City Gas Distribution: Creating Demand for India’s Energy Future – Changes To Support The Shift To A Gas Economy.

 

13 March, 2019

 

 

Just as the bidding closed on the 10th Round of the City Gas Distribution (CGD)[1], fundamental changes have been made to the bidding criterion to create a regime that strikes a balance between the for-profit enterprises, and public interest and accountability.

 

In this first part of a two-part blog series, we assess these changes and the challenges faced in meeting targets to increase the share of natural gas in India’s energy market.

 

Background

 

The Government aims to connect 1 crore households with piped gas by 2020. This is in line with increasing the share of natural gas in the primary energy basket from 6% to 15% in a phased manner, over the next few rounds of bidding. The 10th CGD Bidding Round covers 50 Geographical Areas (GA) spread over 14 States and 124 Districts. In this Round, about 225 bids were received in respect of all the 50 GAs offered, and a total of 12 companies, including Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited, GAIL Gas Limited and Gujarat Gas Limited managed to get 50 Geographical Areas (GAs) that were on offer under this round, which also includes participation from two foreign consortiums in this round.

 

Post the successful implementation of the 10th CGD Bidding Round, about 70% of the country shall be under the umbrella of the CGD network. It is envisaged that this initiative will help create a robust infrastructure by bringing in investment of about Rs. 50,000 Crore, generating employment and playing a significant role in achieving the shift towards a gas-based economy, with natural gas as the next-generation, cheaper and environmentally friendly fossil fuel[2]. Further, while promoting the concept of a gas-based economy, the Government has discussed the expansion of the distribution network to Myanmar, through Bangladesh, to meet its domestic requirement, alongside the nationwide expansion of the project.

 

The Petroleum and Natural Gas Regulatory Board (Board), the downstream regulator in the petroleum and natural gas sector, aims at providing regulation and authorisation for gas pipelines, i.e. CGD, along with providing good offices for resolution of disputes. Expeditious granting of permissions by the authorities, Government mandates and reforms in tariff regulations are the three most critical factors for CGD development.

 

The amended “Authorising Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks – Amendment Regulations, 2018”[3] (2018 Amendment Regulations) shall be implemented with the 10th CGD Bidding Round . The need for such change came from the lukewarm response to the initial bidding rounds, which were plagued with “one paisa” or “near zero” bids.

 

The Re-Engineering Of CGD – The Challenges and Experiments

 

The 9th CGD Bidding Round also included two foreign consortium investors winning six GAs out of 78 GAs for which Letters of Intent (LOIs) were awarded by the Board. Due to amended Government policies, the number of GAs allotted to foreign consortium investors has increased to ten in the 10th CGD Bidding Round, thereby bringing global synergy, enhanced technology and long-term value for the Indian economy. For the 10th CGD Bidding round, the major challenge for the bidders is the development of a demand assessment model (baseline and forecasted demand), network layout, technical configuration/simulation and most importantly a bottom-up assessment of a viable Compressed Natural Gas (CNG) station location. The Board has put forth a robust system to monitor project implementation and facilitate the companies in resolving problems on the ground.

 

Some of the challenges and loopholes which deter effective implementation of the 2018 Amendment Regulations are as follows:

 

