Ngb Ppt [Final]

8/3/2019 Ngb Ppt [Final]

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Transportation Tariffs for

Natural Gas Pipelines

Natural Gas Business

ByUdit Agarwal(M-10-33), Rajat Gupta(M-10-25), Venu Vijay(M-10-35), Swarbhanu Handique(M-10-32)


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Factors affecting NG Pipeline Tariff

Determination

Large upfront investments.

Long gestation period.

Risk of low utilization.

Relative economics of alternate fuels.

Constitutes upto 25% of the end price of the gas.


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Cost Plus approach

Tariff is determined on the basis of:

Capex investment

Opex investment

Taxation

Return on capital

Normative Parameters

Best for developing Gas Markets.


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Indexation

Tariff is fixed on the basis of pre-set performance target.

Tariff rate is allowed to be updated.

Updation depends on achievement of performance

targets.

Adopted by UK and many EU countries.

Not suitable for developing Gas markets.


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Market based rate setting

Tariff is fixed on the basis of market based rates.

Gas market should have enough competition.

Adopted by markets having developed pipeline

infrastructure.

Approved basis for setting tariff in USA.


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NG pipeline tariff in India

Two methods are prevalent in India for determining NG

tariff:

Zonal-Postalized System.

Postalized System


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Zonal Postalized Tariff

Zones of length 300 km & width of 50 kms or 10% of pipelinelength(whichever is lesser) each

Same zone pay the same tariffs

Entity to supply gas to all techno feasible customers in the zone.

300 KM 300 KM 300 KM

Zone 1 Zone 3Zone 2

50KM

50KM


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Example

ParticularsEWPL (East west

pipeline of RGTIL)HVJ-GREP-DVP

Zone 1 (closest to gassource)

15 20

Zone 2 42 22

Zone 3 54 25

Zone 4 59 28

Zone 5 (farthest from

gas source)61 na

Zonal tariffing : An illustration (rates in Rsper mmbtu)

Source :: http://www.equitymaster.com/detail.asp?date=04/19/2011&story=4&title=Zonal-tariff-

Blockage-in-the--gas-pipeline


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Bidding criteria

Lowness of PV oftariff bid for each year(70% wt)

tariff to be bid zone-wise (TZn >= TZn-1) with

40% weight for TZ1

20% weight for %age increase over TZ1

10% weight for %age increase over TZ2

Highness ofPV of natural gas volumes (in

MMSCMD) proposed to be transported(30% weightage)


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An Illustration

Tariff Zone Tariff

First Tariff Zone Tariff bid for the first tariff Zone for first year

Second Tariff Zone Tariff bid for the first tariff Zone for first year X [1 +

(PF2/100)]

Third Tariff Zone Tariff bid for the first tariff Zone for first year X [1 +

(PF2/100) + (PF2/100) X (PS2/100)]

Fourth Tariff Zone Tariff bid for the first tariff Zone for first year X [1 +

(PF2/100) + (PF2/100) X (PS2/100) + (PF2/100) X(PS2/100)^2]

PF2 - % increase bid for Zone 2

PS2 - % increase bid for Zone 3


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Zonal Postalized system

Merits:

To balance the perspectives of the entities Incentive for the entities

Ensure transparent bidding process


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Zonal Postalized system

Demerits:

Imbalance in economic growth.

Industries that are located far from gas sourcesbecomes uncompetitive

Unfair penalty on retail consumers located far fromthe gas source


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Complex issue

0.50 0.53 0.55 0.58 0.61 0.64 0.67 0.70

0.61 0.58 0.55 0.53 0.50 0.53 0.55 0.58

Z1 Z4Z2 Z5Z3 Z6 Z7 Z8

Z4Z2 Z3Z2 Z1Z4 Z3Z5

3.00Gas A

4.20

5.20

Gas B

5.90

3.70

5.78

Tariff determination in intersection of pipeline


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Postalized tariff system

Example: HVJ Pipeline

Based on Discounted Cash flow (DCF) methodology .

