High losses and defective meters

The World Bank has expressed serious concern over the incidence of unaccounted for gas (UAG) exceeding 10 percent, well above the internationally accepted standard, and widespread tampering with meters that account for not only a widening demand-supply gap in the country but is also partly the reason behind a steady rise in per unit price.
Theft and UAG add to the cost of operations and it is the general consumer who is forced to suffer from such losses rather than the two utility companies namely Sui Southern and Sui Northern Gas whose objective is to follow a basic economic principle to ensure continued financial viability of their organisations: ensure full cost recovery. There is no doubt that the focus needs to be on improved management to ensure that the UAG losses and theft are brought down dramatically which would, in turn, reduce the pressure to raise tariffs which the common man has been subjected to in recent years.
Be that as it may, there have been concerns voiced from several quarters about the pricing formula that is followed in setting domestic gas prices. The most commonly voiced criticism is that given that gas is domestically produced its linkage with the dollar is difficult to understand. In marked contrast, the change in the pricing of imported petroleum products given the rise in the international price of fuel as well as the erosion of the Pakistani rupee vis-a-vis the dollar is more easy to comprehend.
Different fuels have different costs especially if one fuel is imported and other domestically produced. However, a disparity in their tariff/price to reflect the cost would automatically lead to a greater demand for cheaper fuel relative to imported fuel. At the same time, it must be acknowledged that our gas supply is limited and is getting scarcer due to a variety of reasons including higher UAG losses/theft as well as a sustained increase in demand due to the fact that it is still cheaper than the price of alternate imported fuels. In the event that demand exceeds supply there is a need to either resort to loadshedding, as has been evident in the past four years or so, or compel the regulatory authority to raise the price to better manage demand. And if one adds the element of limited gas supply in spite of some recent discoveries due to routine disruptions due to law and order problems in Balochistan coupled with extensions of the gas network with the objective of meeting political commitments one has the element of rising demand with a declining supply. The result is for all to see: loadshedding and tariff hike.
There is no doubt that the country is currently facing a major crisis of liquidity in its energy sector - a crisis that has translated into heavy loadshedding - be it of electricity or gas. Thus UAG losses as well as theft feed into the liquidity crisis that compromises the ability of the utility company to minimise loadshedding. Pakistan greatly relies on both imported fuels as well as domestically produced gas and the price of the two is obviously different with the cost of gas around 62 percent of the price of imported fuel. However, the difference in the cost, if allowed to be reflected in the tariff, would automatically imply more and more gas shedding and/or increase in tariff to better respond to its demand.
So what is the best way to price domestic gas? A pricing formula for domestic gas, as indeed for all fuels, must be linked to its calorific value or British Thermal Unit (BTU) defined as the amount of heat required to raise the temperature of one pound (0.454 kg) of liquid water by 1 °F (0.556 °C) at a given pressure. Thus the energy output of each fuel should be used as a yardstick to determine its price/tariff which would, in turn, ensure that pricing is strictly in accordance with basic economic norms.
A problem in pricing arises due to the heavy reliance placed by the Ministry of Finance on generating revenue from both imported fuels as well as domestically produced gas through the petroleum levy and gas infrastructure development cess. Failure to reform the inequitable, unfair and anomalous tax structure by eliminating exemptions for the influentials accounts for heavy reliance on taxing the energy sector. There is a need to look at the existing tax structure and make appropriate changes.