PROPOSED TARIFF REGIME

A. Cost of gas (wellhead gas prices)

(i) The cost of gas shall be determined in accordance with the gas price

agreements executed between the Federal Government and the gas producers.

The cost of gas for the two companies will be computed as “weighted average

cost” in accordance with the agreement signed between them under

Government’s policy guidelines.

(ii) The cost of imported gas (pipe gas or LNG) shall also be treated as the

wellhead price for the purpose of calculating the “weighted average cost” of

gas for the two utilities provided the purchase price of imported gas in any

form is decided by the Federal Government.

B. Rate of Return

(i) The utilities shall receive a variable rate of return on the value of their net

fixed assets in operation.

(ii) The rate of return on operating assets shall be indexed to Karachi Inter Bank

Offer Rate for one year (KIBOR) plus 8% to provide a predictable return to

shareholders thereby reducing the regulatory risks.

(iii) For the purpose of determination of estimated revenue requirements for a

financial year KIBOR shall be taken on the basis of average rate for relevant

financial year.

C. Asset valuation

(i) The fixed assets in operation shall be calculated as one half of the sum of the

value of fixed assets in operation at the beginning and at the end of the fiscal year

less the amount of accumulated depreciation as valued at their historical cost

subject to the condition that any asset which is commissioned after 31st March of

the relevant financial year shall not be treated as operational for this purpose.

(ii) Only such capital expenditure shall be included in the asset base for the purpose

of rate of return, as is prudent, cost effective and economically efficient.

(iii) The utilities shall not obtain any loan from the consumers. However, in

accordance with Rule 20(xxii) of the Natural Gas Licensing Rules, 2002, they

may agree with the consumers for cost sharing of an asset for provision of service.

(iv) All assets created through the consumers’ contribution and government grants

shall be allowed a 3% return on their depreciated value.

(v) The KIBOR based portion of the rate of return shall be reduced pro rata in

accordance with the interest rates on any soft term loan obtained by the

companies from the Federal Government or any provincial government. Such

assets shall be separately maintained in the books of accounts for the purpose of

rate of return.

(vi) All materials of standard specification shall be procured by the utilities in a

transparent manner on competitive basis. The Authority may require the licensee

to provide statutory auditors’ certificate to this effect for any specific items of

materials.

D. Depreciation

(ii) Depreciation shall be calculated on straight line basis for different assets at the

following rates:

(i) Transmission pipelines and compressors 4%

(ii) Distribution pipelines 5%

(iii) All other assets as per existing practice

(iii) Depreciation shall be allowed on half yearly basis in the year of addition.

E. Operating revenues

(i) All revenues generated directly or indirectly from carrying out of the licensed

regulatory activities including income from outside contracts but excluding

late payment surcharge on arrears of gas bills and financial income from bank

deposits shall be treated as operating revenues.

F. Operating Expenses

(i) All prudently incurred expenses on the operation of the licensed regulated

activities excluding provision for doubtful debts, corporate income tax and

financial charges on loans shall be treated as operating expenses. For the purpose

of calculating the operating expenditure, the following benchmarks/ targets shall

be used:

Human Resources Costs

a. Human Resource Costs will be allowed as per benchmark in place since

many years. Currently, it is set on the basis of actual cost FY 2007-08,

subject to the following indexation:

i. by 50% of officially notified CPI. At the time of estimation, the

previous year’s CPI shall used. However, at the time of

actualization, CPI for that particular year shall be used;

ii. by 60% of the incremental number of consumers;

iii. by 20% of incremental of transmission/ distribution network;

iv. by 20% of the incremental sales volume;

v. IAS 19 cost will be added back into the results.

b. The saving or excess vis-à-vis HR cost benchmark will be shared

equally between the petitioner and the consumers through adjustment at

the time of determination of final revenue requirement. If the actual HR

cost of the petitioner is higher than the benchmark HR cost, 50% of the

excess amount will be adjusted in the revenue requirement and balance

50% shall be absorbed by the licensee from its own profits. Conversely,

if the actual HR cost is less than the benchmark HR cost, 50% of the

savings shall be retained by the petitioner and the balance 50% will be

adjusted in the revenue requirement.

Unaccounted for Gas Losses (UFG)

(ii) In compliance with the National Security Council decision of October 2000, that

the regulatory authorities shall look into the losses and inefficiencies of the public

utilities before allowing them the tariff increases, the Authority had set UFG

target for both utilities at 6% to be achieved by the end of FY 2004-05. The

companies were allowed to retain the savings if UFG was less than the target,

conversely any loss over and above the target was to be borne by them from their

profits without impacting the consumers’ prices.

(iii) The Authority after due consultation with the utilities has decided to reduce the

UFG progressively to 4% by FY 2011-12 in such a manner that it also provides

the utilities a comfort level and an opportunity to make real efforts to control this

long standing menace. The proposed targets are as follows:

(iv) The above targets are subject to the following conditions:

a. any loss over and above the lower target but upto the upper target shall be

shared 50% between the gas company and 50% in the revenue

requirements;

b. loss over and above the upper target shall be 100% at the cost of the gas

utility without any adjustments in the revenue requirements;

c. loss below the lower target in any financial year shall be retained by the

utility company without any adjustment in the revenue requirements;

d. in the event of a significant additional availability of gas (10% or more

than the actual volumes for the year 2005-06) to any company, these

targets will be reviewed by the Authority.

Financial Year Upper Target Lower Target

2005-06 6.00% 5.70%

2006-07 6.00% 5.40%

2007-08 6.00% 5.10%

2008-09 5.50% 4.80%

2009-10 5.50% 4.50%

2010-11 5.00% 4.25%

2011-12 5.00% 4.00%

G. Non-core activities

Non-core activities like meter manufacturing, sale of gas condensate, royalty from

JJVL, gain on construction contracts etc. shall be treated as separate activities for the

purpose of calculating the rate of return allowed to the gas companies provided such

business units are set up as subsidiary companies within one year of effectiveness of

this new tariff regime.

H. Independent transmission lines / distribution system

Rate of return for any independent transmission pipeline or distribution system shall

be determined on case to case basis in consultation with the Federal Government and

the concerned licensee in accordance with the principles laid down in Section 7 of

OGRA Ordinance.