Slight gas tariff rate hike in 2H18 a sign of functional IBR mechanism

KUCHING: The slight increase in gas tariff for the second half of 2018 (2H18) has been viewed as an indication that the cost past through mechanism, under the incentivebased regulation, is functional and analysts believe that the system could stay beyond 2019.

On Thursday, Gas Malaysia Bhd (Gas Malaysia) had announced that the government has approved the half-yearly natural gas basetariff rate revision for non-power sectors in Peninsular Malaysia to RM31.92 per mmbtu on average for July to December 2018 from RM30.90 per mmbtu in January to June 2018 which is in line with the national rationalisation plan and Gas Cost Pass-through (GCPT) announced in December 2016.

In addition, under the GCPT framework, a surcharge of RM0.77 per mmbtu will apply to all tariff categories due to higher actual gas costs against the reference gas costs, translating to an average effective tariff of RM32.69 per mmbtu which is slightly higher than RM32.52 per mmbtu for 1H18.

“This is not a surprise to us as it is a scheduled half-yearly revision while the tariff revision has neutral impact to Gas Malaysia on a six-month lagged basis as it is a cost pass-through under the GCPT mechanism,” said Kenanga Investment Bank Bhd’s research arm (Kenanga Research) in its report.

Meanwhile, with the implementation of GCPT in January 2016, which is similar to the Imbalance Cost Past- through ( ICPT) for the power sector in Peninsular Malaysia, upward revisions in natural gas tariff are expected in the upcoming reviews until gas price reaches market price.

“Having said that, Gas Malaysia’s profitability would not be affected as its profit margin spread is determined under the IBR framework based on asset return of 7.5 per cent, which is estimated between RM1.80 per mmbtu and RM2 per mmbtu currently.

“As such, any price hikes will have neutral impact to Gas Malaysia via GCPT adjustment,” the research team said.

Meanwhile, it noted that Gas Malaysia also faces the concern of any changes in the GCPT mechanism that might negatively impact it under the Pakatan Harapan’s populist policy.

However, Kenanga Research said, “In our opinion, it is unlikely that the authority will review the base-tariff under the current GCPT’s regulatory period of 2017 to 2019 as it does not impact the public directly given that it deals only with businesses.”