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Tuesday, January 19, 2021

Natural Gas Pipeline Tariffs: Existing pacts under stress, industry says will mount legal challenge

The tariff regime notified by the current two-member PNGRB will likely face legal challenges due to the impact of the new norms on existing agreements between suppliers and consumers of natural gas.

Written by Karunjit Singh | New Delhi | December 2, 2020 6:22:20 am
Petroleum and Natural Gas Regulatory Board, Natural Gas Pipeline Tariffs, unified gas tariff system, Economy news, Indian express newsThe Fertiliser Association of India noted in its comments that the new system would likely raise the cost of plants producing 15 million tonnes of urea per annum by over Rs 400 crore.

The new unified natural gas pipeline tariff regulations notified by the Petroleum and Natural Gas Regulatory Board (PNGRB) may lead to a rise in tariff for a majority of users such as steel and fertiliser plants, which could result in an upward revision in the government’s subsidy spend on urea.

The tariff regime notified by the current two-member PNGRB will likely face legal challenges due to the impact of the new norms on existing agreements between suppliers and consumers of natural gas, including commercial agreements inked by pipeline developers after bagging projects through a competitive bidding process, according to multiple industry players who spoke to The Indian Express.

The regulations mark a shift from the existing system which charges consumers based on the distance from the source of gas and the number of pipelines used to a proposal involving a unified gas tariff system, with one tariff for gas transported within 300 km and another tariff for gas transported beyond 300 km from the source of the natural gas. The move has faced criticism from a section of stakeholders as one which would lead to consumers closer to sources of gas ending up subsidising those located further away.

The move, which PNGRB said is aimed at reducing the cost of gas transportation for consumers further away from sources of gas, effectively seeks to levy a weighted average tariff of 14 pipelines — clubbed as the national gas grid — to its users, even if they use only one of these pipelines. Another complication stems from the fact that four of these 14 pipelines have been handed out after a tariff-based competitive bidding process, with the result that forced changes to the tariff structure now effectively raises question marks over the sanctity of the bidding process, multiple stakeholders indicated. There is also the issue of the lack of clarity of settlement matters owing to “the complex revenue settlement” to the pipeline operators, which the regulator has left to be thrashed out by the service providers themselves.

Most stakeholders — as is indicative from a majority of the 100-odd stakeholders who sent in their comments to the PNGRB on the draft regulation — have expressed the view that the new tariffs would lead to higher costs of gas transportation for industries located near the sources of gas, including LNG terminals on the west coast of India. Fertiliser producers and power plants are among key users of natural gas located close to injection points of natural gas. The Fertilizer Ministry has also in comments on the draft regulations noted that an increase in the landed cost of natural gas would likely lead to an increase in the subsidy burden of the government. “… any upward revision in pipeline tariff will lead to an increase in the delivered cost of gas to the urea manufacturing units resulting in increased subsidy burden on the government,” said the Union Fertilizer Ministry in its comments on the regulations.

The Fertiliser Association of India noted in its comments that the new system would likely raise the cost of plants producing 15 million tonnes of urea per annum by over Rs 400 crore. National Fertilizers Ltd noted that under the new regime existing customers in the second zone would also cross-subsidise costumers utilising higher tariff pipelines. Since the new norms are set to be revenue-neutral for pipelines, any rise in volumes on higher tariff pipelines would have to be borne by the entire system, experts noted.

A government official said the Petroleum Ministry was currently studying the regulations and had not received any representations by industry regarding the new regulations. The official did note that there were significant legal issues that could arise due to the new regulations including the issues of the sanctity of existing contracts and the bidding process for bid out pipelines.

Industry sources noted that it was likely that the new regulations would be challenged by industry players negatively affected by the new tariff regime. Experts also said that industry players seeking legal remedies against the new tariff system may raise the issue that the post of member (legal) on the board has been vacant since March 30. The Supreme Court recently suspended the functioning of the Central Electricity Regulatory Commission until it appoints a member (legal). An emailed request for comments to PNGRB on these issues was unanswered.

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