City gas operators making windfall due to monopoly?
Cos Earn Even More Than Gas Producers
Are gas sellers making more than their fair share for CNG and PNG in the absence of competition in the market and differential regulatory frameworks? A look at the per unit realisation of two of the largest city gas distribution companies, Indraprastha Gas Ltd in Delhi and Mahanagar Gas Ltd in Mumbai, appears to suggest so.
According to a report by Kotak Institutional Equities, monopoly situation and differential regulatory frame works allows city gas distribution firms to earn more than gas producers such as state-run ONGC and Oil India Ltd, who have to sink billions of dollars in risk capital for discovering and developing fields. Kotak Equities is a division of institutional brokers Kotak Securities.
Profitability of IGL and MGL has gone up over the past few quarters as they have been able to retain the benefits of the decline in price of domestic gas and “earn quite high RoAE (return on average equity) as their business es are not regulated,“ the Kotak report said. Other industry analysts said while the regulator allows a return of 12% on investments made by city gas distribution networks, their earning ranges between 18-20%. In contrast, AGLSouthern Company of the US earns 11.68% and UK’s Centrica makes 12.9% on capital employed.
One of the main reasons for the high profitability of city gas distribution business is the monopoly situation. Both IGL and MGL do not have competition, nor do other firms where city gas projects are running. Norms allow market exclusivity for three years to a company that existed before the PNGRB Act came into being.In new projects, which are bid out, companies are given exclusivity for five years.