Rakesh Prasad: Common sense in the pipeline

Common carrier pipelines need transparent regulation

Common carrier pipelines are much in fashion these days. There is a near consensus among independent oil pipeline regulators across the world that such pipelines are a natural monopoly. And it is almost a corollary that natural monopolies should be regulated on the common carrier principle.

When there is such near unanimity on the economic-legal framework for regulation, it is unfortunate that there is so much confusion over what the common carrier principle implies. The sense in which the term is being used is disparate and there seems to be no common sense meaning for it.

To build pipelines under the ground, as is usually done, the permission of the landowner is mandatory. All over the world, this permission is purchased by the pipeline company.

But in India, there is only one pipeline built a long time ago in this manner. For all others, the government compulsorily acquired the "permission" on behalf of the pipeline company. For all proposed pipelines, there are pending requests from the pipeline companies to the government to exercise its powers of eminent domain on their behalf.

In return for this "favour", the government imposes terms and conditions on the laying and operation of the pipeline. It need not. Pipeline regulation can be and ought to be done by law independent of this contingency. But the law for compulsory acquisition of the "right of user" or RoU is not a law for pipeline regulation at all.

Its purpose is to promote the laying of pipelines in the national interest. This is achieved by making available the machinery of compulsory acquisition by the state to pipelines that would otherwise struggle to purchase permissions in a nascent Indian market.

Much that is uncommon in the way the common carrier principle is being applied is attributable to its application on the contingency of a pipeline availing itself of an RoU from the government.

To subserve the common good, what objectives should oil pipeline regulation have? So long as a pipeline laid by a pipeline company is transporting oil owned by it, there is no need for regulation except in an emergency in which event the government can take control.

In normal circumstances, the need for regulation arises only when the pipeline company finds itself in a situation of having less oil to transport than is possible with the pipeline. It is the excess capacity so arising in a pipeline that can be considered a natural monopoly, not the pipeline itself.

The sensible application of the common carrier principle should aim at eliminating "crony capitalism" from transactions in such excess capacity in oil pipelines. Regulation must create a transparent and efficient market in excess capacity. Had this excess capacity been a commodity like soap or cycles, fancy doctrines for regulation would have been uncalled for.

If, as here, this is not so, regulation should attempt to clothe it with the attributes of a commodity so that it can be traded freely and fairly in the way only commodities can be. This is sometimes referred to as the commodification of the market for intangibles.

Quite simply, the seller of excess capacity in a pipeline should clearly identify it and put it up for display and sale on a "shelf" in easy "view" of other sellers as well as all potential buyers. All potential buyers should know that something is up for sale and they should all know and understand what exactly that thing is.

Offers should be invited on the same terms "" if six bi-monthly instalments are envisaged, all offers must be invited in this format so as to enable direct and objective comparison.

The seller should be made to sell to whoever offers the highest price within a prescribed auction period announced publicly to all buyers. And finally, it should not be permitted to decide on the highest offer over considerations other than the price offered.

If soap is a natural monopoly susceptible to abuse, the market for soap must be insulated from other markets such as that for shampoo. In our case, a seller of excess capacity in a pipeline should not be allowed to prefer a lower offer from a collaborator in another market whether in the proximate oil-refining business or even in an altogether different business such as private banking.

This is the common sense of the common carrier principle. In such a regulatory scenario, the pipeline company becomes a common carrier, much like a public bus or a carriageway. It is this common sense meaning of the common carrier principle that is its essence.

Practical considerations dictate how this may best be achieved in the context of oil pipelines. A pipeline company must publicly advertise its entire excess capacity in terms of the time frame and end points before transacting in it.

The seller's discretion of fragmenting and transacting in excess capacity as it pleases ought to be precluded. Since the list of potential buyers is small, some independent but accredited agency or body can be specifically informed, which can be expected in turn to inform all empanelled potential buyers.

The advertisement must contain all the relevant particulars of the excess capacity.

These should include details such as the end points, the course and distance, the total tonnage, the excess tonnage being auctioned, the date from which the excess capacity will arise and when it will end, the grade or type of oil/ petroleum product in transport and as capable of being transported, the technical parameters of the pipeline such as its pressure and material specifications, the take-or-pay terms (that is, pay if you purchase whether or not you actually transport) imposed and the prior termination/penalty terms.

The advertisement must also fully describe the format of the price-offers being invited "" down payment, security, periodicity of instalments, depreciation discounting and so on. The regulations must prescribe the mathematical formula by which multi-term offers will be compared.

The office of the regulator, such as the proposed Petroleum Regulatory Board, can act as a record keeper of the advertisement and of all offers.

If a complaint of discrimination is received in respect of a transaction, it will then be possible for it to open the file and examine whether the complaint is made out or not.

As in other markets, public knowledge that there is a watchdog is only half the recipe for discipline and integrity. The other half is the knowledge that the watchdog can and will bite when necessary.

(The writer is partner, ALG India Law Offices. The views expressed are personal)