OMCs made Rs26,626 crore in 2007-12 by overcharging customers: CAG

State-run oil marketing companies overcharged consumers around Rs26,626 crore by adding notional charges such as customs duty on domestic sales to the actual costs of petroleum fuels over a period of five years, even as they paid more than necessary to buy fuel from private refiners like Essar Oil and Reliance Industries, the Comptroller and Auditor General of India said in a report.

The CAG's latest report on pricing of petroleum products by public sector oil marketing companies, tabled in Parliament on Friday, says the present pricing mechanism benefited the OMCs by around Rs50,513 crore during the five-year period 2007-12.

The OMCs follow a pricing mechanism that allows them to charge an import-linked price at the refinery gates for both petrol and price-controlled products like diesel, LPG and kerosene, thereby also benefiting private refineries at the cost of consumers, CAG pointed out.

According to the CAG report tabled in Parliament on Friday, the three state-run fuel marketing companies - Indian Oil Corp, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd - followed the lop-sided pricing mechanism in the marketing of petrol, diesel, LPG and kerosene making an extra gain of Rs50,513 crore over a five year period between 2007 and 2012.

Also, according to the CAG, inefficient marketing by the OMCs has resulted in higher than necessary expenditure on several items, because of which consumers are forced to pay a higher price than necessary.

The notional charges such as insurance, freight, wharfage, ocean-loss etc added up to Rs50,513 crore in five years between 2007 and 2012, whereas the actual cost paid on imported crude was only Rs23,887 crore, CAG pointed out.

Even allowing for import-related expenses incurred by the refineries on import of crude, OMCS ought to have benefited at least by Rs26,626 crore through the pricing methodology of products, CAG said.

"This even after deduction of relevant expenses incurred in import of crude oil during 2007-2012, OMCs ought to have benefited by Rs26,626 crore," the CAG said.

The notional charges are added for the entire quantum of fuel sold although more than 20 per cent of the oil they refine is sourced domestically, CAG pointed out.

The CAG said state-run OMCs buy fuel from private refiners at refinery gate prices (RGP), which is equivalent to the landed price of imported fuel, adding freight charges, insurance and customs duty etc while private refiners export them at a lower rate called the export-parity price.

State-owned fuel retailers buy diesel from private refiners as their own production is insufficient to meet domestic demand. This purchase is done at trade parity price (TPP) which is 80:20 ratio of import parity price (actual import cost) and export parity price (actual price realised on exports).

"This affords an undue benefit to private refiners (Reliance Industries Limited and Essar Oil Limited), which was estimated at Rs667 crore on high speed diesel alone in one year (2011-12)," it said.

The CAG observed that state firms had made no effort to negotiate and bring down the price, even as private refiners earned more from domestic sales than from exporting fuels.

The current prices paid by state firms "afford an undue benefit to private refiners (Reliance Industries Ltd and Essar Oil Ltd), which was estimated at Rs667 crore on HDS (diesel) in only one year," it said.

The oil ministry had responded to CAG's queries saying that private refiners were bearing costs such CST and coastal freight to move products to the location of OMCs.