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Tuesday, 02 September 2014 00:00
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Kelkar panel gets it right on market pricing

Given how it will entail a doubling, or more, of natural gas prices, it is not surprising that many are opposing the consultation paper of the Vijay Kelkar committee that recommends free-market pricing. What happens if the same principle of international pricing, one argument goes, is applied to fuels like coal whose local prices are lower than those prevailing globally? Another argument, often cited, is that the new prices should apply to only new fields, not ones that are producing already. The problem with the arguments is that they are fundamentally static. To the extent India imports coal, and it imported $14 billion of this last year, we are already paying international prices for a portion of the coal we use. To the extent our power plants are starved for coal—and that is the reason why 14,000 MW of capacity is out of commission and 41,000 MW is working on 0-3 days supplies—we are paying a different kind of price in terms of power shortages and generating expensive substitute power from diesel gensets. As for pricing gas at the old price for existing fields and new prices for the new fields, it goes against the very logic of free-market pricing—do companies charge less for automobiles made from older plants?

It will be argued that electricity is priced the same way, with older plants selling electricity cheaper. While that is true, electricity is a regulated market whereas according to the terms of the production-sharing contracts (PSCs), under which oil/gas fields have been auctioned over the years, the government promised market prices—it is not clear why those wedded to the idea of lower gas prices don’t raise the same objections when it comes to paying firms the market price for the crude oil they produce. India is well within her rights to go back to the old cost-plus method of working, but that takes us back to the problem of determining what costs are; nor is it certain that investors want to invest in such a risky business with even the upside capped. Critics of the Kelkar report would do well to keep in mind that in this situation also, since India will be importing more gas, the customer will end up paying market prices; the other alternative is to not run power/fertiliser plants. It is really that simple.



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