1. Proviso (3), Regulation 12 of the 2018 Amendment Regulations provides for the extension of the exclusivity period in case of delay in the flow of gas[4] in the designated transmission line. Such a provision is predisposed to misuse, by means of connivance between the bidder and the upstream gas producer, thereby leading to hoarding of the licence for longer than the approved exclusivity period. The Board has come up with the Minimum Work Programme[5] (MWP), and follow ups, which would result in a “Reasonable amount of penalty”, which in extreme circumstances may result in cancellation of the licence[6].
2. The success of the CGD network has been contingent on domestic demand, which is still resistant to the use of natural gas. In order to do justice to the magnitude of investment that had been made in the sector, local administrative authorities have come up with legislation pursuant to orders of the court in M.C. Mehta vs. Union of India and Ors{7} to facilitate transition to CNG fuelled vehicles, alongside other initiatives, such as aiding public transport and the implementation of the odd even car rationing scheme, which exempt CNG run vehicles from the operation of such scheme. The success of this is shown by the record CNG sales in the capital, of 2.67 mkg/day in April 2016, post the implementation of such changes.
3. Lack of a CGD corridor, and an expedited procedure for the procurement of permissions from various authorities such as the Railway authorities, National Highway Authority of India, Public Works Department, State Road Transport Departments, etc. heavily impacting the pace of development of the network. Thus, a streamlined procedural approach needs to be undertaken in order to achieve the goals set forth in each bidding round expeditiously. Further, third party excavation on the existing CGD network creates problems in gas transmission. The Board plans to coordinate with state governments and other agencies such as municipal corporations, railways and highway authorities to help companies resolve problems on the ground[8].
4. The Competition Commission of India (CCI), vide its order dated November 8, 2018[9] has justified the existence of long-term supply contracts taking into account various economic factors and foreign jurisprudence. Such power purchase agreements (PPAs), which extend beyond the exclusivity period of eight years, granted under the PNGRB Regulations, 2008[10], will discourage the construction of competing pipelines beyond such period and, thus, reinforce collective dominance in the industry.
5. In the case of Petroleum and Natural Gas Regulatory Board vs. Indraprastha Gas Limited & Ors[11], the Supreme Court held that th Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Natural Gas Distribution Networks and Compression Charge for CNG) Regulations, 2008, are ultra vires the parent statute, and the Board was not empowered to fix the maximum retail price, thus leaving prices open to be determined by the competition, which could be prejudicial to the end consumer. However, such a decision is also investor friendly, and shall aid the expansion of the project, as India currently imports 75% of its domestic requirement; if companies are not given the autonomy to fix the tariff, it might dissuade them from investing in this sector.
6. The profits and the public interest overlap best when the privatised service is in a competitive market. However, the 2018 Amendment Regulations envisages a monopolistic market in the Geographical Areas[12], leaving public interest at the losing end of the tipping scale. Due to the highly capital-intensive nature of the industry, and lack of technical know-how, a growing share of total investment is now being taken up by the private sector. A pivotal benefit of public ownership is the reduction of “the cost of capital”;in the case of private players, the cost is inclusive of the dividends and interest payments to be paid to the shareholders, thereby, leading to higher costs being borne by the end user. However, weak institutional and enforcement capacity to effectively regulate is the key issue in the landscape of the CGD project irrespective of the ownership.

 

In the second part of this blog, we take these challenges and assess how regulations will support the smooth implementation of a nationwide gas supply. 

 

 

For further information, please contact:

 

Jatinder Cheema, Partner, Cyril Amarchand Mangaldas

jay.cheema@cyrilshroff.com

 

[1] The last bid was submitted on February 5, 2019

[2] 10th CGD Bidding Round – Press Release dated February 5, 2019

[3] Notified vide Gazette Notification No. F.No.PNGRB/Auth./CGD/Amd/2018 dated April 6, 2018

[4] Petroleum and Natural Gas Regulatory Board ( Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008, Regulation12, Proviso (3)

[5] Petroleum and Natural Gas Regulatory Board ( Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008, Regulation 7 (1) (b)

[6] PNGRB may consider carrying forward the annual target from one year to another within the period of the first five years, if the delay in implementation is on account of valid reasons.

[7] 2015 SCC ONLINE SC 1327

[8] Sanjeev Choudhary, ‘Tenth round of licensing soon, to cover 50 districts’, The Economic Times, (New Delhi, Sep 18, 2018)

[9] Case Nos. 16-20 & 45 of 2016, 02, 59, 62 & 63 of 2017

[10] Regulation 12

[11] AIR 2015 SC 2978, (2015) 9 SCC 2009

[12] Supra Note 6