NEW DELHI: The national auditor CAG has observed that state oil firms have overcharged customers and collected additional The national auditor CAG has observed that state oil firms have overcharged customers and collected additional Rs 26,626 crore in five years by making people pay for imaginary charges such as customs duty on domestic sales, while they gave "undue benefit" to Essar Oil and Reliance Industries by buying their fuel at high rates.The report was on the pricing mechanism followed by Indian Oil Corp Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd in case of three products, petrol, diesel and LPG.The auditor questioned various components of the retail price and said inefficiency in marketing resulted in higher than necessary expenditure on several items, because of which consumers are forced to pay a higher price than necessary. The Comptroller and Auditor General of India observed that the notional charges such as insurance , freight, wharfage, ocean loss etc. amounted to Rs 50,513 crore in five years up to March 2012, but the actual cost that was paid on imported crude was only Rs 23,887 crore."This even after deduction of relevant expenses incurred in import of crude oil dudring 2007-2012, OMCs ought to have benefited by Rs 26,626 crore," the CAG said. The notional charges are added for the entire quantum of fuel sold although more than 20% of the oil they refine is sourced domestically.The CAG also said state firms were buying fuel from private refiners at a price equivalent to the landed price of the fuel if it was imported after paying freight charges, insurance and customs duty. If state firms do not make the purchase, the private refiners would export them at a lower rate called the export-parity price. The CAG observed that state firms had made no effort to negotiate and bring down the price.CAG’s report on the mechanism for oil pricing, tabled in parliament on Friday, said oil marketing companies (OMCs) should renegotiate prices with private refiners. 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 Rs 667 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, but these costs would have to paid by OMCs if products were purchased at export prices. "It was also stated that the additional amount received by RIL (the difference between trade parity price and export parity price of diesel at Jamnagar) was essentially equal to the coastal freight and CST," the CAG report said.Oil marketing companies also pay a similar price to stand-alone refineries, which do not have retail outlets. The price is also used to calculate the "under-recovery" or revenue loss, which means that the contribution of upstream firms and government’s subsidy to compensate the OMCs is also higher than what it should be.CAG said standalone state-run refiners such as CPCL, NRL and MRPL gained by over Rs 1,400 crore per year because of the pricing system.The report said that the oil ministry sought to justify the pricing system on the ground that state firms needed the additional money to modernize, but the CAG had doubts. " OMCs would be expected to derive a price advantage. However, this advantage does not appear to have been translated adequately in terms of efficiency improvement in refining margins, optimization of costs of production and improvements of yields," it said.The auditor brushed aside companies’ justification that they made huge investments of about Rs 38,800 crore in auto fuel upgradation and refinery modernization projects."While it is acknowledged that OMCs have invested in auto fuel upgradation projects, it may be noted that a higher return is also guaranteed in the price structure for such upgradaded fuels (such as Euro-III & IV products) which would address the need for investment in such projects to some extent," it said.26,626 crore in five years by making people pay for imaginary charges such as customs duty on domestic sales, while they gave "undue benefit" to Essar Oil and Reliance Industries by buying their fuel at high rates.The report was on the pricing mechanism followed by Indian Oil Corp, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd in case of three products, petrol, diesel and LPG.The auditor questioned various components of the retail price and said inefficiency in marketing resulted in higher than necessary expenditure on several items, because of which consumers are forced to pay a higher price than necessary.The Comptroller and Auditor General of India observed that the notional charges such as insurance, freight, wharfage, ocean loss etc. amounted to Rs 50,513 crore in five years up to March 2012, but the actual cost that was paid on imported crude was only Rs 23,887 crore."This even after deduction of relevant expenses incurred in import of crude oil dudring 2007-2012, OMCs ought to have benefited by Rs 26,626 crore," the CAG said. The notional charges are added for the entire quantum of fuel sold although more than 20% of the oil they refine is sourced domestically.The CAG also said state firms were buying fuel from private refiners at a price equivalent to the landed price of the fuel if it was imported after paying freight charges, insurance and customs duty. If state firms do not make the purchase, the private refiners would export them at a lower rate called the export-parity price. The CAG observed that state firms had made no effort to negotiate and bring down the price.CAG’s report on the mechanism for oil pricing, tabled in parliament on Friday, said oil marketing companies (OMCs) should renegotiate prices with private refiners. 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 Rs 667 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, but these costs would have to paid by OMCs if products were purchased at export prices."It was also stated that the additional amount received by RIL (the difference between trade parity price and export parity price of diesel at Jamnagar) was essentially equal to the coastal freight and CST," the CAG report said.Oil marketing companies also pay a similar price to stand-alone refineries, which do not have retail outlets. The price is also used to calculate the "under-recovery" or revenue loss, which means that the contribution of upstream firms and government’s subsidy to compensate the OMCs is also higher than what it should be.CAG said standalone state-run refiners such as CPCL, NRL and MRPL gained by over Rs 1,400 crore per year because of the pricing system.The report said that the oil ministry sought to justify the pricing system on the ground that state firms needed the additional money to modernize, but the CAG had doubts." OMCs would be expected to derive a price advantage. However, this advantage does not appear to have been translated adequately in terms of efficiency improvement in refining margins, optimization of costs of production and improvements of yields," it said.The auditor brushed aside companies’ justification that they made huge investments of about Rs 38,800 crore in auto fuel upgradation and refinery modernization projects."While it is acknowledged that OMCs have invested in auto fuel upgradation projects, it may be noted that a higher return is also guaranteed in the price structure for such upgradaded fuels (such as Euro-III & IV products) which would address the need for investment in such projects to some extent," it said.