The rate of return on capital employed shall be the rate of

return on capital employed equal to 12% post-tax.

Reasonable rate of return on the total capital employed todetermine the return on capital employed in the project over

its economic life.

Total capital employed shall be equal to the gross fixed assets

in the project less accumulated depreciation plus normativeworking capital (equal to thirty days of operating costs

excluding depreciation and eighteen days natural gas pipeline

tariff receivables).


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The volumes of natural gas is considered as divisor inthe determination of the unit natural gas pipeline tariff

over the economic life of the project.

Year of natural gas pipeline

operations

Percentage Utilization

First 60%

Second 70%

Third 80%

Fourth 90%

Fifth 100%


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Merits:

Ideal for Attracting New pipeline investments in developing

NG markets.

Return rate being risk related is a fair way of compensatingcapital investment.

Simple to operate.

Perceived balanced economic development.

Uniform tariff policy can easily work for gas transmission

pipeline business where capital cost rather than the operating

expenditure holds the key.


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De Merits:

Multiple inefficiencies in the form of cross-subsidies.

Uniform tariffs, if taken a closer look at, are same as Freight

equalization policy adopted in 1948 by GOI.Factories were set up all along the ports or around big cities

except Bihar ( one of the richest in mineral resources) . The

policy simply destroyed Bihar's huge competitive advantage of

holding minerals. Significant deviations in estimating cost.(example: HVJ

Pipeline)


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HVJ Pipeline Case

Government fixed HVJ transportation tariff at Rs 1150/tcm

based on the recommendation of Sankar Committee on

Natural Gas Pricing(December 1996).

When reworked, transportation tariff of natural gas worksout to Rs 679/tcm.(In 2004).

Significant deviations due to changes in capital investment,

debt-equity ratio, cost of capital, and transportation volume.


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Analysis

Zonal Postalized seems to be a better option.

Allows freedom to the bidding entity to bid tariff based on

its real cost of capital.

Demand-Supply and Market Dynamics of end-produce shall

take care of (any) tariff-based advantage that is likely to

accrue to any natural gas consumer in zones located near to

the source of natural gas.

Why should consumers of a natural gas-rich state subsidize

consumers in other states L Mansingh.


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Recommendations

Each zone to be given proportionate weightage as per the formula:

S = n/2[2a + (n-1)d]

S = 70%(Total Weightage), a= Farthest Zone, n= no. of zones, d=

6%( increase in tariff in subsequent zone)

Example: Let no. of Zones = 5, d = 6%, then a= 2%

TZ1 = 26%, TZ2 = 20%, TZ3 = 14%, TZ4 = 8%, TZ5 = 2%.

SD ( ) of PV across the five zones should not be zero. Bidders are

not allowed to keep same tariff across all the five zones.

Final Calculation = K* Composite Score *

When arranged in ascending order, the bidder placed in the median

will win.

In case of even number of bidders, the one with lower wins.


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Contributions:

Udit Agarwal(M-10-33)- Introduction and various methodologies

of tariff determination.

Rajat Gupta(M-10-25)- Introduction to zonal postalized &

Postalized tariff

Venu Vijay(M-10-35)- Rationale, Merits, and De-merits of zonal

postalized tariff.

Swarbhanu Handique(M-10-32)- Postalized tariff rationale,

merits, demerits. Analysis of the tariff recovery basis on the

development of gas markets in India, and Recommendations

(Conclusions).


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References:

Energy Security Insights(Volume 4, Issue 2, April-June 2009).

Infralines paper on Transportation Tariff of HVJ and Dahej-

Vijaipur Pipeline.

Provisional gas transmission tariff for Reliance, GAIL networks

approved (Hindu Business Line April 20, 2010).

GAIL to benefit from PNGRB tariff revision(The Financial

Express October 28, 2011)

PNGRB Regulations GSR340(E),GSR594(E), GSR480(E),

GSR38(E), GSR769(E), GSR802(E)

PNGRB Regulations GSR807(E), GSR986(E).


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Q & A


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