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Regulation in Petroleum Sector: Need to cover Upstream Segment, Shri R V Shahi, Former Secretary, Ministry of Power

All the important business dailies have carried the news that the Petroleum Ministry is opposed to the recommendation of the Committee, headed by Mr. Chawla for upstream Regulator in petroleum sector.

Petroleum products are important fuel inputs for almost every aspect of our activities. Fuel needs of industry, transport, service and households are met by oil and gas and various other products in the petroleum group. Unfortunately, our dependence on import, in this sector have increased to an extent that almost 84% of the demands are to be met through import, and the balance only 16% through domestic production. This is one sector of the economy in which liberalization started much earlier, almost simultaneous with the economic reforms initiatives launched in the early 90's. Ever increasing demands, and more importantly less than commensurate increase in the domestic production, coupled with not so efficient consumption practices, have all culminated into such a heavy reliance on imports.

When a sector is opened up as a consequence of liberalization initiative, it is expected that a number of players will come into action, and the balancing of the interests of various stakeholders, in such a situation, inevitably, becomes a challenge. When the market matures, with a large number of competing players on the supply side, and shortage situation comes within manageable limits, it could be expected that market itself will respond to the challenge of balancing conflicting interests. Increase in supply leads to pressures on different suppliers both for competitive prices and improved quality of services. But, if the supply is far below demands, markets themselves cannot take care of the interests of all stakeholders, particularly of consumers. Suppliers do take advantage of shortage situation and consumers are at the receiving end faced with ever increasing prices and not so high level of quality of service. Market allows the supplier to have an upper hand and mostly "take it or leave it" scenario emerges. It becomes then the responsibility of the Government to ensure that there is mechanism to regulate the market in a manner that suppliers do not get away with undue and unwarranted benefits at the cost of consumers, and at the same time there is enough incentive for investors in the system to ensure that investments happen, expansions take place, supplies increase, thereby bringing the situation to near about good and balanced market, taking care of the interests of all stakeholders.

Somehow, when the petroleum sector was opened up, the task of regulating various aspects of the sector continued with the Government. Normally, it has been seen world over that when a sector is liberalized and opportunities are opened up for private investments, for various good reasons, the Governments decide to put in place Regulators to ensure a balance to be maintained amongst various stakeholders. Even in India when the telecom sector was opened up, a Regulatory Authority was put in place, though it is different that the Regulatory Authority was given somewhat truncated jurisdiction and didn't have even the power to issue licenses. In the power sector, with its opening up, post electricity Act 2003, a very strong regulatory mechanism has been established. As a matter of fact, even prior to Electricity Act 2003, Regulatory Commissions, with somewhat less authority, were visualized under the Electricity Regulatory Commission Act 1998. In a large number of States they started functioning. Post Electricity Act 2003 the regulatory institution has been further strengthened with more empowerment and also an Appellate Authority to adjudicate over the decisions of Regulators. Power sector continues to be faced with shortages. Regulatory institutions, in a transparent manner determine prices both upstream, viz. generation of power, to downstream covering the distribution of power. There are issues, and regulatory mechanism in the power sector could have functioned better, there are a number of areas of improvement. Yet, the larger picture is that distancing pricing in the power sector from political and Governmental system to autonomous quasi-judicial institutions has been of great advantage.

In the petroleum sector, the market imbalances are even more. Shortages are sharper, players are much less in number and the sector is far away from the situation of a balanced and perfect market. Therefore, need for regulation in this sector is much more than in power sector. While deliberating in the Expert Committee on Integrated Energy Policy, during 2004-06 there were several views, more particularly with reference to the regulation in the petroleum sector. The Integrated Energy Policy finally has recognized that in none of the segments of energy - power, coal, or petroleum - we have reached anywhere near a balanced market structure, and, therefore, regulation in these sectors is essential.

Para (16) in Chapter-V of the Integrated Energy Policy (2006) is relevant to be quoted :

"Independent Regulation is critical to attaining competitive efficiency in the energy sector ......... It is important that all sub sectors of the energy sector are regulated and done so in a consistent manner..........."

