Capital Recovery under Levelized DCF Tariff for Gas Pipeline in India

Abstract

Petroleum and Natural Gas Board (PNGRB) has been established as regulatory body to regulate the Gas Pipelines in India. One of the major function of PNGRB is to regulate the tariff of the certain existing Gas Pipeline. As per PNGRB Regulations, tariff shall be worked out based on Discounted Cash Flow (DCF) by levelizing over the economic life of 25 yearsin such a manner which is sufficient to recover the operating cost and capital cost along with the reasonable rate of return. As in DCF calculations though the recovery of operating cost can be separately monitored but the recovery of capital cost and the return is recovered in combined form, which makes the monitoring of each parameter of tariff difficult. Objective of this paper is to break the interest part and capital recovery part from the total revenue earned. This will not only help the regulator for better monitoring of each component but also help in reviewing the capital cost in between the economic life if required. General notion is that capital recovery under the gas pipeline tariff is uniformly recovered over economic life.With the help of example of tariff working, it has been demonstrated that under the levelized DCF method results in lower capital recovery in the initial year instead of uniform capital recovery. Methodology has been demonstrated to break the capital recovery and interest part to enable the review and corrective measure on each component.