May 26, 2000|
Energy Sources - Unravelling the APM
The administered pricing mechanism popularly known as APM has probably become a dirty word with the shift in economic thinking, from socialism to a more market driven ideology. The Government in 1998 declared to completely deregulate the oil sector by 1st April 2002.
It has partially deregulated the exploration & production (E&P) and refining sector by allowing private participants although, it still regulates the crude and product prices. However, the aim of the Government is to completely dismantle the APM, which currently seems like an onerous task considering the political sensitiveness on the issue of pricing.
To try and understand the functioning of the APM; the Government regulates the prices of crude oil at import parity levels.
Import Parity Price (IPP) = Cost of crude + freight + landing charges = landed cost of crude*
*Landed cost of crude + Import duty (15%) = Import Parity Price
All domestic produced crude is to be sold to the refineries at these prices. The Government purchases crude from the domestic E&P companies at 75% of IPP and sells it to the refiners at IPP; the balance is transferred to the oil pool account (OPA). In addition E&P companies are entitled to earn a maximum return of 15% on capital employed (ROCE) any excess has to be transferred to the OPA, in case of shortfall E&P companies are to be reimbursed from the oil pool.
Once the crude is refined, (crude distillation process) the output is categorised as controlled and decontrolled products. Petrol, diesel, kerosene, LPG and ATF come under controlled status while naphtha is decontrolled. Decontrolled products are allowed to be sold at market determined prices while the controlled products are to be sold at IPP to the PSU marketing companies.
Import Parity Price = FOB prices + freight + landing charges = landed cost of the product*
*Landed cost + import duty (25%) = Import parity price
These products are then to be sold by the PSU marketing companies at regulated prices determined by the Oil Coordination Committee (OCC). The marketing companies are entitled to a maximum of 12% ROCE, any excess is to be transferred to the OPA and shortfall to be reimbursed by the same. The OPA balance is then used to subsidise the prices of controlled products to the final consumer.
Hopefully post 2002 the Government will not have to keep track of such complicated structures but more importantly the OPA deficit will not have to be funded by the exchequer.
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