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India ought towalk before it jogs

Thought leader Edward de Bono’s theory is that most of the mistakes in our thinking are inadequacies of perception rather than mistakes of logic.

Jul 05, 2007, 04.40 AM IST
NEW DELHI: Thought leader Edward de Bono’s theory is that most of the mistakes in our thinking are inadequacies of perception rather than mistakes of logic. Consider, for instance, the raging controversy about “market-determined” prices for natural gas newly discovered in the Krishna-Godavari basin.

The perception seems to be, in certain quarters, that gas prices need necessarily to be set so as to maximise revenues and realisations. Such thinking is fundamentally flawed because we just do not have a proper market for gas.

In any case, the extant rules do not really mention of market-determined gas prices. Besides, international experience does suggest that sound market design is critical to successfully deregulate gas prices. Administered prices are clearly sub-optimal. Sure, we do need efficiency prices in gas to better allocate resources, to get the relative prices right and to correctly determine scarcity value. But to insist that such prices ought necessarily to be in the Maximum-City mode is to be plain unrealistic. It is wrong interpretation of policy as well.

It is not quite correct to maintain that gas acreage struck under the New Exploration Licensing Policy are to have market-determined prices, whatever that means. As the model production sharing contract, as per article 21, makes clear: “Production of natural gas...shall be made in the context of the government’s policy for the utilisation of natural gas and shall take into account the objectives of the government to develop its resources in the most efficient manner...

”And further that, as per clause 6.1, the gas so discovered is to be sold at “arms-length prices to the benefits of the parties” concerned. Additionally, according to sub-section (b), gas sold to the Centre “or any other government nominee shall be valued on the terms and conditions actually obtained”, complete with pricing formula and delivery schedules. The fact of the matter is that the extant rules call for mutually-agreed, efficiency prices in gas.

The backdrop of the present controversy is of course the de-merger and split in the Reliance group. Reportedly, Reliance Industries (RIL), which has a prior (before demerger, that is) contract to supply 28 mmscmd of gas to Reliance Natural Resources Ltd (RNRL), has asked for a substantial revision in the contracted price. In fact, last November, a government committee did reject the initial price contract between RIL and RNRL, maintaining that it could not have been at “arms-length prices”. Where such price discovery is not quite possible, however, the Gas Pricing Committee Report for NELP adds, “the most recent competitively determined price in the region” ought to be the indicative price. And there is indeed such a price available as RIL has competitively bid and won the contract to supply 12 mmscmd of gas to NTPC.

It is another matter that RIL reportedly wants to considerably revise the gas price for NTPC as well. But it is noteworthy that RIL’s gas price arrived at for NTPC, via a transparent process of price discovery, was close to that initially determined for RNRL. Which would suggest that the price contract between RIL and RNRL was really an arms-length transaction after all.

It is possible to take the stand that the gas contract was a while ago, and that it needs to be indexed to factor in higher costs. The gas pricing committee did in fact recommend that the percentage increase in the price of furnace oil (FO) be considered for the purpose of indexation. It was so suggested because FO has shown the “least price volatility in recent years”. Note that gas produced by state-owned ONGC and OIL is at a controlled prices linked to a basket of fuel oils.

The larger issue is the policy vacuum when it comes to pricing principles and the lack of clear-cut, standalone legislation for gas. The gas pricing committee noted upfront that “its mandate did not relate to determining the principles for pricing of natural gas”. Gujarat did frame a law on gas, but the Centre took it to court and the Supreme Court held, rightly, that it is a central subject and that the Gujarat law was unconstitutional. But we have had no follow through central Act.

It is in marked contrast to the practice abroad. In the US, for example, after years of unbundling of regulated gas prices to separate wellhead, transportation and storage tariffs, the 1989 Natural Gas Wellhead Decontrol Act required the removal of all price controls on wellhead sales — but note — only by 1993. Since then, over 500 companies are classified as power marketers and have filed rate tariffs with the federal energy regulator. And this followed years of market development and investment in pipelines and attendant infrastructure which facilitate hub-to-hub transfers and regular price discovery.

The point is that when it comes to gas market design and its complex logistics, one must walk before one can jog. Yet, here, the powers-that-be seem game on spiriting and having “market-determined prices” from the word go, never mind the poor gas market network and huge shortages to boot, which can thoroughly distort price signals. Or, consider Canada, where although gas sales are deregulated, the authorities recognise that due to the monopoly characteristics of transmission and distribution networks, proactive regulation is the way ahead.

The European energy markets too have been subject to extensive legislation to have better market design on the ground, and to have a gradual opening up of the market. We surely need such a system here.
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