section 8 (1) of the oil and gas regulatory authority...

No. OGRA-6(2)-1(5)/2009

IN THE MATTER OF

SUI NORTHERN GAS PIPELINES LIMITED

ESTIMATED REVENUE REQUIREMENT, FY 2010-11

UNDER

SECTION 8 (1) OF THE OIL AND GAS REGULATORY AUTHORITY ORDINANCE, 2002 AND

RULE 4 (2) OF NATURAL GAS TARIFF RULES, 2002

DECISION

May 18, 2010

Before: Mr. Tauqir Sadiq, Chairman Syed Hadi Hasnain, Vice Chairman /Member (Gas) Mir Kamal Marri, Member (Finance) Dr. Ilyas Fazil, Member (Oil)

Determination of Estimated Revenue Requirement of SNGPL Financial Year 2010-11 Under Section 8(1) of OGRA Ordinance, 2002

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CONTENTS 1. Background ....................................................................................................................1 2. Salient Features of the Petition ..................................................................................2 3. Proceedings ....................................................................................................................4 3.2. Lahore Hearing .......................................................................................................................... 4 3.3. Faisalabad Hearing.................................................................................................................... 6 3.4. Peshawar Hearing ..................................................................................................................... 8 4. Authority’s Jurisdiction And Determination Process .........................................12 5. Return to the Petitioner .............................................................................................14 6. Operating Fixed Assets..............................................................................................14

6.1. Summary .................................................................................................................. 14 6.2. Transmission............................................................................................................ 16 6.3. Compression ............................................................................................................ 17 6.4. Distribution Development ..................................................................................... 18 6.5. Telecommunication................................................................................................. 21 6.6. Plant, Machinery & Equipment and other Assets .............................................. 21 6.7. IT Related Expenditure........................................................................................... 25

7. Operating Revenues...................................................................................................27 7.1. Sales Volume............................................................................................................ 27 7.2. Sales Revenue at Existing Prescribed Prices........................................................ 28 7.3. Other Operating Revenues .................................................................................... 28

8. Operating Expenses....................................................................................................30 8.1. Cost of Gas ............................................................................................................... 30 8.2. Unaccounted for Gas (UFG) .................................................................................. 31 8.3. Transmission and Distribution Cost..................................................................... 35

i. Summary .................................................................................................................. 35 ii. Human Resource (HR) Cost................................................................................... 36 iii. Gas Internally Consumed (GIC) ........................................................................... 36 iv. Stores and Spares Consumed................................................................................. 38 v. Repair and Maintenance ........................................................................................ 40 vi. Fuel & Power ........................................................................................................... 41 vii. Rent, Rate, Electricity and Telephone.................................................................. 42 viii. Transport .................................................................................................................. 44 ix. Insurance .................................................................................................................. 45 x. Legal and Professional Charges............................................................................ 46 xi. Provision for Doubtful Debts................................................................................ 47 xii. Advertisement.......................................................................................................... 48 xiii. Staff Training & Recruiting Expenses.................................................................. 48 xiv. Uniform & Protective Clothing ............................................................................ 49 xv. Security Expenses .................................................................................................... 50 xvi. Five Year Special Training Program .................................................................... 51 xvii. Other Expenses ........................................................................................................ 51 xviii. Remaining Items of Transmission & Distribution Cost ................................... 52 xix. Transmission & Distribution Cost Determined by Authority ......................... 52

8.4. Workers Profit Participation Fund (WPPF)......................................................... 53 8.5. Cost of Reinstated Employees ............................................................................... 53

9. Decision ........................................................................................................................54 10. Directions .....................................................................................................................56 11. Public Critique, Views, Concerns, Suggestions ..................................................57


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TABLES Table 1: Comparison of Projected Cost of Service with Previous Years............................................... 1 Table 2: Comparison of Projected Operating Revenues with Previous Years..................................... 3 Table 3: Comparison of Projected Operating Expenses with Previous Years ..................................... 3 Table 4: Computation of Requested Increase in Average Prescribed Price ......................................... 4 Table 5: Computation of Projected Return on Operating Fixed Assets.............................................. 15 Table 6: Comparison of Projected Deferred Credits with RERR FY 2009-10 ..................................... 15 Table 7: Summarized schedule of Projected Addition in fixed assets compared with Previous Years .........16 Table 8: Additions to Transmission Network ........................................................................................ 16 Table 9: Detail of Additions to Distribution Development ................................................................. 18 Table 10: Detail of Additions to Plant, Machinery & Equipment and Other Assets ......................... 21 Table 11: Summary of Asset Additions Determined by the Authority. .............................................. 26 Table 12: Comparison of Projected Number of Consumers with Previous Years ............................. 27 Table 13: Comparison of Sales Volume with Previous Years ............................................................... 27 Table 14: Comparison of Projected Sales Revenue with Previous Years............................................. 28 Table 15: Comparison of Projected Other Operating Income with Previous Years .......................... 29 Table 16: Comparison of Cost of Gas with Previous Years ................................................................... 30 Table 17: Estimates for Determination of WACOG according to the Petition ................................... 30 Table 18: Comparison of UFG with Previous Year ................................................................................ 32 Table 19: Adjustment on Account of UFG Targets set by OGRA for the said year ........................... 34 Table 20: Comparison of Projected T & D Cost with Previous Years .................................................. 35 Table 21: Projected Breakup of GIC.......................................................................................................... 37 Table 22: Historical Analysis of GIC Volumes........................................................................................ 37 Table 23: Comparison of Projected Stores and Spares Consumed with Previous Years .................. 38 Table 24: Comparison of Projected Repair and Maintenance with Previous Years........................... 40 Table 25: Comparison of Projected Fuel & Power with Previous Years.............................................. 42 Table 26: Comparison of Rent, Rate, Electricity and Telephone with Previous Years ...................... 43 Table 27: Comparison of Transport with Previous Years...................................................................... 44 Table 28: Detailed Comparison of Projected Insurance Expenses with Previous Years ................... 45 Table 29: Detailed Comparison of Projected Legal & Professional Charges with Previous Years .. 46 Table 30: Detailed Comparison of Projected Provision for Doubtful Debts ....................................... 47 Table 31: Comparison of Advertisement Expense with Previous Years ............................................. 48 Table 32: Comparison of Staff Training & Training Expenses with Previous Years ........................ 49 Table 33: Comparison of Security Expense with Previous Years ........................................................ 50 Table 34: Comparison of Other Expenses with Previous Years........................................................... 51 Table 35: Remaining Items of Transmission and Distribution Expenses ........................................... 52 Table 36: Summary of T&D Cost Determined by the Authority ......................................................... 53 Table 37: Components of ERR for FY 2010-11 as Determined by the Authority............................... 55


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ANNEXURES: A. Computation of Estimated Revenue Requirement for FY 2010-11 .....................58 B. Provisional Prescribed Prices for FY 2010-11 w.e.f. July 1, 2010...........................59 C. Comparison between Existing Sale Prices and Revised Prescribed Prices ........62 D. Computation of HR Cost Benchmark........................................................................63

APPENDIX

Public Comments


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1. Background

1.1. Sui Northern Gas Pipelines Limited (the petitioner) is a public limited company,

incorporated in Pakistan, and listed on the stock exchanges at Karachi, Lahore and

Islamabad. It is engaged in construction and operation of gas transmission and

distribution pipelines, sale of natural gas and sale of gas condensate (as a by-product).

1.2. The petitioner filed a petition (the petition) on December 03, 2009, under Section 8(1) of

the Oil & Gas Regulatory Authority Ordinance, 2002 (the Ordinance) and Rule 4(2) of the

Natural Gas Tariff Rules, 2002 (NGT Rules), for determination of its estimated revenue

requirement for FY 2010-11 (the said year), at Rs. 223,502 million (the amounts have been

rounded off to the nearest million here and elsewhere in this document), estimated

operating income at Rs. 210,605 million, and estimated shortfall of Rs. 12,897 million,

translating into an increase of Rs. 20.36 per MMBTU in the current average prescribed

price. The increase is anticipated mainly due to rise in well-head gas prices as a result of

increase envisaged in the international prices of Crude Oil (crude) and High Sulphur

Fuel Oil (HSFO).

1.3. The petitioner ‘s submission is summarized in the following statement of cost of service

per MMBTU and compared with previous years:

Table 1: Comparison of Projected Cost of Service with Previous Years

Rs. per MMBTU

Units sold (BBTU) 544,544 570,216 633,446 Cost of gas sold 277.91 254.63 313.28Transmission and distribution costs 16.09 15.59 12.53Depreciation 9.78 12.06 12.94Return on net average operating fixed assets 14.36 14.72 14.09Prior year adjustment 17.41 0Other operating income (7.91) (5.00) (6.03) Cost of service / Prescribed price 310.22 309.39 346.81Current average prescribed price 310.22 309.39 326.45Increase in average prescribed price requested by the petitioner. - - 20.36

ParticularsFY 2009-10

RERRFY 2010-11

The PetitionFY 2008-09

FRR

1.4. The Authority admitted the petition for consideration, as the prima facie case for

evaluation existed and otherwise found in order.


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1.5. A notice inviting interventions / comments on the petition from the consumers, general

public and other interested / affected persons, was published in daily newspapers,

namely: The News (combined), Nawa-e-Waqt (combined), Jang (combined) & Mashriq

(Peshawar) on February 18, 2010. The Authority received ten applications to intervene in

the proceedings from the following persons / entities:

i) Mr. Hussain Pervaiz, Consumer.

ii) Captain (R) Raza Shuja Anwar, Chairman, Punjab Region, All Pakistan CNG

Association.

iii) Mehmood Elahi Engineers, Sui Gas Contractor, Faisalabad (two interventions).

iv) Sh. M. Ayub, Chairman Lahore/Gujranwala Region, All Pakistan Textile

Processing Mills Association.

v) Mr. Ahmed Shafiq, Gas Consultant, Pakistan Electric Power Company Limited,

Lahore.

vi) Mr. Shabbir Ahmad, Former Chairman, All Pakistan Textiles Processing Mills

Association.

vii) Sheikh Sarfaraz Ahmad, Senior Vice Chairman, All Pakistan CNG Association.

viii) Mr. Ghiyas Paracha, Chairman (Central), All Pakistan CNG Association.

ix) Mr. Shumail Ahmad Butt, Legal Advisor, Khyber Pukhtoonkhwa Chamber of

Commerce & Industry, Peshawar.

The Authority accepted all the above mentioned applications for intervention.

1.6. A notice intimating the date, time and place of the public hearing, was published in the

daily newspapers, namely: The News (combined), Jang (combined), Nawa-e-Waqat

(combined) and Mashriq (Peshawer) on April 02, 2010.

2. Salient Features of the Petition

2.1. The petitioner has made the following submissions:

2.1.1. The petitioner has claimed annual return at the rate of 17.5% of the net fixed

assets in operation, before corporate income tax, interest, mark-up and other

charges on debt, in accordance with the requirement of World Bank loan

covenants and license condition No. 5.2.


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2.1.2. The petitioner has projected a gross addition of Rs. 17,529 million in the fixed

assets and ex-depreciation addition of Rs. 9,334 million, resulting in projected

increase in the net operating fixed assets from Rs. 62,208 million determined in

Review of Estimated Revenue Requirement (RERR) for FY 2009-10 to Rs. 71,542

million during the said year. The petitioner has further claimed that after

adjustment of deferred credits, the net average operating fixed assets eligible for

return works out to Rs. 50,990 million, and the required return to Rs. 8,923

million.

2.1.3. The petitioner has projected the net operating revenues at Rs. 210,605 million, as

detailed below (and compared with previous years):

Table 2: Comparison of Projected Operating Revenues with Previous Years

Rs. in millionFY 2008-09 FY 2009-10 FY 2010-11

FRR RERR The Petition

Net sales at current prescribed price 160,700 176,421 206,788 30,367 17%Rental & service charges 990 1,000 1,050 50 5%Surcharge and interest on arrears 1,201 760 1,261 501 66%Amortization of deferred credit 1,096 902 1,281 379 42%Return on Government grants 561 - - - Other operating income 462 190 225 35 18%

Net Operating Revenues 165,010 179,273 210,605 31,332 17%

Increase / (Decrease) over

RERRDescription

2.1.4. The petitioner has projected the net operating expenses at Rs. 214,579 million , as

detailed below (and compared with previous years):

Table 3: Comparison of Projected Operating Expenses with Previous Years

Rs. in million

FY 2008-09 FY 2009-10 FY 2010-11


Cost of gas 151,332 145,194 198,449 53,255 37%Transmission and Distribution costs 7,168 7,264 9,816 2,552 35%UFG disallowance above allowable limit (4,601) (1,551) (5,804) (4,253) 274%Gas Internally Consumed (GIC) 3,267 2,964 3,802 838 28%Depreciation 5,325 6,874 8,193 1,319 19%Prior Year Adjustment (FY 2007-08) 2,775 9,925 - (9,925) -100%Other Charges including WPPF 150 210 124 (86) -41%

Net Operating Expenses 165,417 170,880 214,579 43,699 26%

Increase / (Decrease) over

RERRDescription

2.1.5. The petitioner has projected Weighted Average Cost of Gas (WACOG) for the

said year at Rs. 288.73 per MMBTU, as against Rs. 238.71 per MMBTU provided

in RERR for FY 2009-10. The petitioner has explained that cost of gas is linked


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with international prices of crude and HSFO per Gas Pricing Agreements (GPAs)

executed between the producers and Government of Pakistan (GoP).

2.1.6. The petitioner has projected Unaccounted for Gas (UFG) at 7.50% (56,403

MMSCF), higher than the lower target of 4.25% fixed by the Authority for the said

year.

2.1.7. The shortfall in the projected revenue requirement after achieving 17.5% return

on average net operating fixed assets is estimated at Rs. 12,897 million, requiring

increase of Rs. 20.36 per MMBTU in the existing average prescribed price, as

detailed below:

Table 4: Computation of Requested Increase in Average Prescribed Price

Rs. in millionA Net operating revenues 210,605 B Less: Net operating expenses including WPPF 214,579 C Shortfall/ (excess) (A – B) 3,974 D Return required @ 17.5% on net fixed assets in operation. 8,923 E Total shortfall /(excess) in the revenue requirement (C+ D) 12,897 F Sales volume (BBTU) 633,446

20.36

Description

Increase in the existing average prescribed price (Rs./MMBTU) (E / F )* 1000

3. Proceedings

3.1. The petitioner made submissions in detail, with the help of multimedia presentation

explaining the basis of the petition, during the hearings. The petitioner also responded

to the comments, observations, objections, questions, and suggestions of the

participants.

3.2. Lahore Hearing

3.2.1. A public hearing was held on April 19, 2010, at Lahore which was participated

by the following:

Petitioner:

(i) Team led by Mr. Hasnat Aziz Banth, Deputy Managing Director

Interveners:

(i) Mr. Hussain Pervaiz, gas consumer.

(ii) Captain (R) Raza Shuja Anwar, Chairman, Punjab Region, All Pakistan

CNG Association.


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(iii) Mehmood Elahi Engineers, Faisalabad.

(iv) Sh. M. Ayub, Chairman Lahore/Gujranwala Region, All Pakistan Textile

Processing Mills Association.

(v) Mr. Ahmed Shafiq, Gas Consultant, Pakistan Electric Power Company

Limited, Lahore.

