Finally, the regulatory rigmaroles in the gas space should be soon resolved—with positive ramifications for gas distribution and transmission companies

The gas regulatory board has got real teeth now that Section 16 of the PNGRB Act of 2006 has been notified with effect from 15th July. This is a big step towards resolving the regulatory rigmaroles in the gas space and will be positive for gas distribution and transmission companies. This will also push forward badly needed investments in this space.

PNGRB (the Petroleum and Natural Gas Regulatory Board) was formed in
October 2007 but it did not have the authority to issue distribution rights to companies retailing CNG for automobiles and piped cooking gas to households because for some peculiar reason, the Act was notified without Section 16 which gave PNGRB the right to call for bids. Despite this, PNGRB conducted two rounds of bidding for city gas distribution (CGD) rights. GAIL Gas, a wholly-owned subsidiary of GAIL India won the first round - it got five cities - while Bhagyanagar Gas, a 50:50 JV of GAIL and Hindustan Petroleum Corp got Kakinada. When PNGRB called for the second round of bidding for seven cities, including Ghaziabad, Allahabad and Chandigarh, Indraprastha Gas (IGL) challenged its right (in the Delhi High Court) to issue licenses without Section 16 being notified, and the court upheld the challenge. This caused the auction process to come to a grinding halt.

IGL objected mainly because it had already been given the mandate by the Environment Prevention & Control Authority, a central government entity, to establish a CGD network in Ghaziabad before the PNGRB Act. Not surprisingly, after the government authorised IGL to continue developing Ghaziabad, its share price ran up from Rs240 to Rs293 -it is close to an all-time high now.

It is possible that the two rounds that PNGRB has already conducted will get implicit approval and we might see more than 10 cities ready to set up gas distribution networks very soon. Earlier, the PNGRB apparently had plans to develop CGD network in 330 additional cities, by putting 8-10 cities up for auction each month over the next two to three years. With more than two years of sluggish activity, this pace seems ambitious. But who knows what the PNGRB can achieve now that its hands have been unshackled?

The fact is all gas stocks are likely to roll and pitch in the wake of PNGRB getting authority under Section 16. In the pyramid of beneficiaries, the gas distribution companies such as IGL and Gujarat Gas will be at the top. These would be followed by gas transmission companies such as GAIL and GSPL. At the third tier will be gas supply companies such as RIL and Petronet LNG.

Recently, following the rise in administered price of gas, IGL demonstrated its pricing power by passing on the full increase to customers without any drop in volume. Therefore, there is no doubt that demand for CNG is strong (it results in 50% savings on an average over diesel and petrol). With the cut in LPG subsidy recently, even PNG will be more attractive to users - earlier the advantage was only about 3%. IGL has a strong presence in Delhi and it will be fairly easy for the company to expand in the north. Gujarat Gas is spread over Ahmedabad, Surat, Bharuch, and Valsad. However, with the freeing of distribution rights, it will be able to bid for more cities in western India.

GAIL is the largest gas transmission and distribution company in India. Its arterial HBJ pipeline is the country's largest. It is spending Rs340 billion over 4-5 years on pipelines and an assured RoCE (Return on Capital Employed) on these investments reduces risks and also provides visibility, not to mention leads to upgrades in valuation. Fast-paced gas distribution licenses will undoubtedly benefit GAIL. It will also benefit directly by bidding for city gas distribution projects through its wholly-owned subsidiary GAIL Gas. GSPL, which has 1,573 km of gas pipeline in operation from Hazira-Vadodara-Ahmedabad-Kalol-Himmatnagar-Mehsana-Rajkot-Morbi-Anjar-Jamnagar, transports more than 35 MMSCMD of gas and has 450 km of gas pipeline under execution.

Both GAIL and GSPL have shown improvement in their volumes after the supply of RIL's gas began. With more cities ready to supply CNG, volume estimates for both GAIL and GSPL should be revised upwards. Gas suppliers such as RIL and Petronet LNG can also benefit, but it depends purely on their ability to ramp up supply to match demand and also in Petronet LNG's case, to supply at a reasonable price (since Petronet is a re-gasification company, its prices fluctuate with spot rates, even though it has long-term contracts with gas suppliers abroad). Brokers have been telling their institutional clients today that bidding for six pipelines (6,000km) which was postponed should now begin -in fact, they believe the process will kick-start and will be completed in the next few weeks.