-June 2013. 8.1.3. The Authority observes that well-head prices of gas for all fields in Pakistan are computed in accordance with GPAs and/or provisional pricing parameters, available on record, and are notified in exercise of powers vested in it under the Ordinance. 8.1.4. The Authority notes that the actual average C&F prices for the period June to November, 2012 of crude oil and HSFO are close to the petitioner s projections. Therefore, the Authority finds that, on the basis of currently available information and revised projections of gas sale and purchase volume, the computation of cost of gas submitted by petitioner are reasonable. 8.1.5. The Authority, therefore, provisionally determines WACOG at Rs. 331.15 per MMBTU and cost of gas at Rs. 136,092 million for said year. 8.2. Un-accounted for Gas (UFG) 8.2.1. The petitioner has project UFG at 8.75% (37,665 MMCF) for the said year. The petitioner has computed UFG disallowance at 7% (i..e. Rs. 2,365 million) in line with interim stay granted by the SHC. 8.2.2. In view of above, the Authority accepts the UFG disallowance at Rs. 2,365 million on account of UFG for the said year. 8.3. Transmission & Distribution Cost: 8.3.1. Natural Gas Efficiency Project (NGEP) related Expenditure: Repair & Maintenance & Others 15
8.3.1.1. The petitioner has claimed Rs. 198 million on account of NGEP for the said year. The petitioner has argued that the Authority, at one side, has approved the said project, in principle, and appreciated the initiative for controlling UFG menace and on the other side, it disallowed Rs. 198 million. The petitioner has provided the following comparison of claimed NGEP revenue expenditure versus allowed by the Authority: Table 3: Comparative of NGEP Revenue Expenditure Particulars Claimed by the Petitioner Allowed in DERR Rs. in Million Disallowance FY 2012-13 (a) T&D cost: Repair & Maintenance (NGEP) (i) Coating & wrapping of distribution pipelines 118 95 24 (ii) Overhead / underground leaks survey / rectification 624 499 124 Sub-total 742 594 148 (b) T&D cost: Other (NGEP - UFG curtailment) (i) Training 25 13 13 (ii) Appliances Efficiency Pilot Project 75 38 37 Sub-total 100 50 50 Total 842 644 198 8.3.1.2. The petitioner has argued that this partial disallowance of cost would hamper the work flow and achievement of physical targets already agreed with the World Bank (WB) and GoP. These physical targets have been submitted in PC-1 and also approved at the level of ECNEC and MP&NR. 8.3.1.3. The petitioner has further asserted that achieving targets, controlling measurement and reporting of actual performances to WB and other agencies would also be distorted. Ultimately, the targets set for achieving level of UFG will also be disturbed. 8.3.1.4. In view of above, the petitioner has requested the Authority to allow above expenditure in order to comply with the conditions laid down in the WB loan and agreed upon by several other Government Departments. 8.3.1.5. The Authority notes that the petitioner is trying to evade from his commitments made for controlling UFG menace based on this plea that a minimal amount of Rs. 198 million has been disallowed. The Authority, 16
however, notes that it had approved the overall project in principle, and had only rationalized the cost / expenditure in view of the historic trend and other factors. 8.3.1.6. The Authority, overseeing the Company s intent to evade from the targets set for achieving UFG based on this disallowance, decides to provisionally allow the requested amount i.e. Rs. 198 million for the said year. The Authority further notes that entire amount claimed on account of NGEP has now been allowed to the petitioner, and the Company remains with no plea that its targets set for UFG now can t be achieved. The Authority further directs the petitioner to achieve its set targets of UFG failing which the burden of the same will be met through its own profits. 8.3.2. Revenue Expenditure relating to RLNG: 8.3.2.1. The petitioner has claimed Rs. 140 million on account of revenue expenditure relating to RLNG as against its initial estimates of Rs. 127 million for the said year. The petitioner, in view of the latest developments discussed in para 6.2.1 has revised RLNG related revenue expenditures. 8.3.2.2. The Authority, as per the decision in para 6.2.3, decides to pend the same subject to the actualization at the time of FRR for the said year. 9. Revenue Shortfall of FY 2011-12 9.1. The petitioner has requested to include the revenue shortfall arising from the determination of FRR of FY 2011-12 as part of the revenue requirement for the said year. The petitioner has submitted that gas development surcharge to the extent of Rs. 1,663 million is available in FY 2011-12 to adjust the shortfall for the same period. The petitioner also, in the public hearing held at Karachi, has requested to allow a provisional amount in this respect, in case of delayed issuance of the decision of FRR for FY 2011-12. 9.2. The Authority accepts the petitioner s request in this respect and decides to allow a provisional amount of Rs. 2,000 million in tariff calculation for said year. The Authority will adjust the difference, if any, in forthcoming determinations. 10. Notional Income on IAS-19 Provision 17