Participant:

(i) Mehr Irshad Mehmood, Senior Vice Chairman, CNG Dealers Association

(ii) Miss Amna Nasir Jamal, gas consumer

The substantive points made by the interveners/participants are summarized below:

3.2.2. Textile processing industry in Punjab is facing gas load shedding since last 5

months, which is not applicable in case of Sui Southern Gas Company Limited

(SSGCL)’s industrial consumers. The same has rendered this industry

uncompetitive both domestically and internationally. The textile industry

opposed any increase in gas prices and stressed that such increase is likely to

result in complete shut down of the industry.

3.2.3. Unscheduled gas pressure drops have become very rampant resulting in

tremendous wastage of chemical and raw materials of the textile industry. It

was highlighted that the entire process is stopped when gas pressure falls

below the specified parameters.

3.2.4. High pilferage / gas theft of the petitioner must be stopped. Also, corrupt

officials must be held accountable to eliminate this wide spread menace.

Similarly, high overheads of the petitioner, including fabulous salaries and

benefits of its executives and staff, be rationalized in order to avoid any gas

price increase. Interveners strongly opposed shifting of ever rising UFG burden

from the petitioner to consumers at large.

3.2.5. Interveners/ participants stressed the need for reducing the waiting time in

provision of gas connection, which currently takes several years. The need for

new expansion was also criticized to eliminate gas load shedding. Reservations

were expressed on the BTU values adopted by the petitioner in the gas bills and

the Authority was requested to get the same verified through UFG audit.


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3.2.6. Qadirpur gas field will run out of its useful life unless the petitioner installs

requisite 14 compressors within next few months time frame. It was highlighted

that cross subsidy on fertilizer at the cost of other industry must be gotten away

with, in order to save the industry and general public from gas price hikes.

3.2.7. CNG industry representatives demanded that CNG stations be charged general

industrial tariff in accordance with the policy and previous practice. Gas load

shedding must be stopped since it is depriving general public from cheaper

alternate fuel. It was demanded that fuel adjustment charges in the electricity

bill for CNG stations must be waived off, since the stations are already paying

commercial electricity tariff.

3.2.8. Representative from PEPCO pointed out that even though Captive Power, IPPs

and WAPDA are providing the same product i.e. provision of electricity to the

public, however, there is major distortion in their respective gas tariff. WAPDA

is presently being charged discriminatory gas price of Rs. 393.79/ MMBTU

while IPPs and Captive Power Stations are getting gas at the rate of

Rs. 332.36/MMBTU and Rs. 382.37/ MMBTU respectively. It was requested that

said anomaly must be removed on immediate basis.

3.2.9. Some interveners demanded that in future, master CD / soft copy should be

provided with the petition. It was also highlighted that copies of the petition are

not properly readable and the same needs to be rectified.

3.2.10. Bills payment date is generally at the end of month, which may be extended up

to 10th of every month, so that poor consumers are able to pay bill on time.

3.3. Faisalabad Hearing

3.3.1. A public hearing was held on April 21, 2010, at Faisalabad which was

participated by the following:

Petitioner:

(i) Team led by Mr. Hasnat Aziz Banth, Deputy Managing Director

Interveners:

(i) Mr. Shabbir Ahmad, Former Chairman, All Pakistan Textile Processing Mills Association.


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(ii) Sheikh Sarfaraz Ahmad, Senior Vice Chairman, All Pakistan CNG Association.

(iii) Mehmood Elahi Engineers, Faisalabad.

Participants:

(i) Mr. Muhammad Iqbal Dlhon, Moon Corporation, Sargodha.

(ii) Haji Talib Hussain Rana, Senior Vice President, New Seven Star Sizing.

(iii) Mr. Muhammad Babar, gas consumer.


3.3.2. Interveners conveyed their displeasure on projected gas system expansion even

though there is shortage of gas. It was demanded that such expansion must be

stopped till such time either new discoveries are made or gas is imported from

other countries.

3.3.3. Entire distribution development expenditure of Rs. 13.613 billion be disallowed,

since the same is imprudent owing to unavailability of additional gas, as well as

under utilization of the existing system. It was further stressed that any

addition in assets base will further increase the demand and supply gap,

thereby adversely affecting the economic and social activities.

3.3.4. Wellhead gas prices effective 01.01.2010 were notified in April 2010, even

though same was to be done in January, 2010. It was also highlighted that price

of various fields were increased by varying percentages, which is not

understandable.

3.3.5. It was inquired that OGRA had reduced the wellhead prices of gas by 30%

w.e.f. 01.07.2009, but why the sale price was not decreased correspondingly.

3.3.6. The interveners expressed their inability to understand the major variation in

price increase sought by the two utility companies. The petitioner sought

additional Rs. 20.36/ MMBTU, whereas its sister utility i.e. SSGCL is seeking

increase of Rs. 63.10/ MMBTU. Interveners / participants expressed their

concern that Privatization Commission has asked for re-valuation of assets of

SNGPL and SSGCL and the same is likely to adversely affect the gas consumers

in a significant way. The Authority therefore, was requested to effectively safe

guard the public interest.


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3.3.7. It was stressed that system expansion must be stopped otherwise same is likely

to lead to further increase in UFG. Serious apprehensions were tabled by the

interveners in respect of BTU values adopted by the petitioner.

3.3.8. The Federal Government (FG) uses OGRA as an engine for revenue generation,

since sale prices advised by FG are much higher then prescribed prices

determined by OGRA. The explanation was sought as to why CNG stations are

selling the CNG at Rs. 53.30 per Kg whereas they are getting gas at Rs. 22.9 per

Kg. It was demanded that margin on CNG sales should also be fixed similar to

petroleum product price.

3.3.9. It was demanded that existing seven slabs structure for domestic consumers be

rehashed since it is resulting in very high gas bills during the winter season.

Consumer’s misery has further been aggravated by introduction of new

computer system which is resulting in large number of excessive billing related

consumer’s complaints.

3.3.10. It was brought to the attention of Authority that the license condition no. 5

stipulates that the Authority shall determine the tariff based on total revenue

requirement of the licensee for each regulated activity. Tariff for transmission

and distribution has not been separately calculated and therefore the petition

should be rejected.

3.3.11. Addition of Rs. 13.6 billion in the capital expenditure should be analyzed by the

Authority in accordance with Rule 17(j) of NGT Rules, 2002 wherein only

prudent, cost affective and economically efficient assets are qualified for

inclusion in the rate base. There is no justification for allowing the said increase

owing to declining gas sales volumes. The wasteful assets should therefore not

be added to the rate base.

3.4. Peshawar Hearing

3.4.1. A public hearing was held on April 26, 2010, at Peshawar which was

participated by the following:

Petitioner:

(i) Team led by Mr. Amer Tufail, Chief Financial Officer.


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Interveners:

(i) Mr. Ghiyas Paracha, Chairman (Central), All Pakistan CNG Association.

(ii) Mr. Shumail Ahmad Butt, Legal Advisor, Khyber Pukhtoonkhwa

Chamber of Commerce & Industry, Peshawar.

Participants:

(i) Mr. Nauman Wazir, Chairman, ITAC, Khyber Pukhtoonkhwa Chamber of Commerce & Industry, Peshawar.

(ii) Mr. Khalid Latif, Chairman, Hazara Region, all Pakistan CNG Association.

(iii) Mr. Pervaiz Khan Khattak, Chief Executive, Motorway Enterprises CNG.

(iv) Mr. Habibullah Zahid, Chairman, Tajr Grand Alliance, Peshawar.

(v) Mr. Abdul Hafeez , Executive Member, All Pakistan CNG Association.

(vi) Mr. Fayaz Ahmad, Chairman Khyber Pukhtoonkhwa Zone, All Pakistan CNG Association.

(vii) Mr. Minhaj-ud-din, Senior Vice Chairman, All Pakistan CNG Association, D.I.Khan.

(viii) Mr. Fazal Moqeem, Chief Executive, Orion CNG.

(ix) S. Manzar A. Zaidi, Training Coordinator, Society for Skills Training Development (SSTD), USAID CNG program.


3.4.2. Current petition for the revenue requirement for FY 2010-11 is not maintainable

for consideration per law. Section 154 of the constitution of Pakistan read with

Part-II of Federal Legislative List pertaining to gas utilities, stipulates that

validation of policies regarding extension in T&D network, capital expenditure

etc; is to be obtained from the Council of Common Interest. Thereafter, the

petitioner can present the case to OGRA and implement the policies.

3.4.3. The petition does not fulfill the requirement of Rule 4 of the NGT Rules and

public notice consequent to admission of petition is not complied with Rule 5 of

the NGT Rules.

3.4.4. Detailed parameters and method of calculation of WACOG has not been

substantiated by the petitioner. Further, justification /rationale for equalization

cost included in the WACOG has not been provided. This unnecessary cost


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borne by the petitioner is creating economic distortion which needs to be gotten

away with, pursuant to Section 7(f) of the Ordinance.

3.4.5. Rate of return claimed by the petitioner is on a very high side. The Authority

must penalize the petitioner for its performance vis- a-vis increased UFG and

other fiscal performance parameters over the years.

3.4.6. UFG is rising due to the management’s own inefficiencies and unscrupulous

elements in the system. The petitioner’s request to review the UFG target must

not be considered. The petitioner must control its line losses, so that consumers

at large must not be affected.

3.4.7. Expansion in asset base will further increase demand supply gap leading to

forced shutdown of the industry. The petitioner’s projected 5 year expansion

plan is therefore beyond comprehension owing to dwindling gas supplies.

GOP, not the consumer, should pay for expansion based on political

considerations. Further increase in system expansion be, therefore, disallowed

till such time new gas discoveries or import of gas projects are materialized. It

was also stressed that the Authority is obligated to allow only prudent, cost

effective and economically efficient assets pursuant to Rule 17(j) of NGT Rules,

2002.

3.4.8. Increase in T&D expenses from 50% to 70% in different heads during the said

year is not justified. The petitioner has also included some expenses which have

already been disallowed by the Authority. Further, projection of Rs. 3.6 billion

in GIC is very high and without any justification. The consumers cannot tolerate

any extravagance at all, therefore increase in T&D cost must not be allowed.

3.4.9. Lavish expenditures on the different celebrations and exorbitant increase in the

salaries and the perks of the petitioner were strongly opposed. It was

demanded to optimize the operating costs.

3.4.10. Telecommunication system amounting to Rs. 670 million be disallowed and

existing cellular networks be used for this purpose

3.4.11. Demanded increase under the head Provision for Doubtful Debt is unrealistic

and hypothetical. It is the cost of management’s inefficiencies which is

adversely affecting the consumers. Provision under this head should only be

allowed keeping in view actual write-off of debtors/defaulters. Further, return


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on fixed assets and depreciation expense, both being part of revenue

requirement, are an act of dichotomy. Fund based provision on the basis of

replacement value mechanism of fixed assets be introduced, similar to other

countries.

3.4.12. Cross-subsidy mechanism burdens the majority of consumers with price

increase which is higher than the average increase projected by the petitioner.

Therefore, same should be abolished. Further, seven slab structure in respect of

domestic category consumers needs to be rationalized since the same has

resulted in excessively high gas bills.

3.4.13. The business conditions have become highly unfavorable due to war against

terrorism throughout the province especially in Peshawar. The purchasing

power of the people has dropped due to being in conflict zone which has

caused flight of capital. Further snub in terms of gas price increase, on the plight

of people, is not justified. All the policies should focus on the economic

conditions of the people, not the marginal cost of the gas utilities.

3.4.14. Low pressure, even in the days of normal supply, was strongly criticized. It was

agitated that the petitioner has never supplied the committed pressure to this

area even after the discovery of gas from Gurguri field. It was also pointed out

that low pressure is the main cause for high number of sticky meters leading to

estimated bills that are much higher than the actual consumption. This illegal

practice must be stopped. The poor quality of gas was also highlighted wherein

prevalent condensate has damaged CNG stations’ equipments.

3.4.15. The petitioner is intentionally regulating the pipelines at low pressure to restrict

the UFG which otherwise may increase owing to leakage in pipeline. The

consumers must not suffer due to the inefficiencies and low quality

workmanship of the petitioner.

3.4.16. New billing system on Oracle is fleecing the CNG consumers. Readings of EVC

meters, installed by the petitioner, are not understandable and are

comparatively faster. Correct meters should be installed and the

errors/omission in billing system must be rectified on urgent basis.


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Undeclared and unscheduled GCV increases the gas bills. Further it was

proposed to constitute a resolution committee with the representation of

consumers to streamline all billing related issues.

3.4.17. Serious apprehensions were recorded by the interveners in respect of incorrect

GCV per MCF charged by the petitioner leading to high gas bills. The

consumers of Khyber Pukhtoonkhwa territory, the interveners said, are being

defrauded by supplying gas at lesser calorific value than charged by the

petitioner. Further, 1,055 BTU/MCF for Peshawar region as against 904 for

Lahore and other regions is not understandable. This issue needs to be resolved

immediately.

3.4.18. The attendance of the petitioner’s personnel in Peshawar office must be ensured

to overcome the problems of the consumers. Further, OGRA should set up a

desk at petitioner’s office to check the efficiency of the petitioner in addressing

the public grievances.

3.4.19. The relief on account of 50% exemption on GST for this war affected area

announced by the honorable Prime Minister of Pakistan has not been complied

with. This relief is highly supportive for poor business conditions. It should be

passed on to the consumers without further delay.

3.5. The Authority has carefully considered all the submissions and argument of the parties

made in writing and at the public hearings, and proceeds to make its determination.

4. Authority’s Jurisdiction And Determination Process

4.1. The Authority is obligated to determine the revenue requirement /prescribed prices of

the petitioner in accordance with Section 8(1) and 8(2) of the Ordinance and License

condition no. 5.2 of its integrated License.

4.2. Section 8(1) of the Ordinance empowers the Authority to determine an estimate of the

total revenue requirement of its licensees for a financial year, before its commencement,

in accordance with the NGT Rules, and on that basis, advise the FG, the prescribed price

of natural gas for each category of retail consumers. Determination of revenue

requirement therefore falls under the exclusive domain of OGRA, which does not require

any advice/decision.


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4.3. GoP, pursuant to Section 8(3) of the Ordinance, is legally empowered to advise the

Authority for notification in the official gazette, the minimum charges and sale price for

each category of retail consumers, deciding in this process, the extent of subsidy to be

enjoyed or extra amount to be paid by various categories of consumers with respect to

average cost of supply.

4.4. The Authority is obligated to abide by the sector specific policies of the FG while

determining the prescribed prices for each category of consumers, which include the

subsidy given to the domestic consumers and fertilizer-feedstock.

4.5. The Authority examines all applications and petitions in the light of relevant rules. Public

notices are issued and all the stakeholders are provided full opportunity to intervene /

comment upon the issues pertaining to determination of revenue requirement, in writing

and at public hearings, which are duly taken into account. Further, GoP’s attention is

specifically drawn to the pleas relating to policy matters for consideration before

deciding the retail prices for various categories of consumers.

4.6. Well-head prices of gas are computed and notified per Section 6(2)(w) of the Ordinance,

in accordance with the GPAs of the gas producers with the FG, on the basis of

international crude / fuel oil prices. The well-head gas prices are notified as and when

the respective applications from various gas producers are received, and are applicable

on a retrospective basis i.e. January 01 and July 01 of each year. The filing of such

applications with the Authority is contingent upon receipt of crude oil import data from

the FG. The well-head cost of gas is the main component of the revenue requirement and

is a pass through item under the current mechanism of determining prescribed prices.

