India’s Regulators And Their Magnificent Obsession With Floor Prices

The Supreme Court has stuck to its stand on Wednesday that all pending adjusted gross revenues of the telecom service providers have to be recovered at one go. The combined dues of Vodafone Idea, Airtel and erstwhile Tata Teleservices are about Rs 1.19 trillion. Non-oil companies, including Gail and Oil India, need to pay about Rs 1.83 trillion.

Can the telecom department (DoT) offer these companies any financial space to mitigate the impact? One of these is for the government to lower its future license fees or spectrum base prices, both eminently possible. Instead, it wishes to pursue an anti-competitive plan, that of a floor price for future telecom services.

Though the decision has to be made by the Telecom Regulatory Authority of India (Trai), it will certainly be shot down by the Competition Commission of India. One of the quirks of the Indian regulatory space is that regulators fight among themselves about their scope bitterly dragging those fights to courts. CCI and the Trai have fought over who will decide whether or not telecom companies have offered adequate facilities to each other for subscribers to call across different networks. The experts commenting on the fight noted that it was a proxy war among the three private sector companies Vodafone Idea, Airtel or RJio to get an advantage over the other.

Regulatory crosswires

If Trai chooses to offer a floor price or some variation on it, one can be sure CCI will be at loggerheads over it. On its part the telecom regulator has already made public why it does not think a floor price is a great idea. A consultation paper released by the regulator in December weighs the evident to note, “Fixing of a floor price is, thus, fundamentally against the consumer interest. Not only this, price controls cause a net deadWeight Loss… A floor price is, therefore, considered inefficient for the economy.”

There are no significant telecom markets in the world that offer a floor price and for the same reasons. Telecom analyst Mahesh Uppal says a floor price “is a retrograde idea and no mature markets offers to set floor price”.

The Trai argument endorses Uppal and should, in principle, find support from the CCI too. Think of a floor price as a minimum support price (MSP) that the government offers farmers for cultivation of 24 types of crops. To understand why it is a failure, ask any farmer. The price support should not be necessary if there is a shortage, as farmers will be able to sell prices higher than MSP. It should work whenever there is a glut of production. Yet farmers are annoyed because the state agencies do not manage to buy more during the glut. The farmers then sell at a price lower than the MSP and make a loss. The experiment shows, instead, that making the markets efficient would help the farmers more than this administrative fiat.

Floor price: other sectors

Curiously though, India has continued to experiment with floor prices in several sectors. We saw its impact on farming. There are other sectors like water supply, renewable power and even in natural gas. The experiments in water supply and gas date back to the early nineties while that for renewable power are fairly recent. These experiments informs us why there is an environment of pundits which support floor price in a sector.

In the case of renewable power, the Central Electricity Regulatory Commission has set a floor and forbearance for trading through exchanges. This should not have been necessary, since a power exchange by definition should set prices. In its order dated December 30, for the period between April, 2012 to March, 2017 the power regulator had set the prices. The reason are the same, as that which Trai has received from the telecom sector. The floor will stop distress sale of renewable power by the producers. Remember the government has brought in a renewable power purchase obligation for the electricity distribution companies, i.e. they have to mandatorily buy a percentage of their power from the renewable sector. Since there is no rule which decides what will be the price at which those purchases will happen, the CERC waded in to set a floor price. Significantly while renewable energy has a share of 23.39 percent in the total installed generation capacity in the country i.e. 368.98 GW (up to February 29, 2020), most of the growth has happened after 2017 when the floor price ceased to operate

The other example is natural gas. The production sharing contracts for the first set of gas fields—Panna-Mukta & Tapti had elements of floor price. Those contracts were written in December 1994. The price formula for the gas was linked to an internationally traded fuel oil basket, with a specified floor and ceiling price of $2.11 and $3.11 per million metric british thermal units, respectively. Twenty-five years later, these fields have exhausted their production capacity but the bad habits have persisted. The government still works on a price-fixation formula to set domestic gas prices every six months. It has announced in 2018 plans to migrate to a spot exchange for gas but those are still in the works with the first step hiving of Gail to separate its role as a carrier from the business of providing gas in cities, still pending. Meanwhile China has already set up a spot exchange for gas in Shanghai. The domestic exploration sector is basically assured there shall be a floor price for its discovery and the costs are consequently gravitating there. It has not helped. The more the price setting mechanism has been fine tuned, the differential with global prices have come down. It is expected to fall by close to 51 percent in just one year a Bloomberg report notes, eating into the profits of state run ONGC. A move to erase the floor would have made the company far better.

―Business Standard