in the matter of sui northern gas pipelines...

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Case No. OGRA-6(2)-1(3)/2011-Review

IN THE MATTER OF SUI NORTHERN GAS PIPELINES LIMITED

REVIEW OF ESTIMATED REVENUE REQUIREMENT, FY 2011-12

UNDER

SECTION 8(2) OF OIL AND GAS REGULATORY AUTHORITY ORDINANCE, 2002 AND NATURAL GAS TARIFF RULES, 2002

DECISION

NOVEMBER 24, 2011 Before: Mr. Sabar Hussain, Acting Chairman /Member (Oil) Mir Kamal Marri, Member (Finance) Mr. Mansoor Muzaffar Ali, Member (Gas)

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Table of Contents

1. Background................................................................................................................................... 1

2. Petition........................................................................................................................................... 2

3. Proceedings................................................................................................................................... 4

4. Authority’s Jurisdiction, Determination Process and Discussion about Related Points6

5. Operating Fixed Assets............................................................................................................... 7

5.2. Transmission ................................................................................................................................. 7

5.3. Distribution Development .......................................................................................................... 9

5.4. Compression & Normal Assets ................................................................................................ 12

5.5. Pipeline infrastructure for upcoming LNG import................................................................ 12

6. Other Operating Revenues ...................................................................................................... 14

7. Operating Expenditures ........................................................................................................... 14

7.1. Cost of Gas .................................................................................................................................. 14

7.2. Human Resource (HR) Cost ...................................................................................................... 16

7.3. Cost of Reinstated employees................................................................................................... 16

7.4. Stores and Spares Consumed - Odorant Oil .......................................................................... 17

7.5. Operating Cost for Pipeline infrastructure for upcoming LNG import ............................. 18

7.6. Remaining items of Operating Expenditure ........................................................................... 18

7.7. Revenue Shortfall of FY 2010-11............................................................................................... 19

8. Determination ............................................................................................................................ 20

9. Public Critique, Views, Concerns, Suggestions .................................................................. 20

Annexure:

1. Computation of Revised Estimated Revenue Requirement FY 2011-12 ......................... 22

2. Provisional Prescribed Prices for FY 2011-12........................................................................ 23

Appendix:

Written submissions of the interveners

Review of Estimated Revenue Requirement of SNGPL Financial Year 2011-12 Under Section 8(2) of the OGRA Ordinance, 2002 _______________________________________________________________________

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1. Background

1.1. Sui Northern Gas Pipelines Limited (the petitioner) is a public limited company,

incorporated in Pakistan, and listed on Karachi, Lahore and Islamabad Stock

Exchanges. It is engaged in the business of construction and operation of gas

transmission & distribution pipelines, sale of natural gas and compressed

natural gas, and sale of gas condensate (as a by-product) .

1.2. Petitioner had filed a petition under Section 8(1) of the Oil and Gas Regulatory

Authority Ordinance, 2002 (the Ordinance) for determination of Estimated

Revenue Requirement (ERR) for FY 2011-12 (said year) on November 30, 2010,

which was subsequently amended by it on March 01, 2011. The Authority, vide

its decision dated May 24, 2011 determined a shortfall of Rs. 4,583 million (the

amounts have been rounded off to the nearest million here and elsewhere in this

document) translating into an increase of Rs. 7.54 per MMBTU in the average

prescribed price w.e.f July 01, 2011. Subsequently, Authority revised this

revenue requirement per Ministry of Petroleum and Natural Resources

(MP&NR) advice, and adjusted shortfall arisen due to interim relief granted by

Lahore High Court (LHC) pertaining to FY 2010-11. Accordingly, average

prescribed price was increased to the tune of Rs. 11.02 per MMBTU effective

July 01, 2011.

1.3. Being aggrieved by the determination, petitioner challenged issues of UFG, non

operating income, gain on construction contracts, HR benchmark and provision

for doubtful debts in LHC. The Honorable Court granted interim relief to the

petitioner and directed OGRA to determine the revenue requirement of the

petitioner for the said year in accordance with the LHC Order dated January 11,

2011 against OGRA petition No. 1068-2010. The Authority, based on said

decision, revised the revenue requirement at Rs. 227,699 million translating into

an increase of Rs. 23.90 per MMBTU w. e. f July 01, 2011.


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2. Petition

2.1. Petitioner has submitted this review petition on October 14, 2011, under Section

8(2) of the Ordinance, which was subsequently amended by it on October 16,

2011 and October 31, 2011, projecting a shortfall of Rs. 31,548 million in

determined ERR, translating into an increase of Rs. 112.41 per MMBTU, w.e.f.

January 01, 2012 (Rs. 56.45 per MMBTU on annualized basis for said year).

Petitioner further amended the petition vide its letter dated November 24, 2011

(the petition), requesting to allow increase in average prescribed price at Rs.

59.69 per MMBTU w.e.f. 1st July, 2011, based on inclusion of additional pipeline

infrastructure for up coming LNG project envisaged to be completed in said

year.

