The Petroleum and Natural Gas Regulatory Board (PNGRB) has proposed to amend the Petroleum and Natural Gas Regulatory Board (Determination of Natural Gas Pipeline Tariff) Regulations, 2008 (“NGPL Tariff Regulations”). These regulations may be called Petroleum and Natural Gas Regulatory Board (Determination of Natural Gas Pipeline Tariff) Amendment Regulations, 2020. On June 29, 2020, PNGRB had issued a public notice regarding the proposed changes in the Natural Gas Pipeline Tariff Regulations seeking comments and suggestions from the industry stakeholders. The deadline for public comments is July 26, 2020 and the open house through video conferencing is scheduled for July 31, 2020. The amendments aim at supporting the development of transportation pipelines and growth of the gas markets. The amendment proposes changes in the definition of capacity of natural gas pipeline, miscellaneous income clause, volume divisor and clause of economic life. Besides, propositions also include insertion of clause for considering 350 working days for the tariff determination. It proposes to exclude provisions of regulation 12 and regulation 21 of Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 for the purpose of determination of tariff in respect of ‘cost-plus’ natural gas pipelines. The amendment further recommends an annual increase in the levelised tariff and invites inputs on the percentage of escalation.
The key players in the sector hold varying opinions on the various clauses of the amendment proposed by the board. The suggestions, comments and views of stakeholders on the proposed draft amendment are as follows.
Adani Total Private Limited
Adani Total Private Limited has supported the exclusion of provisions of regulation 12 and regulation 21 of Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 for the purpose of determination of tariff in respect of ‘cost-plus’ natural gas pipelines and also on whether or to treat interconnection between two natural gas pipelines as extension/expansion/tie in. It believes that this will benefit all the new LNG terminals that are coming up in Gujarat and other parts of the country and will boost expansion of existing pipeline infrastructure keeping transportation tariff reasonable. Further, Adani has requested PNGRB to ensure that additional capacity created by under these regulations remains available to users on common carrier basis as per PNGRB guidelines.
Swan LNG Private Limited
Swan LNG Private Limited has supported the decision to exclude provisions of regulation 12 and regulation 21 of PNGRB (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipelines) Regulations, 2008 for the purpose of determination of tariff as it will benefit all the new LNG terminals that are coming up in Gujarat and other parts of the country and expansion of existing pipeline infrastructure yet keeping transportation tariff reasonable.
According to Swan LNG Private Limited, the right intent of the amendment issued in January 2016 wherein board provided under Clause 6(1)(d) of Schedule A of Tariff Regulations, that “In case of addition of any new source that comes during 01.04.2015 to 31.03.2020, any increase in design capacity because of this new source shall not be considered in tariff determination for a period from 01.04.2015 to 31.03.2020” to incentivise connectivity to the new sources and thus develop new gas markets was undermined by the existing provisions in Authorisation Regulations viz (a) sharing of revenues in spite of periodic tariff review provisions for non bid-out pipelines and (b) cross referencing of Regulations 12(2) of Authorisation Regulations with Regulations 21(1)(d)(ii) of Authorisation Regulations implying that in case of expansion due to tie-in connectivity, same may have an impact on the pipeline tariffs-50 per cent sharing of incremental revenue and higher volume divisor (no exemption beyond March 2020). Further, this will adversely impact the viability of the new upcoming terminals in the country.
The gas pipeline network in Gujarat requires expansion to cater to the capacity of upcoming LNG terminals. Swan LNG Private Limited believes that this may set precedence and in future other terminals planned in Gujarat would have similar new pipeline/expansion requirement. Therefore, it has requested the board to take cognisance of the matter so as to facilitate pipeline developers and incentivise connectivity with new sources which is essential for the viability of the new LNG Terminals coming up in the country with an aim to develop the gas market.
Shell Energy Private Limited
According to Shell Energy Private Limited, the amendment to consider a more gradual volume ramp-up over the first ten years of operation, instead of the current provision of five years, may not achieve the intended results as the incremental tariff revenues due to the increase in pipeline tariffs may offset by the reduction in volumes. The proposed normative volume multipliers will result in a steep increase in the tariffs, as high as 50-80 per cent, depending on the difference between the actual volumes and the existing normative multipliers, and years of operation. Such a steep increase in the tariffs couple with the impact of pancaking will adversely impact the competitiveness of natural gas vis-à-vis alternative fuels. This may not only result in the contraction of gas demand in the existing markets, but also adversely affect the development of emerging gas markets. Considering these issues, Shell Limited has requested the board to revise the normative volume multipliers at the time of implementation of unified tariff for all pipelines in the country to minimize the adverse impact.
Shell Energy Private Limited has requested the board to consider a nominal annual escalation (2 per cent) to strike a balance between the interests of the pipeline developers and gas consumers over the tariff review period. The current methodology provides for inflation/escalation of capex and opex in the determination of levelised tariff. The levelised tariff also allows an opportunity to front-load revenue and support pipeline developers in the cash flow management during the initial years of operation/volume ramp-up period. Therefore, the proposed annual step-tariff may support the development of gas markets through lower tariffs during the initial years, but the higher tariff in the outer years may adversely impact the gas demand.
