Public Consultation Document

(Ref: No. PNGRB/M(C)/17-Vol III dated 03.02.2016)

Subject: Final initial unit natural gas pipeline tariff under the

provisions of the Petroleum and Natural Gas

Regulatory Board (Determination of Natural Gas

Pipeline Tariff) Regulations, 2008.

Name of Entity: GAIL (India) Limited [GAIL]

Name of Pipeline: Dadri-Bawana-Nangal Natural Gas Pipeline Network

[2]

1. Regulatory Framework

1.1. In terms of Section 22 of the PNGRB Act, 2006, the Board is entrusted

with the responsibility of determining the natural gas pipeline tariff to be

charged by the entities laying, building, operating or expanding a natural

gas pipeline before the appointed day.

1.2. The methodology for determination of pipeline tariff has been specified in

the relevant provisions of the Petroleum and Natural Gas Regulatory Board

(Determination of Natural Gas Pipeline Tariff) Regulations, 2008

(hereinafter referred to as “Tariff Regulations”) notified on 20.11.2008.

Under the provisions of these regulations, PNGRB is to determine the

initial unit natural gas pipeline tariff on a provisional basis first and then

finalize the same considering the actual costs and data at the end of the

financial year on the basis of audited accounts. The transportation tariff is

determined using the Discounted Cash Flow (DCF) method using actual

and projected pipeline capex and opex costs (in line with provisions of

Tariff Regulations) over the entire economic life (25 years) of the pipeline

thus arriving at a single levelized transportation tariff. If the length of the

pipeline is more than 300 kms the recovery of the transportation tariff is

apportioned across such zones of 300 kms each resulting in zonal tariff

where the zonal tariff of a later zone is higher than that of an earlier zone.

2. Provisional Transportation Tariff Order

2.1. PNGRB issued the final terms and conditions of acceptance to Central

Government Authorization for Dadri-Bawana-Nangal Natural Gas Pipeline

Network (DBNPL) of GAIL vide communication dated 13.02.2011. The

[3]

provisional capacity and length as per the acceptance letter is 31

MMSCMD (including common carrier capacity of 7.75 MMSCMD) and

886 kms respectively.

2.2. PNGRB issued a provisional tariff order no. TO/07/2012 dated 12.07.2012

determining the provisional initial unit natural gas pipeline tariff under the

provisions of the Tariff Regulations for DBNPL of GAIL. (The same is

available on the PNGRB’s website.) The provisional transportation tariff as

proposed by GAIL and as determined by PNGRB are as follows:

Particulars

Provisional

Tariff proposed

by GAIL

(Rs. / MMBTU

on GCV basis)

Provisional Tariff

determined by

PNGRB

(Rs. / MMBTU on

GCV basis)

Levelized Provisional

Transportation Tariff 27.73 11.85

2.3. As stated in the final terms and conditions of acceptance to Central

Government Authorization issued by PNGRB, the total length of the

network is 886 kms. Of this, the length of the trunk line and spur line is 336

km and 550 km respectively. Since the length of the trunk line is more than

300kms, there are two zones in the network.

2.4. PNGRB issued tariff order no. TO/01/2013 dated 18.02.2013 determining

the zonal tariff apportionment of the provisional initial unit natural gas

pipeline tariff under the provisions of the Tariff Regulations for DBNPL of

GAIL. (The same is available on the PNGRB’s website.) Accordingly,

based on the methodology for calculating the zonal tariffs as specified in

[4]

the Tariff Regulations, the zonal apportionment of provisional tariff

proposed by GAIL and that approved by PNGRB is as below.

Particulars

Provisional Zonal

Tariff proposed by

GAIL

(Rs. / MMBTU on

GCV basis)

Provisional Zonal

Tariff approved by

PNGRB

(Rs. / MMBTU on

GCV basis)

Zone 1 11.84 11.84

Zone 2 11.86 11.86

3. Details of the Order of Appellate Tribunal for Electricity (APTEL)

3.1. GAIL had challenged PNGRB’s provisional tariff order in APTEL in

appeal no. 38 of 2014 on various aspects of computation of tariff. APTEL

in its order dated 29.05.2015 (in appeal no. 161/13 & batch) has held that

the provisional tariff already fixed shall continue to apply, subject to

adjustment, if any, in terms of the Regulations. APTEL directed PNGRB to

complete the process of determination of final tariff of DBNPL by

31.03.2016 and pass a speaking and reasoned order. APTEL also directed

PNGRB to consider the matter independently without being influenced by

the view already taken by it in the provisional tariff order. However, if after

independently considering the matter, PNGRB takes a view similar to the

one taken in the provisional tariff order, then this would not be held against

PNGRB.

