Uniform transport tariff for gas – a flawed idea

Speaking at the launch of the nation’s maiden online gas trading platform by Indian Gas Exchange (IGX), petroleum minister Dharmendra Pradhan alluded to “a new pipeline tariff policy that will replace existing practice of seven different pipeline operators charging separate rates and customers away from gas source paying more than those nearer to source.” Petroleum and Natural Gas Regulatory Board (PNGRB) Chairman DK Saraf was even more specific when he spoke of a “single rate across pipelines so as to make the price of fuel uniform for customers across the country.”

According to the minister, “the new policy will help bring down the cost of natural gas, make it affordable in every part of the country and facilitate development of gas market in eastern and northeastern part of the country.”

Currently, nearly 50% of India’s total natural gas requirement is imported as LNG (liquefied natural gas) which is re-gasified at plants set up at major terminals, namely Hazira and Dahej (Gujarat), Kochi (Kerala) and transported through a network of pipelines to consuming areas. The indigenous supplies (accounting for the balance 50%), mostly from western offshore fields, are also transported through pipelines.

The cost of supplying gas to customers located near the source (such as those in Gujarat) is bound to be less than supplying to customers who are located far away in the hinterlands. Accordingly, under the existing arrangement, customers located near the source pay less whereas those far off pay more. The government intends to replace this by a ‘uniform’ tariff payable by all consumers. The idea is flawed.

There can only be two rational approaches for setting tariff -- (i) it is left entirely to the forces of demand and supply and to let the market decide tariff; (ii) cost-plus principle. Of course, tariff fixation using the latter method has to be based on norms in regard to factors such as the pipeline carrying capacity, volume of gas actually transported, permissible rate of return on investment, etc. At present, this principle is followed by operators for determining tariff.

If now, the government wants to do a ‘one country, one rate’ for all consumers, it will result in two anomalies. First, considering that operators have different cost structures (due to varying capital cost, overheads and operating expenses), prescribing uniform tariff for supplies from all operators will result in fortuitous gain for some, whose costs are lower, and loss for those whose costs are higher.

Second, this will be tantamount to taking money from consumers located near the source and giving it to those who are far away. This is totally unjustified. An argument that the inherent disadvantage of a unit located away must be removed is not valid. This is because it may be better placed in some other respect, which has a bearing on its overall cost competitiveness.

To illustrate, let us compare two urea manufacturing units (gas is used for making urea), one located near the gas source and the other in the hinterland. Undoubtedly, the latter has to pay more for transportation of gas (albeit under cost-plus principle), but being near major fertiliser consumption areas, it saves on outward movement of the finished product, namely urea. The former may save on gas cost, but being away from major consuming areas has to spend more on movement of urea. On balance, the playing field is automatically leveled.

So, to ignore the holistic picture and see things in isolation would be unfair and illogical. Any policy intervention based on such a myopic view would only lead to distortions.

In July 2015, the government had introduced a system of pooling cheaper domestic gas with expensive imported LNG to provide gas at ‘uniform’ delivered price to all urea manufacturing plants connected to the gas grid. If the base price can be uniform, goes the logic, why can’t the transport tariff be the same? The comparison is not on as the two situations are entirely different.

The gas pooling was forced by a peculiar system of an inter-ministerial committee undersecretary in the petroleum ministry deciding inter-sector allocation of domestic gas as also to individual manufacturers. This gas was cheap but in short supply, leading to an anomalous situation whereby some manufacturers would get a major share of their requirement (or even all it) from domestic gas, others had to contend with expensive imported LNG. Pooling of supplies from the two sources and delivering gas from the pool to all manufacturers hooked to the grid at the same price has removed this anomaly.

When it comes to transportation of gas, the variation in tariff has nothing to do with exercise of discretion in allocation of gas. Here, the tariff variation arises entirely due to the distance of the consuming unit from the supply source, and the charges are entirely formula-driven.

In view of the above, there is absolutely no merit in pursuing the uniform transport tariff idea for gas. Decades ago, we had a system of freight equalisation for steel – something akin to what is being proposed now for natural gas. It was eventually abolished as it was considered neither fair nor rational.

The government should not intervene in areas where it ought not to. It should dismantle the existing regime of multiple prices for gas (there are at least half a dozen), deregulate import of LNG, hive off the handling and transportation infrastructure from the Gas Authority of India Limited (GAIL) and free up determination of transport tariff.

These areas should be left entirely to the market forces.

However, an area which needs urgent attention is the tax structure. At present, natural gas is out of GST purview. Even as the excise duty on gas is nil, VAT varies from state to state from as low as 5% in Rajasthan to a high of 21% in Uttar Pradesh. Some states impose local levies, such as ‘purchase tax’ in Gujarat on that portion of gas used for making urea that is sold outside the state. This convoluted regime must go. Gas should be brought under GST and taxed at 5%.

(The writer is a New Delhi-based policy analyst)