China to Tighten Regulation on Gas Sector?


"Government wants to cap gas companies' return on equity at 8%. . ."

China's push for cleaner fuels has kept urban gas distributors in a sweet spot, but an industry regulation being tested in the northern province of Hebei suggests a bumpy road ahead.

Hebei's government wants to cap gas companies' return on equity at 8% in a bid to keep natural gas prices in check, especially for households.

Unlike natural gas used in power plantsówhich had been tightly regulated on governmental concerns about electricity pricesóhome-use natural gas, used mostly for cooking, has been left largely unregulated.

While the bulk of energy consumption in China is from industry, consumers are using more energy as they become wealthier. China last year surpassed the U.S. as the world's biggest consumer of energy, according to the IEA, and the government has been struggling to meet its goals for improving efficiency and reducing pollution.

The city gas sector has been lightly regulated, but that could change as more consumers switch from burning coal and oil to less-polluting natural gas. Beijing wants natural gas to account for 10% of the nation's energy mix by 2020, up from about 4% now.

The effort in Hebei is a reminder of the risks investors face when backing Chinese companies in sectors the government considers strategic, and where rising prices risk undermining social stability.

Citigroup Analyst Pierre Lau says Hong Kong-listed Chinese gas distributors would average a 16% return on equity this year, well above the 8% cap. "Other provinces might also make similar announcements in our view," he added.

If the 8% cap is limited to Hebei province, then the broader impact on gas distributors would be mild, said Y.K. Lee of Core-Pacific Yamaichi. But the ramifications could be greater if densely populated provinces in eastern China and elsewhere adopt similar measures, he said.

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