Decontrol in India

Patrick Crow
Washington, D.C.
[email protected]

India's committee on downstream hydrocarbon sector regulation has urged the government to phase out its controls on product prices, relying on a free market system by 2001 or 2002.

The panel recommended the Petroleum Ministry disband the Oil Coordination Committee (OCC) and give its duties to a new regulatory panel, the Commission on Oil Regulation (COR).

The policy change follows the decision of Prime Minister Inder Kumar Gujral's government to sharply increase products prices on Sept. 1.

India long has controlled retail prices despite the cost of imported oil. That has protected consumers from price swings but was costing the government about $4.4 billion/year.

The committee also recommended formation of an industry association called the Petroleum Federation of India (PFI), which would be similar to the Confederation of Indian Industry (CII).

Like CII, PFI would coordinate oil supply plans and logistics with railways, ports, and pipelines. It also would collect industry data and lobby on behalf of the oil industry.

COR's role

If all the recommendations are accepted, COR would track product availability from refineries, impose penalties on refiners for stock outages, and ensure access to industry-owned terminals and port facilities to all users at reasonable tariffs.

COR, which will be independent, will create a market-based production, supply, distribution, and pricing system. It also would be a forum for settling disputes among government, industry, and consumers.

Presently, OCC sets crude and product imports, optimizes refinery operations, coordinates supply and distribution, manages pool accounts, responds to supply crises, and maintains a management information system for the oil sector.

The Indian government finally decided that controlling products prices discourages innovation and efficiency and leads refineries to make inefficient decisions under the shelter of a cost-plus system.

It established a panel headed by R. K. Pachauri, director of Tata Energy Research Institute, to suggest an alternative regulatory body to govern a decontrolled industry.

Product slates

If the government accepts the proposed system, refiners would be free to decide their product slates based on economics and without government interference.

Although prices would be freed, COR would remain on guard against formation of monopolies or cartels.

Companies would have full autonomy to set their operational crude and product inventories, which OCC presently dictates. COR would monitor the availability of products in the market and the companies' position to supply them. There is also a system of penalties for non-delivery.

OCC currently coordinates the transport of crude imports and coastal movement of products. The Surface Transport ministry oversees oil movements at terminals and ports.

The committee has proposed that companies should be free to choose transportation links and to build terminals. And COR would ensure access to all users of industry facilities at reasonable tariffs.