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Explained: How move to open up city gas distribution will benefit customers, impact incumbents

Indraprastha Gas Ltd. in Delhi, Mahanagar Gas Ltd. in Mumbai and Gujarat Gas Ltd. are three city gas distribution companies set to be affected by the opening up of these markets and their pipeline infrastructure to third parties.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi | Updated: August 4, 2020 12:42:03 pm
PNGRB, PNGRB rules for gas companies, Delhi Indraprastha Gas Ltd, Mahanagar Gas Ltd Mumbai, Gujarat Gas Ltd, gas distribution, gas pipeline infrastructure rules, gas distribution infrastructure, Indian Express The government had decided to grant exclusivity to gas distribution companies to incentivise them to invest in infrastructure to deliver PNG and CNG widely across cities. (Reuters Photo/File)

City gas distribution companies may soon face competition from third parties, with the Petroleum and Natural Gas Regulatory Board (PNGRB) set to notify regulations to allow competition for these companies, which have thus far enjoyed exclusive marketing rights in their respective geographies. Indraprastha Gas Ltd. in Delhi, Mahanagar Gas Ltd. in Mumbai and Gujarat Gas Ltd. are three city gas distribution companies set to be affected by the opening up of these markets and their pipeline infrastructure to third parties.

What is the current scenario?

These players currently have exclusive right to lay, operate and expand gas distribution infrastructure in their respective geographies as well as market both Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) in these areas. The government had decided to grant exclusivity to gas distribution companies to incentivise them to invest in infrastructure to deliver PNG and CNG widely across cities. These companies supply PNG to household, industrial and commercial use and CNG for vehicles through retail sites of state-owned oil marketing companies Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporate Ltd.

What is the proposed change?

Under the proposal by the PNGRB, distribution companies would have to provide access to third-party companies to pay to use their infrastructure to market CNG and PNG based on a transportation tariff set by the incumbent players but regulated by the PNGRB in case of disputes. The PNGRB has sought comments from stakeholders on how the tariff for use of the pipeline network of the city gas distribution companies should be decided.

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What is the likely impact on consumers?

According to experts, the end of marketing exclusivity may lead to some competition and lower prices for CNG. City gas distribution companies market CNG at the retail pump sites of state-run oil marketing companies. CNG sales are the most profitable market segment for city gas distribution companies with margins at around 30% of the retail price of the fuel, according to experts.

OMCs which currently receive a commission on the sale of CNG sold through their retail points may seek to take some market share in the CNG distribution business by using the distribution network of the city gas distribution companies to retail CNG directly to customers.

“This is more about the regulator trying to balance CGD profits and the interest of the consumer,” said Vivekanand Subbaraman, an analyst at Ambit Capital, noting that this was a reflection of the maturation of the CGD trade in the country.

Another expert, who did not wish to be quoted, said that oil-marketing companies may not seek to take up the opportunity that arises from the end of the exclusivity period immediately as they are currently enjoying risk-free commissions on the sale of CNG at their retail sites. The expert noted that the CGD companies and OMCs may decide to increase the commissions provided to OMCs once gas distribution companies lose marketing and infrastructure exclusivity.

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What would be the impact on the CGD companies?

According to the experts, the profitability of city gas distribution companies would be affected significantly if their market share is taken up by competitors and it may even reduce their ability to invest further in expanding gas distribution infrastructure.

The CGD companies have opposed the opening up of CGD infrastructure for use by third parties. IGL has challenged the proposal by the PNGRB to end marketing exclusivity in the Delhi High Court and have argued that any reduction in market share in any of its marketing segments including CNG and PNG would impair their ability to invest in infrastructure to expand its PNG network to supply natural gas to a larger number of households.

DK Sarraf, chairperson of the PNGRB recently noted that the regulator would notify regulations for the opening up of competition in CGD areas as there had not been any stay issued by the high court in the case.

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