Further, while the board has proposed to exclude provisions of regulation 12 and 21 for determination of tariff in respect of cost-plus natural gas pipelines, Shell Energy Private Limited does not recommend an alternative methodology for determination of the tariff if the tie-in connectivity results in expansion of the pipeline. In such cases, the board may revise the tariff based on the revised capacity of the pipeline which is required to be determined by the operator annually as per the existing regulation on the determination of capacity.
Pipeline Infrastructure Limited
According to Pipeline Infrastructure Limited (PIL), the sub clause 8 of clause 5 of Schedule A should be deleted in total and a common adjustment mechanism may be formulated to adjust any increase/decrease in actual revenue vis-à-vis the normative revenue on account of volume as well as other income over the economic life. This is due to the reason that since income from imbalance management services is a business income and is shown along with the transportation income on the revenue side. PIL is paying other charges considering both income from transportation and imbalance management services together. On one hand, PNGRB is already considering normative income which is higher than the actual income including income from imbalance management services. Therefore, it may not be correct to adjust income from imbalance services which is a business income by reducing opex. Once the combined revenue from transportation charges and income from imbalance management services is higher than the normative income, automatically the tariff would be adjusted based on the principle of higher of actual or normative revenues.
Further, PIL believes that pipelines which are covered under the tariff regulations, should be excluded from the tariff related provisions provided in other regulations including regulations 12 and 21. Appropriate changes may be made in the regulations to exclude the interconnectivity between two pipelines from the purview of extension/expansion/tie in provisions.
It has further suggested that the method of computation of tariff may be reviewed and a shorter period tariff method be developed wherein each component can be separately monitored by the PNGRB such as cost of service method which is followed in power sector for the transmission of power.
In view of the current Covid-19 situation, PIL has suggested to provide relaxation for the affected period to be appropriately factored while considering the volume denominator during tariff review. PIL has also requested to introduce a concept under the review mechanism, to adjust the volume of gas which could not be transported due to force majure or due to constraints which are beyond the control of both transporter and shipper and impact of such adjustment should be passed on in the tariff prospectively.
Gujarat State Petroleum Corporation
On the amendment in volume divisor, Gujarat State Petroleum Corporation (GSPL) has submitted that most of the operating pipelines have completed more than 10 years of operation and accordingly there will be no impact on account of the proposed changes, unless the regulations are implemented retrospectively. GSPL believes that reforms to the said provision shall also incentivise various pipelines to expand the capacities if the suggested proposed amendment is allowed to the existing pipelines also. GSPL has also suggested that if a cost-plus pipeline is expanding its capacity, the said expanded capacity should also be eligible to ramp up of capacity as proposed above.
GSPL has supported the amendment to delete the provisions of regulation 12 and 21 from Authorisation Regulations for cost plus pipelines. GSPL believes that for transmission of gas from new sources (typically LNG terminals), new capacities are required to be developed (as some of the pipelines are operating at full capacities) and this expansion in pipeline capacity necessitates as the same would lead to development of new gas markets in the country and help in moving towards a gas-based economy. Since this would require capex and opex, therefore, its grossing up should be allowed for the tariff determination. GSPL supports that interconnection between two natural gas pipelines shall not be treated as extension/ expansion/tie in for the purposes of tariff determination and mentioned that the extant regulatory provisions deter a pipeline developer from connecting to new gas sources. GSPL suggests that new source connectivity shall not be considered as an expansion/extension of pipeline network for the purpose of tariff determination.
GSPL has also submitted that force majeure events such as Covid-19 may be accepted as non-revenue days by PNGRB while computing the tariff.
GSPL has further suggested that transmission losses (which includes LUAG) up to a maximum of 0.3 per cent of transported volumes should also be considered as cost.
H Energy has supported the amendment in clause of economic life. However, it believes that a clarity from the board may be required regarding the economic life whether it will be counted from the date of authorization or date of commissioning of the pipeline. H-Energy states that, conversion of two tariff system based on cost plus pipelines and bid out pipelines is required. Old pipelines have different tariff and new pipelines have different. So, conversion is the key in this regard.
GAIL (India) Limited
GAIL considers delinking the volume divisor from the capacities determined/declared under the PNGRB NGPL Capacity Regulations, 2010 and considering capacity as originally authorized or accepted by the board under the PNGRB NGPL Authorization Regulations, 2008 a welcome step. It has suggested that capacity should be separate for tariff determination and access code. However, in some of the pipelines, capacity has already been determined. Therefore, wherever the capacity has been determined, it should continue to be taken for the tariff determination and wherever it has not been determined, it may be taken as per authorisation.
GAIL has supported the amendment for escalation in tariff. According to GAIL, the pipeline entity may be given the option of applying escalated tariffs wherever considered necessary in view of market affordability consideration, etc. In cases where such option is availed, the PNGRB may like to fix the upper-cap of escalation percentage beyond which the pipeline entity cannot escalate its annual tariffs. This upper-cap may be based on the WPI Data published by Government of India.
The full policy document along with the stakeholders’ comments can be downloaded from the PNGRB’s website https://www.pngrb.gov.in/public-notice.html