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Major recommendations of Rangarajan Committee

APM
Regulatory Overview achievements & drawbacks
Problems of APM
Future Scenario
Critical Success Factors

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Major recommendations of
Rangarajan Committee
On Pricing of Petrol & Diesel

shift to a trade parity pricing formula for

determining refinery gate as well as retail prices;

Government to keep at arms length from price

determination and to allow flexibility to oil
companies to fix the retail price under the proposed
formula; and

reduce effective protection by lowering the

customs duty on petrol and diesel to 7.5%.
Surbhi - UPES

Major recommendations of
Rangarajan Committee
On Pricing of Domestic LPG & PDS Kerosene

Restrict subsidized kerosene to BPL families only;

Raise the price of domestic LPG by Rs. 75/cylinder;
Discontinue the practice of asking ONGC/GAIL/OIL to
provide upstream assistance, but instead collecting
their contribution by raising the OIDB cess from the
present level of Rs. 1,800/MT to Rs. 4,800/MT; and

Government meeting the balance cost of subsidy from

the budget.
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Major recommendations of
Rangarajan Committee
On restructuring Excise duties

Shift from the present mix of specific and

advalorem to a pure specific levy and calibrating
the levies at Rs. 5.0/litre of diesel and Rs.
14.75/litre of petrol.
The Committee has recommended that each of the
first two sets of recommendations should be
implemented as integrated package.
Surbhi - UPES

Administered Pricing
Mechanism

APM in place since 1976

Applied to both upstream (Exploration) and

downstream (Refineries, Pipelines & Marketing)

Under APM prices of petroleum products were fixed
on the basis of socio-economic factors:
LPG/Kerosene subsidies met through cross
subsidy on petrol
Gap between prices charged and actual cost
adjusted through the Pool Account
Union Budget did not provide any subsidy
Pool accounts intended to be self balancing
Oil Coordination Committee maintained pool A/cs
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Administered Pricing
Mechanism
Oil companies were compensated for:
actual cost of inputs
refining cost and marketing cost
plus a reasonable rate of return or profit.

Customers were charged price as per their

ability to pay principle

Pool accounts acted as a bridge between the

two
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Regulatory Overview
Primary Policy
Making Body

Administers
Pricing of
Petroleum
Products

Approves Major
Programmes and
Budgets

OCC

Controls/Manages
all Public Sector Oil
& Gas Companies

Purchases and
Allocates Crude Oil
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Regulatory System Major

Achievements
Ensured stability of prices
Insulated domestic prices

from

international price fluctuations

Enabled cross subsidisation & made

available subsidies to selected products
for socio-economic reasons
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Regulatory System Major

Achievements
With

assured

development

of

returns,
Refineries,

ensured
P/L

&

Marketing infrastructure

Allowed Indian Oil Companies to grow

No un-disposable surpluses generated
Remote/un-economical areas well
served
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Regulatory System Major

Drawbacks
Non application of international
standards
Cost control
Yield improvement
Value addition
Productivity of resources etc.

Not attracting foreign/private capital

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Problems with APM

Slowdown in domestic investment in refining and
production of crude oil

Accumulation of large pool deficit because of

infrequent price revisions

No incentive for efficiency

Cost plus formula encourage gold plating
Insulated players from market realities
Distorted consumer prices lead to sub economic
pricing, promoted Dieselization of the economy
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Phased Dismantling of APM

Cabinet decision to dismantle Nov 1997
APM till: Mar 1998
Refinery decontrol: Apr 1998
Transition phase: 1998-2002
Domestic crude price: Phased price increase
Pipelines: Remained under APM
Marketing: Controlled Products namely MS, HSD,

SKO, LPG &

ATF (ATF decontrolled effective April 2001) continued under

APM

Complete deregulation: Apr 2002

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Future Scenario
Increased number of Players
Branded Products
Premium on quality
Market Determined Pricing
Price war - discounts
Exposure to international prices/Low refining
margins(volatility)
Branding of Outlets
Import dependence on Crude oil
Product Surpluses - export market
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Future Scenario
Increased Competition from
Private players /MNCs
Other PSUs
Parallel Marketers
Direct Importers
Alternate fuels and tariff structure
LNG impact on Naphtha
CNG on MS/Diesel

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Recap- Deregulation : Before & After

APM Scenario
Regulated
Shielded from external shocks
Assured Returns
Stable market share
Continuing deficit in
Refining capacity
Pool accounts for under/
over recoveries
Lesser Customer focus
Cost control not critical

Structured Environment

Deregulated Scenario
Deregulated
Susceptible to external shocks

Margins not assured

Market share under attack
Indian/Global Competition
Likely surplus
No pool accounts for u/recoveries
Complex Distribution Decisions
Strategic Pricing Decisions
Customer focus paramount
Cost control critical

Unstructured Environment

Role of Regulator ?

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Critical Success Factors

Quality Improvement
Cost Reduction
Improved Service
Response time - speed of decision making
Competitiveness - benchmark and become
global player
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