Economy

The Pricing of Piped Gas Stinks in India

City gas distribution companies are able to hide their inefficiencies and effect non-transparent price hikes, far in excess of what is fair and just.

File photo of ONCG facilities. Credit: Reuters

File photo of ONCG facilities. Credit: Reuters

From midnight of 25th August, 2016,  Indraprastha Gas Limited (IGL), the company that supplies piped gas to the capital and the NCR towns of Noida and Greater Noida raised the price of domestic cooking gas and CNG yet again. Piped cooking gas (PNG) is up from Rs.24/ cubic meter to Rs.25.50 in Delhi;  in the NCR region, it went up from Rs.25.50 to Rs.27.30/cubic meter. Compressed natural gas (CNG) prices also went up from Rs. 36.85 to Rs. 38.15/ kg in Delhi and from Rs. 42.20 to Rs. 43.50/kg in NCR.

Since cooking fuel bills form a much smaller proportion of the family budget, compared to the bills we pay for other utilities (like electricity or Internet), companies like IGL might believe that consumers will absorb the hike without a fuss.  In any case, city gas distribution (CGD) companies are aware that their customers have already surrendered their LPG cylinders and are totally at the mercy of the monopoly gas supplier. Which is why, not just IGL, but all CGD companies raise rates periodically without justification. Besides, there is also considerable variation in the prices of PNG and CNG across cities in India (see table below) although there is little reason for such variation.

All the CGD companies everywhere in India get gas from the same source—and at a uniform price.  PNG and CNG differ from electricity in as much as electric utilities in each state buy power from various power plants at different prices and therefore, there can be genuine variations in the cost of electricity across states. Unlike other petroleum products, natural gas supplied to PNG and CNG customers is not linked to global gas prices.  In fact, there is no single global gas price since it is not a fungible commodity like oil. Gas prices vary from region to region, country to country. But many consumers in India might not even be aware that PNG and CNG are different from petrol or diesel whose prices fluctuate in tune with global prices.

Unlike electricity, natural gas is the domain of the union (although this is being disputed) which empowers the central government to exercise control over this resource.  And it does. Governments – whether UPA or BJP – have been quick to recognise the political gains from reliable piped gas supplies to kitchens and have gone out of their way to make sure that this segment gets a stable supply of gas at a reasonable price.   This is done through a gas allocation policy which allocates domestic gas production according to a pre-determined priority list of consumers.  Domestic cooking gas and CNG, which is considered a cleaner auto fuel are high on the priority list for allocation of gas produced from fields in India.  (Piped gas used for purposes other than cooking does not get priority allocation and its price is market-determined). In fact, the ministry of petroleum and natural gas cut the price of gas produced from domestic fields by 20 per cent with effect from April 1, 2016. At that time, many CGD companies did lower their PNG and CNG prices, but now, without any ostensible reason, IGL resorted to this hike.

The government’s gas allocation policy clearly states that the demand for gas for domestic cooking and CNG will be fully met through firm allocation from domestic production, even if it means cutting off supplies to non-priority users.  Thus, there can be no shortage of supply for these two segments nor are CGD companies required to import gas to supply our kitchens and automobiles.  And more importantly, all of them will get this gas at the same price. The Ahmedabad High Court, in a 2013 ruling, ensured that the government cannot discriminate between CGD companies when it comes to assured supply of gas or on the basis of price.

Yet, domestic cooking gas and CNG prices vary widely across the country.  It ranges from Rs.24.71/cubic meter in Mumbai to as high as Rs.27.30/cubic meter in Noida.  CNG which sells for Rs.41.20/Kg in Mumbai retails at over Rs.45/KG in areas supplied by Adani and GAIL Gas and even higher in Hyderabad.  What accounts for this difference in prices?

