New natural gas tariffs might lead to legal challenges

For a large percentage of consumers, the new consolidated regulations on the tariff of natural gas pipelines notified by the Petroleum and Natural Gas Regulatory Board (PNGRB) may contribute to an increase in tariff. These include steel and fertiliser plants, and this could lead to an upward revision of the government's subsidies spent on urea.

According to several industry experts, the tariff structure informed by the current two-member PNGRB is likely to face legal challenges owing to the effect of the new requirements on existing arrangements between suppliers and consumers of natural gas, including commercial agreements that pipeline developers have signed since bagging projects via a competitive bidding process.

The regulations mark a change from the present scheme, which taxes customers based on the distance from the source of gas and the number of pipelines used to a plan involving a single gas tariff system. It has one tariff for gas being shipped within 300 km and another tariff for gas being transported beyond 300 km from the source of gas.

PNGRB said this step aims to minimise the cost of transporting gas for customers farther away from gas fields, essentially attempting to levy its consumers a weighted average tariff of 14 pipelines, clubbed as the national gas grid, even though they use only one of these pipelines. Some stakeholders said that another difficulty arises from the fact that four of these 14 pipelines were distributed after a competitive tariff-based bidding procedure, with the result that forced improvements to the tariff system now effectively raising question marks about the rightness of the bidding process, some stakeholders said.

Most stakeholders have expressed the opinion that the new tariffs would lead to higher gas distribution rates for industries located near gas supplies, including LNG terminals on the west coast of India, as shown by a majority of the 100-odd stakeholders who submitted their comments to the PNGRB on the draft rule. Fertiliser factories and power plants are among the primary consumers of natural gas located near natural gas infusion points. While talking about the draft regulations, the Ministry of Fertilisers also stated that a rise in the landing costs of natural gas would likely lead to an increase in the government's subsidy burden. It claimed that any upward revision of the pipeline tariff would lead to an increase in the cost of gas delivered to urea production units. This will increase the government's subsidy burden.

In its remarks, the Fertiliser Association of India stated that the current scheme is expected to increase the cost of plants processing 15 million tonnes of urea per annum by more than Rs 400 crore. National Fertilizers Ltd found out that current consumers in the second zone will also cross-subsidise consumers using higher tariff pipelines in the new regime. Experts observed that because the current requirements are set to be revenue-neutral for pipelines, the whole scheme will have to bear any increase in volumes for higher tariff pipelines.

A government official said the Ministry of Petroleum was currently reviewing the regulations and had not received any complaints about the proposed regulations from the industry. The official acknowledged that due to the new rules, including the concerns of the rightness of current contracts and the procurement procedure for bidding out pipelines, significant legal issues could emerge.

According to industry sources, it was possible that the industry players who were adversely impacted by the new tariff regime would oppose the new regulations. The experts have suggested that players in the industry pursuing legal remedies against the new tariff scheme may raise the problem that the position of member (legal) of the board has been vacant since 30 March. The Supreme Court recently suspended the operation of the Central Electricity Regulatory Commission until it appoints a member (legal).

Source: New Indian Express