Competition Ahead!

Recently the Petroleum and Natural Gas Regulatory Board (PNGRB) floated a concept paper related to determining network rate of an existing player for a third party / new entrant to access its network.

For the uninitiated, the City Gas Distribution (CGD) companies have two kinds of exclusivity i.e. 'infrastructure' and 'marketing' for any Geographical Area they service. The infrastructure exclusivity is for 25 years meaning that the CGD company would have right/obligation to lay the pipeline infrastructure for 25 years. However, end-users would get a choice of who supplies the gas only after 5 or 8 years (end of marketing exclusivity of an incumbent player). Thus any third party / new entrant could access the pipeline of the incumbent CGD Company and supply gas to the consumer.

The concept paper broadly proposes two tariff/ rate mechanism for such access

1. Based on Cost of servicing the customers

a. Return on Capital computed by PNGRB based on pre-decided norms of land, CNG station cost, financing etc

b.Entities will self-determine the reserve price based on approach prescribed by PNGRB

1. Auction based on Reserve price determined by PNGRB viz. Rs 30 per MMBtu for Transportation rate for CGD Network and Rs.2 per Kg for Transportation

This initiative of open access needs to be looked into from three broad perspectives

1.Customer - Whether customers will get choice of suppliers or cheaper gas?  - The answer to this is “not really” as domestic gas gets allocated to the CGD company in the current scheme of things. Thus if any new third party / entrant were to desire to secure gas and use open access, it would not get “domestic gas” which is cheaper than “imported gas”. Domestic gas availability and allocation to smaller independent agencies (on exchange or otherwise) can probably help! 

2. Players - Will it harm players ability to lay infrastructure?  - My view is that the impact on companies who have been operational for substantial period shall be ‘limited’ unlike  “very significant” as perceived by many. This is mainly because such companies   

• have the brand, infrastructure, customer relationship to leverage
• have got assured returns on their infrastructure (unlike new players who have bid aggressively) giving them sufficient financial muscle to source gas efficiently and service customers
• have a shareholding of national oil companies giving them ability to enter into the CGD areas of the other company trying to poach its customers

However, this does have the potential to significantly harm the new players (operational in the last 2-3 years) who have bid near zero infrastructure tariff. Such companies are facing multiple challenges i.e. laying pipeline wherein its difficult to get right of way, securing conversions (EV push, low automobile sales, old vehicles etc) , areas with low  population density and per capita income etc. Imagine the situation, when the customer base will be targeted post marketing exclusivity period! 

 3. Policy/ Regulatory –Is this going to transform the CGD landscape? OR Can it be easily implemented with stated norms?

Transformation: Recently in the United Kingdom, the end consumers paid  heavy price of increased competition. Over a period of time the regulator considered it a “good transformation” by increasing the number of service providers from the erstwhile 6 monopolies to more than 70. However, the transformation failed miserably as many of the new players proved to be unsustainable, causing them to crash.

Implementation: The proposed compensation mechanism has its inherent issues in terms of difficulty to have a common/ normative land cost, cost of power as it would vary widely by the geographies. Further as in the past, some companies may also end-up challenging the powers on rate determination.

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