Open Access Regulations For City Gas Distributors To Increase Competition, Simplify Tariffs

The Petroleum and Natural Gas Regulatory Board has notified access codes for new city gas distributors that would help them transport, distribute and price natural gas.

The move is expected to simplify gas pipeline tariffs and attract investment for building new gas infrastructure. The regulations will also increase competition in newer cities coming under gas distribution networks.

As part of the open access code, brought out in a government notification, existing CNG stations operated by dealers and oil marketers won’t be considered as “third-party shippers” to allow access in gas stations. This means, oil marketers already selling CNG won’t be allowed to participate through the open access route or seek access to retail CNG on their own.

The regulation also prevents existing oil marketers from setting up their own dispensing units in their network if they’re let out to supply compressed natural gas to incumbent players.

The notification is also expected to bring relief to existing players, including Indraprastha Gas Ltd. and Mahanagar Gas Ltd. that earn significant profit margins from CNG segment, even as they’re dependent on oil marketers for last-mile connectivity to customers. That’s because it may reduce the bargaining power of oil marketers to negotiate trade discounts.

This also reduces a significant risk to margins earned by incumbent players in the CNG segment—a substantial portion of which is catered to by the oil marketers.

The city gas distribution and CNG transportation rate regulations are largely unchanged as proposed in the draft, with 12% post-tax return on capital employed, though the notification also mentions discovery of rate through bidding.

The regulation also allows for incorporating cost of transportation for distance exceeding 300 kilometres from the source of gas. For this, the regulator has ensured transmission tariff for two zones—zone-1 within 300 km from gas source; and zone-2 beyond 300 km. The transmission tariff will be decided on an annual basis by the regulator.

The new tariffs will be revenue neutral—or won’t have significant impact on revenues—for companies with pipeline infrastructure, according to Emkay Global. The tariff for zone-1 will be 40% of the zone-2 tariff.

This would mean consumers in zone 2 along the northern grid may witness tariff hikes, the brokerage said.

The regulations also aim to ramp up competition in city gas distribution segment by declaring gas networks as common or contract carriers one by one.

Oil marketers that have authorisation to distribute CNG in 77 areas are keen to foray into large-volume CGD areas like Delhi, Mumbai and Pune when the competition is allowed. “Competition is likely to lead to de-rating and margin fall,” analysts at ICICI Securities said in a report. “IGL is most vulnerable to de-rating and MGL to margin contraction once competition kicks in.”