The Hindu Business Line : `Regulated tariffs more important than pipeline competition' -- Mr Proshanto Banerjee, Chairman, GAIL (India)

The adoption of a well-defined tariff methodology will promote healthy competition among gas marketing entities, and consumers would then have the option of sourcing gas from different locations or producers through the common grid. This would ensure optimal tariffs across the national gas grid, the Chairman of GAIL (India) Ltd, Mr Proshanto Banerjee, told Business Line in a recent interview.

Excerpts from the interview:

There has been lot of debate on natural gas tariffs. How does the present mechanism ensure that a monopoly supplier like you is not overcharging consumers for supplies through the cross-country pipelines?

I would clarify that the transportation tariffs for the two inter-State pipelines of GAIL — that is, the Hazira-Bijapur-Jagdishpur (HBJ) Pipeline and the Dahej-Bijapur Pipeline (DBPL) — have been mandated by the Government.

Natural gas pipelines are considered natural monopolies. That is why, world over, regulators rely on stringent regulation of the pipeline tariff with well-defined incentives for achieving better efficiencies, rather than promotion of competition in building parallel pipelines.

The Centre is already working on forming an independent regulatory authority for the Petroleum and Natural Gas Sector. Accordingly, in the future, the Regulator is expected to regulate the gas pipeline transportation tariff.

The tariffs charged by GAIL for HBJ and DBPL pipelines came under the scanner recently after Reliance proposed supply of gas to NTPC through the 1,400-km pipeline from the Krishna-Godavari (KG) basin to Gujarat at a tariff that is almost half of the comparative tariff for HBJ. While the Tariff Commission is to submit its report soon, is there a case for maintaining your present level of tariff?

GAIL has already offered to transport the KG basin gas to the proposed NTPC projects at a rate that is cheaper by 16 per cent than that of their current offer (from Reliance). Therefore, I firmly believe that on a like-to-like basis, GAIL's tariff is very competitive vis-à-vis the other offers. As regards the review of the current pipeline tariffs, it needs to be mentioned that the current HBJ tariff was fixed by the Government in its Gas Pricing Order of 1997. Since the Government is reviewing the price of natural gas, the pipeline tariff is also under its review.

The HBJ pipeline is largely depreciated. Also, your internal rate of return from the pipeline is believed to be 12 per cent against a cost of capital of 7 per cent.

Cost of levies such as corporate tax, which was taken into account while calculating the HBJ tariff, has come down today. Considering all this, is there not a fit case for reduction in tariff for supplies through HBJ pipeline?

The transmission charge for the HBJ pipeline system was first fixed by the Planning Commission in 1987 at Rs 850 per thousand standard cubic metre (MSCM) based on the Discounted Cash Flow (DCF) method with a 12 per cent post-tax return, in line with the then PIB investment criteria.

In 1997, the T. L. Sankar Committee on gas pricing reviewed the HBJ pipeline tariff taking into account the additional investment made by GAIL for the expansion of the pipeline and recommended a tariff of Rs 1,150 per MSCM based on an economic life of 30 years (1987-2016) with a 12 per cent post-tax return on equity.

On the flip side, the fuel cost considered in the tariff calculation was Rs 2,066 per MSCM while, right from Day One, GAIL has been paying for gas at a much higher rate, ranging from Rs 2,409 to Rs 3,211 per MSCM. Further, the government had pegged the returns for the HBJ and DBPL systems at 12 per cent on equity and not on the weighted average cost of capital (WACC).

Also, there is an important distinction between the capital recovery element for tariff determination and the depreciation charged to the Profit and Loss account. Depreciation is governed by the Indian Companies Act, 1956, which stipulates a rate of 10.43 per cent per annum for pipelines, which translates to about 10 years of economic life.

On the other hand, tariff determination is based on 30 years of economic life, which translates into a capital recovery rate (or depreciation) of 3.33 per cent per annum.

This, therefore, implies that an asset deemed to have zero value in the books of account after ten years will still have 20 years of economic life left for the full recovery of the capital cost.

GAIL has also made a representation to the Company Law Board to standardise the economic life of pipelines to 25 years for the purpose of booking depreciation in the books of accounts. This will achieve proper alignment between the accounting depreciation period and the tariff evaluation period and will eliminate the prevailing misconceptions.

While the HBJ users who consume domestic gas are charged the transportation tariff of Rs 1,150 per MSCM, the DBPL users(re-gasified LNG) are charged only Rs 652 per MSCM. Why is there such a substantial difference though there is no major difference in the distance travelled by the gas?

The HBJ tariff of Rs 1,150 per MSCM is a levelised charge, that is, it would remain constant throughout the pipeline life envisaged, whereas the tariff of the Dahej-Bijapur pipeline would escalate at 5 per cent per annum .

If one seeks to compare this tariff with the HBJ tariff, on a like-to-like basis, the equivalent tariff for the DBPL system over 25 years, would work out to Rs 1,056/MSCM. The other major parameters, such as allowable returns, are the same for both the pipeline systems.

GAIL is planning to build an inter-connected National Gas Grid. If a consumer in Delhi wishes to source gas from the KG Basin, don't you think the total transportation tariff of the gas will be prohibitively higher than through a direct pipeline between the KG Basin and Delhi? How does GAIL plan to optimise the tariff structure for its National Gas Grid?

GAIL is planning the integrated National Gas Grid, which will have the advantage of optimum tariffs throughout the grid. We are studying the entry-exit tariff methodology, a complex regression of tariffs of individual pipeline sections, which is generally adopted in the European gas markets.

As regards transporting the KG gas to Delhi, we believe that a well-designed tariff methodology, such as the entry-exit system, will optimise tariff solutions.

If there is competition in building pipelines, the consumer will naturally get the benefit of lower tariffs. Therefore, why should not the concept of multiple pipelines by multiple players be encouraged rather than building the National Gas Grid through GAIL alone?

The large and capital-intensive inter-State high-pressure gas pipelines are considered natural monopolies and it is well-defined regulation rather than competition that ensures reasonable and fair tariff.

On the other hand, the multi-player, multiple-pipeline model has major drawbacks. Besides the problems of operational compatibility and efficient demand-supply balancing, the pipeline tariffs also would be additive on account of separate tariffs for various sections.

If one looks at the way integrated grids have evolved globally, especially in Europe, the entire integrated grid is virtually developed and operated by a single nodal entity in each country.

In my view, development of the National Gas Grid by a nodal agency and adoption of a well defined tariff methodology like the entry-exit system will promote healthy gas-to-gas competition among gas marketing entities, as consumers would then have the option to source gas from different locations or producers through the common grid.