China's natural gas transmission tariffs proposals positive for industry

BEIJING - China's proposals on regulated transmission tariffs for inter-provincial natural gas pipelines will be credit positive for the natural gas transmission industry in the long run, according to a Moody's report.

If implemented, the proposals will enhance the transparency and predictability of the regulatory framework, said Moody's.

The National Development and Reform Commission (NDRC) on Tuesday released its proposals on regulated transmission tariffs for public consultation.

The highlights of the proposal include that permitted revenue will consist of permitted costs, permitted returns and taxes.

Permitted costs, which are audited and approved by the NDRC, will include depreciation and amortization expenses, together with operating and maintenance (O&M) expenses.

"The enhanced transparency and predictability of the tariff mechanism -- assuming the proposals are implemented -- would promote the development of the natural gas transmission industry over the long run," said Moody's Assistant Vice President and Analyst, Ivy Poon. "The proposed tariff setting would also improve the stability of national pipeline operators in terms of cost recovery and reducing volume risk in the future."

Currently, there is no structured tariff adjustment mechanism for the natural gas midstream transmission in China. Tariff setting is basically driven by the pipeline length.

The proposed regulations will regulate transmission operators based on a "cost-plus-reasonable return" approach compared with the current tariff settings for each individual transmission pipeline, according to Moody's.

However, Moody's said that the proposals will have no immediate rating impact on national natural gas pipeline operators, such as Kunlun Energy Company Limited and Beijing Enterprises Holdings Limited, given the current limited visibility of potential tariff adjustments for their pipelines.