2.2. Earlier, petitioner had submitted a review motion on June 22, 2011 under Rule

16 of the Natural Gas Tariff Rules, 2002 (NGT Rules) against determination of

ERR for the said year. Later on, petitioner filed an amendment dated August 20,

2011 in motion for review, taking into account additional impact of HR bench

mark proposed by it, adjustment of prior year revenue shortfall on the basis of

initialed accounts and revenue loss owing to prescribed prices applicable from

August 07, 2011 instead of July 01, 2011. Authority observes that the said

petition is under its consideration, and decision in the matter has not yet been

announced. The Authority observes that petitioner has included all its claims

per the said motion for review in the instant petition as well, along with request

to treat review motion as part of the instant petition. Authority, in view of the

request of petitioner, decides to treat said review motion as part of the instant

petition.

2.3. Petitioner has projected an increase of Rs. 59.69 per MMBTU w.e.f July 01, 2011

based on following claims for said year:

i. Projected Weighted Average Cost of Gas (WACOG) at Rs. 308.95 per

MMBTU taking into account the latest actual/estimated oil prices in the

international market, devaluation of rupee against US $, revised projection


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of gas purchase volume based on actual gas availability for the months of

July and August, 2011 and latest indications.

ii. Capitalization of operating fixed assets- transmission lines (Kunnar /

Pashaki & Capacity enhancement for LNG import), distribution

development, compression & normal assets.

iii. UFG target at 7%.

iv. Revised HR benchmark cost.

v. Cost of reinstated employees

vi. Stores and spares consumed

vii. Repair & maintenance

viii. Fuel and power

ix. Rent, rates, electricity and telephone

x. Transport

xi. Legal and professional charges

xii. Gathering charges of collection data

xiii. Advertisement

xiv. Security expenses

xv. Provision for doubtful debts

xvi. Five years’ special training program

xvii. Other expenses

xviii. Prior year adjustment Final Revenue Requirement (FRR) FY 2010-11

xix. Negative GDS – FRR FY 2010-11


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Table 1: Component-wise Breakup of Requested Increase in Average Prescribed Price

Rs./MMBTUA Decrease in revenue due to Sales Mix at revised volume (23.87)

Adjustment in operating revenues due to Volume variance. (0.15)Total Decrease in Revenues (24.03)

Decrease in Cost of gas sold due to increase in WACOG. 20.18 Decrease in UFG Disallowance (10.08) Net impact of Increase in T&D cost, depreciation and decrease in GIC 15.37 Prior year adjustment pertain to FY 2010-11 4.35 Increase in Rate of Return 5.85

B Total Increase in Expenditures 35.67 C=A-B Total Increase in Revenue Requirement 59.69

Net Increase effective January 01, 2012 118.86 2.4. Authority admitted the petition for consideration, as a prima facie case for

evaluation existed and it was otherwise in order.

3. Proceedings 3.1. A notice inviting interventions / comments from consumers, general public and

other interested / affected persons, and intimating time and place of the public

hearing, was published in daily newspapers, namely: Dawn (combined),

Nawa-e-Waqt (combined), Mashriq (Peshawar) and Express (Lahore). The

Authority received applications to intervene in the proceedings from the

following persons / entities:

(i) All Pakistan Textile Processing Mills Association (APTPMA),

(ii) Mr. Mahmood Elahi Engineer, Sui Gas Contractor, Faisalabad,

(iii) Mr. Jahanzaib Ahmed Siddiqui, Islamabad,

3.2. Written submissions were also received from some of the interveners, which are

appended to this order.

3.3. Authority admitted all the above intervention requests.


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3.4. A public hearing was held on November 17, 2011, at Lahore, which was

participated by the following:

Participants

i. Mr. Mahmood Elahi Engineer, Sui Gas Contractor, Faisalabad

ii. Mr. Mohsin Aftab, Regional Secretary, APTMA Lahore / Gujranwala

iii. Mr. Tauqeer Ahmed Taqi, Director, Zaheer Soap Factory, Faisalabad

iv. Mr. Masood Ali Shah, Manager Punjab Gases, Lahore

v. Mr. Abdullah Fahim, Lahore

vi. Mr. Naeem Rahat, Lahore

vii. Mr. Aftab, Gas Consumer, Sheikhupura

viii. Mr. Khalid Mehmood, Gas Consumer, Sheikhupura

Petitioner:

ix. Petitioner’s team lead by Mr. Arif Hameed, Managing Director

3.5. Petitioner was given full opportunity to present its petition. Petitioner made

submissions in detail with help of multi-media presentation.

3.6. Participants were of the view that there are 8 regions of petitioner therefore gas

holiday for CNG stations should be made for 1 day for each region during the

week, instead of 3 days on a consecutive basis.

3.7. It was urged that regular participants in public hearing should be informed in

respect of public hearings scheduled, through separate letters in addition to

press advertisements.

3.8. Participants stressed that UFG / gas theft must be controlled at all costs and

effective legislation must be put in place at the earliest. It was further added that

projected increase in gas prices will further add to miseries of people of

Pakistan, wherein a major chunk is already living below poverty line.


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4. Authority’s Jurisdiction, Determination Process and Discussion about Related Points 4.1. Authority examines, in depth, all applications and petitions in light of relevant

legal provisions. Petitions / applications are admitted for consideration, only if

they meet pre-admission criteria laid in the NGT Rules. In the process, public

notices are issued and all stakeholders are provided full opportunity to

intervene / comment upon issues pertaining to determination of revenue

requirement, in writing and at public hearings. Authority gives full

consideration to observations and comments of all stakeholders while

determining revenue requirement and prescribed prices. As regards policy

matters, since Federal Government (FG) is legally competent authority, policy-

related pleas, reservations and sentiments of stakeholders are brought to its

specific attention for consideration before deciding retail prices for various

categories of consumers.

4.2. Authority, under Licence Conditions of the licence granted to petitioner,

determines total revenue requirement of licencee to ensure that it operates

prudently and achieves 17.5% return on its average net fixed assets in operation

for each financial year, subject to efficiency related benchmarks, imposed from

time to time. Authority, may, however, in consultation with GoP and licencee

prescribe revised rate of return or a different basis for determination of a return,

pursuant to Licence Condition No. 5.3 of the licence granted to petitioner.

Authority has developed a new tariff regime for regulated natural gas sector of

Pakistan, which, in the course of legally mandatory consultation process, is with

GoP since October, 2005.

4.3. Petitioner has mainly sought review of cost of gas/WACOG, based on actual

changes in well-head gas prices and relevant factors, in petition submitted

under section 8(2) of the Ordinance. Petitioner has also incorporated all its

claims per review motion against DERR for said year, as explained in para 2.2

above, in the instant petition. It has been observed that said review motion is

under consideration of Authority since decision in the matter has not yet been


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issued. Authority has, therefore, decided to treat the review motion filed under

rule 16 of the NGT Rules as part of petition filed under section 8(2) of the

Ordinance.

4.4. Well-head gas prices for the said year are based on actual prices of crude oil and

HSFO during the period December, 2010 to September, 2011 and include

estimates for October and November, 2011. Latest trend in recent months is to

be taken into account, while determining WACOG to ensure that determination

is rational and fair to all stakeholders.

4.5. Operating revenues, operating expenses and changes in asset base are

scrutinized by Authority in depth. Appropriate benchmarks are set in critical

areas of operation to ensure that cost of petitioner’s inefficiencies and

imprudence are not passed on to consumers. Independent audits are also

conducted, wherever deemed necessary by Authority. Operating expenses of

licencee would have been much higher than what they are and so would have

been gas prices had there been no such control.

5. Operating Fixed Assets

5.1. Petitioner has requested to allow projected capital expenditure of Rs. 34,809

million as against Rs. 5,127 million provided in DERR for said year in respect of

following items:-

5.2. Transmission

5.2.1. Petitioner has submitted that capitalization of Rs. 1,863 million has been

projected on account of 42’’ dia, 21.92 Km loop line between valve assemblies

SV 4 (Rehmat injection point) to valve assemblies SV 5 (24” Sawan– Qadirpur

line). This pipeline has been pended in DERR for said year owing to litigation

cases lodged by landowners in respect of Kunnar / Pashaki and delay in

import of gas from Iran and RLNG. Petitioner has accentuated that said

project is enormously important since it is aimed to facilitate swap

arrangement for receiving additional gas in order to curb extensive gas load


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shedding.

5.2.2. Petitioner has elaborated that its board of directors accorded approval to

undertake the project in year, 2009. ECC also approved gas allocation based

on swap arrangement from different injection points. The project activities in

past years however remained suspended for want of confirmation of

additional gas from gas producers and advancement in cross border gas

import projects. Now, in recent past, OGDCL has informed that it is likely to

put 100 MMCFD off-spec gas in the system followed by another gas pack of

100-150 MMCFD within nine months of first supply. This whole supply from

Kunnar / Pashaki will be injected in SNGPL network since SSGCL has

expressed its reluctance to receive off-spec gas in its system.

5.2.3. Petitioner has further elaborated that fast track efforts have been undertaken

by FG to bring RLNG and gas from Iran. FG has formulated multi-pronged

strategy along with serious initiatives to inject additional gas in national grid

from indigenous sources as well as import projects including third party

access, to the network by participation of private investors.

5.2.4. Petitioner further argued that requisite project is critical part of advance

action plan of Project–X and part & parcel for receiving additional gas

through above proposed arrangements. The project, after approval, will also

take about two years for its completion. In this scenario, if this project is

deferred further, petitioner will not be able to ensure pipeline capacity to

receive additional gas. Petitioner, owing to said compelling circumstances

has requested to allow capitalization under transmission amounting to Rs.

1,863 million for said year.

5.2.5. The Authority observes that combined strategy and concerted efforts are

being undertaken by all concerned quarters including petitioner to explore

new avenues and enhance gas supplies in order to abridge demand supply

gap, which is soaring to adverse level. FG has also made significant progress

in gearing up IPI project, induced gas producers to enhance gas supply from

indigenous sources and invited number of private investors to come at resort


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on RLNG import projects. FG has also finalized necessary policy framework

to attract capital investment in import projects and advised gas utilities to

ensure capacity for third party access to receive additional gas.

5.2.6. Authority also observes that consumers are facing severe gas shortage owing

to extensive load shedding by petitioner, thereby giving rise to violence in

the country. In this exigency, petitioner has no alternate except to test all out

means to increase gas supply to its existing consumers.

5.2.7. The Authority, in view of above, provisionally allows expenditure of Rs.

1,863 million on account of capitalization under head of Transmission for

said year.

5.3. Distribution Development (Govt. schemes, system augmentation, extension of network in existing towns & villages, cost recovery schemes, rehabilitation of systems, replacement of defective meters, modification of TBS’s, construction of SMSs, spares of regulators & meters)

5.3.1. Petitioner submitted that Authority has allowed Rs. 3,918 million for

distribution development during said year as against its request of Rs. 15,589

million to execute a physical target of 5,000 Km extension in network.

5.3.2. Petitioner argued that it has intended to lay 800 Km distribution lines at a

cost of Rs. 1,800 million with more emphasis on rehabilitation, removal of

anomalies, augmentation and UFG related activities, while a separate

requirement of 3,800 Km costing Rs. 7,948 million for completion of ongoing

projects for new towns and villages, per the directives of FG, has also been

submitted. A substantial investment has been made on such projects which

are in progress and if they are abandoned, material already laid will be

wasted due to corrosion. Resultantly, no benefit will be attained from assets

in future. Further, cost recovery jobs of 340 Km amounting to Rs. 600 million

have also been planned.

5.3.3. Petitioner has elaborated that it is prudent to restrict distribution

development budget in accordance with current supply of gas position.

However, restricting critical expenses including rehabilitation of system,


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replacement of undersized meters, regulating systems, GI pipes and fittings,

etc, will actually have negative impact on UFG control efforts. Petitioner in

view of above has requested to allow capitalization of Rs. 15,589 million for

said year.

5.3.4. Petitioner has further argued that main chunk of distribution development

encompasses on-going projects which were undertaken to comply with GoP

socio-political agenda. Authority, in its earlier determination, linked

capitalization under head distribution development with gas availability and

excluded the same from rate base owing to squeezing/debilitating gas

supply. Recently, the FG has formulated a policy for such development

projects and implemented the following moratorium, dated October 4, 2011

on development schemes:

i. Only ongoing development schemes will be executed.

ii. The schemes where work has yet to commence (funding received)

will be initiated after completion of ongoing schemes.

iii. No new gas development scheme will be allowed till implementation

of previous directives / commitments as indicated at para (i) and (ii)

above.

iv. Gas producing districts shall be exempted from Moratorium as

indicated at para (iii) above. Preference will be given to villages /

towns located in the vicinity of gas fields.

5.3.5. Petitioner, in view of above moratorium, submitted that proposed extension

in T& D network and capital cost for attached activities corresponding to new

towns & villages qualifies for capitalization and inclusion in rate base on

account of distribution development for said year.

5.3.6. Petitioner has submitted detailed information pertaining to on-going projects.

The Authority observes that progress on these projects during the current

year denotes that these capital projects and few GoP funded schemes are

likely to be completed during said year. Therefore, Authority, in view of


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above, allows projected capitalization of 4,600 Km in T & D network for

said year.

5.3.7. Authority however observes that petitioner has overestimated standard cost

for laying of each Km of distribution development. In the instant petition, it

has projected cost at Rs. 2.06 million per Km whereas in most recent

completed financial year, actual cost has been observed at Rs. 1.02 million per

Km. Authority, in view of above, adopts Rs. 1.28 million/Km (i.e; at the level

of FRR FY 2010-11 plus 25% to cater for inflation and enhanced activities) as

standard cost and provisionally allows Rs. 5,865 million for distribution

mains. The same will, however, be revisited at the time of FRR for said year,

based on prudently incurred actual costs of projects.

5.3.8. Estimated cost for allied activities in terms of construction of TBSs & DRSs,

replacement of undersized meters, construction of SMS for on-going projects

etc; have also been unreasonably projected on higher side. Keeping in view

the historical trend, which corresponds to petitioner’s capacity to undertake

the capitalization of such activities, the Authority determines projected cost

for other distribution development activities at Rs. 4,936 million for said year.

5.3.9. Accordingly, the Authority, allows Rs. 10,801 Million under distribution

development for said year.

Million Rs.

Sr.# Description Claimed by the

petitionerAllowed by the

Authority1 Distribution System Mains 9,747 5,865

2 Laying of distribution mains on cost sharing basis 600 600

3 Installation of new connections 2,207 2,206

4 Construction of TBS/DRS 582 214 5 Construction of SMS 400 276

Sub- total 13,536 9,161 6 Replacement of defective meters 1,183 994 7 Rehabilitation of distribution system 600 487 8 C.P. System 220 117 9 Spares of meters & Regulators 50 42

Sub- total 2,053 1,639 Total 15,589 10,801


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5.4. Compression & Normal Assets (Plant & machinery, measuring and regulating assets, motor vehicles, construction equipments, office equipments)

5.4.1. Petitioner has elaborated that Rs. 183 million on account of compression,

disallowed in DERR for said year, is part of complete package for import of

material, therefore it should be allowed. Authority allows the same keeping

in view integrated cost of project.

5.4.2. Petitioner has requested for admissibility of Rs. 336 million on account of

normal assets, disallowed in DERR for said year.

5.4.3. Authority observes that petitioner has neither provided any new admissible

evidence or justification which could not have reasonably been discovered at

the time of original decision nor has it been able to prove any change in

circumstances to consider its request. Authority therefore maintains its

earlier decision and rejects petitioner’s request on this account for said year.

5.4.4. Authority also observers that petitioner has included a net amount of Rs. 232

million as addition in fixed assets on account of new offices /regions for said

year. Petitioner however has not sought prior approval or provided detailed

information about the project. Therefore, claimed capitalization on this

account is disallowed.

5.5. Pipeline infrastructure for upcoming LNG import

5.5.1. Petitioner has requested to allow Rs. 15,379 million for laying of pipeline

infrastructure for up coming LNG project envisaged to be completed in said

year. Petitioner has elaborated that GoP is aggressively pursuing import of

LNG to make up shortfall in gas supplies. In this respect a meeting was held

on October 27, 2010 under chairmanship of Secretary, MP&NR, in which

decision was taken to allocate capacity to all three LNG terminal licensees

enabling them to transport their RLNG to customers, on payment of

transportation tariff plus capacity charge to respective gas utility company.

Formal letters of capacity allocation has been issued by OGRA to all three

LNG licensees. Allocation of capacity is subject to a number of conditions out

which following are directly related to gas utility companies for provision of


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pipeline system capacity for LNG terminal licensees:

(i) Entry and exit points should be indicated to gas utility companies within 90 days.

(ii) Performance guarantee of US $ 10 million per project to be furnished within 90 days of capacity allocation.

(iii) The utility companies, SNGPL and SSGCL, will start investing in capacity enhancement after receipt of performance guarantee.

5.5.2. Petitioner has urged that above conditions related to capacity allocation calls

for immediate action from both petitioner and SSGCL to make available

pipeline system capacity to LNG developers in line with their terminals.

5.5.3. Authority observes that gas supply in national network is dwindling thereby

creating a massive shortfall faced by each category of consumers. FG, in

order to prevent economic distortion, is vigorously making concerted efforts

to increase gas supply in the system and has developed multi-pronged

strategy in this regard. On one hand, it has inked long term capital intensive

pipeline project with Iran and Turkmenistan to import 500 MMCFD gas and

on the other, it has induced number of potential investors to develop

terminal and import RLNG on fast track basis. OGRA, for this purpose, has

also issued licenses to interested stakeholders and assisted FG in

establishment of necessary regulations in this regard.

5.5.4. Authority also observes that RLNG import option is practicable only if

availability of additional pipeline capacity is ensured by gas utilities to RLNG

transporter. Gas utilities, however, in the present circumstances, reported

their inability to allocate additional capacity owing to their own operational

requirement.

5.5.5. Authority observes that petitioner would undertake massive capital

investment to transport LNG through its network, and therefore emphasize

that petitioner should only incur expenditure on this account subject to the

following:-

a) compliance of Article 4 of Schedule IV of the OGRA Natural Gas


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Regulated Third Party Access Rules, 2011, as reproduced below:

“Transporter will start investing in capacity enhancement after receipt of requisite performance bank guarantee of US $ 10 million from the shipper”

b) decision taken in the meeting held on October 27, 2011, under the

Chairmanship of Secretary MP&NR, as stated under :-

“The utility companies SNGPL and SSGCL, will start investing in capacity enhancement after receipt of performance bank guarantee from a reputable bank acceptable to OGRA and en-cashable in Pakistan.”

5.5.6. Authority, in view of above, observes that availability of infrastructure, in

timely manner, is an essential prerequisite of RLNG import arrangements.

Authority, therefore, approves the said project in principle and decides that

actual expenditure on this account will be added in rate base at the time of

FRR, subject to successful commissioning of said pipeline as well as

requisite compliance of relevant rules and applicable decisions.

5.6. In view of above, depreciation expense claimed by petitioner comes down to Rs.

8,761 million as against Rs. 9,395 million. Decrease in depreciation is

consequence of adjustment on account of claimed addition in assets for said

year, as discussed above. Accordingly, net closing fixed assets for said year

works out to Rs. 82,200 million for said year.

6. Other Operating Revenues

6.1. Petitioner has projected “Rental and Services Charges” at Rs. 1,100 million and

“Other Operating Income” at Rs. 300 million, as against Rs. 1,331 million and Rs.

450 million per DERR respectively for said year. Petitioner has not cited any

reason for revised estimates, the Authority, therefore, determines the same at

level of DERR for said year.

7. Operating Expenditures

7.1. Cost of Gas 7.1.1. Petitioner has projected WACOG to increase to Rs. 308.95 per MMBTU on an

annualized basis as against Rs. 300.31 per MMBTU, projected at time of


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determination of ERR for said year, based on following parameters:

(i) Well-head gas prices of various producing fields for period July 1, 2011

to December 31, 2011, as already notified by Authority.

(ii) US $ exchange rate for payment of monthly invoices of gas producers

has been assumed at Rs. 88.29 for period July-December, 2011.

(iii) Prices of crude oil / HSFO during the period June, 2011 to November,

2011 to form basis for computing well-head prices for the period

January 1, 2012 to June 30, 2012 in accordance with provisions of

existing GPAs between producers and GoP.

(iv) Actual international FOB prices of crude oil and HSFO for the period

June, 2011 to September, 2011. For October and November, 2011, crude

oil prices have been assumed at US $ 107.76 and US $ 108.30 per barrel

respectively and HSFO prices have been assumed at US $ 647.43 and US

$ 650.66 per ton respectively.

(v) US $ exchange rate assumed at Rs. 90 for calculation of well-head gas

prices as well as for monthly invoicing to gas producers for the period

January–June, 2012.

7.1.2. On the basis of above parameters, petitioner has estimated average C & F

prices of crude oil and HSFO for June-November, 2011 at US $ 109.55 per

barrel and US $ 654.06 per ton respectively, and has used them for

computation of well-head prices for January-June 2012.

7.1.3. Authority observes that well-head prices of gas for all fields in Pakistan are

computed in accordance with GPAs and/or provisional pricing parameters,

available on record, and are notified in exercise of powers vested in it under

the Ordinance.

7.1.4. Authority finds that, on the basis of currently available information, revised

projections of sale and purchase volume, and computation of cost of gas

submitted by petitioner are reasonable.

7.1.5. Authority, therefore, provisionally determines WACOG at Rs. 308.95 per


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MMBTU and cost of gas of petitioner at Rs. 194,870 million for said year.

7.2. Human Resource (HR) Cost

7.2.1. Petitioner has referred its proposal for review of HR benchmark submitted in

August, 2011 and accordingly requested to revise HR benchmark cost for

said year.

7.2.2. Authority observes that proposals from gas utilities for revision in HR

benchmark have been received, but only after considerable delay and

repeated reminders. Same are under examination in terms of its rationality

and relevance. Also, some detailed information / data in this regard has been

sought from utilities, which is pending till date. The consultative session with

stakeholders in this regard will be initiated soon. Petitioner should not

assume its proposal as being approved by Authority until it is finalized.

Hence, inclusion of additional impact based on proposed HR benchmark at

this point in time is out of question. Authority, therefore, defers any possible

adjustment on this account in the instant decision. Authority, however,

decides to allow HR cost at Rs. 6,693 million for said year on provisional

basis ( i.e. HR cost per FRR FY 2010-11 Rs. 6,220 million plus provision for

IAS 19 for said year amounting to Rs. 473 million).

7.3. Cost of Reinstated employees

7.3.1. Petitioner has argued that requisite performance / progress report of

reinstated employees for each quarter has been submitted by it, therefore an

amount of Rs. 555 million may be allowed on this account.

7.3.2. Petitioner has further pleaded that reinstated employees, despite possessing

higher education lacks technical knowledge and relevant background to

produce intended results as per OGRA timelines. Petitioner therefore has

made concerted efforts by putting them through various formal training

sessions as well on job trainings. Resultantly, some improvements in various

fields have been witnessed, tangible results however will take time, for which

petitioner is endeavoring to utilize their services to the best of their abilities.

7.3.3. Authority admits the fact that above said employees were reinstated


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pursuant to compliance with FG directives and Sacked Employees

Ordinance, 2009. Authority however notes that these employees, before their

termination, were appointed against suitable positions by the company’s

management itself, surely after due diligence and scrutiny. Authority is of

concerted opinion that desired results can possibly be achieved from

reinstated employees, provided the management eagerly undertakes

appropriate measures for re-training of these employees

7.3.4. Authority also observes that efficiency of petitioner towards some critical

areas particularly UFG is going adverse. Petitioner, in order to pave

efficiency gap, requires motivated workforce to combat all such issues. On

this plea, Authority had adopted rather generous approach in allowing cost

on account of HR for last year.

7.3.5. Authority in view of above, allows 50% expenditure on account of sacked

employees amounting to Rs. 278 million on provisional basis at this time,

subject to improvement consequent to effective utilization of these

employees. The same will, however, be comprehensively reviewed at the time

of FRR and petitioner must be able to demonstrate enhanced utilization of

reinstated employees at that time, in terms of concrete measurable outputs.

7.4. Stores and Spares Consumed - Odorant Oil

7.4.1. Petitioner has argued that odorant oil is a chemical compound which creates

smell and is injected in system in accordance with international standards.

Rate specified in metering manual is 0.5 lbs or 0.22727 kg / MMCF of gas.

Petitioner has pleaded that for projected gas input of 516,475 MMCF, 117,379

KG odorant oil would be required. Petitioner has requested that based on

rate allowed by OGRA odorant oil expense be allowed at Rs. 76 million,

which was earlier claimed in DERR at Rs. 33 million, with the assumption

that actual cost will be allowed for budgeted quantity.

7.4.2. Authority observes that expenditure on account of odorant oil has been

exhaustively discussed and elaborated in DERR for said year. Petitioner’s

own position on this issue is in doldrums and the historical position


18

elaborates that initial claims of petitioner, on this account especially, had

been on higher side.

7.4.3. In view of above, Authority maintains its earlier decision for said year,

subject to review based on prudently incurred actual expenditure at the time

of FRR for said year, owing to essential nature of the expenditure in relation

to UFG control.

7.5. Operating Cost for Pipeline infrastructure for upcoming LNG import

7.5.1. Petitioner has claimed Rs. 36 million as operating cost in respect of laying of

pipeline infrastructure for upcoming LNG import.

7.5.2. Authority in view of the discussion per para 5.5 above pends Rs. 36 million

for said year on this account.

7.6. Remaining items of Operating Expenditure (Repair & maintenance, fuel and power, rent, rates, electricity and telephone, transport, legal and professional charges, gathering charges of collection data, advertisement, security expenses, provision for doubtful debts, five years’ special training programme, other expenses)

7.6.1. Authority notes that all other issues contended by petitioner have been

exhaustively discussed & decided by Authority, after duly considering the

petitioner’s submissions presented at the time of DERR FY 2011-12. Authority

gave conscious thought on petitioner’s submission/ claims and has adopted

rather generous approach to allow unavoidable and improvement/efficiency

related expenditures.

7.6.2. Authority observes that it had made exhaustive discussions while deciding

upon any revenue or expenditure item and arguments advanced now have

already been considered and addressed by Authority. Therefore, admission

of petition based on previously discussed issues defies logic.

7.6.3. Authority notes that review on each disallowed item of expenditure has been

claimed as a matter of practice only, and therefore review petition is rather

flimsy and lack any attempt to provide plausible reasons for review. Further,

item by item analysis of operating cost reveals that petitioner exaggerated its


19

projections for said year when compared with actual results for FY 2010-11.

Therefore, petitioner’s entire submission is not based on careful estimates

and appears to be a futile exercise to retreat historical facts.

7.6.4. Authority further observes that petitioner has neither provided any new

admissible evidence or justification which could not have reasonably been

discovered at the time of original decision nor has been able to prove any

change in circumstances to consider its request. Further, it has also been

noted that petitioner has adopted a non-professional approach of grossly

exaggerating estimates. This practice is totally sluggish and needs to be

abandoned.

7.6.5. Authority, in DERR for said year, had provisionally restricted provision for

doubtful debts at Rs. 180 million for said year. Authority feels that

appropriate and reasonable benchmark on this critical expenditure is

required not only to protect consumers from this avoidable cost of

petitioner’s inefficient practices but also to introduce systematic

improvements in petitioner’s operations. Authority will, therefore, set

requisite benchmark in due course based on information provided by

petitioner and after having consultation session with it.

7.6.6. In view of above, Authority maintains its earlier decision taken in DERR for

said year in respect of all other items.

7.6.7. Petitioner has claimed Rs. 242 million on account of additional operating cost

for 3 new regions and 1 sub region. Authority in view of the discussion per

para 5.4.4 above disallows Rs. 242 million for the said year.

7.7. Revenue Shortfall of FY 2010-11

7.7.1. Petitioner has included Rs. 3,078 million, being revenue shortfall pertaining

to FY 2010-11 arisen due to decision of honorable Courts in the matter of

revenue requirements for FY 2010-11. The Authority, at time of FRR for FY

2010-11, had decided to adjust this amount in RERR for said year, since no

cushion was available to adjust the shortfall in FY 2010-11.


20

7.7.2. In view of above, the Authority includes Rs. 3,078 million in tariff

calculation for said year.

8. Determination 8.1. Authority, after taking into consideration points raised by interveners,

clarifications provided by petitioner, scrutiny of petition and available record,

provisionally determines the shortfall in estimated revenue requirement for said

year at Rs. 24,984 million (Annexure-I).

8.2. In order to dilute the effect of increase in prices, Authority decides to adjust

shortfall in revenue requirement to the extent of available difference, of Rs.

12,655 million, between consumer and prescribed prices already notified for this

period. Authority decides to adjust the remaining shortfall of Rs. 12,329 million,

in revenue requirement by increasing the average prescribed price by Rs. 43.93

per MMBTU w.e.f January 01, 2012, translating into an increase of 14.05% for

all categories of consumers (Annexure-II) except Liberty Power and fertilizer

feedstock, which are governed by separate policy of the Federal Government.

8.3. Revised provisional prescribed prices w.e.f January 01, 2012 are subject to the

condition that these “may be re-adjusted upon receipt of GoP advice under Section 8

(3) of the Ordinance in respect of the sale price of gas for each category of retail

consumers provided that the overall increase in the average prescribed price remains

unchanged so that the petitioner is able to achieve its total revenue requirements in

accordance with Section 8 (6) (f) of the Ordinance.”

8.4. Under Section 8 (3) of the Ordinance, GoP is required to advise Authority,

within 40 days of advice from the Authority of revision of prescribed prices, the

minimum charges and sale price for each category of retail consumers, for

notification in the Official Gazette by Authority.

9. Public Critique, Views, Concerns, Suggestions 9.1. Authority has recorded concerns of interveners and participants in para 3 above,

which include matters relating to policy and do not fall under the purview of

Authority but affect the consumers. Specific attention of GoP is drawn to these

issues for consideration and necessary action.


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9.2. Authority observes that petitioner is in violation of License Condition No. 34,

wherein it is obligated to ensure continuous and reliable supply of natural gas to

its existing consumers. Petitioner should therefore endeavor to ensure early

compliance of the said condition.

(Mansoor Muzaffar Ali) Member (Gas)

(Mir Kamal Marri)

Member (Finance)

(Sabar Hussain) Acting Chairman /

Member (Oil)

Islamabad,

November 24, 2011


22

1. Computation of Revised Estimated Revenue Requirement FY 2011-12 Rs. in million

The Petition Adjustment Allowed BY OGRA

Gas sales volume -MMCF 594,947 - 594,947

BBTU 558,817 - 558,817 July-11 To Dec-11 278,165 - 278,165 January -12 To June-12 280,652 - 280,652

939.2719 - 939.2719 "A" Net Operating revenues

Net sales at current prescribed price 192,741 - 192,741 Rental & service charges 1,100 231 1,331 Amortization of deferred credit 1,904 - 1,904

300 150 450 196,045 196,426

"B" Less ExpensesCost of gas sold 194,870 - 194,870 UFG (disallowance) / allowance (8,197) - (8,197) Transmission and distribution cost 15,349 (5,599) 9,750 Gas Internally Consumed 2,555 - 2,555 Depreciation 9,395 (634) 8,761 Workers Profit Participation Fund 452 - 452

3,078 - 3,078

Total expenses "B" 217,502 (6,233) 211,269

"C" (21,457) (14,843) Return required on net assets:

76,905 - 76,905 102,319 (20,119) 82,200 179,224 159,105

Average fixed net assets (I) 89,612 (10,059) 79,553 20,560 - 20,560 22,656 - 22,656 43,216 - 43,216

