The Indian natural gas market is highly fragmented, thanks to the government’s policy of different pricing for different customers and sources. The petroleum ministry is planning to introduce a pooling system to bring uniformity in gas pricing across the country. However, the Petroleum and Natural Gas Regulatory Board (PNGRB)’s recent switch to zonal tariffs for natural gas transmission could defeat the ministry’s effort towards uniform pricing.
The zonal tariff system, which provides for incremental tariff hike for every 300 km, is also at odds with the government’s gas utilisation policy aimed at equitable growth of all parts and regions. The PNGRB has argued that there is nothing wrong with the zonal tariff regime for natural gas transmission as other sectors like the railways, civil aviation and power transmission also follow a similar distance-based tariff determination system.
However, on close examination,it comes out that there is no apple-to-apple comparison between gas transmission and the sectors that the PNGRB has chosen for comparison.
For example, operating costs for the railways and civil aviation industry are much higher compared to the gas transmission business because fuel is a key component. Operating cost rise for airlines in tandem with the international crude oil price. Similarly, operating cost for the railways would also go when electricity price rises. Significantly, the electricity generation cost itself depends on the price of primary energy resources like coal, natural gas and crude oil. Uniform tariff cannot be implemented in these transportation sectors without subsidisation. But a uniform tariff policy can easily work for gas transmission pipeline business where capital cost rather than the operating expenditure holds the key.
The power transmission business is even more different from the gas transportation business. Power trading and power transmission are two different businesses and need two different players unlike the gas sector where trading and transmission are usually done by the same entity. In other words, bulk power consumers can switch their suppliers but this flexibility is not available to gas consumers.
The PNGRB has contended that transmission charge is a small component of the delivered gas price. However, our analysis shows that this formulation does not hold good in cases where a consumer is located far away from gas sources.
For example, transmission tariff for consumers in Gujarat who source gas from Hazira works out to 40 cents per mmbtu for new pipelines as per the zonal tariff system. However, it works out to $3 per mmbtu for consumers in Nangal of Punjab. Significantly, the well-head price of gas for consumers in both the states is $4.2 per mmbtu. While gas transmission charge accounts for a small percentage of well-head price for consumers in Gujarat, it is as high as 71% for consumers in Punjab.
There is a wide variation in gas tariff in different zones even for existing gas pipelines. For example, gas transmission tariff for Reliance Gas Transmission and Infrastructure Ltd?s (RGTIL) East-West gas pipeline varies from Rs 15 per mmbtu in zone 1 to Rs 60.94 per mmbtu in zone 5.
There is also no merit in PNGRB?s argument that most developed countries have adopted zonal tariff and India needs to follow them. The Indian gas market cannot be compared with gas markets in developed countries as it is in a nascent stage of development.
The PNGRB has argued that authorisation for laying gas pipelines is given to bidders quoting the least tariffs. However, that is beside the point given that nobody has questioned the merit of bidding for allocation of gas pipeline projects. In any case, similar bidding criteria can also be adopted under a uniform tariff regime.
The issue is whether the variable tariff introduced by the PNGRB is superior to the uniform tariff system from the view point of achieving the wider goal of equitable industrial development of all parts of the country. In other words, the real question is will zonal tariff not trigger concentration of gas-based industries near sources of gas production?
Natural gas accounts for just around 10% of India?s primary energy consumption compared to the world average of 24%. The government has initiated policy incentives like cess on dirty coal to promote the usage of natural gas in a bid to contain the country’s fast-expanding carbon footprint. But unfortunately, PNGRB remains blinkered by the economic cost factor advantage theory and is unable to take a holistic view.
Natural gas is a national resource. States rich in natural gas are entitled to royalty payment on production from sources within their boundary, apart from local levies. Why should they also benefit from a lower transmission tariff? If anyone who thinks uniform pricing is not practical should look at how FMCG companies follow it despite varying tax and logistics costs across various states in the country.