The government has commenced the process of splitting the two gas utilities - Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGC) - with a majority shareholding by the federal government into operational and accounting functions - a requirement for eligibility to access loans from the World Bank and the Asian Development Bank, according to a section of the press. This is a standard normal condition for multilaterals who maintain that such reform measures are critical to ensuring reduction in losses and improved performance.
As early as in 2003, the World Bank during an oil and gas review workshop highlighted what it stated were impressive reforms by the then government including (i) establishment of an independent regulator Ogra; (ii) reform of tariff structure with the objective of phasing out subsidies in 3 years; and (iii) commitment to establish third-party access (TPA) that allows for competition. The residual reforms the workshop concluded must include (i) giving powers to Ogra - a condition that was compromised recently after a notification was issued in December 2016 bringing five regulatory bodies, including Ogra, under the control of their line ministries though the Islamabad High Court has stayed the notification; (ii) unbundling; and (iii) third-party access (TPA).
Unbundling, as per the World Bank, must consist of transforming vertically integrated monopoly that provides 'bundled' services at single tariffs to competitive markets with separated monopoly and competitive activities and separate tariffs for each service. Unbundling as per the Bank would require (i) separation of natural monopoly network function from potentially competitive supply activities, and (ii) contractual arrangements for commodity and transportation services. SNGPL operates in Khyber Pakhtunkhwa (KPK), Punjab and AJK and is divided into eight regions while SSGC operates in Sindh and Balochistan and is divided into 5 regions thus unbundling would imply 13 gas distribution companies and one transmission company.
Key economic issues relating to TPA would, the Bank further proposed, necessitate a detailed set of market rules and regulations relating to the following: (i) open non-discrimination and cost-reflective, (ii) separate commodity and capacity charge, (iii) regulate TPA as opposed to negotiating TPA, (iv) capacity rules to include (a) calculation of existing capacity, (b) allocation of capacity rights, (c) minimum periods for capacity booking, (d) capacity hoarding and use it or lose it provisions, (e) public data bank and (f) secondary market for trading capacity.
This newspaper supports these economically viable reforms and it is relevant to note that in July last year, the four provincial governments agreed to unbundling of SSGC and SNGPL in principle. The objective of the exercise is to reduce UfG (Unaccounted for gas) losses that are hovering around 12 to 13 percent - a source of significant financial losses to both companies. A summary submitted to the Economic Coordination Committee in 2013 maintained that unbundling of the gas sector and establishment of a gas market had assumed immense and immediate importance as the Liquefied Natural Gas (LNG) and the pipeline imports could not be managed in the current regulatory environment.
However, the decision by the Prime Minister to grant exemptions on the moratorium on new gas connections in constituencies that are currently represented by his loyalists (including the Minister for Petroleum and Natural Resources), family members (including his son-in law) as well as some key coalition partners (including Maulana Fazlur Rehman) has been challenged in the court. In addition, the Sindh Chief Minister has through a letter also expressed his concern over this highly partisan decision by the Prime Minister. He has argued, among other things, that expansion of new gas network in Punjab, which produces only about 3 percent of gas but consumes over 42 percent of the total gas produced in the country, is in complete disregard of Article 158 of the Constitution which accords priority to the province where a wellhead is situated. It is unfortunate that all economically viable decisions as well as reforms focused on improving performance of state-owned entities are held hostage to political considerations and one can only hope that the unbundling of the two gas utilities does not suffer the same fate.