Revisiting India’s Gas Imbalance Regulations

[Krishna Agarwal is a 3rd year BA LLB Hons. student at Gujarat National Law University]

The Government of India envisages augmenting its gas-based economy from the existing 6% to 15% by 2030. To achieve this goal, the Government of India made certain structural changes in the gas-market. Gas imbalance is a phenomenon where there exists a difference between the quantity of gas delivered at the entry point and that injected at the exit point. The regulation of such imbalance ensures that both the operations of the gas pipeline and the commercial aspects of the gas market are not compromised. Further, such regulation promotes the development of the short-term gas market and ensures fair trade and competition amongst the entities, which might be threatened if imbalances are not managed.

The principle of neutrality, non-discriminatory services and efficient operation of transmission networks are some of the globally recognized characteristics of the gas imbalance management system. The gas markets in India are not as mature as that of EU or USA and, therefore, it is necessary to analyze the present regulatory framework in India against the backdrop of practices in USA and EU for crystallizing the way forward for India.

India: Imbalance Regulations

In India, pursuant to section 61 of the Petroleum and Natural Gas Regulatory Board Act, 2006 (“PNGRB Act”), the PNGRB (Imbalance Management Services) Regulations, 2016 (“Imbalance Regulations”) were issued that were in turn amended by PNGRB (Imbalance Management Services) Third Amendment Regulations, 2020 to realize the objectives of the PNGRB Act.

The offering of imbalance management services is dependent on the discretion of the transporter, as it is conditional in nature. These services can be provided: firstly, if there is no prejudice to the rights and obligations arising out of existing Gas Transportation Agreements (“GTAs”) between the transporter and the shipper and, secondly, if these services conform to the availability of pipeline capacity and the services of shipper and transporter.

In the USA, the Federal Regulatory Energy Commission (“FERC”) Regulations mandate the pipeline to provide parking and lending facilities (imbalance management service) to the shipper to the extent it is operationally practical. However, as found in the High Island Offshore System LLC case before FERC, there exists a higher burden of proof for establishing that the facilities were not operationally practical. No such conclusion can be drawn for India.

Hence, to prevent arbitrariness, it is necessary that an independent system operator be set up in India to scrutinize the requests for providing imbalance management services made by the shipper to the transporter. Additionally, the independent system operator should maintain the records of imbalance management services requested or approved by the transporters and should be responsible to levy charges and penalties against mismanagement of imbalance services. This is in consonance with the international practice of the EU where the independent system operator primarily manages the operation of the imbalance management services.

There are primarily two imbalance management services present in India: parking and lending service, and netting and trading service, and each of these is discussed in turn.

Imbalance Management Services: Parking and Lending Service

Parking and lending service is a short-term storage service available through the pipeline to remedy the imbalance in the system. Parking is said to be done when the shipper delivers the additional attained gas to the pipeline, whereas in case of lending the gas is lent to the shipper by the transporter which shall be returned in the future. The former is efficient in cases where there is variance in gas demand owing to operational reasons, whereas the latter is often used when there is shortage of cash or temporary supply outages. The Imbalance Regulations provide that in cases where the points at which the gas was delivered and re-delivered are different, the transportation tariff has to be borne by the shipper. This is a similar practice as followed in the US gas markets. However, in the US, it has also been provided that unless there is a contrary agreement, any parked quantity which is not nominated for withdrawal will be considered as a property of the transporter and any loaned quantity which is not paid back will be sold to the shipper at 150% of transporter’s cash out index price.

Additionally, it is important to note that India’s Imbalance Regulations neither provide for any provision with regard to the gas trader, nor does it cover gas traders within the ambit of the definition of shippers. This is a lacuna in the Imbalance Regulations, as a gas trader may also park gas until the consumer is identified. Hence, suitable provisions in relation to the gas trader must be introduced in the Imbalance Regulations for greater certainty. Further, charging tariffs as high as Rupees 10 per Million British Thermal Units (MBTU) might disincentivize the stakeholders to resort to parking and lending services. In the USA, charges for providing imbalance management services are fixed by the FERC for each pipeline; hence, there is no common rate for providing imbalance management services. Therefore, it is necessary that the Imbalance Regulations in India should take into account the practical difficulties of the stakeholders.

Imbalance Management Service: Netting & Trading Service

Netting and trading service refers to the practice of offsetting imbalances on GTAs. An ambiguity that occurs in India’s Imbalance Regulations is when the imbalances are within the permissible limits of the GTAs, but they exceed the permissible limit cumulatively, as the shipper has entered into multiple GTAs. This issue is relevant in case there is unification of the grid and the system is seen as a whole. To remove the confusion, a provision must be inserted in the Imbalance Regulations which allows the shipper to avail the facility of netting and trading services.  A unique feature in the USA gas market is that the pipelines cannot impose penalties on the shipper unless the pipeline allows the shipper to use netting and trading service to cure the imbalance.

System Indiscipline

In India, the imbalance in the system can be categorized into three-heads. Positive imbalance is said to be there when the shipper takes less quantity of gas than injected into the pipeline. Negative imbalance is there when the shipper takes more quantity of gas than injected into the pipeline. The tolerance limit of cumulative positive imbalance is 10%, whereas the tolerance limit of cumulative negative imbalance is 5% of the allocated capacity; exceeding it will attract imbalance charges. Unauthorized overrun arises when the shipper utilizes over 110% of the allotted pipeline capacity without the prior permission from the transporter.

We can see that the Access Code Regulations confer responsibility on the shipper to remedy the  imbalances which exceed the tolerance or permissible limit. The system imbalance charges are half the tariff of natural gas pipelines. Such harsh penalties are levied on the shipper without any linkage with the costs incurred by transporter, and the transporters who might also be responsible for system imbalances are self-exempted from any penalties. This system in India gives transporters unduly high cost-advantage vis-a-vis third party marketers such as the shippers.  On the contrary, in the US and EU markets penalties are levied on the shipper to the extent of the costs incurred by the transporter. For fair market competition, it is necessary that one opts for a tranche-wise imbalance rate at different levels of imbalances, which is lower than 50% of the tariff of natural gas pipelines. In pursuance with Article 14 and Article 19 of the Indian Constitution, the penalties should be levied in a non-discriminatory manner against all shippers and transporters involved in the market.  Overall , we find that there are several lacunae which need to be addressed by the Indian Government to achieve its objective of a mature gas market by 2030.

Krishna Agarwal

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