Average net deferred credit (II) 21,608 - 21,608

"D" Average operating assets (I-II) 68,004 (10,059) 57,945 Return required on net assets 17.5% 17.5%

"E" Amount of return required 11,901 (1,760) 10,140 "F"

(33,358) 8,374 (24,984) "G"

59.69 (14.99) 44.71 "H"

118.86 (29.84) 89.02 "I" 229,403 (7,993) 221,410 "j"

404.60 (15) 389.62 "K"

- 45.09 "L"

- 43.93

Other operating income

Particulars

Calorific Value

Average Increase/(Decrease) in Prescribed Price (Rs/MMBTU) w.e.f. 01.01.2012

Shortfall adjusted from available difference amounting to Rs. 12,655 million between consumer price & prescribed price (Rs/MMBTU)

Net assets at endingNet assets at begining

Revenue requirement

Average Prescribed Price (Rs/MMBTU)

Excess /(Shortfall) over return required

Remaining shortfall of Rs. 12,329 million adjusted by increasing prescribed prices wef 1.1.2012 (Rs/MMBTU)

Total income "A"

Prior Year Adjustment from FRR 2010-11

Average Increase/(Decrease) in Prescribed Price (Rs/MMBTU) w.e.f. 01.07.2011

Operating profit / (loss)(A - B)

Deferred credit at endingDeferred credit at begining


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2. Provisional Prescribed Prices for FY 2011-12

(i) Domestic Consumers:

a) Standalone meters

First slab (upto 100 cubic metres per month). 95.00 107.87 123.02 Second slab (over 100 upto 300 cubic metres per month). 190.00 215.74 246.04 Third slab (over 300 upto 500 cubic metres per month). 800.00 908.39 1,035.98 Seventh Slab(over 500 cubic meters oper month) 1,006.40 1,142.75 1,303.26

b)

(i) Upto 300 M3 per monthFirst slab (upto 100 cubic metres per month). 95.00 107.87 123.02 Second slab (over 100 upto 300 cubic metres per month). 190.00 215.74 246.04

(ii) Over 300 M3 per month383.42 435.37 496.52

All off-takes at flat rate of

(ii) Commercial Consumers:

All off-takes at flat rate of 463.76 526.59 600.55

Special Commercial Consumers (Roti Tandoors)

a) Upto 300 M3 per monthFirst slab (upto 100 cubic metres per month). 95.00 107.87 123.02 Second slab (over 100 upto 300 cubic metres per month). 190.00 215.74 246.04

b) Over 300 M3 per month


(iii) Ice Factories:All off-takes at flat rate of 463.76 526.59 600.55

(iv) Industrial Consumers:


(v) Captive Power :All off-takes at flat rate of 382.37 434.18 495.16

Mosques, churches, temples, madrassas, other Religious Places and Hostels attached thereto; Government and Semi-Government Offices and Hospitals, Government Guest Houses, Armed Forces Messes, Langars, Universities, Colleges, Schools and Private Educational Institutions, Orphanages and other Charitable Institutions along-with Hostels and Residential Colonies to whom gas is supplied through bulk meters..

All establishments registered as commercial units with local authorities or dealing in consumer items for direct commercial sale like cafes, milk shops, tea stalls, canteens, barber shops, laundries, tandours, places of entertainment like cinemas, clubs, theaters and private offices, clinics, maternity homes, etc.

All consumers engaged in the processing of industrial raw material into value added finished products irrespective of the volume of gas consumed including hotel industry but excluding such industries for which a separate rate has been prescribed.

Prescribed Prices w.e.f. July 01, 2011

Prescribed Prices w.e.f.

January 01, 2012

Prescribed Prices w.e.f.

August 07, 2011

Rupees per MMBTU


24

(vi) CNG Stations:All off-takes at flat rate of 503.64 571.88 652.20

(vii) Cement Factories:All off-takes at flat rate of 536.42 609.10 694.65

(viii) Fertilizer Factories:

(1) Pak American Fertilizer Limited, Daudkhel.

(a) For gas used as feed stock for fertilizerCommodity charge.All off-takes at flat rate of 102.01 102.01 102.01

(b)

Commodity charge.All off-takes at flat rate of 382.37 434.18 495.16

(2) Pak Arab Fertilizer Limited, Multan.


(b)


(3)


(b)


(4)


(b)


For gas used as fuel for generating steam and electricity and for usage in housing colonies.



Dawood Hercules Chemicals Limited, Chichoki Malian, Sheikhupura District:

Pak-China Fertilizer Limited/Hazara Phosphate Plant Limited, Haripur.



25

(5) ENGRO Fertilizer Company Limited


(b)


(ix) Power Stations:(a)


(b)

Commodity ChargeAll off-takes at flat rate of 393.79 447.14 509.94 Fixed charge (Rupees per month). 390,000 390,000 390,000

(c) Liberty Power Limited. All off-takes at flat rate of 990.97 1,260.34 1,267.35

(ix) Independent Power Projects

Commodity ChargeAll off-takes at flat rate of 332.36 377.39 430.40

WAPDA's Natural Gas Turbine Power Station, Nishatabad, Faisalabad.

WAPDA's Power Stations and other electricity utility companies excluding WAPDA's Natural Gas Turbine Power Station, Nishatabad, Faisalabad.


in the matter of sui northern gas pipelines...

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