Before 1987, ONGC and Oil India Ltd fixed gas prices. But from January-end 1987 the government began regulating prices on a cost-plus basis. The last revision under this so-called administered price mechanism was effective July 2005. When the government began bidding out oil and gas blocks under the New Exploration and Licensing Policy (NELP), it opted for marketdetermined rates for gas.
The producer enjoyed marketing freedom but needed to get the pricing formula approved through 'arm's length pricing'. (This is a transaction where buyers and sellers act independently. They have no relationship with each other. This ensures that both parties are acting in their own selfinterest and are not subject to any pressure or duress from the other party). In 2006 the first controversy began when Reliance Industries invited bids from users and arrived at a price of $4.32 per million metric British thermal units. The matter was referred to an empowered group of ministers headed by Pranab Mukherjee which agreed on a price of $4.20 a unit after suggesting a few changes to RIL's formula, including elements to do away with volatility.
The Cabinet Committee on Economic Affairs approved a new formula based on recommendations of a committee headed by C Rangarajan, chairman of the Economic Advisory Council to the PM. The new policy was based on the price of Indian liquefied natural gas (LNG) imports. Then, the weighted average price at major trading hubs in the UK, the US and Japan was also calculated. Finally, a simple average of the prices of imported LNG and the average international price was calculated. Based on this formula, the current price of domestically-produced gas works out to $6.7 a unit, which will go up to $8.4 a unit from April when the new fi ve-year pricing policy kicks in.
The change was undertaken because the current pricing policy expires at the end of March 2014. The Rangarajan Committee had suggested the new formula arguing that no market-determined arm's length price was available in India and is unlikely to happen for several more years.
Apart from the impact on consumers, many, including some MPs, have alleged corporate influence in policy formulation. Some cabinet ministers questioned the rationale for price revision although officially, the government has maintained that the guidelines will help incentivize investment and check cartelization.
Source:- timesofindia.indiatimes.com
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