Regulator Extends Marketing Exclusivity For Gas Distributors; IGL, Mahanagar, Gujarat Gas In Focus
While the new guidelines does indicate no end to marketing exclusivity, it does increase risk of competition at any time.
The Petroleum and Natural Gas Regulatory Board has withdrawn its September 2021 notice, which previously marked the termination of marketing exclusivity for several city gas distribution companies across diverse geographical regions.
The regulator has implemented a fresh set of guidelines, under which each geographical area will be individually assessed, and the continuation of marketing exclusivity will be determined based on specific criteria.
This action suggests that the companies have yet to conclude their marketing exclusivity arrangements.
What Is Marketing Exclusivity?
In the context of city gas distribution networks, marketing exclusivity refers to a period where a particular company has the sole right to sell natural gas to customers within a specific geographic area. This essentially gives them a monopoly within that region.
Breakdown of Marketing Exclusivity
Limited Competition: During this period, other companies cannot enter the market and compete for customers. This allows the exclusive company to establish itself, build infrastructure, and recover its investment costs.
Focus on Development: The exclusivity incentivises the company to focus on infrastructure development and expanding the reach of the natural gas network within the area.
September 2021 Notice
The Petroleum and Natural Gas Regulatory Board's public notice in September 2021 declared the end of marketing exclusivity in 54 city gas distribution networks.
This included key geographical areas of Delhi, Mumbai, Bengaluru, Gujarat for companies like Indraprastha Gas, Mahanagar Gas, GAIL (India), and Gujarat Gas, respectively.
Latest Guidelines
The regulator's latest public notice on May 27 has introduced a new set of guiding principles for declaring the market exclusivity period of city gas distribution networks.
According to the new guidelines, the board will not consider each geographical area on a case-by-case basis before declaring the end of its marketing exclusivity. The declaration will now be based on various factors like geography, population, demand, availability of natural gas, and more.
What Are The Implications?
The new guidelines make the previous notice that declared the ending period of marketing exclusivity in different geographical areas invalid.
The development also makes the ongoing litigations previously filed by the CGD companies in opposition to the regulator's declaration of end of their marketing exclusivity invalid.
More Competition
According to Citi, the new development also enables the board to pursue- with a renewed effort and clean legal slate – its objective of introducing competition in CGD.
The Petroleum and Natural Gas Regulatory Board's stance of introducing competition in the sector is on the back of CGD companies not meeting their minimum work programme targets of their network expansion.
The new guidelines introduced by the board aims to strike a balance. They allow companies a reasonable period of exclusivity for initial development, but then consider factors like geography, population, and gas availability before opening the market to competition. This can potentially lead to:
More Competition: If a region has a large population, good gas supply, competition might be introduced sooner, potentially benefiting consumers with lower prices or better service.
Targeted Approach: In less populated areas or with limited gas supply, exclusivity might be extended to incentivize network development.
Sector Consolidation
According to Citi, the new development reaffirms the brokerage's view that regulatory pressures could, over time, lead to industry consolidation. This would be done by pushing smaller CGD players who are unable to meet their expansion targets to exit, thereby creating potential acquisition opportunities for the larger players.
Contrary to popular perception, Citi believes that introduction of competition may not be a key concern for larger CGD companies like Indraprastha Gas and Mahanagar Gas since the risk of competition in compressed natural gas is minimal.
For Gujarat Gas, the risk could be higher, given its high and concentrated exposure to the industrial segment of the customer market.
