Gas tariff petitions – nothing to worry

The two gas marketing companies, SSGC and SNGPL had filed respective petitions for determination of estimated revenue requirement for FY21, on the last day of 2019. The regulator has now issued public notices inviting comments on the said petitions as the new prescribed prices are scheduled to go effective from July 1, 2020.

SNGPL has asked for a near 90 percent increase in average prescribed prices for FY21 to Rs1335 per MMBTU from Rs730 per MMBTU at present. SSGC on the other hand has asked for a much modest increase at 20 percent year on year to Rs934 per MMBTU. The likelihood of these petitions being approved as requested, is extremely low, given the history.

Recall that the SNGPL had applied for a similar increase of nearly 90 percent for FY20 but ended up getting no more than 17 percent. The regulator's stance on treatment of a number of variables is not likely to change overnight as Ogra has a completely different understanding of how to treat prior years' shortfall, which ones to include and which to disregard, and the ever-present bone of contention that is the allowance for Unaccounted For Gas (UFG).

Of Rs671/mmbtu increase petitioned by SNGPL, 80 percent pertains to prior year shortfall at Rs537/mmbtu. Three-fourth of the prior year shortfall is related to the contentious allowance up to FY18, which was previously also disallowed by Ogra. It is hard to see the regulator opting for a different approach for the treatment of a previously disallowed part of the petition.

At best, SNGPL would be lucky to be allowed Rs150/mmbtu in lieu of prior year adjustments, if the entire shortfall for FY19 and FY20 is allowed. The increase other than prior year shortfall stands at Rs133/mmbtu, which will also get significantly readjusted as the petition takes no account for UFG losses as per allowance. The regulator has included Rs30-35/mmbtu on account of UFG in the previous two decisions – and is likely to continue the practice.

The SSGC on the other hand, has made a plea for a much reasonable increase, much in line with its previous petitions. SSGC was allowed more than it asked for in FY20, as prior year shortfall was not a big part of the petitions, leaving less to be disregarded. If SNGPL's non-prior year plea is accepted, SSGC is likely to get its petition through in its entirety. The process of revenue determination is a long one, and Ogra considers every tiny detail, before making the decision. But it is difficult to see past a 20-30 percent increase in prescribed prices over previous year for FY21.

As a footnote, SNGPL has projected the sales volume drop by another 14 percent from previous year. A quarter of SNGPL's gas sales volume will have been worryingly shaved in two years, if the final determination considers the petitioned amount. This leads to shrinking gas production and higher share of LNG in the mix, which should make way for considerably higher price regime in the future. For now, the price freeze is in place, and if the PM sticks to his decision, expect no change in the final gas prices, and expect another row for “prior year shortfall" inserted for the next petition.