Operating in Restructured Environment & Dealing with the New Regulator
Licensing in the Gas Sector
Tatyana Yamova
1. Legal Framework
With the establishment of the Bangladesh Energy Regulatory Commission (BERC) and continued restructuring of the gas sector in Bangladesh (i.e. unbundling it into production, transmission, distribution and retail companies/businesses), all entities that are currently involved, or will be involved, in transmission, distribution, retail supply and storage of gas are considered licensees under the Act that created BERC a year ago.
What does it mean for companies like GTCL, Titas Gas or Jalalabad? All entities - the existing and future market entrants - operating in the midstream (transmission and wholesale) and downstream (distribution and retail supply) gas sectors will need to apply to the BERC for a license. The only function of the natural gas sector that is not subject to BERC regulation is gas production or upstream. Licenses will be issued by the BERC to gas companies as a grant of authority to conduct an explicit business activity for a specified term of years subject to the particular conditions that are briefly discussed in the following sections.
As can be seen from Figure 1, the framework for licensing is determined by the BERC Act, other applicable laws of business operations in Bangladesh (i.e. incorporation), and the energy policy formulated by the Government of Bangladesh (GOB).
Figure 1 Licensing Framework
2. Objectives of Licensing Why is It Required?
Licensing is one of the fundamental tools that will be used by the BERC to regulate the mid and downstream gas sector. The BERC will issue licenses that conform to the industry structure promoted by the GOB and in accordance with enabling legislation. From a regulatory perspective, a licensing regime, if implemented properly, has a number of potential advantages:
License conditions in the energy sector usually pursue the following general objectives:
Efficient Market Operations market operations could be improved by enforcing market operations rules; separating monopoly and competitive businesses to prevent anti-competitive behavior and cross-subsidies; requiring compliance with national transmission and distribution codes; and promoting customer choice in competitive aspects of the industry as the market matures.
Customer Protection- licenses usually contain provisions designed to protect the customer's right to connection and supply; provisions promoting fair market behavior; provisions containing complaint handing mechanisms and requirements to produce evidence of technical and financial viability of gas retailers. At the same time, the Licensee will have the right to remove customers from the transmission or distribution system and/or disconnect them for a failure to pay for the provided services. These provisions are usually detailed in transmission, distribution or customer service codes, and applicable rules and regulations, following the authority granted by the BERC Act.
Safety and Environmental Compliance licenses usually address compliance with the technical codes, adherence to environmental standards and codes; and they could promote efficient gas use and observance of network/pipeline safety practices.
Standards of Service there are license conditions that address disclosure of service standards to customer (e.g. time to connect new customers) and improvement of network management (e.g. minimizing outages).
3. Types of Gas Licenses Required in Bangladesh
The license framework will reflect the functional organization of the gas industry and its long-term goal of becoming a more efficient and competitive gas market. The basic functions of an unbundled midstream and downstream gas sector are gas transmission, distribution and retail supply or marketing as phrased in the BERC Act. In the US, gas trading and independent gas supply are considered part of marketing, while retail supply of gas usually implies such activities as metering, billing, collection and customer service. However, in the context of Bangladesh energy sector, these two terms are used interchangeably. As restructuring progresses, retail supply or marketing could be separated from the distribution function and require a separate license. Thus, the main types of currently required licenses are the following:
In general, each type of license could be organized in similar sections, but would contain specific provisions differentiated from others based on the nature of the business subject to the particular license. Some sections may not be applicable to all types of licensees and, therefore, omitted, while in other cases it may be appropriate to add conditions to a particular licensee to reflect unique circumstances. For illustration purposes, typical license conditions generally include the following topics:
It should be noted that this list is not necessarily exhaustive and each of these categories is not necessarily exclusive of all others. The BERC will have to design and organize its licenses to meet the legal, business and regulatory environment of the regulated entities.
The specific, detailed requirements for most aspects of system operations, including technical requirements, gas transmission and distribution codes, accounting/financial standards and reporting requirements, customer connection rules, billing and termination regulations and many others are normally set forth separately in regulatory codes, standards or regulations devoted to a particular subject area.
While the general nature and content of standard industry codes and practices fit a familiar pattern from one regulatory jurisdiction to another (and among countries as well), there might also be significant differences in approach as the BERC responds to its own circumstances and the needs of its particular constituency.
Additional Considerations with Licensing
It is usually better to keep the license as short and simple as possible by referring to appropriate legislation, rules and regulations, and codes and standards. An effective licensing regime will achieve its clearly stated objectives at a minimum cost to licensees and the regulator. At the same time, a poorly designed and implemented licensing regime could result in unreasonably high costs or fail to achieve regulatory objectives. There are many different ways to design a license, however the key features for ensuring an effective licensing regime are:
Also, despite that fact that the primary focus of this article is on licensing for transmission, distribution and retail supply of gas, other entities in Bangladesh that are or will be involved into storage and marketing of natural gas, LPG operations, bottled gas distribution, and CNG filling stations are considered licensees under the BERC Act and they will be expected to apply for a license once the Commission is established and running. The BERC will need to tailor licensing requirements for these entities to reflect the current market structure of the Bangladesh gas sector and activities performed by the license applicants.
Tatyana Yamova Principal Consultant, PA Consulting Group