BATCH -2

DOWNSTREAM QUESTIONS
Q1. “In light to obtain a fair resolution of disputes by an impartial third party without
unnecessary expense or delay. Parties should be free to agree how their disputes are resolved,
subject only to such safeguards as are necessary in the public interest. Regular Courts should
not interfere”. Explain the context of Arbitration and Jurisdiction with reference to PNGRB
with relevant cases. [20 Marks]

Q2 (A) A variety of market structures will characterize an economy. Such market structures
essentially refer to the degree of competition in a market. Oil and Gas products and services
lies in a separate monopoly. Elaborate the concept of Natural Monopoly with characteristics,
suitable examples and relevant theories.[15 Marks]

(B)Briefly explain the functions of PNGRB and Define Common Carrier and Contract
Carrier. [5 Marks]

Q3. “With respect to the process by which Oil and Gas company with several different lines
of business retains core businesses while selling off assets, product lines, divisions or
subsidiaries or offering products or services separately that had previously been packaged
together for a better performing company”, Elaborate the relevant provision of Policy for
Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks
2006,Petroleum and Natural Gas Regulatory Board (Affiliate Code of Conduct for Entities
Engaged in Marketing of Natural Gas and Laying, Building, Operating, or Expanding Natural
Gas Pipeline) Regulations, 2008 & PNGRB Act with a case law.

[20 Marks]
Q4. Explain the context of transport tariffs with reference to the PNGRB Act relating to
Petroleum and Natural Gas Regulatory Board (Determination of Natural Gas Pipeline Tariff)
Regulations, 2008.With the Factors to be considered in tariff determination.

[20 Marks]

Q5. A course or principle of action is adopted or proposed by any Industry or organization.

Explain any 10 Policy for Development of Natural Gas Pipelines and City or Local Natural
Gas Distribution Networks.[20 Marks]
 ANSWERS

ANS 1: Arbitration and Jurisdiction with reference to PNGRB with relevant cases.

