Industry stakeholders voiced concerns about the current gas pricing model, which guarantees a fixed rate of return on assets to Sui companies, resulting in a 21% profit margin that critics say undermines operational efficiency. The Oil and Gas Regulatory Authority (OGRA) on Friday hosted a public consultation on revising the Rate of Return (ROR) study, conducted by KPMG, for transmission and distribution companies operating under the existing tariff regime in the natural gas sector.Â
The current system uses the Weighted Average Cost of Capital (WACC) model to set the return rate, which varies based on market assumptions and the value of regulated fixed assets in operation.
During fiscal year 2024-25, SNGPL and SSGC, two major gas utilities, earned a return of 21% on their net regulated fixed asset base. For indigenous gas sales, SNGPL earned Rs 36.7 billion and SSGC earned Rs 19.9 billion. The utilities also earned Rs 7.3 billion and Rs 6.6 billion, respectively, from RLNG (Re-gasified Liquefied Natural Gas) sales on their respective net regulated asset bases.
The representative of UGDC (United Gas Distribution Company) called for the removal of the guaranteed rate of return, noting it was unnecessary given the profits the utilities were already generating. He also cautioned against using the power sector’s return formula as a benchmark for the gas sector due to fundamental differences in their capital structures.Â
The gas companies, he said, are heavily leveraged and financially strained, whereas many power sector companies operate with minimal debt. Applying the power sector’s formula to cash-strapped gas utilities could result in a return that fails to meet actual financial obligations.
Managing Director of SSGC, Amin Rajpoot, agreed that high-interest rates in recent years have significantly boosted the profitability of gas companies, but noted that these companies are still facing major challenges. He emphasised that the government has not raised gas prices in three years, which has contributed to growing circular debt in the sector. He suggested that changes should be made in one segment of the pricing formula, rather than overhauling the entire system.
Faisal Iqbal, Deputy Managing Director of SNGPL, explained that the guaranteed rate of return was introduced to maintain a stable gas tariff under a regulated regime. He stressed that the rate is necessary to keep the tariff predictable and manageable for consumers.
With the rising pressure on government finances and the sector’s growing debt, stakeholders are looking for solutions that balance profitability and long-term sustainability.