10.1. The petitioner has requested to treat notional income on IAS-19 provision (Rs. 210 million) as non-regulated activities, since the same is not directly related to its core business of transmission, distribution and sale of natural gas. 10.2. The petitioner has asserted that present treatment of notional interest income on IAS-19 provision was not practiced by Ex-Price Determining Authority. The petitioner is, therefore, of view that the Authority should have sought specific policy guideline from GoP on this matter, since in the absence of any directive, adding notional income by the Authority is unjustified and unlawful. The petitioner has requested to re-consider its decision and exclude notional income on IAS-19 provision from tariff working 10.3. The Authority observes that the arguments of petitioner, in respect of notional income on IAS-19 provision, are mere repetition, and the Authority has already taken those into account while determining DERR for said year. The Authority, therefore, maintains its decision on this account. 11. Workers Profit Participation Fund (WPPF) 11.1. The petitioner has claimed WPPF at Rs. 473 million. However, due to adjustments in the components of revenue requirements as discussed above, WPPF is recalculated and provisionally allowed at Rs. 457 million. 12. Determination 12.1. The Authority, after taking into consideration points raised by interveners, clarifications provided by petitioner, scrutiny of petition and available record, provisionally determines the shortfall in estimated revenue requirement for said year at Rs. 5,336 million (Annexure-I) for the said year. 12.2. The Authority decides to adjust the shortfall to the extent of GDS available during July December, 2012. The Authority further decides to adjust the remaining shortfall by increasing the average prescribed price by Rs. 28.28 per MMBTU w.e.f January 01, 2013, translating into an increase of 6.14% for all categories of consumers except fertilizer feedstock, which is governed by sector specific policy by the GoP. The provisional category-wise prescribed prices have been revised based on existing 18
prescribed as well as gas sale prices for each category of consumers as advised by the GoP. 12.3. Sale prices, under Section 8(3) of the Ordinance are advised by FG for notification in the Official Gazette by Authority. Revised provisional prescribed prices w.e.f January 01, 2013 are subject to the condition that these may be re-adjusted upon receipt of GoP advice under Section 8 (3) of the Ordinance in respect of the sale price of gas for each category of retail consumers provided that the overall increase in the average prescribed price remains unchanged so that the petitioner is able to achieve its total revenue requirements in accordance with Section 8 (6) (f) of the Ordinance. 13. Public Critique, Views, Concerns, Suggestions 13.1. The Authority has recorded concerns of the interveners and participants in para 4 above, which include matters relating to policy and do not fall under the purview of the Authority but affect the consumers. Specific attention of the GoP is drawn to these issues for consideration and necessary action. 13.2. The Authority observes that petitioner is in violation of License Condition No. 34, wherein it is obligated to ensure continuous and reliable supply of natural gas to its existing consumers. The petitioner should therefore endeavor to ensure early compliance of the said condition. Sabar Hussain Vice Chairman/ Member (Oil) Saeed Ahmed Khan Chairman Islamabad, November 30, 2012 19
ANNEXURE - II I. Computation of Estimated Revenue Requirement for FY 2012-13 Rs. in Million Particulars The Petition Adjustment Determined by the Authority Gas sales volume -MMCF 390,286 390,286 BBTU 368,972 368,972 July-Dec 2012 180,248 180,248 Jan-Jun 2013 188,724 188,724 "A" Net Operating Revenues Net sales at current prescribed price 150,688 150,688 Meter rentals 661-661 Amortization of deferred credit 401-401 Sale of gas condensate (net of non-operating income) 75 75 Gas transportation charges 19-19 Revenue from JJVL 2,127-2,127 *Royalty income from JJVL - - - *Late payment surcharge (LPS) - - *Meter manufacturing profit (MMP) - - - Notional income on IAS 19 provision - 245 245 Other operating income 917 917 Total Operating Revenue "A" 154,888 245 155,133 "B" Less: Operating Expenses Cost of gas 136,092 136,092 UFG Adjustment (2,365) - (2,365) Transmission and distribution cost 9,519 (127) 9,392 Gas internally consumed 177 177 Depreciation 4,128 (53) 4,075 Other charges 18 18 **Provisional amount of Revenue shortfall pertaining to FY 2011-12 2,000 2,000 W.P.P.F 473 (16) 457 Total Operating Expenses "B" 148,041 1,804 149,845 "C" Operating profit (A-B) 6,848 (1,559) 5,288-22 -
