21% profit surge for gas utilities draws criticism over efficiency losses

Industry stakeholders argue that fixed returns stunt gas sector efficiency amid rising circular debt

ISLAMABAD:

Gas pricing based on a guaranteed rate of return on assets kills the efficiency of public utilities, whose profits have swelled to 21% despite energy shortages in the country, said industry stakeholders at a public hearing on Friday.

The Oil and Gas Regulatory Authority (Ogra) held the hearing to review the existing gas pricing formula for state-owned transmission and distribution companies, which was based on a guaranteed and fixed rate of return on assets.

Owing to the fixed return, the profits of gas utilities – Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) – reached 21% during financial year 2024-25.

It was highlighted during the hearing that in FY25, SNGPL and SSGC earned a 21% return on their net regulated fixed asset base, which amounted to Rs36,754 million for SNGPL and Rs19,978 million for SSGC from sales of locally produced gas.

On sales of re-gasified liquefied natural gas (RLNG), SNGPL earned a return of Rs7,335 million while SSGC got Rs6,671 million.

Consultancy firm KPMG, hired by Ogra, has proposed a revised rate of return mechanism, which includes a targeted return on the equity capital base of gas companies, calculated on the basis of cost of equity and called the Capital Asset Pricing Model. It says the base return on equity capital will be 80% while 20% will be linked with efficiency targets.

At the hearing, Tabeer Energy CEO Shahid Karim said that gas utilities needed a guaranteed rate of return, which killed their efficiency. "Gas utilities will get 80% return even if energy utilisation stands low," he pointed out, adding that there was no mechanism in place to bifurcate the indigenous gas and RLNG.

He stressed that there was a serious lack of data transparency and that was the reason for the increase in circular debt every year.

Head of finance of Universal Gas Distribution Company (UGDC) said that they had operated the first gas company in the private sector among the natural monopolies of SNGPL and SSGC, adding that their gas system was smooth.

He pointed out that the financial cost and even depreciation cost were included in the operating cost of state-owned gas companies. "Gas utilities are making profits from consumers due to higher prices and are transferring these profits to shareholders," he argued, adding that there was no need for a guaranteed rate of return on assets in such a situation.

SSGC Managing Director Amin Rajpoot responded that earnings of gas companies had jumped because of high interest rates in the last few years. "If you look at balance sheets of gas utilities, these show that they are operating with huge challenges," he said and highlighted that the companies had laid new pipelines over 0.2 million kilometres and made huge investments owing to the guaranteed rate of return.

He added that the government had not raised gas prices for the past three years, which increased the circular debt. "There should be change in one segment rather than a sudden change in the entire gas pricing formula," he contended.

SNGPL Deputy Managing Director Faisal Iqbal said that the guaranteed rate of return was enforced to maintain a normal gas tariff. "The guaranteed return is given in a regulated regime to maintain a normal tariff. Circular debt is the result of keeping gas prices unchanged," he said.

"This is a very unreasonable return (proposed by KPMG)," he remarked and urged the regulator to introduce a mechanism that could ensure financial viability for gas companies and keep the gas sector stable.

The consultant said "we must exercise caution while using the power sector's return formula as a benchmark for the gas sector due to fundamental differences in the capital structure."

Unlike the gas utilities, he pointed out, many power-sector companies had minimal commercial debt and operated with a low leverage.

Gas companies are currently "cash-strapped" and heavily leveraged. Applying a formula designed for debt-free or low-debt entities to heavily indebted utilities may result in a return that fails to cover actual financial obligations, he stressed, adding "we must scrutinise this practice before adopting it as a standard for the gas sector."