Currently, the share of railways in carrying this load is around 70 per cent, followed by 25 per cent for pipelines and 5 per cent for roads. Railways and roads are inefficient modes of carrying petroleum products because they consume significantly more energy (320 BTU for railways and 1700 BTU for roads to move one tonne of petroleum products over one km) than pipelines for which the comparable figure is only 50-135 BTU. Clearly, pipeline transportation is the most efficient way of moving petroleum products and gases and, hence, is the preferred mode all over the world. In developed countries like the USA and the UK, almost all long distance transportation of petroleum products and gas takes place through pipelines. India is far behind these countries in realising the full potential of pipelines because it does not have a well-developed pipeline network. At present, the country has only around 2,800 kms of petroleum product and 3,600 kms of gas pipelines. A rapid development of pipelines, therefore, is essential to ensure that the share of this mode in the transportation of petroleum products and natural gas reaches the desired level.

It is estimated that around Rs 30,000 crore are likely to be invested over the next 10-12 years in setting up pipeline networks for liquid petroleum products. This is based on recent announcements made by interested developers and the recommendations of the Sundararajan Committee as shown in Annexure 7.1

In line with this perspective, the three major recommendations for the liquid petroleum product pipelines sector are laid out in the following sections.

Pipeline networks should be developed on the basis of commercial considerations. Any organisation, whether from the private sector, public sector or joint sector, should be allowed to set up a pipeline. This will not only allow generation of the resources required for the development of a pipeline network, but also lead to its speedy and cost efficient implementation.

• However, to ensure this, the Government will have to define a policy framework incorporating the following broad features:

• Transparent guidelines for the setting up and operation of pipelines.

• Legislation to speed up the process of land acqusition/right of way.

• Institutional mechanisms for quick clearances and single point approvals for existing and new pipeline projects.

• A guarantee for all participants against any future changes in legislation that adversely affect the viability of the project.

• Assistance in obtaining requisite clearances.

• Fiscal Incentives such as:

• Infrastructure status

• Tax holidays

• Lower excise and custom duties on capital goods and instruments in the pipeline sector

On the international front, the Government should assist interested developers by initiating talks with the South Asian Association for Regional Co-operation (SAARC) countries to develop an international pipeline network in the region. This will facilitate cost effective and speedy transfer of petroleum products and gas from surplus regions to deficient areas. For example, by entering into such a relationship with Bangladesh, India can not only source surplus gas from that country but also harness its own gas from Tripura.

A case study from USA shows that allowing market based competition in pipeline development and operation can result in significant cost reductions. (See Annexure 7.2)

2. Set up New Pipelines for Products under the Common Carrier Principle

Pipelines are natural monopolies. Putting up a second pipeline where one already exists is normally not economically viable and is a waste of resources. Moreover, a single company's ownership of a monopoly transportation medium is inherently detrimental to the development of competition. To prevent such situations, the common carrier principle has been utilised in the USA and other developed countries.

India should also use this principle for development and operation of all new pipelines for petroleum products, not for gas.

It is very difficult to operate gas pipelines on the common carrier principle because this will allow a new producer to enter a pipeline of limited capacity forcing all other shippers in that line to reduce their volumes based on some allocation scheme. A reduction in volume by a producer already in the line could cause disruption in assured supplies to customers who cannot store it either. Therefore, a different operating principle is required for gas pipelines. In the USA, gas pipelines operate on a " contract carriage " basis which allow users and suppliers to enter long term contracts with pipeline owners to ensure assured supply. India will also have to design a different framework for operating gas pipelines.

All liquid product pipelines intended for third party use should be treated as utilities and the 'common carrier principle' should be made applicable to all users, thereby allowing access to third parties.

Product pipelines set up by producers on individual or consortium basis should always make a predefined capacity available for use on the common carrier basis. The remaining capacity should be available to them on " right of first usage" basis.

A regulatory body should be set up to ensure that all pipeline operators adhere to this principle.

3. Establish an Autonomous Pipeline Development and Regulatory Authority (PDRA)

An autonomous Pipeline Development and Regulatory Authority (PDRA) should be established to do the groundwork for speedy and cost efficient development of pipelines, regulate the trade of petroleum products and natural gas and ensure free and fair competition to protect the interests of the customers.

The formation of the Regulatory Body could follow the guidelines set in the UK Petroleum Act 1975. The PDRA needs to be an independent entity, comprising only professional members.

A 'Pipeline Act' will have to be passed to facilitate the setting up of the regulatory authority. This Act should incorporate provisions for the general powers and duties of the PDRA, acquisition of rights to use pipelines and fixing of tariffs and access charges for use of pipelines by third parties.

The PDRA's responsibilities will include:

• Encourage competition and monitor the market position of companies to ensure that their market power is not unduly exploited.

• Assist developers in acquiring land, securing environmental clearances and procuring right of way.

United States

In the USA, the introduction of competition in the natural gas market resulted in a reduction of the operating cost of pipelines by 25 percent from 1988 to 1994. It also achieved a 29 percent reduction in the number of people employed for gas transmission and distribution in the US. This has led to real price reductions in the US natural gas industry by as much as 27-57 percent over a period of 10 years. The annual value of consumer benefits due to deregulation has been estimated as USD 50-60 billion compared to the 1989 price levels.