Decontrol to fuel competition between petrol companies
New Delhi   21-Sep-2010

Decontrol of petrol pricing may finally help the consumer to be king, with retail outlets heading for a price battle. The consumer will now be able to choose from the dominant players, based on the best rate.

While PSU retailers are set to gradually charge different prices for petrol, private retailers who are currently selling at a higher rate will be forced into competition.

"Going forward, it could be possible that different outlets in one city will have different pricing structures based on competition," said G. C. Daga, director (marketing), IndianOil.

On June 26, the government for the first time decided not to prescribe a formula for arriving at a petrol price. "The government-owned companies should ideally not even be talking to each other on the petrol pricing. Decontrol means that each company is free to take its own decision," said a senior petroleum ministry official.

Though the administered price mechanism (APM) for petrol and diesel was dismantled from April 1, 2002, in reality the deregulation did not materialise because the government had prescribed the import parity formula for arriving at the retail price.

Under this regime, the cost of importing petrol and diesel (inclusive of duties) had been the basis for calculating retail prices and revenue losses were calculated in case the prices were not changed.

The system moved on to a trade parity mechanism on the recommendations of the C Rangarajan committee report in 2006. Under this regime, the benchmark price was arrived at through an import ratio of 80 per cent, instead of 100 per cent.

For the first time since April 2002, the three government controlled oil marketing companies decided to raise petrol rates on different dates. IndianOil raised prices by Rs. 0.27-0.29 per litre with effect from today. Petrol prices in Delhi will now be Rs. 51.83 a litre from Rs. 51.56 a litre. Hindustan Petroleum Corporation (HPC) and Bharat Petroleum Corporation (BPC) are also likely to follow this week.

Daga said each company was taking its own decision to increase petrol prices. "While price charges can happen anytime depending on the international product price we will try not to have frequent price changes."

Each company might have a different mechanism to calculate the retail price, and the most efficient is expected to be the winner in the long run.

So far, the private retailers - Reliance Industries, Essar Oil and Shell - had not been able to increase their market share in diesel and petrol sale due to the subsidy cushion enjoyed by IndianOil, HPC and BPC. For the last two years, the three PSUs were being compensated around Rs. 5,000 crore every year for selling petrol below the market rates.

With decontrol of petrol prices, private retailers should now be in a position to offer competitive rates. "The customer will have the chance to choose the preferred outlet between PSUs and the private sector," said a senior Essar Oil executive. However, he said that preference would not only be based on pricing but on "service, allied products, quality, quantity and incentives", among others. "The best retail outlet will be the winner."

In mature markets, the prices are linked to international prices. Retail selling prices vary from company to company and from time to time. For instance, during the lean 'afternoon' period, outlets could offer a discount while during morning and evening peak hours, the price could be higher. "These changes could be quite frequent - sometimes even on a day to day basis," said the Essar executive.