3.2. GAIL was also directed by APTEL to make submissions including

challenges against the findings/observations/conclusions/calculations in the

provisional tariff orders. The last date to make these submissions in writing

[5]

before the Board was 30.07.2015. GAIL, vide its letters dated 27.07.2015

and 29.07.2015, has made common submissions for all 6 pipelines

networks whose provisional orders were challenged in APTEL. GAIL’s

submissions are placed as Annexure-1 and Annexure-2 and the relevant

issues are discussed under para 5 of this Public Consultation Document

(PCD).

3.3. GAIL had submitted partial tariff filing vide its letters dated 20.02.2015,

26.02.2015 and 30.04.2015. PNGRB was directed to inform GAIL about

any pending data and information required within 15 days from the date of

the order of APTEL. In conformity with the Order, PNGRB issued a letter

to GAIL dated 10.06.2015. GAIL submitted its response vide its letter

dated 08.07.2015. On scrutiny of the information submitted by GAIL, it

was observed that GAIL has not submitted the complete information as

some clarifications were required or some information was missing. Hence,

PNGRB vide its letter dated 07.09.2015 sought clarifications from GAIL.

In response, GAIL has submitted details vide its letter dated 18.09.2015.

GAIL in its letter has stated that it has provided the information sought by

PNGRB in its letter dated 29.06.2015, thereby ensuring compliance to the

directives of APTEL. It may be clarified to GAIL that PNGRB is only

seeking clarifications or asking GAIL to complete it submission and is not

asking GAIL for any additional information. GAIL in its letter dated

18.09.2015 has submitted additional CA certificates and some of these do

not reconcile with CA certificates already submitted by GAIL.

[6]

4. Details of final initial unit tariff filing submitted by GAIL

4.1. PNGRB reminded GAIL to submit/complete its tariff filing for finalization

of tariff vide communications dated 01.01.2015, 29.01.2015, 09.03.2015,

16.04.2015, 26.05.2015, 10.06.2015 and 07.09.2015. In response, GAIL

made submissions vide its various letters and emails mentioned hereafter.

In the first submission dated 20.02.2015, GAIL submitted the following

documents: Attachment 1 (f) to (j) of Schedule A of Tariff Regulations,

extract of minutes of Board Meeting, capex details and list of customers

alongwith tariff charged.

In the second submission dated 26.02.2015, GAIL submitted the following

documents: CA certificates for capex (from 2009-10 to 2013-14), CWIP

(from 2008-09 to 2013-14), net additions and to fixed assets (from 2008-09

to 2013-14) and operating expenditure (from 2010-11 to 2013-14) and trial

balances (from 2008-09 to 2013-14).

In the third submission dated 30.04.2015, GAIL submitted the tariff filing

(model in excel sheet), Attachment 1, 1(a) to (e) of Schedule A of Tariff

Regulations, list of supporting documents for future capex claimed,

revised normative assessment of costs and apportionment of tariff over the

two zones.

In the forth submission dated 08.07.2015 GAIL submitted the following

documents: CA certificates for net additions to fixed assets excluding IDC

(from 2008-09 to 2013-14) and CWIP excluding IDC (from 2008-09 to

2013-14), additional supporting documents and details of future capex, CA

certificate for unaccounted gas loss (quantity and value) from 2008-09 (4th

[7]

quarter) to 2014-15, details and value of last mile connectivity from 2011-

12 onwards and write-up on O&M expenses.

In the fifth submission dated 18.09.2015, GAIL has submitted the

following documents: CA certificate for - (a) common corporate assets and

expenses for 2014-15, (b) common corporate expenses from 2008-09 to

2013-14, (c) net additions to fixed assets and CWIP during 2014-15, (d)

Opex for 2014-15. GAIL has also submitted trial balance for 2014-15.

