This story is from July 24, 2014

Govt sets up panel to suggest new gas pricing mechanism

The government has finally decided to dump the UPA's formula for gas pricing suggested by a panel under then PMEAC chairman C Rangarajan.
Govt sets up panel to suggest new gas pricing mechanism
NEW DELHI: The government has finally decided to dump the UPA's formula for gas pricing suggested by a panel under then PMEAC chairman C Rangarajan. A new panel under Suresh Prabhu, the architect of power sector reforms during the Atal Bihari Vajpayee government, is being set up to come up with an alternative mechanism.
In a proposal sent for approval to the Prime Minister's Office, the oil ministry has suggested the names of Pratap Bhanu Mehta and Bibek Debroy, CEO and faculty respectively, of think-tank Centre for Policy Research, as other members of the panel.

The Directorate General of Hydrocarbons, the ministry's technical arm, will fill in with technical and financial workings of oilfields.
The ministry has suggested a deadline of August 31 for completing discussions with explorers and gas consumers such as urea and power plants. This is being done to allow the government ample time to examine the panel's report and decide on the new formula by October 1.
The group of Cabinet ministers dealing with economic matters had on June 25 decided to defer implementation of the Rangarajan formula till September 31, which would have doubled gas prices to $8.8 per unit. This would have pushed up tariff of power from gas-fired plants, CNG and PNG prices as well as urea subsidy. The Cabinet panel had also decided to review the formula and come up with a new regime by October 1.

The ministry's proposal makes it clear that no other agency with generic knowledge of gas pricing issues would be engaged to examine the panel's report. It would be for the government to discuss and decide on the panel's report, given the "tight" schedule for completing consultations, submitting the report and examination by the government.

The panel would be asked to take into consideration the arguments of power and fertilizer ministries against the steep hike suggested in the Rangarajan formula. The panel would also be asked to keep in mind the observations of Parliament's standing committee on finance under former FM Yashwant Sinha.
Broadly, all of them had opposed the Rangarajan formula on the ground that such hefty hike in fuel price would put pressure on power consumers and farmers. If all their arguments are to be taken together, a price band of $5.6 to $6.7 per unit would be on the panel's plate.
In this scenario, top government sources said it may not be incorrect to assume the panel would be looking to work backwards to arrive at an acceptable price. This can easily be done by removing the Japanese gas purchase benchmark from the formula and spot purchases.
Another option could be to look at rupee-pricing of gas. Finance minister Arun Jaitley had suggested this as an option during the Cabinet discussion on deferring gas price hike on June 25. His argument was that this would cushion prices against foreign exchange volatility.
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