Decision by Zhejiang Province to Cut Gas Prices Could Impact China's City Gas Operators

Recent decision by Zhejiang province to cut wholesale and retail natural gas will have negative implications on China's city gas operators, according to Moody's Investors Service.

Moody's views the price cut may have boarder implications for the industry's cost-pass through mechanism if other provinces follow Zhejiang's example. The local government's imposition of a ceiling on retail tariffs will also weaken the operators' ability to pass on increased gas costs to end users in the future, the rating agency said Monday.

On April 18, the Zhejiang pricing bureau announced that it would lower wholesale natural gas prices for commercial and industrial users by RMB 0.10 per cubic meter to RMB 2.19 per cubic meter. It also set a ceiling on retail tariffs at RMB 3.40 per cubic meter and a ceiling on the dollar margin for coal-to-gas consumption at RMB 0.6 per cubic meter.

The adjustments became effective on April 20.

“The development reiterates the evolving nature of China's regulatory regime. Since 2013, the central government has been introducing numerous market price reforms to improve the transparency of the natural gas pricing mechanism and to align gas tariffs according to changing market conditions. However, the price cap in Zhejiang would reduce the flexibility in changing retail tariffs along with the movement of gas costs or alternative fuels,” Moody’s said.

Nevertheless, Moody's expects that the immediate financial impact on the rated city gas operators resulting from the price cut will be minimal. Most city gas operators -- such as ENN, China Resources Gas, Hong Kong China Gas, Towngas China -- have well-diversified portfolios, and Zhejiang province's commercial and industrial customers only account for 1 percent – 5 percent of their total sales volume.