4.2. In its tariff filing (tariff model in excel sheet) GAIL has submitted the

following tariff.

Final Tariff submitted by GAIL Rs./MMBTU (GCV basis)

From 2009-10 to 2014-15 11.85

From 2015-16 to 2034-35 62.30

Particulars

Rs./MMBTU

(GCV basis)

From 2009-10 to 2014-15

Rs./MMBTU

(GCV basis)

From 2015-16 to 2034-35

Zone - 1 11.84 62.29

Zone - 2 11.86 62.35

5. Issues in the Final Tariff Filing submitted by GAIL

The various aspects of final tariff filing submitted by GAIL are as follows:

[8]

5.1. Economic Life of Pipeline

As per the provisions of final terms and conditions of acceptance of Central

Government authorization issued by PNGRB dated 13.02.2011 GAIL was

required to commission the natural gas pipeline project by January 2011.

GAIL has considered economic life of the pipeline from 06.01.2010 for a

period of 25 years.

5.2. Issue with Trial Balances

GAIL vide its letters dated 26.02.2015 and 18.09.2015 submitted the trial

balances from 2008-09 to 2013-14 and for 2014-15 respectively.

i. For 2008-09: Only one trial balance having BA code 3018 is

submitted.

ii. For 2009-10: Only one trial balance having no BA code is submitted.

iii. For 2010-11: Two trial balances having BA code 3018 and 2016 are

submitted. Further, some entries are not legible.

iv. For 2011-12: Two trial balances having BA code 3018 and 2016 are

submitted. Additionally, it may be noted that there are certain pages

missing in the trial balance having BA code 2016.

v. For 2012-13: Two trial balances having BA code 3018 and 3030 are

submitted.

vi. For 2013-14: Two trial balances having BA code 3018 and 3030 are

submitted.

vii. For 2014-15: GAIL submitted two trial balances. BA code is not

mentioned on the first trial balance. Second trial balance is having

[9]

BA code 3030 but it is for DBNPL and CJHPL. No basis of

bifurcation is mentioned. Further, some entries are not legible.

5.3. Capital Expenditure (Capex)

GAIL in its tariff submission has considered total capex outgo of Rs.

3584.16 crores from 2008-09 till the end of the economic life of the

pipeline in 2034-35. The head-wise breakup is as follows:

Head/Particulars Amount Rs.

in crore

a) Capex outgo including CWIP, Land & ROU from

2008-09 to 2014-15

2273.93

b) Future capex outgo projections from 2015-16 to

2034-35

1306.31

c) Common corporate assets from 2008-09 to 2014-

15

3.92

d) Future common corporate assets projections from

2015-16 to 2034-35

0

Total 3584.16

a) Actual capex outgo including CWIP, Land & ROU from 2008-09 to

2014-15:

GAIL, in its tariff filing, has claimed total capex outgo (excluding

common corporate assets) of Rs. 2273.93 crores. GAIL has submitted

CA certificates vide three letters discussed below:

i. First set of CA certificates dated 23.02.2015 submitted vide

GAIL’s letter dated 26.02.2015. This includes certificate of

[10]

capex from 2009-10 to 2013-14, CWIP from 2008-09 to 2013-

14 and net additions to fixed assets from 2008-09 to 2013-14.

ii. Second set of CA certificates dated 29.06.2015 submitted vide

GAIL’s letter dated 08.07.2015. GAIL re-submitted certificate

of CWIP from 2008-09 to 2013-14 and net additions to fixed

assets from 2008-09 to 2013-14. GAIL, in its letter stated that

IDC figures were inclusive in the CA certificates submitted

earlier and now the CA certificates are revised showing IDC

value separately. However, the CA certificates submitted

earlier also states that the figures are excluding IDC.

iii. Third set of CA certificates dated 12.08.2015 submitted vide

GAIL’s letter dated 18.09.2015. This includes CWIP and net

additions to fixed assets for 2014-15.

