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A Response

 Unsubstantiated Criticism of Natural Gas Regulator Ratan P Watal A point by point rebuttal of the article

DISCUSSION

Unsubstantiated Criticism of Natural Gas Regulator

Ratan P Watal

as chairman and members of the board. It provides for their selection by a search committee chaired by the Member (Energy), Planning Commission and consisting of secretaries to the government in various ministries. The present chairperson and members of the board have been

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

EPW
NOVEMBER 21, 2009

T
he article “Shortcomings in G overnance of the Natural Gas S ector” (EPW, 25 July 2009) by Ashok Sreenivas and Girish Sant makes a number of statements regarding the P etroleum and Natural Gas Regulatory Board (PNGRB). The board was not consulted by the authors for any clarifications on the issues pertaining to it in the article. Since the sweeping generalisations about the board’s functioning are misleading and not based on factual position, these require to be clarified. (1) The performance of PNGRB so far raises further concerns. There have been reports about dissent within the board with some members feeling that the chairman of the board was autocratic, and the government has also pulled up the board occasionally.

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

vol xliv no 47

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,

  • o perating or expanding any such pipeline a uthorised by the central government prior to the appointed day from this requirement. Such entities are required to apply to the board under Regulation 17 of the PNGRB (Authorising Entities to Lay, Build, Operate or Expand Natural Gas Pipeline) Regulations, 2008. The board has been reviewing and monitoring the implementation of the pipelines so authorised by the central government against the schedule given in the approval. There are in addition five expressions of interest submitted by entities for grant of such pipelines, three of which are through central India and connecting to eastern India. The board is in the process of commencing the bidding process for transportation pipelines after taking a final decision on the capacity and alignment of the pipelines after the process of public consultation.
  • (4) Confusion also prevails about some entities involved in natural gas transmission and distribution based on authorisations
  • 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

    NOVEMBER 21, 2009

    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

    vol xliv no 47

    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

    A Response

    Ashok Sreenivas, Girish Sant*

    W
    e would like to respond to some of the points raised in the comment by Ratan Watal on behalf of the Petroleum and Natural Gas Regulatory Board (PNGRB) and provide some suggestions that we believe will help improve the functioning of the board.

  • (1) Unanimity of Decision-Making w ithin PNGRB: We are glad to note that all of PNGRB’s decisions have been made unanimously. The unanimity of decisionmaking within PNGRB would not be questioned if the orders passed by the board are signed by all the board members and dissent notes (if any) are appended. However, two of the five orders posted on the P NGRB web site are signed only by the secretary and not by all the members. In contrast, the orders issued by many regulators, such as the Delhi Electricity Regulation Commission and the Central Electricity Regulation Commission, are published on their web sites along with dissent notes (if any) and signed by all members.
  • (2) Authorisation of Nine Trunk Pipelines: We are glad to note that there is no longer a conflict between the board and the Ministry of Petroleum and Natural Gas (MoP&NG) on the issue of authorisation for nine trunk pipelines, though earlier
  • Economic & Political Weekly

    EPW
    NOVEMBER 21, 2009

    to comply as per the regulations, in addi basis of wide consultation with all stakehold
    tion to the penal action under the Act. Not ers and the general public. The board has
    satisfied with this, the board is in the proc proactively tried to involve consumer groups
    ess of finalising regulations laying down in the consultation process, particularly in
    specific quality of service obligation for finalising the regulation laying down quality
    the natural gas sector supplementing the of service o bligation for entities.
    obligations included as conditions in the It would appear rather strange that the
    letter of authorisation mentioned above. authors, instead of appreciating these
    (9) To address this situation, MOP&NGshould e fforts, actually recommend that the mini
    officially invite public comments on the way stry should undertake an exercise in this
    in which a consumer friendly s tructure can be regard. They should clarify as to how a stat
    developed and how strengthening of utory regulator can function independently
    r egulatory structures can be carried out. and effectively in carrying out its responsi-
    As indicated earlier, the regulations as per bilities if the ministry is expected to under
    which the board exercises its regulator y re take activities which are within the domain
    sponsibilities are finalised and notified on the of the regulator under an act of Parliament.
    media reports (“The Great Gas Pipeline i mproving the procedures of city gas
    Chase”, Business Standard, 25 June 2009) distributions(CGDs) licensing in order to
    indicated otherwise. In the meantime, we strengthen transparency:
    hope PNGRB has been able to consider (a) The PNGRB web site does not even
    whether these authorisations are not just list the winning bidders for the different
    acceptable and convenient but also condu- CGD licences issued so far, leave alone de
    cive to promoting competition. Citizens tails of the bid such as the network tariff,
    would be happy to see PNGRB’s analysis on the compression charge, etc. This does not
    this issue and comparison with inter leave citizens with any source of informa
    national best practices in this context and tion other than media reports to find such
    we look forward to seeing such an analy information.
    sis from the board. This will help bolster In fact, there is also a concern that even
    transparency and the confidence of citi the “model bid document” is not publicly
    zens in PNGRB. available. The appellate tribunal order cites
    Another important issue in the context section 2.8.3 of the bid document as a key
    of authorisation of pipelines is regarding reason to reject GAIL’s application. However,
    approval of their costs. Since the cost is the application-cum-bid form available as
    finally going to be recovered from consum- Schedule C of the PNGRB (A uthorising
    ers of gas, they should be invited to be part Entities to Lay, Build, Operate or Expand
    of the petition of cost approval. When the City or Local Natural Gas Distribution Net
    pipeline costs are to be approved, P NGRB works) Regulations, 2008 does not have
    should, in the interest of consumers, put any such section at all. This implies that the
    up a public advertisement inviting com bid document available on the web site is
    ments. Moreover, as the gas distribution different from the one used in practice, thus
    companies and major gas users (like large increasing concerns of transparency and
    fertiliser and power plants) will be sub casting doubts about the validity of other
    stantially affected by this, they should be information on the web site.
    individually invited by PNGRB to partici- In contrast, the competitive bidding
    pate in the discussions by asking the pipe guidelines issued by the Ministry of Power
    line company to send a copy of the full (MoP) mandate publication of not just
    p etition to all such users. These are routine d etails of the winning bid but also anony
    practices at many other regulatory bodies. mous comparison of all bids received and
    As PNGRB is keen to have such public par all final signed contracts. We request P NGRB
    ticipation and transparency, we are sure also to adopt such good practices and make
    you would initiate such m easures. all information public about the bidding
    documents, successful bidders, details of
    (3) City Gas Distribution Licensing: We the successful bid and anonymous com
    b elieve there is considerable scope for parison with other b idders.
    vol xliv no 47 77

