Stakeholders Challenge 21% Guaranteed Return in Gas Pricing Model

Industry participants have raised serious objections to the prevailing gas pricing mechanism, which guarantees Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) a fixed rate of return on their regulated asset base, currently yielding an effective 21% profit margin that detractors argue diminishes incentives for operational efficiency and cost discipline.

The Oil and Gas Regulatory Authority (OGRA) convened a public consultation session on Friday to deliberate on the findings of a Rate of Return (ROR) study commissioned from KPMG, focusing on the existing tariff determination framework applicable to gas transmission and distribution companies.

The current methodology employs the Weighted Average Cost of Capital (WACC) approach to determine the allowable return, with the rate fluctuating according to prevailing market conditions and the depreciated value of assets in regulated service. During FY2024-25, SNGPL realised Rs36.7 billion and SSGC Rs19.9 billion as returns on indigenous gas sales, supplemented by Rs7.3 billion and Rs6.6 billion respectively from RLNG sales, both computed on their respective net regulated fixed asset bases.

A representative from United Gas Distribution Company (UGDC) advocated for the outright elimination of the guaranteed rate-of-return provision, contending that the substantial profits already accruing to the utilities render it superfluous. He further cautioned against adopting the power sector’s return formula as a reference point for gas utilities, citing material differences in capital structures—gas companies carry heavy leverage and face acute financial stress, unlike many power entities with lower debt burdens. Imposing a power-sector benchmark could therefore result in returns insufficient to service the gas sector’s actual debt and operational liabilities.

Managing Director of SSGC, Amin Rajpoot, acknowledged that elevated interest rates in recent years have artificially inflated profitability, yet stressed that the utilities continue to grapple with severe structural challenges. He pointed out that gas consumer prices have remained unchanged for three consecutive years, exacerbating the accumulation of circular debt across the sector, and recommended targeted adjustments to specific components of the pricing formula rather than a wholesale restructuring.

Deputy Managing Director of SNGPL, Faisal Iqbal, defended the guaranteed return regime as essential for preserving tariff stability and predictability within a fully regulated environment, thereby protecting end-consumers from abrupt volatility.

Amid mounting fiscal pressures on the government and escalating sectoral indebtedness, stakeholders are increasingly seeking a balanced reform pathway that reconciles reasonable profitability with the imperatives of long-term financial sustainability and enhanced operational performance in the natural gas industry.