WACOG: about time!

WACOG (weighted average cost of gas) bill has been passed by the Senate. This is a landmark achievement, which would allow the government to mix the imported RLNG and domestic gas and converge the pricing. RLNG would no more be ringfenced. Through another Ogra amendment bill, the authorities must fully recover the cost of the gas, while the discretionary power would remain with the federal government on pricing different sectors.

This amendment led to the need of WACOG bill. The only caveat is that WACOG bill has been passed without developing consensus among provinces at the Council of Common Interests (CCI) forum. This carries a legal risk of any province (perhaps Sindh) moving the court against the new bill.

There are many questions about these two bills. For this, one needs to take stock of the current situation and find out how the situation has evolved. The gas circular debt is hovering at Rs700 billion. This is the difference between the cost and revenues of the gas supplied by two Sui companies. It has two components. One is the difference between the prescribed price by the OGRA (based on biannual tariff petition) and tariffs approved by the government. This debt is around Rs550 billion.

The other part is due to non-recovering cost of RLNG diverted towards domestic sector (mainly in winters). The sum is approximately Rs150 billion. There is no theft, nor are there other losses. This sum is purely due to mispricing.

Prior to OGRA amendment bill, the federal government has the discretionary power to notify OGRA-prescribed prices. Now the government will be compelled to let these take effect automatically. The government has the power to decide on pricing for each sector, given full cost recovery takes place.

This bill is among one of several conditions faced under IMF programme. With this confirmed, without WACOG bill, prices could become too irrational for some sectors without increasing for others. That created the need for WACOG bill.

The gas circular debt is growing due to depletion of domestic gas which is being replaced by imported RLNG. Prior to 2015, there was no RLNG in the mix. Today, it constitutes 30 percent of the supply. The paying customers of Sui companies (especially Sui North) have been moving towards RLNG while the mix of domestic (household) consumer is increasing in Sui North sales.

The pricing formula was such that paying consumers subsidized others. The share of good consumer is falling and without proportionate increase of domestic consumer pricing, gas circular debt is increasing. In winters, Sui North mixes RLNG in the supply for domestic consumers without any increase in price, and that also contributes to circular debt.

Now with WOCAG, the government can mix RLNG with local gas in the pipeline and have a blended price. There is no set formula decided as such. But the government must recover the full cost from the revenues. The cost of local system gas is around Rs700 per MMBTU while it being sold at Rs550.

The domestic lowest slab price is around Rs121, and average rate of bill is Rs 300-350. RLNG currently costs Rs 2,300-2,400. The blended price comes at Rs 1,350. Hopefully, prices shall come down once international RLNG prices ease. If every sector is priced at average, price for the domestic consumer shall increase manifold. That may not happen.

The government is mulling on few options for WACOG. Right now, domestic and fertilizer are the lowest paying consumers. In any case, these two sector prices shall increase. Then, general industry (apart from Punjab) is paying low rate and their prices shall increase as well. The real benefit shall be for Punjab industrial consumers (including exporting sector) where the price is likely to be lower, and the supply can be ensured. In case of commercial consumers, price may not alter much.

One model is to keep power sector and CNG out of the mix. Power sector price is a pass-through and CNG can be replaced by petrol for consumers. These sectors are already paying full amount for RLNG. Let them continue to do so. This shall allow government to offer blended pricing to consumers in domestic, commercial, fertilizer and industrial sectors. In this case, the increase in price for domestic, fertilizer, and non-Punjab general industry would be lower.

The second option is to have all sectors in the WACOG. The idea is to rationalize power sector merit order and tariffs. RLNG-based power plants are efficient but fall low on the merit order due to high fuel cost. On other hand, old Gencos on domestic gas supply are higher on the merit order due to lower pricing despite being grossly inefficient.

The blended price shall bring RLNG plants up on the merit order and inefficient ones lower. And better pricing of RLNG shall reduce power prices marginally. However, in this case, the increase in prices for domestic, fertilizer, and non-Punjab industrial sectors shall be higher.

The third option is to keep domestic out of the mix and blend prices of all the rest. This option is political. The increase in domestic prices is politically tough especially when the inflation is already high. However, that would not be a good idea. One must take stock of domestic consumers and disparity in prices between those supplied by pipeline and those relying on LPG cylinder.

At today’s prices, if the bill for pipeline consumer is at Rs200per month, LPG buyers pay close to Rs 6,000. For marginal consumer, LPG is 30 times as expensive as pipeline gas. The pipeline connections are for 28 percent of households while the rest mostly rely on LPG. Pipeline is usually in housing sectors where affordability is higher than those rely on LPG. This anomaly must end.

For this, the pipeline network shall expand. And for that expansion, cost recovery of Sui companies is a must. For that the domestic consumer price must increase. That is why it is imperative to rationalize domestic consumer pricing. Pakistan has one of the best pipeline networks laid down many decades back. That needs expansion and maintenance. The Sui companies cannot do so given current cash strapped situation.

One of the biggest impediments for having WACOG was unwillingness of provinces (Sindh and KP). They have the constitutional right to first use of gas in their own provinces. However, the right is not over pricing. When Nadeem Baber was the SAPM, he was on the verge of having consensus on WACOG with Sindh. The reason Sindh had shown flexibility is that its own gas is not enough to meet provincial demand. That is why there is gas load shedding in Sindh these winters. It suits the province to implement WACOG in years to come.

However, KP doesn’t have this issue. But PTI’s government in KP has exercised its influence. A few weeks back, when the WACOG bill was presented in the lower house. Pervaiz Khattak and other KP members were not happy. Then the PM IK assured him that if they agree on these bills, higher supply shall be allocated for KP industry and new domestic connection shall be allowed. Similar ‘bounties’ will be offered to Sindh as well. Pending domestic connections are around 2-2.5 million.

The demand at RLNG prices is low. But it is huge at domestic prices. That is why domestic connections are pending and RLNG import is less. Once it’s blended, there could be firm demand for RLNG and there could be more imports. That is how gas shortage issue could be partially addressed. Then Punjab industry is at a disadvantage. But the supply is not enough for other provinces industries either. Price rationalization can smooth the demand. And government can ensure supply to exporting sector in Punjab.

However, one caveat is that provinces were not taken on board through the CCI forum. This is open for legal interpretation. Sindh (or KP) can take the federal government to court. Technically, CCI can pass it (without consensus) with Punjab’s vote. But experts say that consensus is important.

Then, the OGRA (biannual) public hearing is dispensed legally. With mix of LNG, the need for 12 hearings a year instead of two, and the government has opted to end this. Now this could give power to the federal government to alter pricing for political reasons if the Ogra Chairperson is weak.

There are a few glitches and there could be some legal implications, as the process was expedited, and provincial consensus could not be achieved. Nonetheless, WACOG and Ogra amendment bills are steps in the right direction. The next step is to rationalize domestic prices which needs political courage. So far, the government has shown the resolve to do so.

Copyright Business Recorder, 2022