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    DISCUSSION

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

    and Ghaziabad) with bids of zero network tariffs. Since the information is not easily available from PNGRB to the public, if true, these bids do appear to be irrational. Given that the contractors must have obviously bid zero network tariff in the full knowledge that they can recover their investments through other means, and given that details such as the compression charge and perhaps any other hidden costs are not public knowledge, it is unclear what prices the consumer would have to pay for PNG and CNG in these c ities. Unless PNGRB analyses such seemingly irrational bids and convinces the c itizens that there are no loopholes in the bidding process, concerns would remain. Once again, we can point to the competitive bidding guidelines of MoP which dictate that “the evaluation committee shall have the right to reject all price bids if the rates quoted are not aligned to the prevailing market prices”.

  • (4) Accountability of PNGRB: We are in agreement that regulatory bodies need to be largely independent of the government in order to be able to carry out their duties effectively. However, we believe regulatory bodies should be subject to multiple levels of accountability to citizens which go beyond appeals to the appellate tribunal:
  • (a) Complete transparency of the functioning of regulatory bodies: As discussed above, we believe PNGRB has substantial scope for improvement in this regard even compared to the best practices in India as it does not proactively publish many d ifferent kinds of information.
  • (b) Public participation in decisionmaking: While it is good that PNGRB a llows public comment and feedback b efore finalising regulations, the same does not appear to be true in matters related to cases / petitions and their hearing before the board since people do not have an easy way to know what cases are currently being heard, when they would be heard and by what date they would be allowed to i ntervene. To the best of our knowledge, PNGRB has also not appointed specific consumer groups or reputed academic researchers to protect public interest. Therefore, the legal provision in the regulation that all proceedings
  • (c) Provisions for transparency and public participation should be enshrined in all the procedures and regulations of the board. This will give the measures for transparency and public participation the necessary legal sanctity and empower citizens to actually participate in the board proceedings, and will help translate the objectives of transparency and public participation into practice.
  • (d) Another level of accountability of regulatory bodies, including PNGRB, comes through accountability to both houses of Parliament, where their annual reports should be tabled (Clause 41 of the PNGRB Act). However, no such report from PNGRB is available publicly and the annual r eports section (along with some other sections such as the consumer section) on the P NGRB web site is still “under construction” as of 5 November 2009 though more than two years have elapsed since the board was notified.
  • (5) Emerging Market Concentration and Vertical Integration: We note that your letter does not deny the possibility of such emerging concentration or integration in the natural gas sector. As discussed above, the PNGRB web site does not provide adequate information to decide whether there is sufficient competition at the bidding stage for CGD. However, available media reports suggest that not many bidders appear to be participating in the auctions, and at least three or four cities attracted only one bid within their normal bidding period. Additionally, with the nine trunk pipelines authorised by the government of India prior to the notification of the board, it would appear that two operators (GAIL and RGTIL) would gain rights to a significant portion of the country’s pipeline grid even before any auctions for gas pipeline infrastructure can begin. We would be happy to hear what measures PNGRB is taking to promote competition and discourage vertical integration as a means to create a healthy gas market in the country.
  • * Ashok Sreenivas (ashok.sreenivas@gmail. com) and Girish Sant (girish@prayaspune.org) are with the Prayas Energy Group, Pune.

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