4.7. The operating revenues, operating expenses and changes in asset base are scrutinized in

depth, keeping in view the FG socio economic agenda and policy advices, in accordance

with Rule 17(j) of NGT Rules, 2002.

4.8. Appropriate benchmarks are also set in critical areas of operation (i.e. UFG, HR cost) to

ensure that the costs of inefficiencies and imprudence are not passed on to the

consumers. Further, the Authority allows depreciation expense calculated on straight line

method, in accordance with loan covenants agreed between GOP, World Bank and Asian

Development Bank (ADB) & communicated to OGRA through a FG’s policy guideline.


14

5. Return to the Petitioner

5.1. The Authority is obligated under Section 7(1) of the Ordinance, to determine or approve

tariff for regulated activities whose licenses provide for such determination or such

approval, or where authorized by this Ordinance, subject to policy guidelines. License

Condition No. 5.2 of license granted to the petitioner, clearly states that the Authority

shall determine total revenue requirement of the licensee to ensure that it achieves 17.5%

return on its average net fixed assets in operation for each financial year, subject to the

efficiency related benchmarks adjustments. The Authority, accordingly, has been

determining the revenue requirement of the petitioner, providing the said return on net

operating assets in accordance with the said provision of the Ordinance as well as the

petitioner’s license.

5.2. All uneconomical extension of network to new towns and villages over and above the

criteria approved by the “Economic Coordination Committee of the Cabinet” are funded

by the GoP and to that extent are not included in the rate base of the petitioner. The GOP

however, reserves the right to issue policy guideline to the Authority, in accordance with

Section 21of the Ordinance.

5.3. The Authority, may, however, in consultation with and the licensee, prescribe revised

rate of return or a different basis for determination of a return, pursuant to License

Condition No. 5.3 of the license granted to the petitioner. The Authority has developed a

new tariff regime for regulated natural gas sector of Pakistan, which, in the course of

legally mandatory consultation process, is with GoP. Pending its finalization, the

Authority has decided to follow the existing basis of 17.5% return on the average net

operating fixed assets, in accordance with the License Condition No. 5.2 and GoP Policy

Guidelines.

6. Operating Fixed Assets

6.1. Summary

6.1.1. The petitioner has projected a gross addition of Rs. 17,529 million in the fixed

assets and ex-depreciation addition of Rs. 9,334 million, resulting in projected

increase in net operating fixed assets from Rs. 62,208 million per RERR for FY

2009-10 to Rs. 71,542 million during the said year. After adjustment of deferred

credits, the net average operating fixed assets eligible for return are projected at

Rs. 50,990 million, and the required return at Rs. 8,923 million, as under:


15

Table 5: Computation of Projected Return on Operating Fixed Assets

Rs. in million

Description The PetitionNet operating fixed assets at beginning 62,208 Net operating fixed assets at closing 71,542

Sub Total 133,750 Average net assets (A) 66,875

Deferred credit at beginning 14,526 Deferred credit at closing 17,245

Sub Total 31,771 Average deferred credit (B) 15,886

Average net fixed assets (A-B) 50,990 Return required 17.5%Amount of return requested by the petitioner 8,923

6.1.2. The details of projected deferred credits for the said year are compared with

RERR for FY 2009-10 as under:

Table 6: Comparison of Projected Deferred Credits with RERR FY 2009-10

Rs. in million

FY 2009-10 FY 2010-11

RERR The Petition

Balance as at July 01 9,428 14,526

Addition during the year 6,000 4,000

Sub-total 15,428 18,526 Amortization for the year (902) (1,281) Un-amortized balance as at June 30 14,526 17,245

Particulars

6.1.3. The Authority provisionally allows the estimated deferred credits opening

balance at Rs. 14,526 million and closing balance at Rs. 17,245 million, as

projected by the petitioner for the said year.

6.1.4. Comparative analysis of projected additions in fixed assets with the previous

years is as follows:


16

Table 7: Summarized schedule of Projected Addition in fixed assets compared with Previous Years

Rs. in million

Land 234 - - - - Transmission 3,240 1,098 1,863 765 70%Compression 2,136 397 20 (377) -95%Distribution Development 8,642 8,871 13,613 4,742 53%Telecommunication 670 670 100%UFG assets 100 126 - (126) -100%Plant, Machinery & Equipment and Other Assets 920 735 976 241 33%MIS Project 190 387 197 104%

Net addition in asset base 15,272 11,417 17,529 6,112 53.53%

Inc./(Dec.) Over RERR

ParticularsFY 2010-11

The PetitionFY 2008-09

FRRFY 2009-10

RERR

6.1.5. The petitioner has provided further breakup of the major items of additions,

which are discussed below:

6.2. Transmission

6.2.1. The petitioner has projected Rs. 1,863 million during the said year for laying of

42” dia, 21.92 Km transmission loop line between valve assemblies SV4 (Rehmat

Injection Point) to valve assemblies SV5 (24” dia Sawan - Qadirpur line), to

receive additional gas supplies from Kunnar /Pashaki, import gas from Iran and

Regassifiend Liquefied Natural Gas (RLNG). The breakup of projected increase

during the said year is as under:

Table 8: Additions to Transmission Network

S.No Description Rs. in million 1 Construction of pipeline 1,625

2Procurement of semi automatic welding system and internal/external lineup clamps and tongs

200

3 Spares like lubricant, tyres etc. 20

4 For leak clamps and respective tools for 42'' dia line

15

5 Purchase of vehicle to facilitate added operational duty

3

Total 1,863

6.2.2. The petitioner has elaborated that the above said expenditure is part of “Advance

Action Plan” of Project-X, total cost of which has been projected at Rs. 25 billion

and is expected to be completed during FY 2010-11 to FY 2013-14. The project is


17

aimed to extend the T&D network in order to receive the additional gas based on

the swap arrangements from the southern sources.

6.2.3. The Authority observes that per the information provided by SSGCL, the Kunnar

/ Pashaki project may face some delay owing to long outstanding litigation cases

with land owners, pending from the last several years. The expenditure on laying

of pipeline for integration of these fields to SSGCL system has also been pended.

Further, import of gas from Iran is a long term project, which is not likely to

become operational during the said year. Similarly, RLNG project is also in its

initial stages whereby contract in this respect has not yet been awarded and

hence, there is very less likelihood of injection of RLNG into the system during

the said year.

6.2.4. The Authority, in view of the above, decides to pend the requested addition under

the head Transmission. Further, the Authority directs the petitioner to submit a

separate petition on this account pursuant to Rule (xviii) of Natural Gas

Licensing Rules, 2002.

6.3. Compression

6.3.1. The petitioner has projected an expenditure of Rs. 20 million on account of

compression, out of which Rs. 13.5 million has been projected for installation of

pre-filtration system at saturn turbines of compression station AC- IX and AC -4,

AC-6, AC-7, CC-1 and CC-3. The remaining amount of Rs. 6.5 million has been

projected for routine operational requirements.

6.3.2. The petitioner has elaborated that it is facing tripping problems in compressor

units during foggy weather, during which heavy moisture blocks the filters and

ultimately blocks the air into the turbines. The petitioner affirmed that installation

of pre-filtration system improves the efficiency of turbines since similar treatment

on saturn turbines of compression station AC-8, BC-1 and Head Office turbines,

during the last year, had presented the desired results.

6.3.3. The Authority observes that pre-filtration system prevents damage of the engine

blades and consequently results in smooth running of the turbines. The

installation of this system at compression stations is particularly more effective in

fog/dusty weather, since under the existing system, the air filters are blocked by

fog which stops the air into turbine causing its forced shutdown.


18

6.3.4. The Authority keeping in view the system requirement and improved efficiency,

as explained above, allows Rs. 20 million under the head compression as claimed

by the petitioner.

6.4. Distribution Development

6.4.1. The petitioner has projected an amount of Rs. 13,613 million for distribution

development including new development phases, detail of which is as follows:

Table 9: Detail of Additions to Distribution Development Sr.No

Description Million Rs

1 Distribution System Mains 8,812 2 New Connection 1,954 3 CMS/TBS/DRS 198 4 Construction of SMS 440 5 Rehabilitation of Distribution system 500 6 Replacement of defective Meters

(including 16 years old)950

7 Regulating System 50 8 C.P.System 220 9 G.I.Pipe & Fittings 370

10 Service cost of Govt. Funded Projects 119

Total 13,613

6.4.2. The petitioner has submitted that projected 5,000 Km extension in distribution

network for the said year is on account of compliance to GoP’s socio economic

policies / agenda and downward revision of per consumer cost criteria by the

GoP last year, resulting in inclusion of more towns and villages in the petitioner’s

projected capital cost. The petitioner has also explained that the material cost has

been estimated on lower side owing to decrease in steel prices in the international

market.

6.4.3. The projected cost is based on the above parameters and accordingly per Km cost

of distribution network has been estimated at Rs. 4.71 million per Km as

compared to Rs. 6.62 million per Km provided in RERR FY 2009-10. The

petitioner has reported that it has achieved more than proportionate projected

capitalization during first half of FY 2009-10 and expressed high level of

confidence regarding its capacity for the capitalization of projected extension in

T& D network during the said year.


19

6.4.4. The petitioner has also explained that projected expenditure under the head

“Distribution system mains” amounting to Rs. 8,812 million, includes Rs. 5,602

million for extension in network for supply of gas to new towns for the said year.

6.4.5. The Authority notes with concern that the petitioner is facing acute shortage of

gas available for sale owing to which it is unable to meet the demand of existing

consumers. The Authority, therefore, provisionally allows Rs. 8,812 million under

the head “Distribution system mains” for the said year, subject to the following

conditions:

(a) New development phases will only be included in the rate base, if and

only if, the petitioner can establish availability of additional gas

supply for the same,

(b) The petitioner to ensure continuous and reliable supply of natural gas

to its existing consumers in accordance with license condition no. 34 of

its license.

6.4.6. Regarding new connections, the petitioner has projected 229,000 new gas

connections at an estimated amount of Rs. 1,954 million for the said year. The

petitioner has pleaded that increase in number of connections correlates with gas

sale volume and number of distribution mains. The petitioner has elaborated that

average per unit cost has been estimated at Rs. 8,533 per connection, which is 10%

less than that of RERR FY 2009-10 (Rs. 9,517 per connection), owing to decrease in

material cost.

6.4.7. The Authority observes that per connection average cost appears to be over

projected when compared with actual average cost of Rs. 4,782 per connection for

the period July-December, 2009.

6.4.8. The Authority therefore adopts the average cost per gas connection observed

during July-December, 2009 and allows Rs. 1,095 million for 229,000 new

connections as against Rs. 1,954 million claimed by the petitioner for the said

year.

6.4.9. Regarding item No. 3 to 7 in the table above, the petitioner has projected

Rs. 2,138 million during the said year for normal up-gradation and regular

operational requirements.


20

6.4.10. The Authority, keeping in view the historical trends, observes that the petitioner

has never been able to capitalize the expenditure under these distribution heads

up to this magnitude.

6.4.11. The Authority therefore determines Rs. 1,336 million for the said year on these

accounts, by increasing the actual cost during FY 2008-09 @ 40% in order to cater

for the cumulative effect of two year inflation and increased activity.

6.4.12. The petitioner has projected Rs. 220 million under the head Cathodic Protection

(CP) system for the said year in order to safeguard the underground pipelines

from early deterioration and utilize them for longer duration. The Authority

allows the requested expenditure since it is essentially required for the protection

and optimum utilization of existing assets.

6.4.13. The petitioner has, for the first time, projected Rs. 370 million under G.I. pipe for

the said year, for inclusion in the asset base. The petitioner has elaborated that

these fittings will only be used for domestic gas connections and will help to

reduce the UFG through lesser leakages. The Authority observes that earlier these

fittings were arranged by the consumers and hence were not claimed as part of

rate base by the petitioner.

6.4.14. The Authority appreciates the petitioner’s initiatives to combat UFG. It, however,

is of the view that the fittings be procured and installed by the petitioner and its

cost be recovered from the respective gas consumer. The said expenditure shall

therefore not be made part of rate base. The Authority, in view thereof, disallows

Rs. 370 million projected by the petitioner on this account for the said year.

6.4.15. The petitioner has projected an amount of Rs. 119 million under the head “Service

Cost of Government Funded Projects” for the first time. The petitioner has,

explained that this amount has been projected in order to meet the running cost

of utilizing its machinery and other services while undertaking GoP funded

projects and other distribution development activities.

6.4.16. The Authority observes that the petitioner has not provided appropriate

justification of these expenses. The Authority, therefore, provisionally pends the

said expenses for the time being.


21

6.4.17. The Authority in view of above allows Rs 11,463 under the head Distribution

Development for the said year as against Rs. 13,613 million claimed by the

petitioner.

6.5. Telecommunication

6.5.1. The petitioner has projected Rs. 670 million under the head

“telecommunication” for the replacement of existing digital microwave

backbone system costing Rs. 647 million and Rs. 23 million for the

procurement of miscellaneous communication related equipments. The

petitioner has elaborated that existing digital microwave system is

operating since 1955 at the direction of Frequency Allocation Board (FAB).

Now the frequency band has been reallocated worldwide to the cellular

sector to provide Third Generation (3G) cellular mobile phone services and

the FAB has, therefore, advised to vacate the existing band at the earliest in

lieu of new allocated frequency spots in 7 & 8 GHz bands. The petitioner

has explained that frequency allocation provides the connectivity of the

networks among big cities and makes the communication possible through

SCADA system, which is operating from gas wells to distribution system.

6.5.2. The Authority observes that the frequency allocation is essentially required

for the connectivity of network and smooth operation of integrated system.

The Authority also observes that SSGCL, the sister utility company has

also switched over to the new system since last year. The Authority, in view

of the justification provided by the petitioner, allows Rs. 670 million on this

account for the said year.

6.6. Plant, Machinery & Equipment and other Assets

6.6.1. The petitioner has projected additions of Rs. 976 million on account of “Plant,

Machinery & Equipment and Other Assets” for the said year, break-up of which

is as follows:

Table 10: Detail of Additions to Plant, Machinery & Equipment and Other Assets


22

Rs. in millionSr. No. Particulars Amount

1 Civil Construction of buildings on free hold Land 120 2 Plant & Machinery 160 3 Measuring & Regulating Equipments 105 4 Tools & Equipments 150 5 Motor Vehicle 222 6 Construction Equipments 128 7 Furniture & Fixture 16 8 Office Equipments 24 9 Computer Hardware 51

976 Total:-

(i) Civil Construction-Buildings on free hold land.

6.6.2. The petitioner has projected a total of Rs. 120 million under the head civil

construction of buildings on free hold land for the said year. The petitioner has

estimated Rs. 12 million to construct additional rooms required for the extension

of radio equipments, separate sound proof room within the building of central

meter workshop, record rooms for accounts & billing department, etc. Further,

the petitioner has projected lump sum figure of Rs. 46 million for small sized

construction projects. The petitioner has explained that construction of these

contiguous projects is necessary to provide better working conditions /

environment. Besides above, the petitioner has projected Rs. 50 million for

intelligent pigging of transmission line and Rs. 12 million for protective works i.e

earth filling at MP-34-37 Sui- Guddu segment.

