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Gas Transmission : Introduction of COS

Cost of Service Method

Cost of Service (COS) method based transmission tariff comprises of three elements

1. Operating Cost
2. Depreciation
3. Return on Asset Base

Tariff is calculated for specified block period based on estimated investment, tax rate, inflation rate and volume during the period. At the end of the specified period tariff is reviewed considering the actual capital cost incurred, volumes transported, inflation rate and the tax rate. Any over or under recovery is adjusted in the tariff of next block period.

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How to calculate:

1. Calculation of Asset Base:

   Asset Base is the total cost of the pipeline and its facilities and cost of any expected investment in the next five years.

2. Depreciation:

   Depreciation is calculated considering the life of the Pipeline.

3. Operating Cost:

   Repair & maintenance cost, general administration expenses, unaccounted gas and bad debts are considered operating cost at predefined percentage.

4. Return on Asset Base:

   Return is generally based on the weighted average cost of capital. The net fixed asset base is arrived after deducting the accumulated depreciation from the Gross Asset Block. Cost of capital is weighted average of debt and equity. Net asset value is calculated by deducting the accumulated depreciation cost from the network. Accumulated depreciation is calculated from the date of capitalisation till the calculation year.

The Total of Depreciation, Operating Cost and Return is the Network Revenue requirement.

The Net Present Value of required revenues as arrived above over a specified period is divided by Net Present Value of expected volumes over the period to get the tariff under the Cost of Service method.

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