The Hindu Business Line : Draft paper for integrated view of energy policy

Powering a policy
There was no reason why energy resources must be taxed much more than others unless there were some `externalities' involved.
The framework should ensure competition in each sub-segment of the energy sector while removing all entry barriers so as to realise optimal fuel and technology choices.

New Delhi , June 17

A policy framework that ensures uniform tax and regulatory structure across all energy sub-sectors and treats different sources of energy on a similar footing has been advocated in a draft approach paper for the Eleventh Five Year Plan (2007-12).

Such an approach, says the paper, would minimise distortions across sectors and maximise efficiency gains.

The paper has underscored the need for the 11th Plan to take an integrated view of the energy policy across different energy sub-sectors.

A consistent tax structure is also expected to help propel the economic growth rate from the current levels of average 8 per cent.

Naphtha - a case in point

Taxation structures on naphtha, liquefied natural gas are largely determined on the basis of the sector in which they are used and are often a topic of debate within Government circles.

A case in point is that of customs duty on naphtha used in the fertiliser sector and that used for the power sector.

While there is no import duty on naphtha used in fertilisers, the duty rate in the case of naphtha used for specified power plants is 10 per cent.

The draft approach paper has also noted that there was no reason why energy resources must be taxed much more than others unless there were some `externalities' involved.

It has stated that the framework should ensure competition in each sub-segment of the energy sector while removing all entry barriers so as to realise optimal fuel and technology choices.

The draft Paper also suggested that the framework should ensure energy pricing that leads to efficient choice of fuel, inter-fuel substitution, and technology so that resource allocation takes place based on market forces operating under a credible regulatory regime.

"Thus oil, where imports exceed 70 per cent of our consumption, has to have trade parity pricing being linked to import parity or export parity depending upon whether we are surplus or deficit in specific products", the draft paper said.

On oil and natural gas sector, the draft paper stated that the most important policy issue related to pricing of petroleum products. "The recent increase in oil prices is now expected to persist for some years and although the prices of some petroleum products have been raised, the increase still leaves a large uncovered gap," the paper noted. In the long run, says the draft paper, the only viable policy to deal with high international prices is to rationalise the tax burden on oil products over time and remove "fat" which may exist in current pricing mechanisms that give oil companies an excessive margin.

Moreover, it has also been suggested to realise efficiency gains through competition at the refinery gate and retail prices of petroleum products and pass on the rest of the international oil price increase to consumers, while compensating targeted groups below the poverty line as much as possible.

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