Who determines the price -- market or regulator?

The govt needs to decide whether it wants a regulator to exercise pricing controls

A Supreme Court order last week ruled that the Petroleum and Natural Gas Regulatory Board did not have pricing powers for city gas distribution.

With this, PNGRB is among the few regulators that have neither pricing powers, nor the power to lay the guiding principles for what is to be charged to consumers.

“On scanning of the entire Act and applying various principles, we find that the Act does not confer any such power on the board. . .  .

"The power to fix the tariff has not been given to the board.

The board cannot frame a regulation, which will cover the area pertaining to determination of network tariff for city or local gas distribution network and compression charge for CNG.

As the entire regulation centres around the said subject, it deserves to be declared ultra vires, and we do so,” said the apex court in its July 1 order.

This is in sharp contrast to financial sector regulators, which not only exercise pricing control powers in different ways, but are far more powerful than other regulatory bodies.

“The Reserve Bank of India is a super powerful regulator and even the Securities Exchange Board of India is increasingly exercising its powers, especially in products where companies are playing around with public money,” says Hemal Mehta, senior director, Delloite.

Similar is the case with the Insurance Regulatory and Development Authority of India (Irdai), which puts caps and intervenes in designing of insurance products that have an impact on premium and returns to the investor.

Even in sectors like ports, power, telecommunication and airports, laws have been designed to give the regulators either price approval powers or they set caps and formula, which the players in the sectors are required to strictly follow.

Moving from pricing control to a free market for any sector brings along with it greater competition.

But if for a consumer it means services or products becoming more expensive, the government and sectoral regulators have often intervened.

In the case involving PNGRB, Indraprastha Gas Ltd, a joint venture of government-controlled GAIL India and Bharat Petroleum Corporation, had challenged the board’s powers to regulate its tariff.

The dispute dated back to 2012 when PNGRB ordered IGL to cut network tariffs by 63 per cent to Rs 38.58 a million British thermal unit from Rs 104.05 submitted by it.

Similarly, the compression charges for compressed natural gas was asked to be cut by almost 59 per cent to Rs 2.75 a kg.

The PNGRB order came with retrospective effect from April 1, 2008. The differential was “a staggering amount almost equivalent to the company’s net worth at that point in time” and would have “severely impacted” the financial profile of IGL, says an ICRA report.

Following the PNGRB order, every CGD player needed to file tariff petitions for network and compression charges and get it approved by the regulator, something similar to what the electricity regulators do with power tariffs even if arrived through a bidding process. ICRA says the dispute heightened the regulatory risk in the sector. IGL moved the Delhi High Court and in June 2012 got a favourable verdict, following which PNGRB went for an appeal in the Supreme Court.

This was not the first time that IGL had a dispute with PNGRB. It had also challenged the regulator’s power to issue authorisation in 2009.

CGD players, like IGL, Mahanagar Gas Ltd and Gujarat Gas, have been in existence prior to the setting up of the regulator.

Since IGL was a government-controlled entity and even in the trunk pipeline business, public sector GAIL was the dominant player, PNGRB was intentionally kept a lame duck regulator since its inception.

The government for four years did not notify section 16 of the PNGRB Act, which gave the regulator powers to issue authorisation.

Section 16 of the Act says that no entity will lay, build, operate or expand any pipeline or CGD network without obtaining authorisation under the Act except in cases where such authorisation has been granted earlier. The section was notified only in June 2010. Both for CGD and laying trunk pipelines, the rights (called authorisation) are now given out by PNGRB through auctioning.

The latest Supreme Court judgment now settles the issue of pricing powers.

It’s reading of section 11 of the Act, empowering the regulator to come out with regulations with regard to access and transportation rates for common or contract carrier, and access to CGD or local gas distribution, limits the pricing power of PNGRB to only situations where the network is run on common or contract carrier principle and not when a company like IGL owns both the gas and the network.

Though the order does not limit the power of PNGRB to set tariffs for trunk pipelines, the government contention throughout the proceedings that it did not intend to give such powers to the regulator in the case of CGD has put the lid on the controversy and left almost all the CGD consumers out of regulatory protection at least for 25 years from the inception of such networks.

After such period, when the common carrier principle comes into play, PNGRB can perhaps get back its teeth.

More importantly, however, the government would need to answer whether it wants a regulator to exercise pricing controls or leave it to competition whenever it gives up such powers in a particular sector while opening up of the market.

This also raises the question whether the regulators should control pricing in a monopoly market for the benefit of consumers.

Image: A stock trader reacts. Photograph: Reuters