Tuesday, November 20, 2012

The Politics of CNG Pricing

Should the Supreme Court intervene in the economy?

That is one of the questions at the heart of the October 25 Supreme Court hearing involving CNG. The court argued that CNG prices were being artificially inflated and that this was imposing an unfair burden on the public. The result of the court hearing was an order to reduce the price of CNG. Opponents of the Supreme Court believe that the court had no right to intervene in the economy in such a manner and that the order was driven less by respect for the law and more by populism and a need for the judiciary to assert itself against the government.

The reality is that the Supreme Court was operating well within its limits when it ordered the lowering of CNG prices and it wasn't needlessly intervening in the economy.

The primary responsibility of the Supreme Court is to interpret the law. Any order that it gives can and should be considered politically legitimate if that order is driven by the need to ensure that the law is not misinterpreted in any way.

CNG prices are regulated by the Oil and Gas Regulatory Authority (OGRA). In particular, OGRA is responsible for determining the components that go into the CNG pricing formula. For example, the operating cost of CNG stations and the profit of CNG station owners is included in the final CNG price.

According to the Supreme Court, OGRA is not legally authorized to arbitrarily set these two price components because there is no legal statutory provision that gives OGRA such authority. That is why CNG prices should be considered artificially inflated. By arguing in this manner, the Supreme Court is focusing on the legality of the situation. It isn't making an economic argument. As such, it is operating well within its legal domain and is not delving into something outside its expertise.

That the Supreme Court is not overstepping its limits is further evidenced by the fact that the court did not attempt to perform OGRA's job and set the pricing formula on its own. Rather, it delegated the responsibility of coming up with a new pricing formula to OGRA.

Given the recent confrontation between the Supreme Court and the PPP government, it isn't surprising that this verdict has resulted in a host of politicized statements against the judiciary. Aitzaz Ahsan, a former president of the Supreme Court Bar Association and a current PPP senator, denounced the court for getting involved in an issue like CNG pricing, which to his mind is too trivial a matter for the highest court in the country.

One way of determining whether an issue is important enough to be investigated by the Supreme Court is to consider how many people are affected by the issue. In this case, the widespread use of CNG within Pakistan virtually ensures that there will be a substantial impact on Pakistani consumers. If CNG prices are indeed being artificially inflated, then an economically unfair burden is being imposed on a wide range of Pakistanis.

There are other ways by which this case affects a wide range of people. Besides the CNG industry, this court order may result in a discouragement of illegal price-fixing in other sectors of the economy. As well, the verdict may shine a spotlight on other regulatory agencies and force them to reform themselves in much the same way that OGRA was forced to review and reform its CNG pricing formula. In short, the claim that CNG prices are too trivial a matter for the Supreme Court to investigate does not hold because the potential economic effect on the public is too great.

The economy is not something that can very easily be tinkered with. It is a complex system that doesn't respond in a predictable manner when it is interfered with. For example, this particular court order to lower CNG prices has resulted in CNG station owners shutting down in protest. That is hardly the result that the Supreme Court or the original case petitioner were hoping for. This, however, is no excuse to allow the rules to be bent so that some players in the economy illegally benefit at the expense of others.

It is clear that the Supreme Court was operating well within its legal domain when it issued the court order. And far from interfering in the government's work, the court delegated the responsibility of CNG price setting to OGRA. At first glance, the issue of CNG prices may seem trivial. But it has far-reaching implications for the Pakistani economy and, by extension, the average Pakistani consumer.

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