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POV : Is Zonal Tariff in contradiction with the idea of an integrated national gas grid owing to cascading effect of distance based tariff/s?

By , ,
Industry : ONG

The downstream oil industry regulator, Petroleum and Natural Gas Regulatory Board (PNGRB) has put in place, the Zonal Telescopic Transportation Tariff System with an aim to determine tariff for all existing or under implementation pipelines. However, there are contradictory views in the industry, some pointing that the move is in variance from the national gas grid in the country. The critics fear that it might result in concentration of fertliser and gas based plants in few specific locations.

InfralineEnergy sought industry opinion on the issue.

Shri Labanyendu Mansingh,Chairman, Petroleum and Natural Gas Regulatory Board (PNGRB)

There is no contradiction between the Zonal Telescopic Transportation Tariff System which has been put in place by the PNGRB and the idea of an integrated National Gas Grid. Since the investment on each transportation pipeline has to be assured of a minimum return in order to facilitate the flow of massive investment required for the expansion of the gas distribution infrastructure in the country, the tariff is required to be determined for all existing or under implementation pipelines, prior to the appointed date separately, as per the relevant tariff determination regulations.

However, in order to minimise the incidents of transmission tariff on the ultimate consumer of gas, the board has decided to actively encourage swapping of gas. In accepting EOIs for pipelines for grant of authorisation through the bidding process, the board tries to bring a degree of competition between the pipelines so that the consumers benefit from the competition.

Dr Pramod Paliwal,Professor and Chairperson,PGDPMX, School of Petroleum Management,

The development of a robust gas transmission infrastructure is a prerequisite to the development of natural gas industry catering to myriad of customers in India. It is a fact that laying down of several hundreds of kilometres of high pressure cross-country natural gas transportation pipelines is highly capital intensive. It requires systematic approaches, necessary policy thrusts in the area of transmission tariffs being one of these.

While natural gas transmission tariffs are a key component of consumer-end gas prices, it is important that any tariff structure is also pro-pipeline infrastructure development. At the same time, it is also necessary that the tariff policy evolves with the evolution of natural gas market and this becomes all the more important in the Indian context.

The erstwhile postal tariff system that was based on a uniform tariff for customers irrespective of the distance between them and source was perhaps best suited for the stage of market development prevailing at that point of time. However, with changing times, when the natural gas market development is gradually progressing towards a definitive phase, it should no longer be anybody's argument that we continue with a tariff system that was fraught with multiple inefficiencies in the form of cross-subsidies and under-recoveries for the concerned entities.

Transmitting natural gas over long distances requires extensive compression and the same is not possible without an adequate capital expenditure and concomitant operating expenditure at later stages. This in itself becomes the very logical basis of a tariff structure based on rational principles.

The supporters of postal tariff regime argue about the so-called asymmetrical development of natural gas/ natural gas based industry in India that the zonal tariff system shall bring in. However, while it is true that the transmission company for example will charge different tariff for supplying KG basin gas to users in Andhra Pradesh, Maharashtra and Gujarat--depending upon their distance from the gas source--it would be illogical to say that all the natural gas based industries shall be located in Andhra Pradesh only. That is simply not possible because while academically speaking (in the zonal tariff regime), the majority of fertilizer industrial activity may come up in Andhra Pradesh, but at the same time, one cannot overlook one simple fact that all the fertilizers' end-consumers are not concentrated only in Andhra Pradesh! Even the fertilizer companies shall have to look for pan-Indian marketplace to sell their produce. This fundamental economic principle of demand-supply and market dynamics of end-produce, shall take care of (any) tariff-based advantage that is likely to accrue to any natural gas consumer in zones located near to the source of natural gas. And the reverse is true for natural gas consumers located at farther distances.

Similarly, to presume that the entire city gas distribution (CGD) activity is going to take place in earlier zones, is also a flawed argument. Like natural gas based industries, even the market for CGD companies also have a saturation point in these zones and it is quite obvious that given the availability of gas, other zones shall also develop. Even assuming that in the extreme case, it so happens, that CGD development takes place in a lopsided manner in Andhra Pradesh or Maharashtra for that matter (due to relatively lower tariffs), would it not result into the gross impact on (subsidised) LPG and other polluting fuels' reduced usage? It is thus important to look at the larger picture.

It is imperative to have a tariff structure that incentivises the players to come forward and create pipeline infrastructure in the country in a big way. There are many larger issues like availability of gas, allocation and pricing that the industry has to contend with. It is high time that the stakeholders shun their scepticism on zonal transmission tariff, which is (zone based transmission tariff) essentially pro-infrastructure development.

Shri Prosad Dasgupta,Former MD and CEO, Petronet LNG

Nowhere else in the world do you have postal tariff like ours. It cannot be that you carry gas from Petronet LNG's Dahej plant to Balooch at 65 cents per mmbtu and if you take it to Jagadishpur still it will cost you 65 cents.

What could possibly the government do to address the issue? It needs to pursue the National Pipeline Grid just, and just a cess of five cent on gas prices would fund it. Whatever pipelines that we have today are courtesy Government of India. All the trunk lines have been laid by them. Organisations such as GAIL need to be more proactive. GAIL along with other players should actively construct spur lines to customers and charge the money. In my opinion, the trunk line should be developed by the government so that it reaches every part of the country. Trunk lines, which are 24, 32, 24, 18 inch should be done by an authority, which could function or fashioned on the lines of Highway Authority of India, which is doing a good job with building new highways for the country.

The trunk line tariff has to be like postal, but then we should not allow this postal tariff to enrich private companies. I'm in favour of postal tariff only for trunk lines and we need to come up with many spur lines as trunk line alone does not solve transportation issues. And trunk line tariff should be distance based.

Since GAIL is the prominent builder of pipelines in the country, they should follow Indian railway tariff. GAIL built the Dahej run pipeline at our behest that started off Ratnagiri. If there is a spur line going from somewhere from the pipeline to Gujarat State Petronet Limited (GSPL) or HPCL petrochemical plant, GAIL cannot be charging the same amount as they are charging for trunk lines. It has to be a combination of both, for the simple reason that there should be more players to create competition.

Pipeline Tariff in US is all privatised. Even for some sections of trunk lines there, they have distance based tariff somewhere, it is one dollar, 24, 45 or 10 cents. We also have suggestions regarding modeling pipeline tariff similar to railway fare chart. But the railway-kind of fare is only possible, if you have a single owner. Here railways own everything, but in a pipeline business you cannot assume that.

And incremental cost is never double. For example, when at Petronet LNG, we constructed Dahej, first phase cost us US$600 million. When it was expanded, the cost only came to US$300 million. Therefore, you can have an incremental cost, but necessarily not an extrapolated cost.

(InfralineEnergy's "Points of View"(POV)is an initiative for encouraging dialogue between various stakeholders of the Indian energy sector on contemporary subjects. For feedback, please write to

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