Year-wise breakup of capex claimed in tariff filing and that

certified in CA certificates submitted by GAIL is as follows:

[11]

(Amount Rs. in crores)

Year Tariff

Filing CA Certificate 1 CA Certificate 2

Fixed

Assets CWIP Total

Fixed

Assets CWIP

Total

IDC Total

2008-09 89.80

89.80

(Gross

Block)

89.80 93.97 0.05 94.02

2009-10 358.45

315.15

(Gross

Block)

43.30 358.45

315.15

(Gross

Block)*

35.16 3.83 354.14

2010-11 778.80 28.70 750.10 778.80 28.70 747.96 -1.73 774.93

2011-12 737.13 34.91 702.23 737.14 21.64 659.20 54.15 734.99

2012-13 223.78 1729.15 (1505.37) 223.78 1666.60 -1478.70 46.19 234.09

2013-14 69.15 90.87 (21.72) 69.15 90.87 0.74 -26.67 64.94

TOTAL 2257.11 2198.78 58.25 2257.03 2122.96 58.33 75.82 2257.11

*GAIL did not resubmit any certificate for this figure. Hence, figure is taken from the CA certificate submitted

earlier.

It may be noted that there are differences in the CA certified capex

figures submitted by GAIL in these two CA certificates. GAIL has not

submitted any reason or justification for the change in the CA certified

capex figures.

GAIL submitted following capex figure in the third CA certificate:

(Amount Rs. in crores)

Year Tariff

Filing

CA Certificate 3

Fixed

Assets

CWIP Total

2014-15 16.81 13.33 68.94 82.27

[12]

b) Future capex outgo projections from 2015-16 to 2034-35

GAIL, in its tariff filing, has claimed total actual capex outgo

(excluding common corporate assets) of Rs. 1306.31 crores.

Head wise future capex projections from 2015-16 onwards as per tariff

filing and as per GAIL’s letters dated 30.04.2015 and 08.07.2015 is as

follows:

Heads/Descrip

tion

Tariff Filing GAIL’s

letter dt.

30.04.2015

GAIL’s

letter dt.

08.07.2015

1. Project

Execution (PE)

53.35* 47.60** 48.60 48.60

2. O&M Capex 361.61* 166.75** 166.75 167.65

3. PD

Department

(PD)

891.35* 627.51** 609.40 607.71

1306.31 841.86 824.75 823.96

* Escalated at 5.87% p.a. from 2014-15 onwards, as claimed in

tariff filing

**Un-escalated figures

1. Project Execution (PE) Capex

Under PE head, GAIL has claimed a total future capex of Rs. 53.35

crores in the tariff filing. The amounts claimed in the tariff filing

has been escalated starting from the year 2014-15 and onwards at an

inflation rate of 5.87% per annum.

GAIL in its letter dated 08.07.2015 has claimed total PE capex of

Rs. 48.60 crores. This is comprised of LMC in Haridwar Region

[13]

(Rs. 1 crore) which GAIL has considered in the year 2014-15 and

LMC in NCR Region (Rs. 6 crores) and LMC for Rajpura

Consumers (Rs. 41.60 crores). In the tariff filing, GAIL has

considered LMC in NCR Region (Rs. 6 crores) and LMC for

Rajpura Consumers (Rs. 41.60 crores) after escalating it by 5.87%

per annum resulting in a total amount of Rs. 53.35 crores.

2. O&M Capex

Under O&M head, GAIL has claimed a total future capex of Rs.

361.61 crores.

GAIL in its letter dated 30.04.2015 claimed Rs. 166.75 crores as

O&M capex which it revised to Rs. 167.75 crores vide its letter

dated 08.07.2015. GAIL has stated that this O&M capex amount is

suitably inflated in the model using appropriate inflation rate.

3. PD Capex

Under PD head, GAIL has claimed a total future capex of Rs.

891.35 crores. The projections are for future last mile connectivities

(LMC) in the pipeline. The LMC amount claimed in the tariff filing

is claimed under two heads: (i) PD future capex with IDC

(amounting to Rs. 423.25 crores) and (ii) PD future capex without

IDC but after inflation (amounting to Rs. 468.10 crores). GAIL has

considered inflation rate at a rate of 5.87% p.a. starting from the

year 2014-15 and onwards.

i. ‘PD future capex with IDC’ (amounting to Rs. 423.25 crores)