6.6.3. The Authority keeping in view the justification provided by the petitioner allows

Rs. 120 million on this account for the said year.

(ii) Plant & Machinery

6.6.4. The petitioner has requested to allow Rs. 160 million on account of plant &

machinery for the said year as against Rs. 398 million provided in RERR FY

2009-10. The petitioner has explained that claimed amount comprises

procurement of different equipments for its common serving departments, e.g

equipments for security and firefighting, telecommunication equipments, loose

tools, soil resistively meager, pipeline locator for corrosion control, etc.

6.6.5. The Authority, in view of the above justifications, allows Rs. 160 million on this

account for the said year.

(iii) Measuring & Regulating Equipments


23

6.6.6. The petitioner has claimed Rs. 105 million on account of measuring & regulating

equipments for the said year. The petitioner has summarized that equipments

under this head include gas chromatograph, flow computers, temperature

calibrator, gas leak detector, portable transfer prover machine, etc. The petitioner

further explained that Rs. 50 million, out of Rs. 105 million, is required for the

modification of 10 SMSs at different locations of the petitioner.

6.6.7. The Authority observes that claimed capitalization under this head is essentially

required to carry out technical activities and smooth operation of the system.

The Authority, therefore, allows the same as projected by the petitioner for the

said year.

(iv) Tools & Equipments

6.6.8. The petitioner has projected Rs. 150 million under the head “Tools & Equipment”

for the said year. The petitioner has explained that capitalization under this head

includes purchase of different equipment used for hydraulics, heavy duty

crimping tool, DC welding plants, drilling and stopping machines C1- 36, MS

pipe beveling machine, air compressor 1.6 MPA (232 Psi), etc.

6.6.9. The Authority, keeping in view the frequent use of small equipments, allows

Rs. 150 million on this account as claimed by the petitioner for the said year.

(v) Motor Vehicles

6.6.10. The petitioner has projected Rs. 222 million on account of purchase of motor

vehicles during the said year. The petitioner has apportioned Rs. 12 million for

purchase of fork lifter for stores, Rs. 12 million for replacement of allocated

vehicles and Rs. 198 million for replacement of over 15 year old operational

vehicles. The petitioner has explained that same amount of Rs. 198 million was

also requested last year on the similar reasons, however due to financial

constraint; this budget was not utilized during FY 2009-10. It is, therefore, again

claimed in the said year.

6.6.11. The Authority observes that the petitioner was asked to provide complete detail

of vehicles to be purchased and replaced during the said year. It, however, failed

to provide specific and concrete justification along with detailed breakup of

vehicles to be used in different departments. The Authority feels that keeping in

view the financial constraints; the petitioner should make judicious and prudent

use of existing vehicle fleet.


24

6.6.12. The Authority in view of above, allows Rs. 111 million (being 50% of claimed

amount) under this head for the said year.

(vi) Construction Equipment

6.6.13. The petitioner has projected Rs. 128 million on account of construction equipment

for the said year. The petitioner has stated that Rs. 10 million is required for

transmission & compression activities and Rs. 118 million is required for the

distribution activities comprising purchase of welding plants and air compressors

for its various locations.

6.6.14. The Authority reiterates its earlier stance that the petitioner has not envisaged

any major project to be executed during the said year and the Project-IX has now

been completed. The petitioner can, therefore, obtain/ utilize the existing

equipment spared from its project department. This will save the money and

encourage optimum utilization of the assets.

6.6.15. In view of above, the Authority allows Rs. 10 million for transmission and

compression as claimed by the petitioner and restricts the expenditure for

distribution development at Rs. 59 million i.e 50% of the claimed amount. The

total amount of Rs. 69 million is allowed under this head.

(vii) Furniture, Fixture and Computer Hardware (Other Assets)

6.6.16. The petitioner has projected Rs. 16 million under “furniture and fixture” and Rs.

51 million for purchase of computers for the said year. The petitioner has

elaborated that the requested capital items are for normal office use.

6.6.17. The Authority observes that the projected amounts of Rs. 67 million under the

above heads are reasonable when compared with the actual results for FY 2008-

09. The same is, therefore, allowed for the said year.

(viii) Office Equipment

6.6.18. The petitioner has projected Rs. 24 million for purchase of office equipment for

the said year for normal office use. The Authority observes that historically,

actual capitalization under this head has been considerably less, i.e; around 50%

of the initially demanded amount. The Authority therefore allows Rs. 12 million

i.e 50% of the claimed expenditure under office equipment.

6.6.19. The Authority in view of above discussion allows Rs. 794 million under the head

Plant, Machinery & Equipments and Other Assets for the said year.


25

6.7. IT Related Expenditure

6.7.1. The petitioner has projected Rs. 387 million for the said year on account of IT

related expenditure on account of ERP Oracle & CC&B system. The petitioner

has submitted that it had projected Rs. 617 million at the time of DERR FY 2009-

10 to undertake pending IT projects, in order to achieve manifold increase in

productivity and efficiency of existing system. The project was approved in

principle, however Rs. 190 million was allowed for FY 2009-10, Rs. 40 million on

account of Business Reprocess Engineering (BPR) was disallowed on the plea that

same task can be accomplished through in-house expertise while Rs. 387 million

was pended. The projected expenditure of Rs. 387 million, being sought for FY

2010-11, is in fact the amount pended by the Authority in the FY 2009-10.

6.7.2. The petitioner has elaborated that ERP system comprising Business Process Re-

engineering (BPR), implementation of Enterprise Resource Planning (ERP)

modules (Purchasing, Inventory, Payroll, HRM, Projects and Enterprise Asset

Management (EAM) is at the advanced stage and likely to be completed in FY

2010-11. Customer Care & Billing system (CC& B) has been completed at a total

cost of Rs. 324 million as against Rs. 260 million projected at the initial stage. The

petitioner has attributed the variation in budgeted amount to rise in dollar rupee

parity from Rs. 60 to Rs. 84. The petitioner has argued that the benefits on this

account will begin to accrue once the systems are fully functional and adopted in

letter and spirit.

6.7.3. The Authority observes that the petitioner’s IT project was discussed exhaustively

at the time of DERR FY 2009-10 and was allowed Rs. 190 million in the same year

to undertake the said IT project. The projected cost on account of BPR, HR and

rental space & furniture was allowed/ rationalized upto realistic level and the

balance amount in the subsequent year was only to be considered by the

Authority after it is fully satisfied with the desired results in respect of service

improvement, UFG control, not yet billed customers, other activities, etc.

6.7.4. The Authority notes with concern that large number of complaints have been

reported since launch of CC&B system owing to technical faults. Several

computation errors have been observed in billing. Also, large numbers of

consumers are not receiving gas bills in time. As a matter of fact the entire IT


26

senior management team has been changed owing to failure in respect of ERP

and CC&B implementation.

6.7.5. In view of the above, the Authority finds no reason to allow any further

expenditure on account of IT projects, till such time it is satisfied with the

desired results. The credibility and effectiveness of the petitioner’s new IT project

also needs to be ascertained afresh.

6.7.6. The Authority also directs the petitioner to submit long awaited ERP and CC&B

benchmarks, cost benefit analysis and performance indicators for measuring the

efficiency of the project before and after the implementation.

Fixed Assets Determined by the Authority

6.7.7. The value of additions in assets claimed by the petitioner and provisionally

allowed by the Authority for the said year is as under:

Table 11: Summary of Asset Additions Determined by the Authority.

Rs. in million

ParticularsRequested By

PetitionerDisallowed by the Authority

Determined by the Authortiy

Transmission 1,863 1,863 -

Compression 20 - 20

Distribution Development 13,613 2,150 11,463

Telecommunication 670 - 670

Plant, Machinery & Equipment and Other Assets 976 182 794

MIS Project 387 387 - Net addition in asset base 17,529 4,582 12,947

6.7.8. Depreciation expense claimed by the petitioner comes down by Rs. 126 million to

Rs. 8,069 million as a consequence of adjustment in depreciation expense on

addition in assets for the said year, as discussed above.

6.7.9. In view of the above, the Authority provisionally determines the closing net

operating fixed assets (net of deferred credit) for the said year at Rs. 49,841

million.


27

7. Operating Revenues

7.1. Sales Volume

7.1.1. The petitioner has projected increase in number of consumers from 3,580,465 per

RERR for FY 2009-10 to 3,809,465 during the said year, as follows:

Table 12: Comparison of Projected Number of Consumers with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Domestic 3,291,534 3,516,534 3,741,534 225,000 7%Commercial 54,565 58,065 61,565 3,500 7%Industrial 5,416 5,866 6,366 500 9%

Total 3,351,515 3,580,465 3,809,465 229,000 7%

Growth over RERRCategory

# of Consumers

7.1.2. The sale volume for the said year has been projected at 633,446 BBTU, as against

577,208 BBTU provided in RERR for FY 2009-10, i.e; an increase of 10%. Category-

wise comparison with previous years is provided as under:

Table 13: Comparison of Sales Volume with Previous Years

FY 2008-09 FY 2009-10 2010-11

FRR RERRThe

Petition

Power 157,243 179,608 195,997 16,389 9 %

Cement 2,923 - - - -

Fertilizer 44,630 70,809 80,286 9,477 13 %

General Industries 117,574 81,385 88,017 6,632 8 %

CNG 63,005 72,131 79,231 7,100 10 %

Commercial 23,522 26,654 28,085 1,431 5 %

Domestic 135,646 146,621 161,831 15,210 10 %Total 544,544 577,208 633,446 56,238 10 %

CategoryInc./ (Dec.) over

RERR

Volume in BBTU

7.1.3. The petitioner has envisaged new gas supply from different fields including

Qadirpur Permeate, Tajjal, Manzalai, Nashpa, Maran zai, Koonj and Mami Khel.

The petitioner has explained that number of gas fields are depleting, however,

due to additional supply available from the new fields, the sale volume is

projected to increase by 10% for the said year.


28

7.1.4. The petitioner further submitted that due to increasing demand in various other

categories of consumers, it has not projected any sales to cement sector which is

last in priority as per gas allocation policy. The Gas Sale Agreements (GSAs) with

cement plants are also executed on “as and when available” basis.

7.1.5. The Authority provisionally accepts the gas sale for the said year at 633,446

BBTU as projected by the petitioner.

7.2. Sales Revenue at Existing Prescribed Prices

7.2.1. The petitioner has projected sales revenue for the said year, at existing prescribed

prices, to increase by 17%, from Rs. 176,420 million provided in RERR for

FY 2009-10 to Rs. 206,788 million. Category-wise comparison of sales revenue is

given below:

Table 14: Comparison of Projected Sales Revenue with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Power 58,218 63,000 77,624 14,623 23%Cement 1,270 1.43 - (1.43) -100%Fertilizer 5,651 10,705 11,029 324 3%General Industries 39,104 27,927 33,655 5,728 21%CNG 25,671 33,403 39,904 6,501 19%Commercial 8,855 11,685 13,022 1,337 11%Domestic 21,935 29,698 31,555 1,857 6%

Total 160,703 176,420 206,788 30,368 17%

Inc./ (Dec.) over RERR

Rs. in million

Category

7.2.2. The Authority provisionally determines the estimated sales revenue for the said

year at Rs. 206,788 million.

7.3. Other Operating Revenues

7.3.1. The petitioner has projected other operating revenues at Rs. 3,817 million during

the said year as against Rs. 2,852 million according to RERR for FY 2009-10,

showing an increase of 42%. Comparison with previous years is given below:


29

Table 15: Comparison of Projected Other Operating Income with Previous Years Rs. in million

FY 2008-09 FY 2009-10 FY 2010-11


Rental & Service Charges 990 1,000 1,050 50 5%Surcharge and Interest on arrears 1,201 760 1,261 501 66%Amortization of deferred credit 1,096 902 1,281 379 42%Return on Government grants 561 - - Other operating income 462 190 225 35 18%

Net Operating Revenues 4,310 2,852 3,817 965 34%

DescriptionIncrease /

(Decrease) over RERR

7.3.2. The petitioner has projected 66% increase on account of “Surcharge & Interest on

arrears” compared with RERR FY 2009-10. The Authority observes that income

under this head is under-estimated when compared with the actual results per

FRR 2008-09 (i.e; an increase of only 5% over two years). Further, income on this

account is relevant to gas sale volume, gas sale price and number of the

consumers, which are continuously following the rising trend.

7.3.3. In view of above, the Authority determines the said income at Rs. 1,501 million

i.e; at the level of FRR FY 2008-09 plus 25% cumulative increase of two years.

7.3.4. The Authority observes that the petitioner has projected Rs. 225 million under the

head “other operating income” for the said year as against Rs. 190 million per

RERR FY 2009-10, showing an increase of 18%.

7.3.5. The Authority observes that estimates per RERR FY 2009-10 and the said year are

on the lower side when compared with actual income for FY 2008-09 amounting

to Rs. 462 million. Further, the petitioner has not projected the income on account

of advertisement while SSGCL, the sister utility company of the petitioner is

generating reasonable income on this account.

7.3.6. In view of above, the Authority determines the said income at Rs. 518 million i.e

10% over FRR FY 2008-09 plus Rs. 10 million on account of advertisement on

tentative basis.

7.3.7. In view of above, the Authority provisionally determines, for the said year, other

operating revenues at Rs. 4,350 million.


30

8. Operating Expenses

8.1. Cost of Gas

8.1.1. The petitioner has projected cost of gas for the said year to increase from Rs. 145,194

million provided in RERR for FY 2009-10 to Rs. 198,449 million, based on its

projections of international prices of crude and HSFO. Comparative analysis of

projected cost of gas with previous years is given below:

Table 16: Comparison of Cost of Gas with Previous Years

BBTU Million Rs BBTU Million Rs BBTU Million Rs

544,544 151,332 570,216 145,194 633,446 198,449

FY 2010-11 (The Petition)FRR FY 2008-09 RERR FY 2009-10

8.1.2. The well-head gas prices on the basis of which cost of gas is determined are

indexed to the international prices of crude or HSFO per GPAs between the GoP

and the producers and are notified semi-annually, effective on 1st July and 1st

January. The international average prices of crude and HSFO during the

immediately preceding period of December to May are used as the basis for

calculating the estimated well-head gas prices for the period July to December, and

similarly oil prices during the immediately preceding period of June to November

are used to calculate the projected well-head gas prices for the period January to

June.

8.1.3. The petitioner computed WACOG at Rs. 288.73 / MMBTU for the said year

projecting international prices of HSFO & crude and PKR / US $ exchange rate as

under:

Table 17: Estimates for Determination of WACOG according to the Petition

Applicable for wellhead gas price for the

period

Average FOB oil prices for the

period

Average FOB price of Crude

Oil (US $ per

BBL)

Average FOB price of HSFO

(US $/ M.Ton)

Exchange Rate

(Rs /US $)

Jul 10 to Dec 10 December 09 to May 10 89.60 485.31 87.00

Jan 11 to Jun 11 June 10 to November 10 100.96 560.85 90.00


31

8.1.4. The Authority has reworked the WACOG for the said year at Rs. 268.66 per

MMBTU on the following basis:

(a) Wellhead gas prices effective for the period July 01, 2010 to December 31,

2010 are worked out on the basis of actual prices of HSFO and Crude during

the period December, 2009 to May 10, 2010, which comes to US $ 470.46 per

metric ton and US $ 78.92 per barrel respectively, taking the exchange rate at

Rs. 85 per US $. Average of Crude and HSFO prices for first ten days of

May, 2010 has however been adopted for the remaining part of the month.

