High FCAs can be eliminated if there is political will

Sector experts are of the view that if power plants in the country were prioritized to be the recipients of natural gas ahead of all other sectors, as per the law, FCAs (fuel charge adjustments) can be eliminated at the stroke of a pen. The public misery and outcry on Fuel Costs exacerbate whilst the Ministry of Energy is still trying to grapple with the energy crisis affecting the country.

The power sector’s heavy dependence on imported gas is the single largest contributor to FCA. With imported RLNG prices skyrocketing, the prices of electricity production are high, and this entire burden is being passed onto consumers through highest ever Fuel Charge Adjustments in history.

The problem is not that the country has limited natural gas but the fact that these precious molecules are being illegally allocated to please a select few whilst the masses suffer. Not only that, these illegally routed precious molecules are being supplied at 30% to 70% discounted rates.

Pricing a scarce resource so low is contrary to basic economic logic– this differential pricing alone is causing a loss of billions upon billion to national economy. Gas is being monopolized by few companies to create unfair advantage. This is also anti-competitive that the Competition Commission of Pakistan is failing to take note of.

Data on gas molecules is exceptionally harder to find compared to the power sector. This lack of transparency opens up room for corruption, allows vested interests to come into play and an overall lack of governance. The two biggest gas suppliers SSGC and SNGPL claim that the supply of indigenous gas resources is dwindling.

How can one explain why there is a shortage for the priority domestic and commercial sectors, yet molecules are surprisingly available for businesses, local industry, non-export manufacturers and even malls are running on gas? More importantly, logically, the prices of scarce products should increase proportionately, instead of continuing to be sold at discounted prices to a minority of industries that too against the legal act.

In February 2022, the Senate passed a bill to reform pricing through the weighted average cost of gas (WACOG) which would allow OGRA (oil and gas regulatory authority) to charge weighted average costs of indigenous gas and RLNG to consumers. The expected price of the gas molecule in this way was expected to be between PKR 1500 to PKR 2500 per MMBtu.

Later, the price of gas was proposed to be revised to PKR 1550. Neither bill has yet been enacted. Interestingly, KE officials had at the time expressed their willingness to pay this premium if it meant they will get 190mmcfd gas instead of half the quantity of RLNG, which is 4 to 5 times more expensive.

This would have eased the burden on the government of mistargeted subsidies, one of the biggest reservations of the IMF (International Monetary Fund). However, WACOG was never implemented due to lack of political will. You know KE is willing to offer this price for 190mmcfd gas even today.

If Ministry of Petroleum led by Dr Musadik Malik considers their proposal, then this will halve the FCA burden on Karachi customers and also boost gas revenues. Supplying gas to KE instead is also beneficial for SSGC – using the lowest possible transportation can reduce Unaccounted for Gas (UFG) losses for SSGC by 1.5% to 2% percent, resulting in an estimated additional PKR 1 billion in earnings.

In conversations with KE, they have also confirmed that even if prices are set at PKR 1550 for instance, it will still be well under half the price of RLNG which the company is getting at about PKR 4,000.

Every molecule of gas that KE gets at a cheaper rate means they can reduce the cost of per unit power for their customers. They have expressed that they will wholeheartedly welcome a pricing intervention that will ease the burden for customers.

If KE gets all its required gas at the same rates as captive producers than the FCA can be eliminated almost entirely. This is possible because electricity produced through natural gas is approximately 7 rupees per unit; through RLNG, this cost goes to 35 rupees per unit. This is an additional monthly burden of almost 16 billion rupees being transferred to the houses, offices, and industries of Karachi that can be washed away in a single order.

Spreading the impact of Fuel Charge Adjustments over several months by Prime Minister Shahbaz Sharif and Minister of Energy Khurram Dastgir is a temporary measure while the real problem remains unresolved.

Since 2021, Members of NEPRA (National Electric Power Regulatory Authority) have also been writing dissenting notes on every Fuel Charge Adjustment notification for government-owned DISCOs, which have emphasized the need to streamline the fuel supply chain to avoid the crisis we are currently in. A fight was put up by Sindh Chief Minister who is the only political leader to have openly made this point in interest of the people and against the business lobby. But it was a one off.

Various political statements are also being made against these Fuel Charge Adjustments, but nobody is willing to acknowledge the presence of the elephant in the room that solutions are readily available. The fate of Karachi, for example, can be transformed with the stroke of a pen, wielded by the same political parties who are scratching their heads on the high FCAs.

Pakistan is on the brink of an economic recession. Despite serous reprimand from the IMF, the government continues to provide mistargeted subsidies.

How a company can deny the legally entitled sector on pretext of shortage and instead sell this scarce, precious resource at discounted rates to wealthy businessmen is a case worthy of interest of Transparency International.

As a starter they can request OGRA to publish the data of each molecule produced and the rate it is sold to which segment daily is enough to lift the lid of this can or worms.

Copyright Business Recorder, 2022