A point by point rebuttal of the article “Shortcomings in Governance of the Natural Gas Sector” (EPW, 25 July 2009) which critiqued the working of the Petroleum and Natural Gas Regulatory Board.

Ratan P Watal (ratanpw@yahoo.com) is secretary, Petroleum and Natural Gas Regulatory Board.

Economic & Political Weekly

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The statement is based on a report which appeared in Business Standard on 27 April 2009 as indicated in note no 1 of the article. This is a factually incorrect statement, which was earlier made in an article published in the Business Standard on 29 November 2008 and the board rebutted the same in detail at that time vide letters dated 3 and 5 December 2008.

As per Section 8(3) of the PNGRB Act of 2006, questions coming up before the board shall be decided by the majority of the members present and voting. There is, as such, no requirement of any unanimity on any issue for it to be validly decided by the board. Inspite of this, all decisions in the board so far have been unanimous. The question of the government “pulling up” the board does not in any case arise as PNGRB is an independent statutory authority under an act of Parliament.

(2) The procedure for appointing the regulators is also highly non-transparent, m aking it susceptible to political patronage or capture.

Section 4 of the 2006 Act lays down the minimum qualification for appointment

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s elected by the statutory search committee on the basis of public advertisements calling for applications from all eligible candidates, perhaps the only regulatory body selected in such a manner.

(3) There is also an ongoing battle between PNGRB and the Ministry of Petroleum and Natural Gas (MOP&NG) in the pipeline s egment about who can authorise nine trunk pipelines that had been approved by MOP&NG just before PNGRB was set up, and as a result, it seems that the centre, south and east of the country is being starved of gas.

There is no difference of opinion between the board and the MOP&NG on the issue of authorisation of trunk transportation pipelines. Proviso to Section 17(1) of the 2006 Act providing for submission of application to the board for grant of a uthorisation of common or contract carrier for transportation of natural gas pipeline exempts entities laying, building,

DISCUSSION

received from state governments b efore P NGRB came into existence.

Under Section 17(2) of the 2006 Act, even entities operating existing networks without the approval of the central government prior to the appointed day are r equired to apply for authorisation to the board under regulation 18. There is no confusion in this regard and all such entities have already applied to the board and many of them have already been granted authorisation.

(5) P NGRB’s role includes authorising entities to operate CGD networks and this also has had its share of controversies. One e xample is its recent award of the Mathura CGD licence to an operator with seemingly little experience due to the way the bidding process was conducted.

There is absolutely no controversy in this regard. Grant for authorisation for CGD networks has to be done in accordance with the provisions of the law and the procedure/pre-qualifications notified by the board under regulation 5. Specific criteria for eligibility for participation in the bidding process for CGD networks have been laid down. The bidding process involves submission of two bids: one technical and the other price. The price bids of only those who qualify as per the eligibility criteria on the basis of technical bids are opened. Authorisation is granted to the entity securing highest composite marks as per the bidding criteria laiddown in regulation 7. There is little scope of any discretion in the process designed for total transparency and objectivity.

For the geographical area of Mathura, there were two bids, one by GAIL, a central government undertaking and the other by a private bidder subsequently incorporated as DSM Saumya Limited. The latter bid was submitted when the bid period was extended by the board by one month as provided in the regulations since there was only a single bid. The latter bid was the successful one in terms of composite score on the basis of weighted bid criteria.

Any decision of the board can be challenged before the appellate tribunal which is chaired by a person who is or has been a Judge of the Supreme Court or the chief justice of the high court. GAIL chose to a ppeal against the grant of authorisation before the tribunal, which the tribunal has dismissed with strictures on 16 July. It may be noted that GAIL did not challenge the grant of eligibility of the said entity but on other grounds. In view of this, it is really astounding as to how this decision can be called controversial on the ground that the board chose a party “with seemingly little experience”. Since the authors have repeatedly expressed concern in the same article about the dominance of few players of the natural gas market, surely the intention cannot be for the board to start rejecting bids even after they prequalify on the subjective ground of little experience and confine the selection to the few existing “dominant players”.

(6) All this suggests that the regulatory processes are not functioning effectively. In such a case, the government needs to act by choosing among the options of issuing a ppropriate policy directives to the P NGRB.

It is surprising that such a suggestion should have been made in an article expressing concern about dominance and lack of governance of the market in this sector. The board has already notified 18 regulations since its inception on 1 October, 2007 with more in the pipeline, 10 of which are related to grant of authorisation of transportation pipelines and the city gas distribution. The regulations are intended to subserve the objectives of the said act for ensuring fair trade and competition, protection of consumers’ interest and development of infrastructure. The board has already conducted two rounds of bidding CGD networks and no one so far has challenged, including in the number of appeals filed before the appellate tribunal, the processes under the r egulations and the decisions taken thereo n on the ground of lack of transparency or objectivity.

All regulations of the board are finalised on the basis of wide consultation with all stakeholders and the general public for a period of minimum one month with all com ments received being taken into consideration before finalisation and notification of a regulation. In view of this, it would have been appropriate for the a uthors, if they were serious about ensuring a fair and competitive energy market, to have carefully gone through the regulations and pointed out any possible i mprovement instead of making sweeping generalisations without any basis. The board has

committed itself to ensure transparent and objective regulatory framework based on international best practices which comprehensive review of bid conditions and procedures after every round of bidding.

Any regulatory body can function effectively and achieve the objectives for which it has been set up under an act through its autonomy and capacity to resist interference in its operations. Its accountability comes through provision to challenge its decisions before an appellate body and the transparency of its regulations.

(7) The market structure developing in the natural gas sector is heading towards a heavy concentration of one or two players across virtually all segments of the sector.

In finalising the eligibility criteria for participation in the bidding process for transportation pipeline and CGD networks, this factor has been kept in mind with a view to ensure maximum participation and competition. The proof of pudding is in its eating. There has been considerable participation in the bidding process inspite of the “dominance” of a few players’ as observed in the article.

(8) While PNGRB has notified regulations for “affiliate transactions” that are expected to prevent misuse of market power by vertically integrated entities its performance so far does not inspire confidence that it will be able to protect consumer interests, particularly with such a limited tool.

The board has notified the Affiliate Code of Conduct for entities engaged in production, transportation and distribution of natural gas and the Access Code for common career/contract career pipelines. A similar access code is being finalised for CGD networks. The affiliate code of c onduct prohibits less favourable treatment to a competitor as compared to the entity’s own division or subsidiary. However, it has to be borne in mind that PNGRB being the downstream regulator is not responsible for ensuring marketing of gas by a producer on market determined price at arm’s length.

The access code provides for third party access on a non-discriminatory basis to a transportation pipeline. With the notification of the access code, the foundation for a competitive natural gas market in the country has been laid.

As regards protection of consumers’ interest, specific provisions under the said

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DISCUSSION

Act are listed out under Section 11(f). These apply to notified petroleum, petroleum product and natural gas. The MoP&NG has chosen not to notify a single product so far with the result that the board cannot exercise any powers in this regard. However, inspite of this, the board has listed out elaborate “quality of service” o bligation as part of conditions for grant of authorisation for protecting consumers’ interest by the authorised entity. Compliance with these obligations is ensured through the requirement of submission of a performance bond guarantee from the entity which is liable to be forfeited partly or fully in the event of failure

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(b) Media reports indicate that some city are public does not translate into real pubgas licences (e g, Allahabad, Chandigarh lic participation.