Gas tariff and reforms—I

The government is to announce new gas tariff for the current financial year (1st July 2023-30th June 2024). The announcement will be late by almost three months .Circular debt issues are interconnected with gas tariff on which a plan has already been submitted by the government to the IMF, some details of which have already been shared with the media.

Ogra (oil and gas regulatory authority) determines average yearly gas price of the two gas companies. Based on Ogra determination, the economic coordination committee (ECC) of cabinet determines consumer tariff for one year. Ogra has done its job and now it is the job of economic coordination committee (ECC) of cabinet to devise and approve the consumer tariff.

Both government and consumers should be nervous about the possible rise in the new gas tariffs in the context of already heavy increases in petroleum products and electricity prices. On average, gas price has to be increased by 47% as determined by Ogra. It would not be equal increase among all but as usual there would be different rates of increase. Lower socio-economic groups would most probably be saved or loaded lesser and richer classes would have to bear the brunt. People belonging to middle class, despite a lower burden, suffer due to comparatively lower earning incomes. The art of consumer tariff determination, therefore, is all about devising the consumer tariff of the middle classes.

Review of regional gas tariff

Bangladesh increased gas prices at the beginning of 2023 bringing gas prices in most sectors to Tk 30 per M3 which is equivalent to Pk.Rs.2273 per MMBtu. This includes commercial, industry and captive power. Only residential got Pk.Rs 1364/MMBtu, power (Pk.Rs.1061/-) and fertilizer sector (Pk.Rs 1212/- per MMBtu) got comparatively lesser tariff. Largest increase had been in fertilizer sector in the context of similar pressure that we are facing in Pakistan.

LPG price in Bangladesh is the highest in South Asia. Interestingly, pipeline gas price in India, which covers both residential and industrial sector are Pk.Rs 5060 per MMBtu, is very close to LPG prices. However, India used to provide 12 free LPG cylinders per year, which was reduced to 50% price. Later, Direct Benefit Transfer Scheme has been introduced which continues till date. LPG subsidy stands at IRs 200-400 per cylinder on a price of IRs 900 Rs per cylinder.

This scribe is not aware of some special subsidies that are given to export sectors in India. It can be concluded that Bangladesh’s gas tariff is much higher than Pakistan’s, although it may increase in a few months as there is always a lag of six to nine months between the timings of change in the two countries. Residential tariff is several times higher than in Pakistan except the large residential consumers’ category, which is lower in Bangladesh being only 44% of what it is in Pakistan. Bangladesh’s industrial and captive power tariffs are twice Pakistan’s; while power sector gas tariff in Bangladesh is 24% higher. However, these are rather rough calculations due to several reasons like currency variations, comparability issues, etc.

There are three prices which can be used as a reference for devising consumer tariff, although traditional approach is to apply a percentage increase. It is difficult to impose schemes that are totally out of sync with historical prices. The three price references are; 1. Locally produced gas at USD 6-7 per MMBtu; 2. LNG at USD 10-12 USD per MMBtu; 3. LPG at 15-18 USD per MMBtu.

Possible scope of increase in gas tariff

Ogra has determined a need for increase in average gas price by 47%. A simple and simplistic solution is to increase gas prices in all categories by the same percentage of 47%. After all, if the last year’s tariff was right, passing on increase in the gas prices on the base of it should be right as well. However, everything has not been right in the previous year’s tariff. There are opportunities to improve it. For example, there is a case of adjustment in low gas prices for tariff, which has been discussed here in this space.

Looking at the gas price data in our region and elsewhere, it appears that upward increase in gas tariff is required, especially, in residential .In the lower level tariff, even distribution cost is not covered. But is it the right time to make major increase in gas tariff? Similarly, there are issues in trying to take a major move towards reducing circular debt. Gas tariff and circular debt are inter-related issues.

In the context of very high inflation, currency devaluation and increases in electricity and petroleum prices without any increase in wages, it should make both the government and the people nervous to expect any increase in gas tariff. The other side of the issue is that nothing is free. Gas prices are increasing. Local cheaper gas resources are going down. No significant progress has been made or appears to be in pipeline in finding new gas resources. Nor are we trying any conservation-like promoting devices such as solar geysers, neither biogas resources are being explored seriously. Resultantly, reliance on expensive imported gas resources like LNG will increase.

Residential tariff

There is scope for increasing gas tariff in higher slabs, especially, slab 5 and slab 6.LPG prices could be a good reference. When poor people, having no gas connection, consume and pay for expensive LPG, why can’t the rich pay the same? LPG-based pricing also results in a general increase rate as recommended by OGRA. It may be noted that gas prices in India are almost LPG based.

However, the number of consumers in this category is not much but consumption is disproportionally higher, especially, in winters. Tariff increase in this category will also induce the consumers in this category to adopt conservation measures such as Solar Geysers, insulation, etc. Minimum payment requirement may also be introduced for the residents of posh areas and large plots areas. There is higher investment requirement to cover these areas. It has been noted that some people in this category get a gas bill of Rs.500-700 only.

(To be continued on Wednesday)

Copyright Business Recorder, 2023