(b) Wellhead gas prices effective for the period January 01, 2011 to June 30, 2011

have been worked out by escalating the price of HSFO and Crude as

elaborated above by 2% per month for the period June-November 2010, in

view of the level of uncertainty about the global oil supply. Also the

exchange rate is assumed at Rs. 88 per US $.

(c) Wellhead gas price of Kadanwari field, for the said year, has been computed

in accordance with the decision of the GoP i.e. applying floor on

international price of HSFO at US $ 100 per ton and ceiling of US $ 365 per

ton, respectively. The petitioner has, however, computed wellhead gas price

of Kadanwari field without applying the floor and ceiling prices of HSFO.

8.1.5. Based on the above discussion, the Authority provisionally determines cost of gas

at Rs. 184,645 million for the said year. The petitioner is, however, directed to

submit a review petition to the Authority latest by October 15, 2010 for review of

its estimated revenue requirements as required under Section 8(2) of the Ordinance,

keeping in view the actual and anticipated changes in international prices of crude

and HSFO during the period June to November, 2010 and the trend of Rupee –

Dollar exchange rate.

8.2. Unaccounted for Gas (UFG)

8.2.1. The petitioner has projected UFG for the said year at 7.50% ( 56,403 MMCF), as

follows:


32

Table 18: Comparison of UFG with Previous Year Volumes in MMCF

Gas Purchases 663,606 752,050 Gas Sales 623,465 695,647 UFG 40,141 56,403

UFG % 6.05% 7.50%

FY 2009-10 RERR FY 2010-11 (The Petition) Particulars

8.2.2. The Authority, after giving due weight-age to all relevant factors, including the

contentions of the two gas utilities, had fixed the UFG benchmark per its order on

motion for review of DERR FY 2005-06 dated October 12, 2005, on a long term basis.

For the said year, the upper and lower targets of UFG had been fixed at 5.0% and

4.25%, respectively, with the condition that the petitioner would be entitled to

retain the savings in the event of performance being better than the lower target,

fully bear UFG above the upper target from its own profits whereas UFG between

the lower and upper targets be adjusted in the revenue requirement to the extent of

50% and the balance 50% be borne by the petitioner from its own profit.

8.2.3. The petitioner has re-iterated its earlier contention that UFG targets set by the

Authority are un-realistic and un-achievable due to the persistent theft culture and

existing ground realities. The petitioner, in view of the foregoing, has requested

during the proceedings to revisit / review the UFG benchmark and fix the same at

7% or the maximum UFG disallowance be restricted at 25% of profit, whichever is

lower, for the next three years.

8.2.4. The petitioner has also submitted that gas supply ratio from bulk to domestic

category is continuously following a rising trend. Bulk to domestic gas supply ratio

in FY 2004-05 was 45% & 55% respectively, whereas in the current financial year

2009-10, it has been observed at 22% and 78% respectively. Increase of gas supply

to domestic sector is more contributive to UFG. It, therefore, needs to be reviewed

and fixed at the target of 7%.

8.2.5. The petitioner has further asserted that the Authority in its determinations of FRR

for FY 2008-09 showed its intention to undertake a comprehensive impact

assessment study of the UFG benchmarks introduced by it and change in the

benchmark was to be considered on the completion of the said study. The petitioner

has submitted that review of UFG targets has long been outstanding issue, since


33

these unrealistic targets have already caused irreparable damage in terms of UFG

disallowances causing decline in profitability of the company.

8.2.6. The Authority is of the view that the UFG benchmark was setup on the basis of

international/ regional standards, while giving major discounts for ground realities

and operational constraints prevalent in the country. The petitioner, however, has

failed to come up with concrete strategy / plan and consequent focused efforts to

curb the ever increasing theft, leakages and measurement errors over most part of

the last decade, which is now resulting in constant increase in UFG and

consequently reduced profitability.

8.2.7. The Authority observes that the petitioner has failed to provide requisite details of

efforts and projects undertaken by it in relation to UFG control, which reflects its

non-serious approach towards this matter of national importance. The Authority is

also of the firm opinion that large scale theft of natural gas from high pressure

pipelines is simply not possible without collaboration of the petitioner’s technical

staff. The petitioner, therefore, needs to devise appropriate check and balance

systems and improve corporate governance to eliminate unfair practices within its

ranks. Also, large scale leakages are indicative of lack of concerted efforts by the

petitioner to augment its aging system and deteriorating quality of workmanship.

The petitioner lacks appropriate quality assurance system, which needs to be put in

place on immediate basis.

8.2.8. The petitioner’s view point of gas level shift from bulk to retail domestic sector also

holds no water since major chunk of retail sale again comprises of industrial

consumers, which are not difficult to regulate. Even otherwise, the bulk to retail

ratio will be reversing during the said year in favour of the petitioner owing to

projected increase in the supply of gas, which is likely to increase the sales to power

sector. It, therefore, seems that the petitioner wants to shift the UFG burden over to

gas sector consumers at large, which is not acceptable.

8.2.9. In view of above, the Authority decides to maintain the existing UFG benchmark

for the said year.

8.2.10. The Authority observes that UFG percentage calculated by the petitioner is not

correct since it has divided the UFG volume over “total gas purchases” instead of


34

“Gas available for sale”. Revised calculation of UFG and its disallowance based on

revised WACOG per para 8.1.4 above, is as under;

Table 19: Adjustment on Account of UFG Targets set by OGRA for the said year

Gas Purchases

Calculated by

the Petitioner

Calculated

by OGRA

Metered Gas Purchased As Per Books 752,050 752,050 Gas taken out / put into - - Gas Available A 752,050 752,050 Gas Internally ConsumedTransmission(i) Compression 13,442 13,406 (ii) Residential Colonies 71 71 (iii) Coating Plant 154 154

Total 13,667 13,631 Distribution(i) Free Gas Facility 528 528 (ii) Co-Generation 94 94

Total 622 622 Total GIC 14,289 14,253 Gas Available for Sale B 737,761 737,797

Gas carried for PPL, POL and SSGCL - - Gas lost in ruptures - - Gas Sold (Billed) 681,357 681,357

- - Total Sales C 681,357 681,357

UFG Volume (A-B) D 56,403 56,440 UFG %age (C/A)*100 7.50% 7.65%

Working Of Penalty(i) 50% Of UFG Between 5% and 4.25%

Gas Available for Sales (MMCF) E=A, B 752,050 737,797 UFG OGRA Target (MMCF) 5% F=E*5% 37,603 36,890 UFG OGRA Target (MMCF) 4.25% G=E*4.25% 31,962 31,356 Disallowance (MMCF) H=(F-G) 5,640 5,533 Disallowance (MMCF)- 50% I 2,820 2,767

(ii) 100% Of UFG Between 5.% and Actual RateUFG OGRA Target (MMCF) 5% J=E*5% 37,603 36,890 Disallowance (MMCF) K=(D-J) 18,801 19,550 Total UFG Disallowance (MMCF) L= I+K 21,621 22,317 Avg. Cost Of Purchases Rs. Per MCF M 268.43 249.77

Value Of Disallowance (Million Rs) N=L*M/1000 5,804 5,574

MMCF

8.2.11. Based on the above computation, the Authority provisionally deducts Rs. 5,574

million from the revenue requirement of the petitioner for the said year.


35

8.3. Transmission and Distribution Cost

i. Summary

8.3.1. The petitioner has projected 33% increase in transmission and distribution cost

(including gas internally consumed), from Rs. 10,215 million per RERR FY 2009-10

million to Rs. 13,616 million for the said year, as detailed below:

Table 20: Comparison of Projected T & D Cost with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11

Rs. %

Human Resource Cost 4,840 4,922 6,185 1,263 26 %Stores and Spares Consumed 521 438 574 137 31 %Repair and Maintenance 700 650 943 293 45 %Fuel and Power 165 179 202 23 13 %Stationery, Telegram and Postage 73 73 117 44 60 %Dispatch of gas bills 51 63 68 5 8 %Rent, Rate, Electricity and Telephone 152 160 403 244 153 %Traveling 139 139 159 20 15 %Transport expenses 455 370 529 159 43 %Insurance 125 144 179 35 24 %Legal and Professional Services 29 38 46 7 19 %

Consultation for ISO 14001 & OHSAS 18000 1 3 3 (0) (12) %

Gas bills collection charges 239 267 287 20 7 %

Gathering charges of gas bills collection data 23 32 34 2 7 %

OGRA fee 86 110 174 63 57 %

Advertisement 60 74 94 19 26 %

Bank Charges 20 19 23 4 19 %

Uniforms & protective clothing's 8 14 14 0 3 %

Staff training and recruiting 5 13 12 (1) (9) %

Security expenses 143 232 289 57 25 %SNG training insititute 5 8 9 1 9 %Provision for doubtful debts 180 180 614 434 241 %Sponsorship of chairs at University 3 5 5 (0) (7) %5 Year special training programme 4 16 17 0 1 %Budget for UFG control related activities - 25 (25) (100) %Out Sourcing of call centre complaints management 9 8 15 8 101 %Stores spares written off 32 - - Cost of Gas Blown off 65 - - Contribution to Inter State Gas System Limited 37 125 145 20 16 %Other expenses 55 60 78 18 31 %Sub-total Expenses 8,225 8,367 11,217 2,850 34%

Allocated to fixed capital expenditures (1,064) (1,119) (1,403) (284) 25 %Net T&D expenses before gas internally consumed 7,161 7,248 9,814 2,566 35 %

Add: Gas internally consumed 3,267 2,967 3,802 835 28 %

Toal 10,427 10,215 13,616 3,401 33 %

FRR The Petition RERR

Rs. in million

Increase / (Decrease) Over RERR

Particulars

8.3.2. Various components of operating cost are discussed in the following paras:


36

ii. Human Resource (HR) Cost

8.3.3. The petitioner has projected the HR benchmark cost to increase from Rs. 4,922

million provided in RERR for FY 2009-10 to Rs. 6,185 million for the said year,

showing an increase of 20%. The petitioner has computed the HR cost per the

benchmark set by the Authority in FRR FY 2008-09, taking FY 2007-08 as base year,

while adopting indexation weightage for standard factors as follows:

i. 60 % increase in number of consumers

ii. 20 % increase in sale volume

iii. 20 % increase in T & D network

iv. 50 % CPI adjustment of previous year HR benchmark cost

8.3.4. The Authority observes that the petitioner has correctly calculated the HR cost

benchmark for the said year; however it has wrongly included Rs. 136 million i.e

50% of excess cost, in the HR benchmark. This 50% sharing on account of

excess/saving in HR cost benchmark is normally determined at the time of FRR

when actual results are available.

8.3.5. The Authority observes that the petitioner has estimated the total T&D network at

85,477 Km, after incorporating the projected addition of 4,661 Km, for the said year.

However, based on discussion in paras 6.2.1 above to 6.2.4 above, the Authority

provisionally determines the total T&D network at 85,455 Km including addition

of 4,639 km for the said year.

8.3.6. In view of above, the Authority determines the HR Cost at Rs. 6,049 million for the

said year based on the revised HR benchmark as per Annexure–D.

8.3.7. The petitioner is directed to provide, at the time of final revenue requirement, an

unconditional (without “exception”, “subject to” provisions), certificate by its

statutory auditors to the effect that HR cost used for comparison with HR

benchmark includes all regular, contractual and casual staff / labour.

iii. Gas Internally Consumed (GIC)

8.3.8. The petitioner has projected cost of GIC for the said year at Rs. 3,844 million

(14,290 MCF, including projected capitalization of 155 MMCF i.e: Rs. 42 million) as

against Rs. 2,996 million (13,227 MMCF) in RERR for FY 2009-10, showing increase

of 8%. Projected breakup of GIC is provided below:


37

Table 21: Projected Breakup of GIC

MMCF MMBTU Million /Rs.Transmission SystemCompressors (Comp) 13,442 12,496,316 3,616 Residential Colonies 71 66,413 19 Total Compression 13,513 12,562,730 3,635 Coating Plant (CP) 154 143,453 42 Total Transmission 13,667 12,706,182 3,676

Distribution System (Dist)Free Gas Facility 528 491,330 142 Co-Generation 94 87,267 25 Sub total 622 578,597 167 Grand Total 14,290 13,284,779 3,844 Total Gas Purchases 752,050 GIC used to compress per MMCF 0.0180

The Petition for FY 2010-11Particulars

8.3.9. Historical analysis of volume of GIC, as percentage of gas purchases & per MMCF

consumption in “compression”, is as under:-

Table 22: Historical Analysis of GIC Volumes MMCF

Financial Year

Gas Purchase Volume

GIC in Compression

GIC in Distribution

Total GICGIC used to

compress per MMCF

% of total GIC over Gas

Purchase Volume

2005-06 587,539 10,449 672 11,121 0.0178 1.89%2006-07 638,608 11,788 578 12,366 0.0185 1.94%2007-08 642,845 11,363 715 12,078 0.0177 1.88%2008-09 682,634 12,378 578 12,956 0.0181 1.90%2009-10 663,606 12,378 578 12,956 0.0187 1.95%Average 624 0.0179* 1.91%* .017922

8.3.10. The Authority observes that average GIC used in compression, per MMCF of gas

purchased, during the last five years works out to 0.0179 per MMCF compared with

0.0180 per MMCF projected for the said year. The Authority, therefore, restricts the

GIC at this level and determines 13,478 MMCF for the said year under this head, as

against 13,513 MMCF claimed by the petitioner.

8.3.11. The Authority also observes that 622 MMCF GIC projected by the petitioner in

“Distribution” & 154 MMCF in “Coating Plant” is in accordance with the trend;

therefore same is accepted for the said year.


38

8.3.12. The Authority, in view of above, determines the GIC at 14,255 MMCF (Comp.

13,478+ CP 154+ Dist. 622) as against 14,290 MMCF claimed by the petitioner. The

Authority accepts the petitioner’s allocation of 154 MMCF for capitalization

during the said year, the cost of which is, however, recomputed based on revised

WACOG per para 8.1.4 above, at Rs. 39 million as against Rs. 42 million claimed

by the petitioner.

8.3.13. Based on the above, cost of GIC is re-calculated and provisionally determined at

Rs. 3,529 million (14,099 MMCF after capitalization) as part of revenue

requirement for the said year.

iv. Stores and Spares Consumed

8.3.14. The petitioner has projected stores and spares consumed for the said year at

Rs. 574 million as against Rs. 438 million provided in RERR for FY 2009-10.

Historical comparison of stores and spares consumed is given below:

Table 23: Comparison of Projected Stores and Spares Consumed with Previous Years

FRR RERR The Petition Rs. %

Compression 128 150 164 14.09 9.4 %Transmission 85 143 192 49.40 34.5 %Distribution 244 84 121 36.42 43.1 %Others (incl H.O.) 7 6 30 24.00 378.0 %Freight & handling 57 54 67 12.51 23.2 %

Total 521 438 574 136.43 31.2 %

Inc. / (Dec.) over RERR FY 2008-09 FY 2009-10 FY 2010-11

Particulars

Rs. in million

8.3.15. The petitioner has claimed Rs. 192 million under Transmission sub-heads which

comprises Rs. 66 million & Rs. 126 million on account of odorant oil and

consumption of stores, spares and supplies respectively

8.3.16. The petitioner has stated that increase of Rs. 20 million out of Rs. 49 million in

transmission component is due to estimated increase in consumption and price of

odorant oil. The remaining Rs. 29 million is on account of projected increase in the

prices and consumption of stores, spares & supplies owing to enhanced activities.