– This amount includes IDC of Rs. 32.99 crores from 2015-16

[14]

to 2017-18 and it also considers escalation at 5.87% p.a. from

2014-15 and onwards. However, GAIL in its submissions vide

letters dated 30.04.2015 and 08.07.2015 has not considered

IDC value in these figures. Hence the total PD figures do not

reconcile.

ii. ‘PD future capex without IDC but after inflation’ (amounting

to Rs. 468.10 crores) includes Rs. 105.94 crores in 2015-16

and Rs. 10 crores per annum from 2016-17 to 2034-35 (All

these figures are escalated by 5.87% per annum from 2014-15

and onwards). To substantiate this claim, GAIL vide it letter

dated 08.07.2015 has submitted CA certificate for addition to

last mile connectivity from 2011-12 to 2014-15 stating that the

total capitalization cost during this period is Rs. 427.59 crore.

Hence GAIL has stated that it has incurred average

expenditure of Rs. 106.90 crores per year. Hence, GAIL has

stated that presently minimal future capex of Rs. 10 crores /

year has been considered to provide LMC to new customers

enroute DBNPL network from 2015-16 onwards which is

much lower than the actual yearly capital investment done

during the last four years.

GAIL’s comments on future capex is mentioned as point 4 from page

(32) to (35) of annexure A of GAIL’s letter dated 27.07.2015 annexed

to this PCD.

[15]

c) Actual Common Corporate Assets from 2008-09 to 2014-15

In the tariff filing, GAIL has claimed actual common corporate assets

from 2008-09 to 2014-15 of Rs. 3.92 crores. GAIL has submitted

first CA certificate dated 18.06.2015 vide letter dated 23.06.2015

providing allocation of assets from 2009-10 to 2013-14. Subsequently

GAIL submitted second CA certificate dated 16.09.2015 vide its letter

dated 18.09.2015 providing allocation of assets in 2014-15.Year-wise

gross common corporate assets allocated to DBNPL as given in the

tariff filing and that certified in CA certificates submitted by GAIL is

as follows:

(Amount Rs. in crores)

Year Tariff Filing CA Certificate 1

dt 18.06.2015

2009-10 0 0

2010-11 0 0

2011-12 0.25 0.23

2012-13 1.33 1.30

2013-14 2.34 3.59

(Amount Rs. in crores)

Year Tariff Filing CA Certificate 2

dt 16.09.2015

2014-15 0 7.30

[16]

With regards to mechanism for allocation of common corporate assets

GAIL has stated that - GAIL has 8 offices/work centers and 11 zonal

marketing offices providing services to the whole company. There are

many capital expenditure and operating expenditure incurred to build,

maintain and operate these offices. GAIL has calculated the total

capex and opex of these offices and bifurcated them among all

business segments of the company on the basis of total gross block of

respective business segments. Capex and opex allocated to business

segment – NG Transmission is then allocated to all the pipelines

including dedicated pipelines on the basis of actual throughput in that

particular pipeline system in the corresponding previous year.

PNGRB in its letter dated 07.09.2015 sought clarifications on the

allocation of corporate common assets that GAIL had submitted on

23.06.2015. It was also observed that GAIL had included marketing

related assets in the common corporate assets and has allocated it to

NG transmission business which is not in line with PNGRB

Regulations. GAIL was asked: (a) rationale of allocation of the assets

to all business segments on the basis of gross block, (b) bifurcation of

these assets (excluding all marketing and finance related assets) into

direct and indirect assets certified by CA, (c) reconciliation of indirect

assets (excluding all marketing and finance related assets) with un-

allocable assets appearing in the business segment information in

annual report of GAIL certified by CA.

GAIL in its response to the clarifications sought by PNGRB reiterated

the same rationale allocation for common corporate assets and has not

[17]

submitted the bifurcation into direct and indirect assets and

reconciliation of indirect assets with un-allocable assets. GAIL also

stated that as corporate marketing department is providing services to

Gas Transmission and all other business segments also, therefore all

common assets including marketing related expenses are allocated to

all business segments.

d) Future common corporate assets projections from 2015-16 to 2034-35

GAIL, in its tariff filing, has not claimed any future common

corporate assets from 2015-16 to 2034-35.

5.4. Operating Expenses (Opex)

Head-wise breakup of opex considered by GAIL in its tariff submission for

the entire economic life of the pipeline as follows:

(Amount Rs. in crores)

Particulars

a) Opex outgo (2009-10 to 2014-15) 123.53

b) Future opex projections (2015-16 to 2034-35) 3050.24

c) Common corporate expenses (2009-10 to 2014-15) 7.55

d) Future common corporate expenses (2015-16 to 2034-35) 3.91

TOTAL 3185.23

a) Actual Opex Outgo from 2009-10 to 2014-15

In its tariff filing, GAIL has claimed opex of Rs. 123.53 crores from

2009-10 to 2014-15. Year-wise breakup of opex claimed in tariff

filing (excluding common corporate expenses) and that certified in CA

certificate submitted by GAIL is as follows:

[18]

(Amount Rs. in crores)

Year Tariff Filing CA Certificate

2009-10 Nil

2010-11 Nil Nil

2011-12 0.15 0.15

2012-13 0.92 0.92

2013-14 4.65 4.65*

2014-15 117.81** 3.81

TOTAL 123.53 9.53

* Includes Interest Apportionment of Rs. 2.78 cr

** This is projected figure in the tariff filing

The following points are observed:

i. GAIL in its letter dated 30.04.2015 has stated that as the

pipeline was commissioned on 06.01.2010 and opex has been

allocated based on last year volume flow, therefore no opex

for the period from 01.01.2010 to 31.03.2010 has been

allocated.

ii. GAIL has not netted off miscellaneous income from operating

expenses in tariff filling as well as in CA certificate.

iii. Further, the total opex figures for DBNPL from 2008-09 to

2013-14 certified in the CA certificate could not be reconciled

with the trial balances of GAIL due to the discrepancies

mentioned in para 5.2 above.

[19]

GAIL’s comments on netting off misc. income is mentioned as point 7

on page (37) of annexure A of GAIL’s letter dated 27.07.2015

annexed to this PCD

b) Future opex projections from 2015-16 to 2034-35

In its tariff filing, GAIL has claimed a future capex of Rs. 3050.24

crores from 2015-16 to 2034-35. This amount includes:

i. O&M escalated future opex of Rs. 384.38 crores

ii. PE future opex of Rs. 54.24 crores

iii. PD future opex of Rs. 305.15 crores

iv. Other opex of Rs. 2306.47 crores

GAIL has considered annual escalation rate of 5.87% p.a. from 2014-

15 onwards and has considered 280 operating days in the year 2034-

35.

GAIL’s comments on inflation rate is mentioned as point 3 from page

(31) to (32) of annexure A of GAIL’s letter dated 27.07.2015 annexed

to this PCD.

GAIL’s comments on future opex is mentioned as point 4 from page

(32) to (35) of annexure A of GAIL’s letter dated 27.07.2015 annexed

to this PCD.

c) Actual common corporate expenses from 2009-10 to 2014-15

[20]

Actual expenses claimed by GAIL during this period are Rs. 7.55

crores. Year-wise breakup of expenses claimed in tariff filing and that

certified in CA certificates submitted by GAIL is tabulated in table

below. GAIL has submitted two CA certificates on the bifurcation of

common corporate expenses amongst all natural gas pipelines.

However the figures in these two CA certificates do not reconcile.

(Amount Rs. in crores)

Year Tariff Filing

CA Certificate

(submitted on

23.06.2015)

CA Certificate

(submitted on

18.09.2015)

2011-12 0.27 0.26 0.28

2012-13 2.00 1.95 2.83

2013-14 5.18 5.06 5.18

TOTAL 7.55 7.27 8.29

(Amount Rs. in crores)

Year Tariff Filing

CA Certificate

(submitted on

23.06.2015)

CA Certificate

(submitted on

18.09.2015)

2014-15 0.10* Not submitted 10.17

* Projected figure as considered by GAIL in its tariff model

Rationale for allocation of the actual expenses: With regards to

mechanism for allocation of common corporate expenses GAIL has

stated that it has 8 offices/work centres and 11 zonal marketing offices

providing services to the whole company. There are many capital

[21]

expenditure and operating expenditure incurred to build, maintain and

operate these offices. GAIL has calculated the total capex and opex of

these offices and bifurcated them among all business segments of the

company on the basis of total gross block of respective business

segments. Capex and opex allocated to business segment – NG

Transmission is then allocated to all the pipelines including dedicated

pipelines on the basis of actual throughput in that particular pipeline

system in the corresponding previous year.

