The government remains committed to the idea of trade parity pricing mechanism for all commercial primary energy sources, mooted by the Integrated Energy Policy (IEP) drafted two years ago. But with oil and gas prices, Planning Commission member (energy) Kirit Parikh has argued that the transition to trade parity price would have to happen in a phased manner.
Speaking to FE, Parikh, who is in charge of finalising the IEP before it is placed for Cabinet approval later this month, said, ?In the current kind of a large bubble in the energy prices, it will not be possible to move to that (trade parity price) right now. It might require some phasing. The principle (mentioned in the IEP) remains the same. We should accept the principle of trade parity price.?
Trade parity price is a mix of import parity and export parity prices, with more weightage given to the former. Under import parity, oil price will be equal to the world price plus transport, tariff and other costs the customer would bear if they were to import. India had moved to trade parity price in 2006 following a notification from the Finance Ministry.
Incidentally, the high-level B K Chaturvedi committee on pricing of fuel which submitted its report in August this year has suggested, among other things, shifting to export parity price. Under the export parity model, the price is set in line with the global rates, minus any transport, tariff. The supplier would incur any other cost if the product is exported.
According to the draft IEP cleared by Prime Minister Manmohan Singh at a Full Planning Commission meeting held on September 20, prices of different fuels should not be set independently of each other. ?As a general rule, all commercial primary energy sources must be priced at trade parity prices at the point of sale, namely the Free-on-Board (FOB) price for products for which the country is a net exporter and Cost, Insurance and Freight (CIF) price for which it is a net importer,? it states. Under the trade parity pricing mechanism, the price of a product for which the country is self-sufficient in a competitive market with many suppliers and buyers, would fluctuate between the two depending upon the ease of import or export and reliability of supplies.
Referring to the Indo-US nuclear deal, which is expected to be ratified by US President George W Bush on October 13, Parikh said, ?The nuclear deal does open up slightly different possibilities but in the foreseeable future, in the next 20-30 years the contribution that nuclear energy will make will depend on how much we are able to import. In any case, it will be of modest proportions compared to our total needs. So the emphasis we make is on sensible policies and that pricing should be consistent and having uniformity across the energy sector. We are saying price these things properly,? Parikh said.
Relative prices play the most important role in choice of technology, fuel and energy form, Parikh stressed: ?In a competitive set up, the marginal use value of different fuels, which are substitutes, should be equal at a given place and time so that the prices of different fuels at different places do not differ by more than the cost of transporting the fuels. The resulting inter-fuel choices will then be economically efficient.?
In a situation with a monopoly supplier with exportable surplus at import parity price, the price would be in between the two depending on the price elasticity of domestic demand. This principle is extremely relevant for the petroleum sector, he said.