The Hindu Business Line : Natural gas industry — Two-tier regulator must be in place

For a large country such as India, a two-tier regulatory system will be most appropriate with the Central and State regulators looking after inter- and intra-State pipelines respectively.

"The essence of statesmanship is not a rigid adherence to the past, but a prudent and probing concern for the future."

Hubert H. Humphrey

LAST year, India imported almost Rs 80,000 crore worth of crude oil and petroleum products. With increasing oil prices, rising demand and now import of LNG, there could be substantial increase in the import bill.

The Government of India has rightly decided that in the years to come, the share of natural gas in the energy basket should significantly increase in view of the availability of highly energy-efficient and cost-effective technology for its use for power generation and other value-added applications where it can directly replace electrical power and, thus, enhance energy efficiency.

With significant indigenous discoveries and commissioning of the first LNG terminal (the second should be set-up any time), the availability of natural gas is expected to go up significantly.

If growth of the natural gas market has to be achieved as envisioned, long-range pre-planning of all sectors of the natural gas market should get priority — augmenting supplies, upgrading/expanding the transmission and distribution network and promoting natural gas as the clean fuel not only in the power sector but in novel uses of natural gas where it replaces electricity.

A transparent, trustworthy, reassuring industrial environment and laying down apriori, the rules of the game are most crucial for the development of the natural gas industry.

There has been a long-drawn episode spanning more than three years, as to who can legislate on the natural gas industry, without the National Advisory Council or the Regulator seeing the light of the day.

By default, the Centre has retained the rein in its hand with both planning and implementation being managed on ad hoc basis. The end result is that the daunting task of creating a nationwide transmission network has been ipso facto left to GAIL alone.

The Centre for Fuel Studies and Research (CFSR) believes that for natural gas to reach demand levels as envisioned, by 2012, over Rs 100,00 crore would have to be invested in the transmission and distribution infrastructure alone, which will be beyond the means of a single entity such as GAIL. The sheer size of the investment required in the gas value chain suggests that the sector has to be thrown open to competition to attract funds and technology .

The investors (especially FDI) in the energy E&P (exploration and production) and gas user industries need an environment of credibility and transparency to take a fearless step to invest in the gas value chain. It needs to be ensured that a regulator is installed at the earliest, which will act without fear or favour and be free from any extraneous pressure — be it even from the Government.

As the situation is only likely to become far more complicated with considerable role of private sector in all stages of natural gas value chain, there is a dire need to ensure that a completely professional look is given to the planning and regulation of natural gas without any loss of time.

Gujarat Gas Act

To provide a favourable policy regime and transparent legal framework, the Gujarat Government took the initiative and enacted the Gujarat Gas Act that came into effect in December 2000.

However, the Centre objected to it on the basis that natural gas was a Union subject and that the Gujarat Government has no locus standi to pass such an Act. The Government of India took the matter to the Supreme Court . The apex Court in its advisory note to the President, said that natural gas is a Union subject and that the State has no legitimacy to enact law on it.

Assuming that the advisory note of the Supreme Court is accepted, no legislation would govern infrastructure development for transmission and distribution of natural gas.

It is difficult to believe how large investments of the order of Rs 60,000 crore (conservatively estimated) can be mobilised without a transparent and forward-looking policy regime.

Proposed way forward

As per the Constitution , natural gas is a Union subject as per Entry No. 53 of List No. 1, and State subject as per Entry No. 25 of List No. 2 in Schedule 7 of Article 246. The Supreme Court has concluded that the natural gas should be central subject under the Entry No. 53 classifying natural gas as petroleum/ petroleum product.

This is perfectly logical as far as the origin of natural gas is concerned and its exploration and production. However, the transmission, distribution and marketing of the natural gas have to be looked at differently.

While petroleum products can be transported using available infrastructure (road, railways), natural gas would require dedicated transmission and distribution network.

As far as the activity of carrying natural gas to the consumers goes, it has to be considered equivalent to electricity, water, and, perhaps, comparable with Entry No. 25 of List No. 2 of Schedule 7 of Article 246.

Considering the above, it can be concluded that there should be no conflict between the Centre and the State with respect to legislation related to transmission and distribution of gas.

In fact, countries such as the US and Canada have a two-tier system of regulation where the inter-State pipelines are regulated by the Central regulator and the intra-State pipelines are regulated by the State regulator.

In a number of countries, the regulator for electricity and gas is common, which is logical in the current context, since gas can help generate electricity more efficiently and, in many applications, it can replace electricity.

Notwithstanding the legal interpretation of constitutional rights of state versus the centre, it would most certainly be in the larger interest of the nation that, as speedily as possible, the new Government must enact a law which would define responsibilities of the Central and State Governments along the same lines as that of electricity transmission and distribution.

The CFSR suggests that for a large country such as India, a two-tier regulation system will be most appropriate with the central and state regulators looking after inter-state and intra-state pipelines respectively. Unlike power sector, the exploration and production of gas may be left to the Centre.

To provide unbiased professional inputs for long-range planning and setting the rules of the game, the National Advisory Council may be installed and the regulatory framework put in place without further loss of time by inducting hardcore professional experts from oil and gas, legal and economic fields, who do not have any profitable connection with the industry players or the government.

This would allow speedy implementation of the infrastructure required for growth of the natural gas industry, as envisioned.

(The authors are with the Centre for Fuel Studies and Research, Vadodara.)

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