“PNGRB has tried to explain in detail the rationale behind the tariff order for Gujarat State Petronet. But we think it is not a progressive order. It would create more confusion in the near term, and as it is applied with retroactive effect,” says Nomura Equity Research
The Petroleum & Natural Gas Regulatory Board (PNGRB) has finally issued the “provisional initial unit” tariff order for Gujarat State Petronet (GSPL). On first look, compared to PNGRB’s earlier tariff orders for other entities, the order appears soft, according to a Nomura Equity Research Quick Note. The determined tariff of Rs23.99/mmbtu (Rs904/scm) seems good for GSPL, in Nomura’s view, and better than street expectations of Rs750-Rs850/scm. Even as the headline tariff indicates a tariff reduction, and payout for retroactive implementation, we think the actual payments may not be much, and GSPL’s average reported tariff numbers may not decline much. But in the short term, there will be added confusion till clarity emerges on retroactive payments, and actual impact on GSPL’s realised tariffs going forward.
The new tariff is 12% lower than the current tariff; but only 2% lower than past five-year average tariff. The tariff order is a retroactive order applicable from 20 November 2008. The current tariff order is a provisional tariff order with final tariff to be decided in a year’s time. By the time PNGRB finalises the final tariff, the term of the current order (November 2013) may well lapse.
According to the Nomura Equity Research Quick Note, even as the tariff order is much longer and PNGRB has tried to explain in detail the rationale on several issues, we think it is not a progressive order. It would create more confusion in the near term, and as it is applied with retroactive effect, the order itself could become stale very soon.
Nomura points out that the order is only for GSPL’s high-pressure network. It is silent on its low-pressure network. The network is operated as a single network and GSPL does not disclose its numbers separately for these two networks. Given that order is coming after such a delay, Nomura feels an order for both networks together would have made much more sense.
PNGRB has considered an inflation rate of only 4.5% as per “extant practice”. This rate is too low, in Nomura’s view, when current headline inflation rates range 8%-10%.
Nomura observes that the tariff order continues to disallow unaccounted for gas. Even as GSPL submitted that such losses are industry wide, and cited international reports/ practices, PNGRB did not agree similar to earlier orders.
PNGRB insists on accounting depreciation rate of 8.33% for periods prior to April-2010, even as the ministry of corporate affairs has now allowed the rate of 3.17%. For its book of accounts GSPL had charged the rate of 8.33% as conservative accounting, but for tariff calculations it was asking for the permitted rate. PNGRB has disallowed this on the grounds that it would result in higher net fixed assets and thus a higher tariff. Nomura feels that GSPL should have been given the benefit of a lower rate of depreciation.
PNGRB has also disallowed ongoing capex of Rs10 million per km of spur pipelines beyond FY15, as GSPL could not give enough data. Nomura’s point of view is that 50km of spur pipelines each year looks reasonable.
Finally, Nomura points out that the working out of past tariff and system usage charges will be cumbersome and create confusion.