PNG & CNG prices in major cities

City Company PNG

Rs/SCM

CNG

Rs/Kg

Effective

VAT rate

Delhi IGL

(BPCL, GAIL, NCT)

25.50 38.15 Nil
NCR (Noida,G.Noida) IGL 27.30 43.50 26%
Mumbai, Thane Mahanagar Gas

(GAIL & BG)

24.71 41.20 12.5%
Ahmedabad, Vadodara Adani 22.69

(excl VAT)

45.80 15%
Meerut, Firozabad GAIL Gas

(Subsidiary of GAIL)

26.11 45.84 26%
Gandhinagar, Jamnagar GSPC

(Gujarat govt)

23.66 47.00 15%
Hyderabad,

Kakinada, Vijayawada

Bhagyanagar Gas

(GAIL & HPCL)

(JV of GAIL & HPCL)

23.16

23.16

52.36

50.33

n.a

Differential VAT rates could explain some of this difference. UP charges a steep 26 per cent on CNG and PNG, Gujarat, 15 per cent, Mumbai, 12.5 per cent and Delhi, nothing at all.  Yet despite this, consumers in Delhi pay steep prices for piped cooking gas and CNG.

Besides VAT, there could be marginal variations in the cost of transporting gas within the CGD network.  These transportation costs within the network – also known as network tariff – should be roughly the same for CGD networks of similar size.  Mahanagar Gas in the Greater Mumbai area serves an area of approximately 4400 square kilometres and supplies 0.8 million households whereas IGL in Delhi and NCR (Noida and Greater Noida) serves around 0.6 million households in a much smaller area. Therefore, there cannot be substantial variations in the network tariffs charged in these two cities. A few rupees increase in the bills of 6 lakh households every month could add up to a tidy sum to further swell the Rs.500- odd crores profit IGL is already making.

Economic theory tells you that monopolies need to be regulated and natural monopolies certainly so. Otherwise, they could exploit their consumers who have no other alternative.  Natural monopolies are typically utilities like gas, water or electricity where duplication of physical infrastructure like pipelines or wire grids is wasteful and therefore, there is room for only a single player. Gas distribution network is a quintessential natural monopoly business that needs to be regulated either by the government or by an independent body. Regulation is meant to protect consumer interests against monopoly price-gouging.

The government set up an independent regulator – Petroleum and Natural Gas Regulatory Board (PNGRB) – precisely to do that. An independent regulator was considered necessary to provide a level playing field in a sector that has a mix of public and private companies, each a monopoly in its franchise area.  Of course, the regulator has no power to control final consumer prices of PNG or CNG, but certainly it is a core regulatory function to determine transportation tariffs of monopoly infrastructure in CGD networks.  Across the world, regulators do just that – regulate transportation tariffs. They also bring in a modicum of transparency in pricing which is an effective shield against price-gouging.

Muzzling the regulator

Yet, in a perverse judgement delivered by the Supreme Court last year, the regulator has been restrained from exercising its core function, namely determining the network tariffs of CGD entities.  The original petition was filed by IGL when PNGRB pared down its usurious network tariffs to grant relief to the consumers. When PNGRB appealed against the order through a Special Leave Petition, the apex court resorted to some confounded semantics to make a fictitious distinction between ‘transportation rate’ and ‘network tariff’ to stymie the regulator although network tariff is nothing but transportation rate for gas transported within the city gas networks.  An inability to appreciate the role of regulators in a monopoly market is at the core of this judgement. The government played a mischievous role in instigating this misinterpretation when its counsel submitted before the apex court that PNGRB Act 2006 did not empower the regulator to regulate network tariffs of CGD entities! Why then was the regulatory board set up in the first place?

To add fuel to the fire, and in gross violation of consumer rights, the apex court went on to rule against transparency in pricing as well.  The government and the regulator had required the companies provide a break-up of their pricing, indicating the cost of gas, network tariff, marketing margins and local taxes. But the same apex judgment ruled that CGD companies are not required to provide break-up of bills charged to consumers.  Which means, CGD companies can now hide their inefficiencies and/or avarice to present the consumers with a consolidated bill, far in excess of what is fair and just.  No wonder CGD companies resort to unwarranted price revisions.

Where can the hapless Indian gas consumer turn when three titans – the monopoly gas utility, the government and the judiciary team up against her?

Sudha Mahalingam is an independent energy consultant and former Member, Petroleum and Natural Gas Regulatory Board.