PNGRB in its letter dated 07.09.2015 sought clarifications on the

allocation of corporate common expenses that GAIL had submitted on

23.06.2015. It was also observed that GAIL had included marketing

related expenses in the common corporate expenditure and has

allocated it to NG transmission business which is not in line with

PNGRB Regulations. GAIL was asked: (a) rationale of allocation of

the expenses to all business segments on the basis of gross block, (b)

bifurcation of these expenses (excluding all marketing and finance

related expenses) into direct and indirect expenses certified by CA, (c)

reconciliation of indirect expenses (excluding all marketing and

finance related expenses) with un-allocable expenses appearing in the

business segment information in annual report of GAIL certified by

CA.

GAIL in its response to the clarifications sought by PNGRB reiterated

the same rationale allocation for common corporate expenses and has

not submitted the bifurcation into direct and indirect expenses and

reconciliation of indirect expenses with un-allocable expenses. GAIL

[22]

also stated that as corporate marketing department is providing

services to Gas Transmission and all other business segments also,

therefore all common expenses including marketing related expenses

are allocated to all business segments.

d) Future common corporate expenses from 2015-16 to 2034-35

In addition to the above, GAIL has also claimed future common

corporate expenses of Rs. 3.91 crores. Expenses claimed in each year

are calculated by considering 2.5% of the sum of total capex outgo

from 2008-09 to that respective year. Each year’s figure is then

escalated by 5.87% annually, starting from 2014-15 onwards. GAIL

has considered 280 operating days in the year 2034-35.

5.5. Unaccounted Gas

In addition to the opex, GAIL has considered 0.3% of the throughput as

unaccounted gas loss, as a cost to be recovered through the transportation

tariff. GAIL, in its tariff filing, has claimed a total unaccounted gas loss of

Rs. 2492.06 crores from 2008-09 to 2034-35.

Further, PNGRB vide its letters dated 26.05.2015 and 10.06.2015 had

asked GAIL to provide CA certificate for unaccounted gas data in

MMSCM and unaccounted gas expenditure from 2008-09 onwards as

appearing in the books of accounts for both sub-networks of DBNPL.

GAIL vide its letter dated 08.07.2015 has submitted a CA certificate on

unaccounted gas loss from 2008-09 to 2014-15 as appearing in the audited

books of accounts of GAIL. This is tabulated below along with figures in

tariff filing for the same period.

[23]

(Amount Rs. in crores)

Year Tariff Filing CA Certificate

2008-09 0.00 NIL

2009-10 0.85 NIL

2010-11 7.08 NIL

2011-12 14.14 0.28

2012-13 34.82 2.74

2013-14 49.69 2.43

2014-15 51.80 4.83

TOTAL 158.37 10.29

In addition to the figures mentioned in the table above, GAIL has claimed

projected future unaccounted gas of Rs. 2333.69 crores from 2015-16 to

2034-35.

GAIL’s comments on unaccounted gas loss is mentioned as point 2 from

page (29) to (31) of annexure A of GAIL’s letter dated 27.07.2015 annexed

to this PCD.

5.6. Volume Divisor

As per the final terms and conditions of acceptance to Central Government

Authorization issued by PNGRB the total capacity is 31 MMSCMD

(including common carrier capacity of 7.75 MMSCMD).

Year-wise capacity considered by GAIL in its tariff submission is as

follows:

[24]

(In MMSCMD)

Year Capacity

2009-10 2.89

2010-11 3.01

2011-12 4.83

2012-13 8.59

2013-14 11.57

2014-15 12.00

2015-16 12.89

2016-17 13.77

2017-18 12.03

2018-19 onwards 12.07

GAIL’s comment on volume divisor is mentioned as point 2 from page

(19) to (28) of annexure A of GAIL’s letter dated 27.07.2015 annexed to

this PCD.

5.7. Working Capital

Working capital is calculated as sum of 30 days of opex (excluding

depreciation) and 18 days of revenue (tariff receivables), in conformity

with the Tariff Regulations. GAIL, in its tariff submission, has considered

total working capital of Rs. 71.41 crores for DBNPL.

