Unbundling the wrong way


Amid strong opposition from key stakeholders, the Cabinet Committee on Energy (CCOE) led by Minister for Planning and Development Asad Umar has put on hold the unbundling of two gas utilities — Sui Northern Gas Pipelines Ltd (SNGPL) and Sui Southern Gas Company Ltd (SSGCL) — until a comprehensive, feasible and time-bound road map for gas-sector reforms is available.

He agrees that the unbundling of gas firms into transmission and distribution companies is not the objective per se and lessons should be learnt from power-sector reforms that began with the unbundling of power companies in 1992.

Responding to a question, he candidly accepted that it was the Power Division’s “absolutely bad decision” to recently ask power distribution companies to sign management contracts with Pakistan Electric Power Company (Pepco) abolished almost a decade ago.

Mr Umar said the unbundling of Wapda through power-sector reforms launched in 1992 via Pepco may have been successful with an envisaged sunset period of three to four years. But unbundling without associated reforms “played havoc with the power sector and the country”.

It is not easy to find 14 chief executive officers for power companies. The power centre in the Power Division has to end to allow competition, he said, adding that “precisely because of this reason, I have not approved the unbundling of gas companies until we have a complete and bankable road map” for management structure, loss reduction, efficiency improvement and pricing reforms.

‘I won’t approve the unbundling of gas companies until we have a complete and bankable road map for reforms,’ says Asad Umar

As a result, the CCOE directed the Petroleum Division to “prepare a comprehensive strategy for regulatory and policy reform of the gas sector and implement short-term measures for efficiency enhancement and loss reduction” even though it generally agreed that for the longer term, the road map to a competitive gas market was required where the private sector should perform an active role.

Based on the above, the federal cabinet did not approve the summary on the unbundling of gas companies, confirmed Special Adviser to the Prime Minister on Petroleum Nadeem Babar. He said the cabinet asked for a complete reform package for the gas sector, including transmission, distribution, reduction in unaccounted-for gas (UFG), technological inductions, system expansion and so on.

The Ministry of Energy’s Petroleum Division (MEPD), as part of its understanding given to international lending agencies, proposed the immediate appointment of a transaction adviser to work out the unbundling of SNGPL and SSGCL into five companies.

The MEPD has proposed the creation of a National Gas Transmission Company (NGTC) to take over the transmission system of both gas utilities and operate as a common carrier for existing and newly formed gas distribution companies like National Transmission and Despatch Company (NTDC) in the power sector.

It expects third-party access by private firms to the NGTC gas network that will not itself engage in the sale and purchase of gas but only transport it and charge wheeling costs to all suppliers and purchasers of local gas or imported liquefied natural gas (LNG). Some influential players with connections in right places had been interested in the NGTC shareholding.

Under the plan, the distribution network of the two gas companies would then be divided into multiple distribution companies with unified principles by both SNGPL and SSGCL within the area of their jurisdictions for operation of smaller business units or distribution companies. “The companies would be established on a technical and economical basis, including population, network density, gas demand, workload and management/supervision and efficiency for the sustainability of newly formed gas distribution companies,” the MEPD recommended.

The Petroleum Division is also seeking approval for “a mechanism of weighted average sale price equalisation or any other suitable mechanism (that) would be developed for gas sale pricing and the same would be implemented simultaneously”. It claims its proposed structure had become inevitable as Article 158 of the Constitution promised “precedence to the gas-producing province over other parts of the country in use of gas who now demand uninterrupted supplies based on surplus production”.

Also, it argues that growing gas demand and depleting local gas production were expanding the gap for which heavy reliance was shifting towards imported LNG. Some of its arguments are disappointing to say the least. It confirms the willingness of the private sector to set up new LNG terminals without conceding the fact the Petroleum Division and other arms of the government were hampering progress. It also concedes its failure in UFG control and reluctance of the existing consumers to pay a higher cost for imported gas besides the Power Division backtracking on its LNG commitments.

The regulator has opposed the summary and advised that “mechanism/approach of unbundling should first be decided in consultation with all the stakeholders/provincial governments, including the approval of the Council of Common Interests (CCI), before the appointment of any consultant since the terms of reference (ToR) of such consultant shall depend on the mutually agreed mechanism”. It also opposed the bifurcation of the two existing companies into five or multiple entities before the completion of advisory tasks by the transaction adviser, specifically the feasibility of proposed reforms in the first place and wanted a study of lessons learnt from the unbundling of Wapda.

The Financial Sustainability Group of experts from various public and private sectors, while reviewing the World Bank’s road map for gas-sector reforms, had concluded a few months ago that gas distribution companies (Discos) would become invariably unsustainable and loss-making entities and only NTGC (Transco) would be profitable, which would then need to subsidise Discos.

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