8.3.17. The petitioner has explained that it has projected 60,000 Kg consumption of odorant

oil for the said year on the basis of actual consumption trend during July-

December, 2009, as against 50,000 Kg estimated at 50% of 0.5lb/MMCF in RERR FY


39

2009-10. The petitioner has also projected escalation @ 20% in the price of odorant

oil i.e; from Rs. 923/Kg per RERR FY 2009-10 to Rs. 1,108/kg for the said year.

8.3.18. The petitioner has repeatedly elaborated that odorant oil is used as an effective tool

to combat UFG and therefore the Authority has allowed a considerable amount on

this account to support the UFG control related activities, however, no significant

reduction in UFG has yet been witnessed. The Authority further observes that the

petitioner has unreasonably estimated the price of odorant oil on very high side

since it has consumed 26,400 Kg of odorant oil @ Rs. 607/kg during July-December,

2009.

8.3.19. The Authority, in view of above, determines Rs. 36 million for Odorant Oil on

estimated consumption of 50,000 Kg equivalent to that of FY 2009-10, at the rate of

Rs. 728/Kg (Rs. 607/Kg per RERR FY 2009-10 plus 20% to cater for inflationary

impact).

8.3.20. The Authority also observes that remaining Rs. 29 million increase (i.e 30%, from

Rs. 97 million per RERR FY 2009-10 to Rs. 126 million for the said year) under this

head is not justified since no tangible justification has been advanced by the

petitioner. It is, therefore, restricted at Rs. 116 million (i.e Rs. 97 million per RERR

FY 2009-10 plus 20% to cater for inflationary impact). In view of above, Rs. 152

million on account of “Transmission” is allowed for the said year.

8.3.21. The petitioner has projected Rs. 121 million under the head “Distribution” for the

said year as against Rs. 84 million per RERR FY 2009-10 and actual expenditure of

Rs. 244 million during FY 2008-09.

8.3.22. The Authority observes that an exorbitant increase was allowed in FRR FY 2008-09

in distribution component on the plea of UFG combat; however the prevalent UFG

level does not corroborate the expenditures incurred on this account.

8.3.23. The Authority has always encouraged and supported UFG control related

activities and has, therefore, been allowing the claimed expenditure on this

account. In view of lack of improvement noticed in the UFG level, the Authority

directs the petitioner to undertake more focused and concerted efforts to eradicate

the underlying causes contributing towards high UFG.


40

8.3.24. Considering the above, the Authority allows the projected amount of Rs. 121

million, and directs the petitioner to provide, at the time of FRR for the said year,

tangible results to support the expenditure claimed under this head.

8.3.25. The petitioner has projected Rs. 30 million under the subhead “Others” mainly due

to overhauling of two gas turbines installed at Head Office. The petitioner has

explained that Gas Turbine No. 1009 H31 was completely overhauled in FY 2008-

09. Now Rs. 24 million is required for the partial overhauling of Gas Turbine No

1010531 and complete overhauling of Gas Turbine No. 20911.

8.3.26. The Authority observes that Gas Turbine No. 1009 H31 was overhauled during FY

2008-09 with the actual expenditure of Rs. 6.53 million. The petitioner was asked to

provide tangible justification for projecting phenomenal increase for the same task

during the said year, which however is pending to date.

8.3.27. In view of above, the Authority observes that the projected expenditure under the

sub-head “Others” seems to be grossly exaggerated when compared with FRR FY

2008-09. The Authority, therefore, restricts the expenditure at the level of RERR FY

2009-10 (i.e Rs. 6 million).

8.3.28. In view of above, the Authority provisionally determines the total expenditure on

stores and spares consumed for the said year at Rs. 511 million.

v. Repair and Maintenance

8.3.29. The petitioner has projected repair & maintenance expenditure at Rs. 943 million

for the said year as against Rs. 650 million determined in RERR for FY 2009-10 i.e.

an increase of 45% as under:-

Table 24: Comparison of Projected Repair and Maintenance with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Compression 28 17 18 2 9 %Transmission 154 211 301 89 42 %Distribution 412 257 443 186 73 %Others 107 165 181 16 10 %

Total 700 650 943 293 45 %

Rs. in million

Inc. /(Dec. ) over RERRParticulars


41

8.3.30. The petitioner has elaborated that the increase in sub-head “Transmission” is due to

phenomenal increase in price of material, synthetic fiber and ethanol etc, used in

the transmission process.

8.3.31. The Authority accedes to the petitioner’s plea of hike in prices of fiber glass, ethanol

etc., however, 42% increase over RERR FY 2009-10 seems unreasonable in view of

the actual expenditure of only Rs. 19 million under this head during July-

December, 2009. The Authority also observes that there is a significant increase of

37% during the FY 2009-10 based on the actual results of FY 2008-09. The Authority,

therefore, allows 20% increase over RERR FY 2009-10 to cater for inflation and

other adjustments and determines the said expenditure at Rs. 253 million for the

said year.

8.3.32. The petitioner has projected Rs. 443 million under the head “Distribution” against

Rs. 257 million in RERR FY 2009-10. The petitioner has elaborated that increase

under this head is mainly due to enhanced leakage rectification measures and

revision of contracts of the firms hired for leak rectification/UFG control related

activities.

8.3.33. The Authority observes that the actual expenditure booked under this head during

July-December, 2009 is Rs. 145 million. The trend of the expenditure incurred

shows that the proportionate actual expenditure is on higher side compared with

RERR FY 2009-10. Keeping in view the actual expenditure for July-December 2009,

the Authority allows Rs. 360 million for the said year (i.e Rs. 300 million estimated

actual expenditure for FY 2009-10 plus 20% increase to cater for inflationary

impact).

8.3.34. The Authority, in view of the enhanced level of activities of the petitioner,

determines repair and maintenance expenditure for the said year at Rs. 812 million

as against Rs. 943 million claimed by the petitioner.

vi. Fuel & Power

8.3.35. The petitioner has projected expenditure on account of fuel & power at Rs. 202

million for the said year as against Rs. 180 million provided in RERR for

FY 2009-10 i.e; an increase of 12% as under:-


42

Table 25: Comparison of Projected Fuel & Power with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11

FRR RERRThe

Petition

Compression 47 54 70 16 30 %Transmission 59 59 63 4 8 %Distribution 59 62 67 4.53 7 %Others (incl H.O. & service depts.) 0.28 4.97 1.65 (3) (67) %

Total 165 180 202 22 12%

ParticularsInc. / (Dec.) over

RERR 2009-10

Rs. in million

8.3.36. The petitioner has projected 30% increase under the sub-head “Compression” in

view of estimated increase in cost and consumption of POL used in

workshops/garages and electricity tariff. The petitioner has also explained that cost

of lube oil is projected to increase from Rs. 137/litre to Rs. 500/litre.

8.3.37. The Authority observes that the petitioner has over projected the amount when

compared with the actual expenditure during July-December, 2009 amounting to

Rs. 18 million. It indicates that actual expenditure per RERR FY 2009-10 will not

exceed the allowed limit.

8.3.38. The Authority, therefore, allows an increase of 20% over RERR FY 2009-10 to cater

for inflationary impact and determines Rs. 65 million on this account for the said

year.

8.3.39. In view of above, the Authority determines a total amount of Rs. 196 million under

the head “Fuel & Power” as against Rs. 202 million claimed by the petitioner for

the said year.

vii. Rent, Rate, Electricity and Telephone

8.3.40. The petitioner has requested Rs. 403 million on account of rent, rate, electricity and

telephone for the said year as compared to Rs. 161 million provided in RERR for FY

2009-10. Historical comparison is given below:


43

Table 26: Comparison of Rent, Rate, Electricity and Telephone with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Rent 55 59 98 40 68%Royalty 7 17 17 0 0%Telephone 16 20 23 3 14%Electricity 46 41 55 14 35%Railways 15 10 194 184 1842%Water Conservancy 2 3 3 0 3%Vehicles rates & taxes 6 6 7 1 22%Others 5 6 6 0 4%

Total 152 161 403 243 151%

Inc. / (Dec.) over RERRParticulars

Rs. in million

8.3.41. The petitioner has explained that increase in sub-head “Rent” is due to hiring of

additional buildings and annual escalation in existing rent. The petitioner has

explained that it has hired 24,230 Square Cubic Feet (SCF) space of Shaheen

Complex @ Rs. 90/SCF while vacating two buildings of Associated House & PAAF

Complex, thereby bearing Rs. 17 million additional cost on this account. Further,

the petitioner has projected Rs. 5 million for Head Office, Rs. 8 million for revision

in existing rental agreements and Rs. 9 million for the provision of building for

CC& B system to improve the customer facilitation.

8.3.42. The Authority after analyzing the need assessment and its proposed arrangement

thereof, observes that the petitioner has not given serious thought to economize this

cost. Keeping in view the petitioner’s financial crunch and ever rising burden of gas

prices on consumers, it should have been more economical.

8.3.43. The Authority therefore, disallows Rs. 17 million additional rental cost of Shaheen

Complex.

8.3.44. In view of above, the Authority determines the expenditure under the sub-head

“Rent” at Rs. 81 million for the said year as against Rs. 98 million claimed by the

petitioner.

8.3.45. The petitioner has stated that the increase in the sub-head “Railway” is mainly due

to lump sum demanded amount on account of 412 railway crossing charges. The

petitioner argued that numbers of railway crossings have been physically

confirmed.


44

8.3.46. The Authority observes that the petitioner has already been directed to undertake

all possible efforts for reasonable settlement of Pakistan Railway (PR) claim. The

petitioner has recently informed that the matter of arrears on account of railway

crossing charges could not be settled due to non availability of record with Railway

Authorities.

8.3.47. The Authority therefore, provisionally allows Rs. 15 million under this head, for

maintenance charges and reiterates its earlier direction to undertake all possible

efforts for a reasonable settlement of the Pakistan Railway’s claims, in order not

to adversely affect the interest of the gas consumers at large.

8.3.48. Based on the above, the Authority determines the expenditure on account of rent,

rate, electricity and telephone at Rs. 207 million for the said year.

viii. Transport

8.3.49. The petitioner has projected transport expenses for the said year at Rs. 529 million

as against Rs. 370 million provided in RERR for FY 2009-10, showing an increase of

43% as under:

Table 27: Comparison of Transport with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Compression 13 10 15 5 52 %Transmission 96 92 107 16 17 %Distribution 225 142 260 119 84 %Others (incl H.O. & service depts.) 120 127 147 20 15 %

Total 455 370 529 159 43%

Inc. / (Dec.) over RERR

Rs. in million

Particulars

8.3.50. The petitioner has explained that the projected expenditure is reasonable when

compared with FRR FY 2008-09. The petitioner has argued that the expenditure per

RERR FY 2009-10 was underprovided since exorbitant increase in oil prices was not

envisaged at the time of budget preparation for FY 2009-10.

8.3.51. The Authority observes that budget per RERR 2009-10 was reasonably provided

when compared with the actual results of Rs. 188 million during July-December

2009. The Authority concurs with the petitioner’s contention that the prices of fuel

and its consumption are rising, however, 43% increase over RERR FY 2009-10

cannot be justified.


45

8.3.52. In view of above, the Authority determines the transport expenses at Rs. 444

million i.e at the level of RERR FY 2009-10 plus 20% to cater for inflationary

impact and increased consumption.

ix. Insurance

8.3.53. The petitioner has projected insurance expenses for the said year at Rs. 179 million

as against Rs. 145 million provided in RERR for FY 2009-10, showing an increase of

23% as under:

Table 28: Detailed Comparison of Projected Insurance Expenses with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11

FRR RERR The

Petition Rs. %

Third Party 1 1 1 (0) -8%Fire Risk 64 70 90 20 29%Fidelity / Cash in transit 0.14 0.30 0.3 - 0%Motor Vehicles 23 27 34 7 24%Loss of Profit 35 43 50 8 18%Miscellaneous 2 4 4 - 0%

Total 125.52 145 179 34 23%

Rs. in million

Particulars


8.3.54. The petitioner has stated that increase in sub-heads “Fire Risk”, “Motor Vehicles”

and “Loss of profit” is due to projected increase in the sum to be insured based on

which the insurance premium is calculated.

8.3.55. The Authority observes that petitioner has computed the insurance premium for

the said year during June 2009 on the basis of notional value of fixed assets which

was taken on higher side. The said value however, has been significantly reduced

per FRR FY 2008-09.

8.3.56. The Authority also observes that the actual expenses during July to December 2009

under this head have been reported at Rs. 73 million. This trend shows that actual

expenditure during FY 2009-10 will be within allowed limit of Rs. 145 million.

8.3.57. The Authority, keeping in view the above and anticipated increase in the sum

insured, allows Rs. 161 million i.e 15% increase over RERR FY 2009-10 under the

above said sub-heads. Therefore, the total insurance expenditure is determined at

Rs. 166 million for the said year.


46

x. Legal and Professional Charges

8.3.58. The petitioner has projected expenditure of Rs. 46 million on account of legal and

professional charges for the said year as against Rs. 38 million provided in RERR

for FY 2009-10, showing an increase of 18%. Historical comparison is given below:

Table 29: Detailed Comparison of Projected Legal & Professional Charges with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11 FRR RERR The Petition Rs. % age

Legal 13 18 25 7 41%Professional 6 11 11 (0) -4%Tax 3 3 4 0 12%Audit 2 3 2 (1) -20%Software Development Charges 0 - - - 0%Apprenticeship/Scholarship/Training 3 1 1 - 0%Others 2 2 3 1 67%

Total 29 38 46 7 18%


Particulars

Rs. in million

8.3.59. The petitioner has argued that increase of 41% under the sub-head “Legal” has

been attributed to the fact that work of legal department has increased manifolds

on account of contract vetting, drafting and legal opinion matters, etc. Further, the

contractors have started invoking Arbitration clauses of the agreements executed

between the parties and as a result arbitrator/advocate fee is projected to increase.

8.3.60. The Authority observes that the petitioner had already been allowed a significant

amount in RERR FY 2009-10 on the same grounds. Further increase of 41% over

RERR FY 2009-10 without concrete reasons in not justified when compared with the

actual expenditure of Rs. 8.6 million incurred during July-December, 2009. The

petitioner was asked to provide specific details of legal suits lodged during FY

2009-10; however it failed to provide the same. The Authority, in view of above,

restricts the expenditure under the sub-head “Legal” at the level of RERR FY 2009-

10 and disallows Rs. 7 million on this account for the said year.

8.3.61. The Authority, therefore, determines the total expenditure on this account at Rs. 38

million for the said year as against Rs. 46 million claimed by the petitioner.


47

xi. Provision for Doubtful Debts

8.3.62. The petitioner has projected provision for doubtful debts for the said year at Rs. 614

million. Historical comparison of provision for doubtful debts with previous years

is provided below:

Table 30: Detailed Comparison of Projected Provision for Doubtful Debts

Rs. in million

FY 2008-09 FY 2009-10 FY 2010-11


Provision for doubtful debts 180 180 614 434 241%


Particulars

8.3.63. The petitioner has elaborated that projected expenditure under this head is due to a

policy which is based on the number of consumers in domestic category and

average sale price of natural gas. Since the price of natural gas w.e.f. 1.1.2010 has

been increased significantly and number of consumers are also increasing

consequent to shifting of bulk to domestic consumers, the petitioner has projected

that provision would be 8% higher than the level of FY 2008-09 i.e. Rs. 568 million.

