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Gas sector - CGD draft regulations appear to favour new entrants - ICICI Securities

Posted On: 2020-10-30 08:24:14

In the past few weeks, PNGRB has issued draft regulations relating to unified tariff and allowing competition in CGD areas. PNGRB has opted for unified tariff for all interconnected pipelines of all entities whereby consumers pay the unified tariff, but each pipeline entity continues to get the same tariff as earlier. All players except GAIL favour PNGRB's proposal. The draft regulations on CGD appear to favour the new entrants over incumbents; new entrants paying cost plus tariff has been opted for instead of base tariff with capacity being allotted to the highest bidder. We expect these regulations to be notified by Dec'20, when the JHBD pipeline is scheduled to be commissioned and the term of the PNGRB chairman expires. IGL and MGL would be more hit by competition than Gujarat Gas (GGL). We reiterate ADD on GGL, SELL on IGL and HOLD on MGL and GAIL.

- Unified tariff on JHBDPL and East-West pipeline 10% and 13-29% lower than current tariff, and may therefore boost volumes: Unified tariff for all interconnected pipelines of all entities and not separately for that of each entity has been proposed in the draft regulations released by PNGRB on 29-Sep'20. Open house discussion on draft regulations was held on 23-Oct'20 and, as per stakeholder comments published by PNGRB, all entities except GAIL are in favour of unified tariff for all interconnected pipelines of all entities; GAIL is in favour of a separate unified tariff for each entity. The unified tariff calculated by PNGRB for 13 interconnected pipelines of seven entities is Rs56.84/mmbtu; it is based on volume-weighted average tariff of these pipelines. Consumers would pay the unified tariff on these pipelines while each pipeline entity like GAIL and GSPL would continue to get the same tariff as earlier. Unified tariff may boost volumes on the pipelines on which unified tariff is substantially lower than the current tariff; unified tariff is lower than current tariff by 10% for GAIL's 16mmscmd capacity Jagdishpur-Haldia-Bokaro-Dhamra pipeline (JHBDPL), by 13-29% for East-West pipeline (current volume 18.3mmscmd) and by 41% for Shahdol-Phulpur (0.9mmscmd) pipeline.

- Draft regulations opt for cost plus tariff for CGD network and do not address concerns of incumbents: The tariff that incumbents can charge for use of their network would be fixed by PNGRB at cost plus 12% post-tax return on capital employed and capacity allotted to new entrants would be on first-come-first-served basis as per the draft regulations issued on 29-Sep'20; the other option PNGRB considered was fixing a base tariff and incumbent allotting capacity to the highest bidders. Thus, PNGRB has opted for cost plus tariff option, which favours new entrants over the incumbents. The three listed CGD entities have proposed tariff at cost plus 14% post-tax return in their comments to PNGRB sent before the open house on 16th Oct'20. The draft regulations on access code issued on 6-Oct'20 don't appear to address incumbents' concern on cherry-picking by new entrants (focusing on CNG and industrial segments). The technical and financial qualifications, which incumbents wanted for new entrants, also have not been suggested in the draft regulations. Comments on access code draft regulations were invited by 27th Oct'20 and the open house on the same is scheduled for 2nd Nov'20.

- OMCs appear keen to foray in to Delhi and Mumbai when competition is allowed: Comments to PNGRB on the CGD draft regulations by the three OMCs, which have authorisation for 77 CGD areas, suggest that they are keen to foray in to large-volume CGD areas like Delhi, Mumbai and Pune when competition is allowed. They would be formidable competitors given that they would require only small additional investment to dispense CNG given their extensive petrol station networks and the fact that they house majority of CNG stations of IGL and MGL.

- PNGRB's authority to allow competition questioned; PNGRB confident regulations would pass muster with Delhi HC: The three listed CGD players have yet again in their comments to PNGRB questioned its authority to notify regulations allowing competition when the matter is in the Delhi High Court (HC). The PNGRB has stated on numerous occasions that there is no injunction by the Delhi HC preventing it from notifying regulations allowing competition and that it is confident its regulations will pass muster with the Delhi HC. However, some delay in implementation of regulations because of the litigation cannot be ruled out.

Source: Equity Bulls

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