Further in Chapter XII on "Oil and Gas Sector Policy", the Report says "There is a need to have an independent regulatory body to regulate upstream allotment and exploitation of available oil and gas reserves and provide downstream regulation that primarily ensures competition on level terms in refining, transportation, distribution, and retailing of oil and gas.............."

Coal Ministry, though belatedly, is in the process of setting up this institution. In the case of petroleum sector, the Petroleum and Natural Gas Regulatory Board has been established. But, it covers only the downstream segment. I recall that when this Bill was being examined, the matter regarding coverage of the upstream was particularly highlighted during a few meetings of the Committee of Secretaries. There was no divergence of view on the need for regulating the upstream segment. What was, however, pointed out by the Petroleum Ministry that the Directorate General of Hydrocarbon would be further strengthened and made autonomous to function as Regulator for the upstream segment. Five year down the line, counting from the above discussions and decisions, we need to take note of two developments - (a) unending controversies between the Petroleum Ministry and the Regulatory Board, which was not allowed to function, even with the truncated jurisdiction, until the Court directed the Ministry to allow this institution to function, and (b) practically nothing was done, contrary to the conclusions in the Committee of Secretaries, on strengthening the DGH and making it an autonomous Regulator. We have seen the consequence of this inaction on the part of the Petroleum Ministry.

Now that the recommendations of the Committee chaired by Mr. Chawla, Former Finance Secretary, are available and these include the need for establishing upstream Regulator for petroleum sector, it is reported that Petroleum Ministry is opposed to having this institution. It continues to justify the relevance of the DGH to have the jurisdiction on issues concerning regulation of the sector. It has been rightly suggested by the Committee that DGH could be further strengthened to become the Apex Technical Body of the Ministry and there should be a separate Regulatory Authority to take care of the upstream segment. If we look at the structure in the power sector, the Central Electricity Authority is the Apex Technical body of the Ministry of Power. Under the earlier Electricity Supply Act (now repealed), the CEA used to have a number of regulatory functions. It was felt that as a part of the Government, it might not be desirable to have these functions under their jurisdiction. Accordingly the Electricity Act 2003, provides for Central Electricity Authority with a large number of functions to take care of complex technical aspects of the sector, prepare long term perspectives and medium term National Electricity Plans including transmission systems, technology upgradation etc. But, to regulate the sector, the institutions of Central Electricity Regulatory Commission, and State Electricity Regulatory Commissions have been envisaged. Petroleum Ministry needs to look at this structure. The argument of the Petroleum Ministry that DGH would do both - providing technical advice to the Government as well as regulating the sector does not seem logical.

It has been reported in the Press that the Petroleum Secretary has defended the existing system saying, "Normally a Regulator in any field is required when level playing field to all the parties needs to be proved. In the upstream sector, Policies such as NELP (New Exploration Licensing Policy) already provide a level playing field to all companies. Therefore the Ministry has been of the view that a separate independent Regulator for upstream sector is not required". As a matter of fact, NELP is not a substitute for a regulatory institution. While dealing with the issue of pricing, NELP itself has envisaged a role for Regulator. Also, the argument of the Petroleum Ministry that in view of numerous technical complexities, an organization like DGH alone can provide the right answer is also devoid of any logic because what is being suggested is separation of technical examination and technical advice from regulation of prices and related issues. Any regulatory mechanism will definitely need the support of DGH, just as the Electricity Regulatory Commissions do need a number of technical inputs from the Central Electricity Authority. It is inconceivable that CEA will function as CERC, and accordingly it is totally illogical to suggest that DGH would be a substitute for a strong quasi-judicial Regulator in the petroleum sector.

So long as Government continues with the temptation of regulating prices, they will continue to face more problems. Issues relating to transparency in decision making would invariably be raised, get politicalised, thereby leading to delayed decisions and associated consequences. Regulatory institutions may not be perfect answer, there may be shortcomings, but on the whole, distancing the process of price fixation and related issues from the Government has considerable merit. The regulatory mechanism requires, as a procedure, a more involved, participative and transparent process, and its quasi-judicial nature gives it a much stronger framework in which there is greater degree of acceptability. Petroleum Ministry, therefore, needs to revisit its approach on the whole issue.