"We should decide now ab initio what should be the price of natural gas. What should be the principles, which should be applied," he said at the launch of the book, "Natural Gas in India: Liberalisation and Policy," written by Anil K Jain, a senior bureaucrat and former joint secretary-exploration in the oil ministry.

"On the one hand, we (advocate) freedom to price gas on an arm's length basis. But on the other hand we also say that (companies) must allocate gas according to the government's priorities," he said citing example of fertilizer sector which can "bid for whatever price" because their input cost is pass through.

Urea-making fertiliser plants have been accorded top priority in allocating domestic natural gas by the government.

The country, he said, "must internalise real cost of energy" while subsidy should be determined separately.

"I am not aware that any of the existing model (for pricing of gas) meet the test of economic rationality," he said.

Speaking of the formula which formed the basis for fixing the price of USD 4.2 per million British thermal unit for the gas produced by Reliance Industries from KG-D6 block, Ahluwalia said: "Under which circumstances that formula should be determine the price of gas."

"These are very big decisions and the government has to take informed view on that. It is very easy to say that particular formula does not have much rationality, but then it is quite difficult to propose what the formula should be in future. The whole issue of energy is quite crucial," he said.

Ahluwalia advocated freeing of natural gas pricing.

The Planning Commission has also advocated the market determined energy price in its Integrated Energy Policy which was approved by the Union Cabinet

Speaking on the occasion, Cairn India CEO Rahul Dhir said taxation system in the country was discriminatory as crude oil producers enjoyed a 7-year holiday from payment of income tax while the same was not available for natural gas producers.

He said energy explorers had no control over what is discovered when a well is drilled and it may turn out that a well may contain both oil and gas and therefore there was an urgent need to end the discrimination between crude oil and gas for tax purposes.