Prize of regulation

NEW DELHI: It’s one small step for a regulator, but a giant leap for regulatory practice. The petroleum and natural gas regulatory board (PNGRB) chief L Mansingh has reportedly dashed off letters to the finance and oil ministers, complaining of untoward governmental “action”. The non-revision of retail prices of key petro-products by fiat and the fact that private sector oil marketers are chary of retail sales of petrol, diesel, etc seem to have got the regulator’s goat.

The board’s move is welcome. We do need competitive prices and well-functioning markets in the over Rs 4,00,000-crore oil economy, amounting to a tenth of GDP. But there are legal, procedural and market-design hurdles that come in the way of the oil regulator actually “fostering fair trade and competition”, for which it has been mandated as per the spirit of the law. Further, the board’s draft norms for pipeline tariffs for carrying gas seem to be promoting cosy, cost-plus returns. We surely need competitive bids to decide on pipeline tariffs and shun cost-plus pricing principles.

PNGRB communication is categorical that “no action which leads to distortion of market forces and prevention of a free and competitive market...can be justified”. The fact is that there is perverse administered pricing of oil products and routine opacity, complete with public-sector oilcos required to set monopoly prices, never mind gross under-recoveries in retail sales. So, despite runaway increase in imported crude oil prices, the rates for diesel and petrol have actually been reduced this year. And a GoM has been formed to pore over domestic prices of petro-goods! The powers-that-be have a knack of shoring up populism, with the purpose of currying favour with the electorate.

Given the lack of transparency in the pricing of petro-goods and the fact that several components that make up administered prices, such as transportation, have built-in cost-plus provisions, the bid to enforce competitive prices makes perfect sense. However, the fact remains that the PNGRB Act is not specific on how the board can intervene per se on the pricing front. It is to ensure “equitable distribution” of petro-goods, and see to it that there is “adequate availability”, including that there is proper “display of information about maximum retail prices”.

But there appears nothing clear-cut on whether the board can suo moto proceed on oil prices. The “equitable distribution” provision does entitle the board to call for adequate access for newer producers of aviation turbine fuel at airports. Indeed, the regulator has actually done so.

However, the legislation does stipulate that such a regulatory step can only be envisioned for “notified petroleum, petroleum products and natural gas”. The phrase is defined to mean such oil products “as the central government may notify from time to time...for securing their equitable distribution or ensuring adequate availability”. It follows that till the products are notified by the Centre, the regulator’s limited mandate would stand compromised.

There are other ground realities in the oil economy that would certainly prevent competitive prices. Abroad, in the mature markets, ‘independent retailers’ account for over half the offtake of petrol, diesel, etc. In contrast, the retail sales of oil products in India are ‘ring-fenced,’ given the onerous investment requirement needed to foray into marketing. In any case, the generous effective tariff protection for domestically-refined petro-goods means that there is no real incentive for independent retailing. Although the extant duty differential between products and crude appears nominal, given the minimal value-added in oil refining, it still means substantial tariff walls.

While it is perfectly valid for the oil regulator to raise the issue of competitive prices, the fact that the board has called for cost-plus pipeline tariffs would raise eyebrows. As its draft norms for pipeline tariffs says, the rate of return would be linked to that on government securities plus X%. And further that X% would reflect the “weighted average cost of capital for such projects”. It would merely incentivise cost-padding and ‘gold-plating’. What’s surely needed is competitive bidding for determining such tariffs; the investment requirement for gas pipelines is put at over $30 billion.