Articles : August 2009

By Rajesh Kumar

The prime objective of constituting the Petroleum and Natural Gas Regulatory Board (PNGRB) was to promote fair competition in the oil & gas market so as to benefit both consumers and producers. However, in the absence of strong political will and focused policy initiatives, the Board has not been given the powers to bite. As a result of this lacuna, competition could not be facilitated in the market and it has adversely affected the level of private investment in the sector. The need of the hour is to allow the Board to function independently, so that it is in a position to be able to balance the various conflicting interests in the sector and attract the required investment to the sector.

The Board was constituted in 2007 as an autonomous body to regulate mid-stream and down stream businesses in the petroleum and gas sectors. The government was supposed to shift all major regulatory functions and powers to the Board in a phased manner. However, this has not happened as envisaged in the statute and policy. The section 16 of the PNGRB Act that empowers the Board to regulate the city gas distribution network is yet to be notified.

Moreover, the procedure followed by the government in providing subsidies has been discriminatory in nature. Given the dominant position of public sector companies in the supply chain of petroleum and gas related products, promotion of a healthy competition to benefit the consumers as well as attract private investment is highly desirable.

Administering of prices of petroleum products by the government requires careful attention. From time to time, the government has been criticised for the lack of transparency and absence of competitive neutrality. Ideally, the government should take necessary steps towards creation of level playing field among all the market players, be it public or private. However, during the last financial year, the government provided subsidies only to the public sector companies for bridging the revenue gap caused by low prices. It adversely affected the business of private sector companies and resulted in shutting down of businesses. For example, Reliance Energy had to close down about 1,400 oil-marketing outlets across the country.

As a result of unfocused policy initiatives, it was observed that the private sector is not very keen to enter downstream business. Recently, PNGRB had invited quotations for allocating licences for the city gas distribution network for five cities. In spite of some encouraging incentives such as an assured rate of return, private participation in the bidding process was not very encouraging. For example, for Mathura, only Gas Authority of India Ltd— a public sector company—submitted the bid. It reveals that there is a need to take conducive steps to enable an appropriate policy and regulatory framework in the sector. Only then the private sector can come forward to participate in this sector. This lesson applies across the board.

There are also some other developments that need to be addressed carefully in order to create healthy competition in the gas market. Recently, it was reported that GAIL and Reliance Industries have come up with a non-compete agreement during the bidding process conducted by PNGRB for the allocation of city gas distribution networks. The said agreement, if it comes true, will benefit both of these dominant players. However, it is likely to limit the scope for competition. Given the high sunk costs and capital-intensive nature of the industry, there is already a lack of adequate number of investors in the business. Therefore, the regulatory body as well as government should take required steps to preserve the scope for further competition.

In order to promote a competitive market, the government should avoid interfering arbitrarily in the oil marketing business. The price for end users should be regulated by taking various factors such as cost of supply and economic efficiency into account. If there is a further need for subsidy, it should be provided in a transparent and accountable manner in consultation with the Board. Otherwise, vested interests would continue to lobby for prices that are so low that cost of supply cannot be recovered. This would discourage private sector participation.

There are lot of other issues in the downstream business on which PNGRB is yet to take a call. For instance, consumers are not satisfied with the quality of service in distribution of LGP cylinders. There are also many irregularities—black marketing as highlighted often by the media. The booking procedure followed by the distributors is tedious and not transparent. Efficiency in booking and distribution of gas cylinders can be brought about only if the Board enforces fair competition among market players, both public and private. This will provide a choice to consumers which would force suppliers to be more efficient.

Therefore, it is important for the government to take important steps that enables the PNGRB in playing a more proactive role in promoting fair competition in the market—the interests of various stakeholders should be balanced in order to create a level playing field among producers and between consumers and producers. The board should also express its views on contemporary issues in oil & gas sector affecting the level of competition. For example, the Board should not remain silent on the ongoing battle between the Ambani brothers regarding the pricing of the gas available from the KG-D6 fields . Though the issue is not under the direct control of the Board, it should intervene though media and public forums in the national and consumer interest. At this nascent stage, the evolution of this board into an effective institution requires adequate political support from the government. Only then would the targeted investment be realised and the quality of service available to end-users improved.

The writer is an assistant policy analyst at Cuts Centre for Competition, Investment & Economic Regulation. Email: rk2@cuts.org

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