[25]

5.8. Number of Working Days

As per the Clause 14(3) of the Access Code Regulations, the planned

maintenance period shall not exceed 10 days in a year. On this basis, there

would be 355 working days for a pipeline in one financial year. GAIL has

considered 85 operating days for the year 2009-10, 345 operating days for

all years from 2010-11to 2033-34 and 280 operating days in 2034-35.

GAIL’s comment on number of working days in a year is mentioned as

point 5 from page (35) to (36) of annexure A of GAIL’s letter dated

27.07.2015 annexed to this PCD.

5.9. Line Pack

Line pack is the value of gas which always remains in the pipeline and as

per regulations it is to be considered as cash outflow in the initial year and

to be considered as cash inflow in the last year of the economic life of the

pipeline.

GAIL, in its tariff model, has considered line pack of Rs. 9.20 crores in

2009-10 (phase 1) and Rs. 47.25 crores in 2012-13 (phase 2).

5.10. Terminal Value

Terminal Value is the sum of the residual value of the assets at the end of

the economic life, working capital and line pack. It is considered as cash

inflow at the end of economic life of the pipeline.

The terminal value submitted by GAIL in its tariff filing is Rs. 1729.64

crores as on 31.03.2035.

[26]

5.11. Return on Capital Employed

GAIL has computed the annual rate of return using a rate of return of 12%

and further grossing this up with the rates of corporate income tax

applicable to each year. For this purpose, GAIL has considered year-wise

income tax rates for both sub-networks as follows:

Year FY 08-

09

FY 09-

10

FY 10-

11

FY 11-

12

FY 12-

13

FY 13-14

and

beyond

Income

Tax

Rate

33.99% 33.99% 33.22% 32.45% 32.45% 33.99%

So in order to arrive at a post tax rate of return of 12% for each year of the

pipeline project, this translates to an allowable pre-tax rate of return, as

claimed in the tariff filing, as follows:

Year FY 08-

09

FY 09-

10

FY 10-

11

FY 11-

12

FY 12-

13

FY 13-14

and

beyond

Rate of

return 18.18% 18.18% 17.97% 17.76% 17.76% 18.18%

Clause 2 of Schedule A of the Tariff Regulations mandates that natural gas

pipeline tariff shall be calculated based on the DCF methodology after

considering the reasonable rate of return (i.e. “twelve percent post tax” as

per clause 3 to Schedule A) to be the projects internal rate of return.

[27]

5.12. Zonal Apportionment

As discussed in para 2.3 above, DBNPL has two zones. Further, as stated

by GAIL vide its letter dated 30.04.2015, increment of zone 2 tariff over

zone 1 tariff is 0.1%.

5.13. Other Issues

In addition to comments on some of the issues stated above, GAIL in its

letters dated 27.07.2015 and 29.07.2015 has provided comments on the

issues:

(a) Interest During Construction - mentioned as point 6 on page (36)

of annexure A of GAIL’s letter dated 27.07.2015 annexed to this

PCD.

(b) Retrospective Implementation of Tariff – mentioned as point 8

from page (37) to (38) of annexure A of GAIL’s letter dated

27.07.2015 annexed to this PCD.

(c) Calculation and applicability of Tariff from date of notification of

pipeline – mentioned as point 9 of annexure A of GAIL’s letter

dated 29.07.2015 annexed to this PCD.

6. Views of stakeholders sought

6.1. Determination of the final initial unit natural gas pipeline tariff is a time

bound exercise. PNGRB solicits the views in writing of stakeholders on

GAIL’s tariff filing for the Dadri-Bawana-Nangal Natural Gas Pipeline

[28]

Network within 21 days of the issue of this document at the following

address:

Secretary,

Petroleum and Natural Gas Regulatory Board,

1st Floor, World Trade Centre,

Babar Road, New Delhi 110001.

6.2. On the expiry of the period provided for stakeholder comments, the Board

will hold an Open House to hear all the stakeholders on 25.02.2016 at 1500

hrs at PNGRB office. Further process will be followed as per APTEL’s

Order in appeal no. 161 of 2013 & batch dated 29.05.2015.

(Upamanyu Chatterjee)

Secretary

For and on behalf of the Board