Tariff Regime for Regulated Natural Gas Sector in Pakistan by Josh and Mak International

OGRA’s document titled “Tariff Regime for Regulated Natural Gas Sector in Pakistan” provides comprehensive guidelines and methodologies established by the Oil & Gas Regulatory Authority (OGRA) for determining and regulating tariffs in Pakistan’s natural gas sector. This policy framework is aimed at ensuring transparency, efficiency, and fairness in the transmission, distribution, and sale of natural gas, while balancing the interests of all stakeholders involved.

Legal Scope

1. Authority and Guidelines:
   • Under Section 6(2)(t) of the OGRA Ordinance 2002, OGRA, in consultation with the Federal Government and licensees, determines a reasonable rate for licensees involved in regulated activities pertaining to natural gas.
   • Section 6(2)(s) empowers OGRA to prescribe, review, approve, and regulate tariffs for these activities.
   • Section 7 of the Ordinance stipulates OGRA’s responsibility to determine or approve tariffs, subject to policy guidelines.
   • Section 21 allows the Federal Government to issue policy guidelines to OGRA on matters of policy, consistent with the provisions of the Ordinance or the Rules.
2. Revenue Requirement:
   • Section 8 of the Ordinance empowers OGRA to determine the total revenue requirement and prescribed prices for each licensee engaged in the transmission, distribution, and sale of natural gas to retail consumers.
   • The Natural Gas Tariff Rules 2002 provide criteria for evaluating petitions for revenue requirements.

General Principles

1. Tariff Type and Model:
   • OGRA determines either an integrated or separate tariff for regulated activities, depending on the respective licenses and petitions.
   • The tariff model is based on the Return on Assets (ROA) approach, computed using the Weighted Average Cost of Capital (WACC).
2. Tariff Design and Revenue Requirement Methodology:
   • The tariff regime operates on a Cost Transfer Pricing Mechanism, aggregating all prudent expenses related to regulated activities to form the revenue requirement.
   • Components include the cost of gas, operating expenses (OPEX), return on regulated assets base (RAB), taxes, levies, and transportation charges.
3. Transportation Tariffs:
   • Transportation tariffs for both transmission and distribution activities are determined on an annual basis, gradually moving towards multi-year tariffs.
   • The transportation tariff for transmission activities covers operating expenses plus return and is charged to shippers under the Third Party Access (TPA) regime.
   • Similarly, the transportation tariff for distribution activities includes operating expenses plus return and is charged to retail consumers and other private parties.

Specific Methodologies and Assumptions

1. Rate of Return:
   • A market-based rate of return (WACC) is applicable for both transmission and distribution networks, computed on the value of fixed assets in operation.
   • The WACC is pre-tax and considers the risk-free rate, market return, market risk premium, and cost of debt.
2. Revenue Requirement Components:
   • Cost of Gas: Determined based on wellhead gas price notifications and the weighted average cost of indigenous gas.
   • Operating Revenues: Includes all revenues generated from regulated activities, excluding financial charges, taxes, and dividends.
   • Operating Expenses: Includes all prudent expenses related to the operation of regulated activities, with specific exclusions for financial expenses and taxes.
3. Special Provisions:
   • Non-Core Activities: Activities undertaken by licensees through subsidiary companies are treated separately, with a fair allocation method used to share expenses.
   • Corporate Social Responsibility (CSR): Encourages expenses related to health, environment, education, and sports in underdeveloped areas, with a 50% contribution from licensee profits.
   • Prior Years Adjustment: Allows for adjustments in revenue requirements based on previous shortfalls or over-expenditures.
   • Efficiency Benchmarks: Implements yardstick regulation to encourage efficiency and cost-effectiveness.
4. Depreciation and Amortization:
   • Depreciation is calculated using the straight-line method at historical cost, effective from the date the asset is commissioned.
   • Assets built through government grants, consumer contributions, or on a Build Own Operate and Transfer (BOOT) basis are amortized over their prescribed periods and included in the RAB.
5. WACC Computation:
   • The WACC is computed using the formula: WACC=Re×(+)+Rd×(+)WACC=Re×(D+EE​)+Rd×(D+ED​), where Re is the cost of equity, and Rd is the cost of debt.
   • The cost of equity is calculated using the Capital Asset Pricing Model (CAPM), while the cost of debt is based on KIBOR rates plus a 2% spread.
6. Implementation and Effectiveness:
   • The tariff regime applies to both bundled and unbundled gas network structures in Pakistan.
   • The regime takes immediate effect prospectively from the fiscal year 2018-19 and onwards.

Conclusion

The Tariff Regime for Regulated Natural Gas Sector in Pakistan establishes a structured and transparent framework for determining tariffs, ensuring fair returns for licensees while protecting consumer interests. By incorporating market-based methodologies and efficiency benchmarks, OGRA aims to foster a balanced and sustainable natural gas sector in Pakistan. This regime not only addresses the financial and operational aspects of gas utilities but also aligns with broader policy objectives, contributing to the overall stability and growth of the energy sector.