(Shyam Industries and Ors. v GAIL.) SOLVED

ANS2:
(A) Natural Monopoly –
 market situation where the costs of production are minimized by having a single
firm produce the product (e.g. public utility companies, oil pipeline in Alaska)
 Natural monopoly is associated with extraordinary economies of scale and of
scope, often coupled with high fixed costs that serve as barriers to entry.
 These factors, when present, can allow a single big firm to serve multiple
customers at a lower cost than multiple firms serving the same market
Characteristic of Natural Monopoly
A natural monopoly is associated with supply and demand of characteristics that include:
• the product or supplied service must be essential
• the products must be non-storable
• the supplier must have a favourable production location
• Examples:
• Oil & Gas utilities
• Electric Utilities
• Gas Utilities
Public Interest Theory:
• Public Interest Theory is a part of welfare economics and emphasizes that regulation
should maximize social welfare.
• The regulation of firms or other economic actors contributes to the promotion of the
public interest.
• This public interest can further be described as the best possible allocation of scarce
resources for individual and collective goods and services in society.
• Central to these policies is development of a regulatory apparatus that provides
stability, protects consumers from the abuse of market power, guards consumers and
operators against political opportunism, and provides incentives for service providers
to operate efficiently and make the needed investments.
• Though regulation is often described as a principal-agent problem between the
government and the operator, there are actually several principal-agent relationships
involved
• There is also a principal-agent relationship between the customers, serving as the
principal, and two agents, namely the government and the regulator. Customers
regulate the government and the regulator through political processes and regulatory
processes.
 • When all elements of the utility service can be competitive, then generally a primary
job of the regulator is to remove barriers to entry or competition.
• Typical steps include removing licensing restrictions or large licensing fees, reducing
switching costs, and requiring access to essential inputs, such as telephone numbering
resources.
• Structural separation separates the potentially competitive portions of the utility
service from the noncompetitive portions.
• Access pricing is an important element of regulatory policies designed to facilitate
competition in the market.
• When a utility service is unbundled, the rivals often pay the operator an access price
for use of the non-competitive element of the service (use of the pipelines, network
tariff).
• Because this price is a source of revenue, the incumbent operator has an incentive to
raise this price to a level that limits competition.
• In cases such as telecommunications where competitors must interconnect their
networks in order to allow customers of rival networks to communicate, regulators
generally require service providers to negotiate such interconnection arrangements
and adopt cost-based prices.
• The regulator also determine network tariff for gas pipelines, power lines, telephone
lines etc
• Auction: When competition in the market is infeasible or impractical, for example gas
pipelines, the right to be the monopoly provider of the service could be auctioned off
through an efficient auction.
• Post-auction regulation may still be necessary to ensure other competitor using such
monopolistic utilities are not exploited. In which case the regulator, for example,
would fix the network tariff for other entitles to use the resources.
• Regulators can also gather financial data from a variety of sources, including reports
to shareholders and taxing authorities, from the operator for regulator for purposes of
regulating overall price levels for the operator.
• One way of regulating is by incentivizing the operator by allowing certain fixed rate
of return or cost of service (network tariff).
(B) SOLVED
ANS 3:
ANS4:
PNGRB Act relating to Petroleum and Natural Gas Regulatory Board (Determination of
Natural Gas Pipeline Tariff) Regulations, 2008
1) Transportation tariff :-
As per sec 22 :
• 1) Subject to the provisions of this Act, the Board shall lay down, by regulations, the
transportation tariffs for common carriers or contract carriers or city or local natural
gas distribution network and the manner of determining such tariffs.
 • (2) For the purposes of sub-section (1), the Board shall be guided by the following,
namely:-
• (a) the factors which may encourage competition, efficiency, economic use of
the resources, good performance and optimum investments;
• (b) safeguard the consumer interest and at the same time recovery of cost of
transportation in a reasonable manner;
• (c) the principles rewarding efficiency in performance;
• (d) the connected infrastructure such as compressors, pumps, metering units,
storage and the like connected to the common carriers or contract carriers;
• (e) benchmarking against a reference tariff calculated based on cost of service,
internal rate of return, net present value or alternate mode of transport;
(f) policy of the Central Government applicable to common carrier, contract carrier and city
or local distribution natural gas network
2) Section 11 E also laid down the power of transportation rate for common carrier and

contract carrier (not GCD). So when CGD is not common carrier or contract carrier,

then transportation rate will not be decide by PNGRB

3) Section 2 (ZN) of transportation tariff, rate to transfer of petroleum product for

Contract carrier and Common carrier and CGD

4) Section 20 (4) during exclusivity period, even then PNGRB has authority to protect

the consumer interest.

5) Section 61 (t) the transportation tariffs for common carriers or contract carriers or city

or local natural gas distribution network

6) tariff zone" means the zone

(i) of a length of three hundred kilometers each along the route of the natural gas

pipeline from the point of origin till the end point and

(ii) a corridor along the natural gas pipeline with a width of up to ten percent of the

natural gas pipeline without including the length of the spur lines of fifty kilometers

measured from the nearest point on the surface of the natural gas pipeline on both

sides, and including the point of origin and the end point of the natural gas pipelines,

whichever is less,

7) tariff review" means the review of:

  the unit natural gas pipeline tariff after every five consecutive years by the

Board;

 with the first tariff review after the end of five consecutive years of the end of

the initial unit natural gas pipeline tariff.

8) Tariff will be determined for:

(a) The period applicable for the initial unit natural gas pipeline tariff;

(b) The period of five consecutive years after the end of the initial unit natural gas

pipeline tariff; and

(c) The period between any two consecutive tariff review

9) Factors to be considered in tariff determination

 Financial Feasibility: The entity to which these regulations apply shall submit

all technical, operating, financial and cost data of the natural gas pipeline

project that may be required by the board in determination of the natural gas

pipeline tariff.

 Reservation rate of return: The rate of return on capital employed shall be the

rate of return on capital employed equal to twelve percent post-tax

 Operating costs: required in the operation and maintenance of the natural gas

pipeline over its economic life shall be computed, on an actual basis or based

on a normative assessment by the Board, whichever is lower

 Volumes: to be considered in determination of the unit natural gas pipeline

tariff.

 Economic Life of the pipeline

ANS 5: