PNGRB - Introduction

India as a crude consumer

it is important to understand and
analyse the pricing, regulatory and
investment dynamics at play in its
downstream petroleum sector.
These factors will to a large extent
shape domestic supply and
consumption patterns currently and
into the future
 In April 2002 India abolished the
Administrative Pricing Mechanism
(APM) controlling the price of
petroleum products.
Under the APM, product prices were
directly administered by the GoI,
based on an opaque and complex
cost of operating capital plus
formula.
 Under the new regime, OMCs would
be free to set retail product prices
based on an import parity pricing
formula.
The domestic refining and retail
sector was also opened to private-
sector firms
 Business
Policies within Indias downstream
petroleum sector clearly have implications
for investment decisions within this sector,
which in turn will determine the way the
sector evolves in the medium or long-term.
Under the current system, OMCs are
largely dependent on indirect handouts
from the GoI for working capital. The
repeated extension of this is the result of a
range of uncertain political processes.
 In the downstream sector, the prices of key products
diesel, kerosene, and domestic LPG are still controlled
by the government and oil marketing companies (OMCs)
are mandated to sell these products at prices lower than
the cost price/international reference prices.
In addition to the adverse complications on the fiscal
balances of the economy and the financial situation of
OMCs, this twisted pricing mechanism has also adversely
affected the level of private participation in the sector.
While private/foreign marketers are free to sell the
products at market prices, they cannot compete with the
lower prices offered by the government-owned OMCs
 Subsidy
Because of the importance of LPG and kerosene as
cooking fuels for Indias low-income population,
per unit subsidies funded from the governments
budget were maintained on LPG and on a fixed
proportion of supplied kerosene.
However, these were to be phased out between
2005 and 2007.
Subsidies are yet to be completely phased out. Under
the new pricing regime,
it was expected that retail prices for petroleum
products (including prices for domestic kerosene and
LPG) would fluctuate with changes in the price of
Indias crude basket
 Under recoveries
The effect of significantly lower product retail
prices than crude input prices a large
effective subsidy has been the increasing
accumulation of under-recoveries by OMCs.
Under-recoveries are a notional measure
representing the difference between the trade-
parity cost of refined product paid by OMCs and
their realised sale price.
Under-recovery refers to the difference between
the desired price of a product and its retail price
(excluding VAT/sales taxes)
 growth, trade and investment
dynamics of Indias downstream
petroleum sector could be analysed,
it is necessary to outline the policy
goals defined by the GoI for the sector.
Similarly, the regulatory framework that
is in place, both governing the sector
and assisting in the achievement of
these policy goals, needs to be outlined.
 The government announced the phased dismantling of the
Administered Pricing Mechanism for certain petroleum
products in 1997.
In March 2002, it notified that the marketing and pricing of
all petroleum products except kerosene and LPG was to be
deregulated with effect from April 2002.
The Petroleum and Natural Gas Bill, 2005 seeks to establish
the Petroleum and Natural Gas Regulatory Board (PNGRB)
to protect the interests of consumers in the deregulated
scenario by promoting fair trade and competition among
entities and ensuring adequate availability and equitable
distribution of petroleum, petroleum products and natural
gas.
 The most recent legislation in the sector was
passed in 2006 when the Petroleum and
Natural Gas Regulatory Board (PNGRB) Act was
passed under which the PNGRB was
established as a statutory regulatory body for
the downstream petroleum.
The Act provides a separate regulator for the
petroleum and natural gas sector independent
of the electricity regulator.
Several countries have a common energy
regulator for both gas and electricity.
 Chapters 10
Sections 63
 The Petroleum and Natural Gas Regulatory Board
(PNGRB) was established in 2007 as the
downstream sector regulator, tasked with
regulating
the refining, processing, storage, transportation,
distribution, marketing and sales of petroleum
products and natural gas.
It does not, however, authorise refinery
infrastructure construction, which is controlled by
MPNG,
and has no role in market pricing, or pricing policy.
 The Petroleum and Natural Gas Regulatory Board Act, 2006
establishes the Petroleum and Natural Gas Regulatory Board
(PNGRB) to regulate downstream activities in the petroleum and
natural gas sector.
The PNGRB shall regulate the laying and expanding of
(a) transmission pipelines for gas and petroleum and
(b) city/ local gas distribution networks.
The entity that lays the pipeline will have the right of first use and
any other entity will have to pay it a transportation charge for use
of the pipeline.
Entities will have to register with the PNGRB to market petroleum
products and natural gas, operate LNG terminals and establish
storage facilities beyond specified capacity.
The PNGRB will have the same powers as a civil court to settle
disputes. The Appellate Tribunal under the Electricity Act will
serve as the Appellate Tribunal for this Act.
 The key practical function of the Board relates to (a) its role as court
of arbitration in disputes within the downstream sector; and
(b) its powers to release tenders for, and grant of
authorisation to lay, build, operate and expand cities
natural gas distribution networks.
PNGRB has powers to investigate and litigate against
downstream operators for monopolistic behaviour;
register entities to market and retail petroleum products,
and monitor these entities for cases of adulteration;
authorise operators to lay product pipelines, and determine
whether pipelines are private- or common-carrier (based on
specific criteria);
and regulate access to pipelines and pipeline
transportation rates.
PNGRB also monitors prices through the downstream
value-chain, including the adherence to maximum prices
set by the GoI; and determines and enforces technical
standards and specifications relating to downstream
activities.
 The establishment of PNGRB is clearly a necessary step
in the evolution and maturation of Indias downstream
sector, providing investors with greater legal certainty
and more transparent regulatory oversight and
arbitration.
Some argue that if transportation and marketing
activities are unbundled, it would only increase operation
and administrative expenses which would be detrimental
to the development of Indias natural gas market.
Some critics, however, have accused the GoI of
establishing a toothless PNGRB, without authority over
the two key areas of product pricing and refinery
investment.
 Issues
involvement of the government in appointment of the
regulatory bodies has affected the independence of regulation
in the downstream sector as well.
Further, members of the Board, have, in the past, faced
charges related to corruption and misuse of position (Delhi
High Court, 2010).
As in the case of the DGH, the Board continues to draw in
players from the oil and gas industry for meeting its staffing
requirements.
Issues of legacy of the members of the board to their parent
organizations have also affected the independence of
functioning of the members.
In addition to these, the relation between the MoPNG and
PNGRB has also affected the pace of development of the sector
 In addition to sector-specific regulators, issues
related to competition are also governed by the
Competition Commission of India (CCI) and the
concerned regulation is the Competition Act 2002.
For the oil and gas sector, the PNGRB is also
mandated to look into issues of competition.
Overlaps between the provisions of both the acts
are present and have led to conflict between the
two bodies as well.
This was observed in the complaint filed by Reliance
Industries Limited (RIL) against public sector Oil
Marketing Companies (OMCs)
 Case Law
Voice of India and another
v
Union of India and another

Delhi High Court

 filed in public interest u/art. 226 of Constitution
challenging the illegal and arbitrary manner in which
the affairs of Petroleum and Natural Gas Regulatory
Board constituted by the Central Government under
the Petroleum and Natural Gas Regulatory Board Act,
2006
Chairmans role
inviting bids from interested parties for development
of City Gas Distribution in Ghaziabad and
order/letter dated 19th March, 2009 by virtue of
which Indraprastha Gas Limited's application for
authorisation in Ghaziabad has been rejected.
 the Chairman had illegally appropriated the core
powers of Members of the Board to himself in order
to get a free hand in taking all the important
decisions on matters involving several thousands of
crores of rupees.
the Chairman had delegated onto himself the
powers of the Board to authorise entities to Lay,
Build, Operate or Expand City or Local Natural Gas
Distribution Networks,
these core powers and functions of the Board,
could be exercised after obtaining general or
special order in writing as provided by S. 58
 Downstream oil sector regulator Petroleum
and Natural Gas Regulatory Board (PNGRB)
has been mired in controversies in the past
over alleged misuse of office by a member,
differences over the Ghaziabad city gas
network authorisation of IGL and over
authorisation of trunk pipelines.
Chairman L Mansingh controls and decides
matters singlehandedly, destroying the
Boards multi-member character.
 Case Law No. 2
Another issue that reflects the persisting lack of clarity on the role
and jurisdiction of the downstream regulator is the recent case in
the CGD sector in Delhi NCR.
The PNGRB had issued an order for Indraprastha Gas Limited (IGL)
the sole gas distributor in the region to reduce its network
tariff and compression charge.
This was challenged by IGL in the Delhi High Court where it
questioned the authority of PNGRB to regulate tariffs and
compression charge. The Delhi High Court ruled in favour of IGL and
stated that the Petroleum and Natural Gas Regulatory Board is
not empowered to fix or regulate the maximum retail price at which
gas is to be sold by entities as the petitioner, to the consumers.
We further hold that the Board is also not empowered to fix any
component of Network Tariff or Compression Charge for an entity
such as the petitioner having its own distribution network.
 Downstream petroleum , Petroleum and Natural Gas
Regulatory Board (PNGRB) has worked out new guidelines
for implementing a safety mechanism for the countrys oil
and gas pipeline infrastructure. The new guidelines come
close on the heels of the latest 350-tonneoil spillin the
ecologically sensitive Sunderbans, giving a tough time to
Indian and Bangladesh authorities.

The regulator has floated the draft of the new guidelines

PNGRB (Integrity Management System for Petroleum and
Petroleum Product Pipelines) Regulations 2014 for
consultations. They will be applicable uniformly to all oil
companies.