Rs. in Million Return required on net operating fixed assets: Net operating fixed assets at beginning 63,871-63,871 Net operating fixed assets at ending 76,112 (544) 75,568 139,982 (544) 139,439 Average net assets (I) 69,991 (272) 69,719 Meter manu. Plant asset at beginning 218 218 Meter manu. Plant asset at ending 286 286 504-504 Average net assets (II) 252-252 Net LPG air mix project asset at beginning 1,210-1,210 Net LPG air mix project asset at ending 1,154-1,154 2,365-2,365 Average net assets (III) 1,182-1,182 Deferred credit at beginning - Assets related to Natural Gas Activity Particulars The Petition Deferred credit at ending - Assets related to Natural Gas Adjustment Determined by the Authority 6,919 6,919 Activity 6,759 6,759 13,678-13,678 Average net deferred credit (IV) 6,839-6,839 "D" Average (I-II-III-IV) 61,718 (272) 61,446 "E" 17% return required 10,492 (46) 10,446 "F" Excess in return required (E-C) (Gas Operations) 3,644 1,513 5,158 Additional revenue requirement for Air-Mix LPG "G" Project 204 (25) 179 Total Shortfall / (Surplus) (F+G) 3,849 1,488 5,336 Increase in average prescribed price effective (Rs. / MMBTU) w.e.f July 01, 2012 10.43 4.03 14.46 Increase in average prescribed price effective (Rs. / MMBTU) w.e.f January 01, 2013 20.39 7.88 28.28 Estimated revenue requirement (B+E+G) 158,737 1,733 160,470 Average Prescribed Price (Rs. per MMBTU) 418.83 4.03 422.86 * LPS, MMP, Sale of Gas Condensate (net of non-operating income) and Royalty Income from JJVL has been calimed by the petitioner as non-operating in the line of the Stay Order granted by Sindh High Court. Rs. 2,000 million has been provisionally allowed to the petitioner in respect of revenue shortfall pertaining to FRR for FY 2011-12 23
II. Provisional Prescribed Prices for FY 2012-13 (i) CATEGORY Prescribed Prices w.e.f. July 01, 2012 Average Prescribed Price w.e.f July 01, 2012 Prescribed Prices w.e.f. January 01, 2013 Domestic Sector: a) Standalone meters: Rs. per MMBTU (i) Upto 100 M 3 per month 100.00 422.86 106.14 (ii) Upto 300 M 3 per month 200.00 422.86 212.28 (iii) Over 300 M 3 per month 500.00 422.86 530.69 b) Mosques, churches, temples, madrassas, other Religious Places and Hostels attached thereto; Government and semi- Government offices and Hospitals, Government Guest Houses, Armed Forces messes, Langars, Universities, Colleges, Schools and Private Educational Institutions, Orphanages and other Charitable Institutions along-with Hostels and Residential Colonies to whom gas is supplied through bulk meters. (i) Upto 100 M 3 per month 100.00 422.86 530.69 (ii) Upto 300 M 3 per month 200.00 422.86 530.69 (iii) Over 300 M 3 per month 500.00 422.86 530.69 (ii) (iii) (iv) Commercial: All establishments registered as commercial units with local authorities or dealing in consumer items for direct commercial sale like cafes, bakries, milk shops, tea stalls, canteens, barber shops, laundries, places of entertainment like cinemas, clubs, theaters and private offices, clinics, maternity homes, etc. All off-takes at flat rate of 600.00 422.86 636.83 Special Commercial (Roti Tandoors): (i) Upto 100 M 3 per month 100.00 422.86 106.14 (ii) Upto 300 M 3 per month 200.00 422.86 212.28 (iii) Over 300 M 3 per month 600.00 422.86 636.83 Ice Factories: All off-takes at flat rate of 600.00 422.86 636.83 23
CATEGORY Prescribed Prices w.e.f. July 01, 2012 Average Prescribed Price w.e.f July 01, 2012 Prescribed Prices w.e.f. January 01, 2013 (v) (vi) Rs. per MMBTU Industrial: All consumers engaged in the processing of industrial raw material into value added finished products irrespective of the volume of gas consumed including hotel industry but excluding such industries for which a separate rate has been prescribed. All off-takes at flat rate of 460.00 422.86 488.23 Captive Power: All off-takes at flat rate of 460.00 422.86 488.23 (vii) (viii) (ix) Compressed Natural Gas (CNG): All off-takes at flat rate of 618.55 422.86 656.52 Cement: All off-takes at flat rate of 700.00 422.86 742.97 Pakistan Steel: All off-takes at flat rate of 460.00 422.86 488.23 (x) Fauji Fertilizer Bin Qasim Ltd.: (i) For gas used as feed-stock for Fertilizer (upto 60 MMCFD) 116.27 422.86 123.41 (ii) Additional allocation (10 MMCFD) (Provisional) 60.67 422.86 60.67 (iii) For gas used as fuel for generating steam and electricity and for usage in housing colonies for fertilizer factories. 460.00 422.86 488.23 (xi) (xii) Power Stations: All off-takes at flat rate of 460.00 422.86 488.23 Independent Power Producers: All off-takes at flat rate of 460.00 422.86 488.23 23