8.3.64. The Authority, in view of alarming increase in provision for doubtful debts, has

repeatedly directed the petitioner in its various earlier determinations to make

concerted efforts to curtail the ever increasing provision for doubtful debts in order

not to pass this avoidable cost to the consumers. The petitioner continuous default

on this account leads to lack of concerted efforts, comprehensive policy and

effective pursuance for timely payment of gas bills. The Authority therefore had

kept the expenditure under this head at the fixed level of Rs. 180 million for last

two years.

8.3.65. The Authority notes that sale price effective July 2009 was reduced and

consequently, the expenditure under this head should have gone down for the said

year. Further, the petitioner was allowed a significant amount under the head

“Litigation” to expedite the recovery of outstanding amount from the defaulters.

Besides above, the Authority reiterates its earlier directions that the expenditures

due to petitioner's inefficiencies can not be passed on to the consumers.

8.3.66. The Authority restricts the said expenditure at the level of RERR FY 2009-10 and

disallows Rs. 434 million for the said year.


48

xii. Advertisement

8.3.67. The petitioner has projected Rs. 94 million under this head for the said year as

against Rs. 75 million provided in RERR for FY 2009-10, showing an increase of 25%

as under:

Table 31: Comparison of Advertisement Expense with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


Advertisement 60 75 94 19 25%

Particulars

Rs. in million

Inc. / (Dec.) over RERR FY 2009-10

8.3.68. The petitioner has reckoned Rs. 49 million for publication of notices, tenders etc

and Rs. 45 million for consumer education campaign. The petitioner has elaborated

that it has projected to execute consumer education campaign through media for

gas conservation costing Rs. 45 million as against Rs. 23 million provided in RERR

FY 2009-10. The petitioner has explained that due to large operational area of the

entity, it has to spend more money compared with the sister utility company.

8.3.69. The Authority observes that it has always supported petitioner’s consumer

education campaign initiative and had been providing a considerable sum on this

account. Further, the Authority observes that the sister utility of the petitioner is

carrying out an effective consumer education campaign by projecting Rs. 25 million

during the said year. The petitioner’s plea that quantum of expenditure relates to

size of the company, is not convincing. The Authority, therefore, determines the

expenditure on account of consumer education campaign, equivalent to that of

SSGCL i.e. Rs. 25 million for the said year.

8.3.70. The Authority, in view of the above, determines total amount of Rs. 74 million on

account of advertisement expense as against Rs. 94 million claimed by the

petitioner for the said year.

xiii. Staff Training & Recruiting Expenses

8.3.71. The petitioner has projected Rs. 12 million on account of “Staff Training &

Recruiting Expenses” during the said year as against Rs. 13 million in RERR FY

2009-10 showing a decrease of 9% as under:


49

Table 32: Comparison of Staff Training & Training Expenses with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11

FRR RERRThe

Petition

Staff Training & Recruiting Expenses 5 13 12 (1) (9) %

5 13 12 (1) (9) %

Particulars

Rs. in million


2009-10

8.3.72. The Authority observes that it has always supported employees training to enhance

the productivity, efficiency and effectiveness of the work force. The petitioner

however, had never been able to carryout the planed activities and spend the

allowed sum for this purpose.

8.3.73. The Authority observes that the actual expenditure under this head during FY

2008-09 was only Rs. 5 million as against Rs. 10 million allowed per DERR FY 2008-

09. Similarly, during July-December 2009, the expenditure on this account is less

than Rs. 0.5 million.

8.3.74. In view of the above, the Authority restricts the said expenditure at Rs. 6 million

for the said year i.e at the level of FRR FY 2008-09 plus 20 % to cater for

cumulative impact of inflation etc.

xiv. Uniform & Protective Clothing

8.3.75. The petitioner has projected Rs. 14 million for the said year as against Rs. 13.8

million per RERR FY 2009-10, showing an increase of 3%. The petitioner has stated

that it has projected the expenditure under this head based at the level of RERR FY

2009-10. The petitioner has further pleaded that the projected amount under this

head is necessary for the protection and safety of life.

8.3.76. The Authority observes that historically, the actual expenditure under this head

remained less than Rs. 10 million. In the most recent completed FY 2008-09, this

expenditure has been reported at Rs. 8 million and actual expenditure during July-

December 2009 was only Rs. 2 million. The Authority observes that the expenditure

per RERR FY 2009-10 was projected based on RERR FY 2008-09, which was prior to

finalization of FRR FY 2008-09, thereby resulting in higher estimates.

8.3.77. In view of above, the Authority allows Rs. 10 million under this account for the

said year as against Rs. 14 million claimed by the petitioner.


50

xv. Security Expenses

8.3.78. The petitioner has projected Rs. 289 million for the said year as against Rs. 232

million provided in RERR FY 2009-10 showing an increase of 25% as under:

Table 33: Comparison of Security Expense with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11


1 Security Expense 93 177 213 36 20 %

2 Security Guards 49 54 76 21 39 %

143 232 289 57 25%

Sr.#

Inc. / (Dec.) over RERR 2009-10

Particulars

Rs. in million

8.3.79. The petitioner has argued that 20% increase appearing at Sr. No 1 is due to revision

in rate and new agreements with Security Forces. Further, the petitioner has

explained that additional 254 security guards have been deployed due to increase

in new offices, operation of new security equipments and increase in security forces

at sensitive installations.

8.3.80. The Authority observes that there has been significant increase in last years on this

account. Strict security measures to protect assets and sensitive installations have

always been encouraged and necessary expenditure had been allowed in this

regard.

8.3.81. The Authority, however, observes that the current estimates seem to be

exaggerated since actual expenditure incurred during July-December 2009 was Rs.

70 million only. Accordingly, increase of 25% over RERR FY 2009-10 in security

expenses without concrete justification and detailed evidences regarding security

contracts is not defendable.

8.3.82. The Authority, keeping in view the discussions in the foregoing paras, restricts the

security expenses at Rs. 232 million i.e; at the level of RERR FY 2009-10. The

Authority feels that it is giving a rather liberal decision on this account, keeping in

view the results of six months actual, in order not to compromise safety of assets

and work force, owing to prevailing security situation in the country. The

Authority further directs the petitioner to utilize the amount allowed in a

judicious and effective manner in order to ensure fool proof security throughout its

areas of operation.


51

xvi. Five Year Special Training Program

8.3.83. The petitioner has projected Rs. 17 million under this account for the said year. The

petitioner has elaborated that it has chalked out five year special training program

amounting to Rs. 85 million starting FY 2008-09. The allocated expenditure has been

projected at Rs. 17 million for FY 2010-11.

8.3.84. The Authority, however, notes with concern that it has been allowing Rs. 17 million

per annum to the petitioner in FY 2008-09 and FY 2009-10. The actual expenditure

during FY 2008-09 under this head remained less than Rs. 5 million. Similarly, the

actual expenditure booked during July-December 2009 was only Rs. 2.5 million. It is

therefore obvious that the petitioner has failed to effectively execute the five year

training program and therefore the benefits to be derived from the same have

become seriously questionable.

8.3.85. The Authority therefore, pends its decision on this account, which will be issued

separately, after conducting comprehensive review of the petitioner’s on going

training programs.

xvii. Other Expenses

8.3.86. The petitioner has projected Rs. 78 million for the said year under this account,

including Rs. 20.5 million under the sub-head Sundries. Comparative analysis of

Sundries expenses is provided below:

Table 34: Comparison of Other Expenses with Previous Years

FY 2008-09 FY 2009-10 FY 2010-11 FRR RERR The Petition %

Sundries 10.5 20.0 20.5 0.5 3 %

Particulars

Inc. / (Dec.) over RERR 2009-10

Rs. in million

8.3.87. The petitioner has explained that expenditure under the sub-head “sundries”

comprises cost of miscellaneous expenses in connection with meetings of Board of

Directors and its sub-committees etc.

8.3.88. The Authority notes that the petitioner has incurred only Rs. 6.5 million under this

head during July- December 2009. This trend shows that actual expenditure during

FY 2009-10 will be less than Rs. 15 million.


52

8.3.89. Accordingly, the Authority in view of above determines the same at Rs. 15 million

for said year as against Rs. 20.5 million claimed by the petitioner. Therefore, the

total expenditure under the head “Other expenses” comes to Rs. 73 million as

against Rs. 78 million claimed by the petitioner.

xviii. Remaining Items of Transmission & Distribution Cost

8.3.90. The items of transmission and distribution cost, except those dealt with in

sub-paras ii to xvi i are projected by the petitioner at Rs. 1,038 million as against

Rs. 877 million according to RERR for FY 2009-10. The comparative analysis is

given below:

Table 35: Remaining Items of Transmission and Distribution Expenses

Rs. in million

FY 2008-09 FY 2009-10 FY 2010-11

Stationery, Telegram and Postage 73 73 117 44 60%Dispatch of gas bills 51 63 68 5 8%Traveling 139 139 159 20 15%Consultation for ISO 14001 & OHSAS 18000 1 3 3 (0) -12%Gas bills collection charges 239 267 287 20 7%Gathering charges of gas bills collection data 23 32 34 2 7%OGRA fee 86 110 174 63 57%Bank Charges 20 19 23 4 19%SNG training insititute 5 8 9 1 9%Sponsorship of chairs at University 3 5 5 (0) -7%Budget for UFG control related activities - 25 (25) Out Sourcing of call centre complaints management 9 8 15 8 101%Contribution to Inter State Gas System Limited 37 125 145 20 16%Subtotal Expenses 782 877 1,038 161 18%

Particulars

% FRR The Petition RERR

Increase / Decrease over

RERR

8.3.91. The Authority observes that the remaining items of T&D expense have been reasonably

projected by the petitioner and therefore, provisionally accepts the same, for the said year, at

Rs.1, 038 million.

xix. Transmission & Distribution Cost Determined by Authority

8.3.92. In view of the examination in para ii to xviii above, the Authority provisionally

determines operating cost for the said year at Rs. 12,164 million against Rs. 13,616

million claimed by the petitioner, as follows:


53

Table 36: Summary of T&D Cost Determined by the Authority Rs. in million

FY 2010-11 FY 2010-11

Human Resource Cost 6,185 6,049 Stores and Spares Consumed 574 511 Repair and Maintenance 943 812 Fuel and Power 202 196 Stationery, Telegram and Postage 117 117 Dispatch of gas bills 68 68 Rent, Rate, Electricity and Telephone 403 207 Traveling 159 159 Transport expenses 529 444 Insurance 179 166 Legal and Professional Services 46 38 Consultation for ISO 14001 & OHSAS 18000 3 3 Gas bills collection charges 287 287 Gathering charges of gas bills collection data 34 34 OGRA fee 174 174 Advertisement 94 74 Bank Charges 23 23 Uniforms & protective clothing's 14 10 Staff training and recruiting 12 6 Security expenses 289 232 SNG training insititute 9 9 Provision for doubtful debts 614 180 Sponsorship of chairs at University 5 5 5 Year special training programme 17 - Out Sourcing of call centre complaints management 15 15 Contribution to Inter State Gas System Limited 145 145 Other expenses 78 73 Subtotal Expenses 11,217 10,038

Allocated to fixed capital expenditures (1,403) (1,403) Net T&D Expenses before Gas Internally Consumed 9,814 8,635

Add: Gas internally consumed 3,802 3,529

Toal 13,616 12,164

Determined by OGRA The Petition

Particulars

8.4. Workers Profit Participation Fund (WPPF)

8.4.1. The petitioner has projected W.P.P.F at Rs. 124 million. However, due to

adjustments in the components of revenue requirements as discussed in Section 6

to 8 above, W.P.P.F is recalculated and provisionally determined at Rs. 116

million.

8.5. Cost of Reinstated Employees

8.5.1. The petitioner, during the hearing on 26th April 2010 at Peshawar, has requested

to allow Rs. 318 million, including Rs. 158 million arrears for FY 2009-10, on


54

account of salaries and wages of reinstated employees, over and above the HR

cost benchmark for the said year.

8.5.2. The petitioner has submitted that Ministry of Labor & Manpower had

communicated the decision of the Cabinet Sub-Committee, and advised it to

include the cost impact in revenue requirement. The petitioner has elaborated

that this cost is unavoidable keeping in view the compliance with Sacked

Employees (Re-instated) Ordinance, 2009 and Federal Government directives

thereof.

8.5.3. The Authority provisionally allows Rs. 318 million on account of reinstated

employees, subject to the condition that the petitioner submits comprehensive

plan to ensure judicious and effective utilization of additional workforce within

two months of issuance of this Order. “Right person for the right job” concept

must be adhered to ensure successful development and implementation of

utilization plan. The petitioner subsequently will be obligated to submit

quarterly progress reports to the Authority on an ongoing basis.

8.5.4. The Authority will re-assess the effectiveness of the workforce utilization plan

undertaken by the petitioner during the year at the time of FRR FY 2010-11, and

only prudent and well justified costs will be allowed. The Authority will expect

tangible and measurable improvements like decline in UFG, improved quality of

services and reduction in project related HR costs, as a consequence of the said

utilization plan.

9. Decision

9.1. In view of the justifications submitted and arguments advanced by the petitioner in

support of its petition, comments offered by the participants, scrutiny by the

Authority and detailed reasons recorded by the Authority in earlier paras, the

Authority recapitulates and decides to:

9.1.1. determine estimated addition in fixed assets at Rs. 12,947 million and

depreciation charge at Rs. 8,069 million;

9.1.2. determine the net average operating fixed assets (net of deferred credit) at

Rs. 48,761 million as against Rs. 50,999, million claimed by the petitioner for

the said year. Consequently, the return required by the petitioner on its assets

is determined at Rs. 8,533 million;


55

9.1.3. determine sales revenue at current prescribed price at Rs. 206,788 million;

9.1.4. determine cost of gas at Rs. 184,645 million .

9.1.5. determine the UFG cut at Rs. 5,574 million per benchmark;

9.1.6. determine T&D expenses at Rs. 8,635 million as against Rs. 9,814 million

claimed by the petitioner;

9.1.7. allows Rs. 318 million on account of salaries and wages in respect of sacked

employees;

9.1.8. determine GIC at Rs. 3,529 million as against Rs. 3,802 million claimed by the

petitioner;

9.1.9. to readjust WPPF to Rs. 116 million as against Rs. 124 million claimed by the

petitioner; and

9.2. In exercise of its powers under the Ordinance and NGT Rules, the estimated revenue

requirement for the said year is determined at Rs. 208,271 million as tabulated below :

Table 37: Components of ERR for FY 2010-11 as Determined by the Authority.

Rs. in million

Description Demanded by the Petitioner

Deternined by the Authority

Cost of gas 198,449 184,645 Transmission & Distribution costs and cost of reinstated employees 9,814 8,953 GIC 3,802 3,529 UFG (disallowance) / allowance (5,804) (5,574) UFG Deferral Account - - Depreciation 8,195 8,069 Return on Assets 8,923 8,533 Other Charges including WPPF 124 116

Net Operating Expenses 223,502 208,271

9.3. The provisionally allowed expenses are subject to adjustments on the basis of review

under section 8(2) of the Ordinance, and later after scrutiny of auditors initialed

accounts of the petitioner for the said year, provided these expenses are substantiated

with appropriate justification and analysis in the form acceptable to the Authority.

