April 9, 2018
The Petroleum and Natural Gas Regulatory Board (PNGRB) notified an amended regulation superseding the 2008 regulations for granting authorization to entities bidding to lay, build, operate or expand City Gas Distribution (CGD) networks. According to an ICRA note, the revised regulation augurs well for the CGD sector and takes care of the anomalies/shortcomings in the earlier guidelines that were proving to be a hurdle. It should attract investors’ interest in the sector.
Elaborating further, Mr. K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA says, “The amended regulation has addressed most of the concerns of the sector. The bidding criteria has been revised such that 80% weightage (compared to 0% earlier) is assigned to infrastructure creation so that gas network penetration is maximised while at the same time, participation of more players is incentivised with the extension of marketing exclusivity period for authorized entities to eight years (extendable upto ten years) as compared to five years earlier. This change should push the bidding entities to commit the highest resources to reach the largest number of consumers, which has been a key thrust area of the government.”
The need for changes in the regulation emanated from the in-effectiveness of the erstwhile bidding criteria to 1) Adequately reflect the relation between economic result of the operator and tariff quoted, as the income of the operator arises from marketing margin charged to consumers and not on tariff quoted, 2) Create an environment for healthy competition based on bid parameters, wherein both small and large players can compete on an equal footing, 3) Provide adequate incentive to bidders in terms of marketing exclusivity and 4) Mobilise highest possible investment in network creation by authorized entities. Furthermore, the extant regulation did not provide adequate protection to authorised entities to receive extension of marketing exclusivity period in case of project delays attributable to externalities, which increased the project risks for interested players.
Also, while there was a Minimum Work Programme (MWP) that had to be executed which covered steel pipeline length and number of domestic connections, the erstwhile regulations did not provide adequately for enabling the PNGRB to levy penalties for non-achievement of execution targets on an annual basis or for non-maintenance of continuous gas supply to consumers, which needed to be addressed. This issue has also been addressed by the new regulation.
Regarding this, Mr. Ankit Patel, Asst. Vice-President and Co- Head, Corporate Ratings, ICRA, mentioned “The new regulation provides adequate checks by way of prescribed MWP targets for each year for all three measurable segments – Steel pipeline length, CNG stations and domestic connections. In case of under-achievement, there are penalties for each year. Further, the new regulation provides for adequate pre-defined penalties to be imposed on the authorized entities in case on interruption in gas supply to consumers and adherence to other service quality standards. Thus, the regulation allows for a higher incentive, but also provides for penalties if adequate efforts to meet the commitments are not made by the bid winners, which is a positive for the development of the CGD sector over the long term. Overall, ICRA believes that the proposed changes in PNGRB regulations for bidding are forward looking and should attract more investor interest while at the same time protecting the long-term interests of the consumers.”
