The Union oil ministry is considering a proposal to adopt differential pricing for diesel, under which industrial users like power utilities, will be charged market prices and retail consumers continue to be subsidised.

The three state-owned oil marketing companies � Indian Oil [Get Quote] Company (IOC), Bharat Petroleum Corporation Ltd [Get Quote] (BPCL) and Hindustan Petroleum Corporation Ltd [Get Quote] (HPCL) � also plan to send a note to the government to this effect.

"Differential diesel pricing for industrial and automotive sectors is one of the things we are looking at. Demand needs to be moderated and the oil companies need to be helped," confirmed Petroleum Secretary RS Pandey after a meeting with the chairmen of the government-owned oil companies on Tuesday.

Differential pricing was a key recommendation of high-powered BK Chaturvedi Committee, which submitted its report on the finances of oil companies to the prime minister on July 30.

Adopting market prices for industrial consumers will increase diesel prices by 46 per cent, but reduce oil marketing companies' under-recoveries.

The oil marketing companies are currently losing around Rs 480 crore a day because they sell petroleum products at below production costs. Diesel prices account for over half this loss and are subsidised more than petrol, though it outsells the latter by a factor of five.

Current diesel demand from industrial users and the resultant saving for oil companies by selling at market rates have not been made public.

The demand for diesel has grown around 18 per cent since April this year, while the refineries are geared up to meet a demand growth of 12-14 per cent, said Sarthak Behuria, chairman and managing director of IOC, which supplies over 50 per cent of the fuels the country consumes, and controls 40 per cent of the country's refinery capacity.

Companies such as NTPC Ltd [Get Quote], India's largest thermal power producer, use diesel to generate power in the absence of other fuels such as natural gas. Diesel currently costs almost the same as subsidised gas sold by Oil and Natural Gas Corporation (ONGC [Get Quote]) and Oil India and is almost 10 times cheaper than other fuels such as naphtha and liquefied natural gas.

"Buying diesel is cheaper for the power companies. A 46 per cent jump in diesel prices will change the economics of a power plant significantly," said an official with state-owned NTPC, the country's largest power generator.

Oil company officials said diesel has now become cheaper than even fuel oil. "This meant that the power producers were buying lesser fuel oil and more diesel leading to the unprecedented growth in demand," said Behuria.

However, Petroleum Secretary Pandey said that the differential pricing could lead to diversion of the subsidised diesel meant for the transport sector to industries. "But a method has to be worked out to control the diversion," he said.

The oil marketing companies say that diesel sales to industrial users can be controlled as industries off-take the fuel in their own tanks. "However, sale to retail users who use it in gensets will be difficult to control," said an official with BPCL, which supplies a quarter of the country's fuels requirements.

Differential pricing of cooking gas for commercial and domestic users have already led to large scale diversion of the cheaper fuel meant for domestic users to the industrial sector. The companies, however, said they have to live with such as situation as it is one of the ways of cutting their under-realisations.