Challenges await implementation of PNGRB's concept paper: ICRA

Investment information and rating agency ICRA said on Tuesday that operational challenges in running city gas distribution (CGD) networks will require resolution for actual materialisation of third-party competition in the business.

The Petroleum and Natural Gas Regulatory Board (PNGRB) had granted exclusive marketing rights to certain pre-existing CGD networks for a limited period. These CGDs have reached the end of the timeframe for exemption from the purview of a common contract carrier.

Hence, PNGRB has formulated a concept paper to determine a process to open up these CGD networks to competition with the intention of promoting fair competition and efficient use of resources while also protecting the interests of the consumers.

This regulation will not be applicable to entities that have pre-determined transportation rates as part of the PNGRB bidding process for authorisation carried out in the ten rounds of bidding until now.

"We have analysed the impact of the above regulation on the incumbents if the cost of service methodology is implemented for major incumbents," said Ankit Patel, Vice President and Co-Head for Corporate Ratings at ICRA.

"The findings indicate that about 65 to 75 per cent of the contribution of these entities can be met from the recovery of the network tariff. The rest of the contribution is generated from marketing or commodity margins," he said.

ICRA said in a report that the impact of third-party competition to existing operators could be more pronounced in the PNG (industrial) segment as the larger absolute volumes and the ease of tying up directly with a group of industrial customers would be relatively easier compared to the CNG segment, where domestic gas allocation needs to be sought to have a number of end-consumers.

K Ravichandran, Senior Vice-President and Group Head for Corporate Ratings at ICRA said there is a possibility that existing players may challenge the final regulation in courts, which could delay it further.

"While competition could intensify over the medium to long term, operational challenges such as determination of surplus capacity and access code will require resolution for the actual materialisation of third-party competition in the CGD business," he said.