9.4. The petitioner’s net operating income is estimated at Rs. 211,138 million as against

revenue requirement of Rs. 208,271 million and thus there is a surplus of Rs. 2,867

million in its estimated revenue requirement for the said year. In order to adjust this


56

surplus, the Authority hereby makes, on provisional basis, downward revision of

2.55 % (Rs. 4.53 per MMBTU) in the petitioners’ average prescribed price for the said

year (Annexure-A).

9.5. The Authority considers it important and essential to impress upon the petitioner that

this provisional determination of estimated revenue requirement for the said year pre-

supposes that the petitioner would, in any case, faithfully and with responsibility

conduct its affairs in full compliance of the requirement of Rule17(1)(h) & Rule 17(1)(j)

of the NGT Rules, as reproduced below:

Rule 17(1)(h)

“tariffs should generally be determined taking into account a rate of return as

provided in the license, prudent operation and maintenance costs, depreciation,

government levies and, if applicable, financial charges and cost of natural gas;”

Rule 17(1)(j)

“only such capital expenditure should be included in the rate base as is

prudent, cost effective and economically efficient;”

9.6. Provisional prescribed prices for each category of consumers for the said year,

effective from July 1, 2010, are attached as Annexure-B. Decrease of 2.55 % (Rs. 4.53 per

MMBTU) in the petitioner’s average prescribed price has been adjusted in all

categories of consumers excluding fertilizer feed-stock & Liberty power which are

governed by separate policy. Comparison between existing sales prices and revised

prescribed prices is attached at Annexure-C. The prescribed prices determined by the

Authority on provisional basis shall be subject to adjustment upon receipt of FG

advice under Section 8(3) of the Ordinance, in respect of the sale price of gas for each

category of retail consumers provided that the overall decrease in the average

prescribed price remains unchanged so that the petitioner is able to achieve its total

revenue requirement in accordance with Section 8(6)(f) of the Ordinance.

10. Directions

10.1. In addition to the directions issued by the Authority in its previous determinations,

the petitioner is further directed to:-

10.1.1. submit a review petition to the Authority latest by October 15, 2010 for review

of its estimated revenue requirements as required under Section 8(2) of the

Ordinance, keeping in view the actual and anticipated changes in international


57

prices of crude and fuel oil during the period June to November, 2010 and the

trend of Rupee – Dollar exchange rate.

10.1.2. provide at the time of final revenue requirement, certificate by its statutory

auditors to the effect that HR cost used for comparison with HR benchmark

includes all regular, contractual and casual staff / labour.

10.1.3. undertake all necessary efforts at various forums for amicable settlement of the

Pakistan Railway’s claims.

10.1.4. prepare and submit, within one month from the issue of this order,

benchmarks and performance indicators for measuring the efficiency of IT

Automation Project, before and after the implementation.

10.1.5. submit comprehensive plan to ensure judicious and effective utilization of

additional workforce / re-instated employees within two months of issuance of

this Order. The petitioner subsequently will be obligated to submit quarterly

progress reports to the Authority on an ongoing basis.

11. Public Critique, Views, Concerns, Suggestions

11.1. The Authority has recorded critique, views, concerns and suggestions of the

interveners and participants in para 3 above, including policy issues falling within the

purview of the FG. The Authority considers it important to draw specific attention of

the FG to the same for due consideration while taking decisions about categorization

of consumers, tariff structure, subsidies, GDS and sale prices for various categories of

the consumers.

Dr. Ilyas Fazil Member (Oil)

Mir Kamal Marri Member (Finance)

Syed Hadi Hasnain Vice Chairman /Member (Gas)

Tauqir Sadiq (Chairman)

Islamabad, May 18, 2010.

Determination of Estimated Revenue Requirement of SNGPL Financial Year 2010-11 Under Section 8(1) of OGRA Ordinance, 2002 Annexure-A

58

A. Computation of Estimated Revenue Requirement for FY 2010-11

Rs. in Million

The Petition Adjustment Determined by

the Authority

Gas sales volume -MMCF 681,357 - 681,357 BBTU 633,446 - 633,446

930.00 - 930.00 "A" Net Operating revenues

Net sales at current prescribed price 206,788 - 206,788 Rental & service charges 1,050 - 1,050 Surcharge and interest on arrears 1,261 240 1,501 Amortization of deferred credit 1,281 - 1,281

225 293 518 210,605 533 211,138

"B" Less ExpensesCost of gas sold 198,449 (13,804) 184,645 UFG (disallowance) / alloawance (5,804) 105 (5,574) Transmission and distribution cost 9,814 (1,179) 8,635 Cost of reinstated employees claimed during proceedings - 318 318 Gas Internally Consumed 3,802 (273) 3,529 Depreciation 8,195 (126) 8,069 Workers Profit Participation Fund 124 (8) 116 Total expenses "B" 214,579 (14,967) 199,738

"C" (3,974) (15,500) 11,400

Return required on net assets:

62,208 - 62,208 71,542 (4,456) 67,086

133,750 129,294 Average fixed net assets (I) 66,875 64,647

14,526 - 14,526 17,245 - 17,245 31,771 31,771

Average net deferred credit (II) 15,886 15,886

"D" Average operating assets (I-II) 50,990 48,761

Return required on net assets 17.5% 17.5%"E" Amount of return required 8,923 (390) 8,533 "F" (12,897) (15,765) 2,867 "G" 20.36 (24.89) (4.53) "H" 223,502 (15,232) 208,271 "I" Average Prescribed Price (Rs/MMBTU) 346.81 (24.89) 321.92

Total income "A"

Calorific Value

Revenue requirement Projected Increase / (decrease) w.e.f. 1st July, 2010

Deferred credit at ending

Excess /(shortfall) over return required

Deferred credit at begining

Operating profit / (loss)(A - B)

Net assets at ending

Particulars

Other operating income

Net assets at begining

Determination of Estimated Revenue Requirement of SNGPL Financial Year 2010-11 Under Section 8(1) of OGRA Ordinance, 2002 Annexure-B

59

B. Provisional Prescribed Prices for FY 2010-11 w.e.f. July 1, 2010

W.e.f 01.01.2010W.e.f

01.07.2010

(i) Domestic Sector

(a) Upto 200 M3 per month(i) 95.01 92.59 (ii) 99.48 96.95 (iii) 181.10 176.49

(i) 99.48 96.95 (ii) 181.10 176.49 (iii) 383.42 373.65

(i) 181.10 176.49 (ii) 383.42 373.65 (iii) 498.80 486.09

(i) 383.42 373.65 (ii) 498.80 486.09 (iii) 648.43 631.91

(i) 498.80 486.09 (ii) 648.43 631.91 (iii) 860.15 838.23

b)

(i) 95.01 92.59 (ii) 99.48 96.95 (iii) 181.10 176.49

383.42 373.65

(ii) Commercial :

463.76 451.94

Over 200 – upto 300 M3 per month(c) Over 300 M3 – upto 400 M3 per month

0 –200 M3 per monthOver 200 – upto 300 M3 per monthOver 300 – upto 400 M3 per month

All off-takes at flat rate of

0 – 50 M3 per month

Mosques, churches, temples, madrassas, other Religious Places and Hostels attached thereto; Government and Semi-Government Offices and Hospitals, Government Guest Houses, Armed Forces Messes, Langars, Universities, Colleges, Schools and Private Educational institutions, Orphanages and other Charitable Institutions along with Hotels and Residential Colonies to whom gas is supplied through bulk meters.

Over 400 – upto 500 M3 per monthAll over 500 M3 per month

(e) Over 500 M3 per month

Over 50 – upto 100 M3 per month

a) Standalone meters


CATEGORY

All establishments registered as commercial units with local authorities or dealing in consumer items for direct commercial sale like cafes, bakries, milk shops, tea stalls, canteens, barber shops, laundries, places of entertainment like cinemas, clubs, theatres, and private offices,clinics, maternity homes, etc.

(a) Upto 200 M3 per month

(b) Over 200 M3 – upto 300 M3 per monthAll off-takes at flate rate of


0 –400 M3 per month

(d) Over 400 M3 – upto 500 M3 per month

Over 300 – upto 400 M3 per monthOver 400 – upto 500 M3 per month



(b) Over 200 M3 – upto 300 M3 per month0 –100 M3 per monthOver 100 – upto 200 M3 per month


60

(iii) Special Commercial (Roti Tandoors):

(a) Upto 200 M3 per month(i) 95.01 92.59 (ii) 99.48 96.95 (iii) 181.10 176.49

(i) 99.48 96.95 (ii) 181.10 176.49 (iii) 383.42 373.65

463.76 451.94

(iv) Ice Factories:463.76 451.94

(v) Industrial Consumers:

382.37 372.63

(vi) Compressed Natural Gas (CNG) Stations:503.64 490.81

(vii) Cement Factories:536.42 522.75

(viii)Fertilizer Factories:

(1) Pak American Fertilizer Company Limited, Daudkhel.

(a)

102.01 102.01

(b)

382.37 372.63

(2) Pak Arab Fertilizer Limited, Multan.

(a) For gas used as feed stock for fertilizer

102.01 102.01

(b)

382.37 372.63

All off-takes at flate rate of




For gas used as fuel for generation of electricity, steam and for usage of housing colonies.

For gas used as feed stock for fertilizer


All consumers engaged in the processing of industrial raw material into value added finished products irrespective of the volume of gas consumed including hotel industry but excluding such industries for which a separate rate has been prescribed.



(b) Over 200 M3 – upto 300 M3 per month

(c) Over 300 M3 per monthAll off-takes at flate rate of









61

(3)

(a) For gas used as feed stock for fertilizer.

102.01 102.01

(b)

382.37 372.63

(4)

(a)

102.01 102.01

(b)

382.37 372.63

(5) ENGRO Fertilizer Company Limited

(a)

58.49 58.91

(b)

382.37 372.63

(ix)

(a)

393.79 383.76

(b)

Commodity Charge393.79 383.76

390,000 390,000

(x)857.51 980.32

(xi) Captive Power :382.37 372.63

(xii) Independent Power Producers:332.36 323.89

Power Stations:

Dawood Hercules Chemicals Limited, Chichoki Malian, Sheikhupura District.

Pak-China Fertilizer Limited/Hazara Phosphate Plant Limited, Haripur.



For gas used as feed stock for fertilizer.

All off-takes at provisional flate rate of

Liberty Power Limited’s Gas Turbine Power Plant (Phase-1) at h k

WAPDA's Power Stations and other electricity utility companies excluding WAPDA's Natural Gas Turbine Power Station, Nishatabad, Faisalabad.

WAPDA's Natural Gas Turbine Power Station, Nishatabad, Faisalabad.


All off-takes at flate rate of Fixed charge (Rupees per month).







For gas used as feed stock for fertilizer




Determination of Estimated Revenue Requirement of SNGPL Financial Year 2010-11 Under Section 8(1) of OGRA Ordinance, 2002 Annexure-C

62

C. Comparison between Existing Sale Prices and Revised Prescribed Prices

DomesticFirst slab (upto 50 cubic metres per month). 95.01 92.59 2.42 Second slab (over 50 upto 100 cubic metres per month). 99.48 96.95 2.53 Third slab (over 100 upto 200 cubic metres per month). 181.10 176.49 4.61 Fourth slab (over 200 upto 300 cubic metres per month). 383.42 373.65 9.77 Fifth slab (over 300 upto 400 cubic metres per month). 498.80 486.09 12.71 Sixth Slab(over 400 upto 500 cubic meters per month) 648.43 631.91 16.52 Seventh Slab(over 500 cubic meters oper month) 860.15 838.23 21.92

Commercial 463.76 451.94 11.82

Special Commercial Consumers (Roti Tandoors)

First slab (upto 50 cubic metres per month). 95.01 92.59 2.42 Second slab (over 50 upto 100 cubic metres per month). 99.48 96.95 2.53 Third slab (over 100 upto 200 cubic metres per month). 181.10 176.49 4.61 Fourth slab (over 200 upto 300 cubic metres per month). 383.42 373.65 9.77 Fourth slab (over 200 upto 300 cubic metres per month). 463.76 451.94 11.82

General Industry 382.37 372.63 9.74

CNG Station 503.64 490.81 12.83

Cement 536.42 522.75 13.67

Power Stations 393.79 383.76 10.03

Captive Power 382.37 372.63 9.74

Independent Power Projects 332.36 323.89 8.47

Liberty Power 857.51 980.32 (122.81)

Fertilizer

Pak Arab Fertilizer LimitedFeed stock 102.01 102.01 - Fuel 382.37 372.63 9.74

Dawood Hercules Chemicals LimtedFeed stock 102.01 102.01 - Fuel 382.37 372.63 9.74

Pak AmericanFeed stock(New) 102.01 102.01 - Fuel 382.37 372.63 9.74

Pak China Fertilizer LimitedFeed stock 102.01 102.01 - Fuel 382.37 372.63 9.74

Hazara Phospate Plant, HaripurFeed Stock 102.01 102.01 - Fuel 382.37 372.63 9.74

ENGRO Fertilizer Company LimitedFeed Stock 58.49 58.91 (0.42) Fuel 382.37 372.63 9.74

Prescribed Prices w.e.f. 01.07.2010

Rs./ MMBTU

Differential (Gas Development

Surcharge)Category

Sale Prices w.e.f. 01.01.10

Determination of Estimated Revenue Requirement of SNGPL Financial Year 2010-11 Under Section 8(1) of OGRA Ordinance, 2002 Annexure –D

63

D. Computation of HR Cost Benchmark

DERR FY 2010-11 Million Rs

Description Calculated by the Petitioner

Calculated by OGRA

Total HR cost Projected 6,321 6,321 Less:IAS-19 (508) (508) HR cost 5,813 5,813 BASIS OF BENCHMARKT & D Network (km) 85,477 85,455 Total No. of consumers 3,909,092 3,909,092 Sale Volume (MMCF) 681,357 681,357 CPI 20.00% 20.00%

Per unit cost factor (T & D Network) (Rs.) (Base Year) - Rs/km 61,478 61,478 Per unit cost factor (consumer base) (Rs.) (Base Year) -Rs/Consumer 1,305 1,305

Per unit cost factor (Sale volume base) (Rs.) (Base Year) -Rs/MMCF 6,886 6,886 Indexation Factors Increase based on CPI 50% 50%Increase on account of increase in T & D Network 20% 20%Increase on account of increase in consumers 60% 60%Increase on account of sale volume 20% 20%

Increase based on 50% CPI 492 492 Increase on account of increase in T & D Network (20% weightage) (Rs. mil) 1,051 1,051 Increase on account of increase in consumers (60% weightage) (Rs. mil) 3,060 3,060

Increase on account of sale volume (20% weightage) (Rs. mil) 938 938

Benchmark HR Cost 5,541 5,541 *Excess/(saving) to the Licensee (50%) (Rs. in mil) 136 - Total benchmark H.R. Cost allowed 5,677 5,541 Add: IAS -19 Provision 508 508

Total HR Cost allowed including (IAS -19 Provision) 6,185 6,049 * Excess/(saving) will be shared at the time of FRR

section 8 (1) of the oil and gas regulatory authority...

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