Gas Tariff Should be based on Cost of Service

March 2, 2002

Islamabad: Consumer Rights Commission of Pakistan (CRCP) has expressed its reservations about the recent increase in gas tariff in a statement issued here. It said the pricing should be based on cost of service and the gas sector should not charge consumers for its inefficiency and transmission losses.

CRCP said determination of gas tariff should be determined according to automatic tariff adjustment formula, which is internationally accepted mechanism for tariff determination. Recent years have witnessed significant increase in gas prices in view of government's effort to enhance the profitability of exploring and marketing companies. Around 60 percent increase in gas prices has taken place since 1999. It said tariff review after every six months should be based on cost of service, while the intention of government is to raise revenue by Rs. 20 billion, which would necessitate an increase of about 70 to 130 percent in gas tariff. Revenue is the goal, cost-effective and consumer friendly service is not, CRCP said.

CRCP suggested that the government could take alternative measures, instead of increasing tariff, to bear the cost of restructuring process in gas sector. It appreciated the government initiative to restructure the gas sector for long-term benefits, but it should not be on the cost of consumers who were already paying for the inefficiency and unaccounted for gas (UFG), which were 13 percent a couple of years ago. Only recently, they have been brought down to 7 percent, which still do not match international standards. CRCP said instead of generating revenue from consumers who regularly pay gas bills, the gas sector should recover the outstanding liabilities from government and semi-government departments.

On the question of subsidy withdrawal, CRCP agreed with the government decision. It said the benefits of subsidy went to the least deserving. Besides stifling market competition, the subsidy was deepening socio-economic cleavage because it benefited only 15 percent of citizens. About 85 percent people use wood and fuel other than natural gas and therefore, do not benefit from the subsidy. It said the withdrawal of subsidy would facilitate market competitiveness and extension of gas supply framework to rural areas hitherto deprived from the facility.

CRCP expressed fears about new gas policy saying it might adversely affect the domestic consumer because it envisaged investment-friendly environment. Consumer did not occupy core place in the whole framework. The policy will more benefit industry than the domestic consumer. This is being done to reduce the oil import bill whose benefits are less likely to be passed on to the consumer as has been happening in the past.

In support of its fears about insensitivity of gas policy towards consumer concerns, CRCP referred to section 21 (2) (c) of the proposed Oil and Gas Regulatory Authority (OGRA), which empowers the Federal Government to issue policy guidelines including "pricing of petroleum." In other words, the issue of pricing is left out of the purview of the Authority. The government may intervene in price determination, which does not conform to philosophy and effectiveness of regulatory framework. The proposed draft does not also guarantee even the minimal protection that is available to consumer under PTA Act 1996 and NEPRA Act 1997. CRCP impressed upon the government to optimize the proposed draft taking into account the concerns of all stakeholders, including the consumer.