CGD Networks and Exclusivity Concerns

Reference Date \| Version	April 18, 2024 \| 1.0
Keywords	CGD network, Geographical Area, Exclusivity, City Gas Station, Natural Gas
Legislation(s)	The Petroleum and Natural Gas Regulatory Board Act, 2006 (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 Petroleum and Natural Gas Regulatory Board (Technical Standards and Specifications including Safety Standards for City or Local Natural Gas Distribution Networks) Regulations, 2008 Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Networks) Regulations, 2008
Jurisdiction	India

Introduction

The legislative framework provides for exclusivity regarding laying, building, operating or expanding a city or a local natural gas distribution network.

As of December 31, 2023, the Petroleum and Natural Gas Regulatory Board (‘PNGRB’) has authorized approximately 33,622 km of natural gas pipeline network across the country, out of which 24,623 km of natural gas pipeline, including spur lines, tie-in connectivity, Sub-Transmission Pipelines (‘STPL’) and dedicated pipelines are already operational. A total of 10,860 km length of pipelines is under various stages of construction.

The City Gas Distribution (‘CGD’) infrastructure is critical, especially in light of India’s growing focus on natural gas as a transition fuel towards its journey to net zero. Proper optimization of resources and assets would likely involve pipelines traversing one or more Geographical Areas (‘GAs’). The scope and extent of exclusivity with respect to laying, building, operating or expanding a city or a local natural gas distribution network thus merits deeper enquiry.

This article discusses the issue of the extent of exclusivity envisaged under the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Authorizing Regulations, 2008’) in light of the recent decision of the Appellate Tribunal for Electricity, New Delhi Appellate Jurisdiction (‘APTEL’) in Central U.P. Gas Limited v. Hindustan Petroleum Corporation Limited and Ors. (MANU/ET/0005/2024). Issues related to such exclusivity are also discussed in this article.

Background

The dispute between Central U.P. Gas Limited (‘CUGL’) and HPCL arose as Hindustan Petroleum Corporation Limited (‘HPCL’) laid down the carbon steel pipeline in the Bareilly GA authorized to CUGL.

CUGL was incorporated on February 25, 2005, as a joint venture between 2 Maharatna Companies i.e., GAIL (India) Limited and Bharat Petroleum Corporation Limited. Since then, CUGL has been authorized by the PNGRB to lay, build, operate or expand the CGD Network in GAs of Kanpur (including parts of Unnao), Bareilly and Jhansi.

For Bareilly CGD Network, the PNGRB vide its letter dated April 22, 2009, accepted the Central Government authorisation and granted CUGL exclusivity for a period of 5 years from the date of issue of Performance Bank Guarantee.

The PNGRB, vide its letter dated March 29, 2019, granted authorization to HPCL to develop CGD network in the Bareilly (EAAA), Pilibhit and Rampur GA under the 10th round of bidding.

Chronology of Events

June 09, 2020: After receiving authorization on 29.03.2019, PNGRB authorized the subject pipeline based on the Detailed Feasibility Report submitted by HPCL for the subject pipeline to PNGRB.

September 25, 2021: HPCL got due permissions from PWD.

December 01, 2021: HPCL got due permissions from NHAI before starting its work.

The above permissions, dated September 25, 2021 and December 01, 2021, were given after public consultation. It was alleged that CUGL never participated in such proceedings to oppose the permissions granted to HPCL.

March 07, 2022: CUGL informed HPCL that they were laying the subject pipeline in the GA authorized to CUGL. Thereafter, CUGL sent several follow-up and reminder emails for the same.

April 19, 2022: In a letter addressed to CUGL, HPCL indicated the proposed pipeline route in GA of Bareilly, Pilibhit and Rampur.

July 12, 2022: CUGL filed a complaint before the PNGRB challenging the encroachment by HPCL.

July 14, 2022: The PNGRB recorded HPCL’s admission that it was laying the pipeline in GA of CUGL and granted interim protection to CUGL. The PNGRB restrained HPCL from carrying out further work in the GA of CUGL and maintained the status quo until the complaint was disposed of.

During the pendency of the complaint dated July 12, 2022, HPCL reached out to CUGL and made multiple attempts to reach an amicable settlement. CUGL refused to settle the issue amicably and instead sought surrender of the infrastructure by HPCL and/or removal of the pipelines already laid by HPCL.

August 29, 2022: HPCL filed its reply to the complaint dated July 12, 2022.In its reply, HPCL submitted that;

the tap-off point from the nearby natural gas pipeline is SV11 of the GAIL natural gas pipeline at Chaubari, and this SV station is under the CUGL’s area.
despite its best efforts, it was unsuccessful in getting suitable land for its City Gas Station (‘CGS’) near the SV station, within CUGL’s GA, to comply with Regulation 2(g) of the PNGRB (Technical Standards and Specifications including Safety Standards for City of Local Natural Gas Distribution Networks) Regulations, 2008. HPCL could only succeed in acquiring land just outside the CUGL’s area at a distance of 0.5 km.

January 5, 2023: HPCL filed an affidavit stating that the pipeline route has been planned to supply the natural gas to its own GA and that the pipeline is meant to ensure connectivity between the source point and the charge areas of GA. HPCL also undertook to not do any business in the area allocated to CUGL and to abide by all legal provisions while operating the pipeline.

February 17, 2023: The PNGRB, in its order, held that HPCL has infringed the infrastructure exclusivity of CUGL and imposed a penalty of INR 5 lakh on HPCL for violating the infrastructure exclusivity of CUGL. The PNGRB held that,

“18. It is clearly depicted from the authorization letters of both the parties that the GA of the Complainant is surrounded by the GA of the Respondent, creates an unusual situation where it restricts the Respondent to lay the pipeline, from the GA of the Complainant. However, the Board keeping in mind the spirit of the PNGRB Act, 2006 to ensure the supply of natural gas in all parts of the country by developing the infrastructure and the submissions of the Respondent that it has made an investment of INR 50 Crore approx. for laying the said pipeline and grave loss will be caused to the public exchequer if the said pipeline is removed, is not inclined to direct the Respondent to discontinue the its activity and removal of said Pipeline, as same would lead to delay of the laying of CGD Network of Bareilly (EAAA) District, Pilibhit and Rampur Districts. It is pertinent to note that since the Respondent is laying its pipeline within the GA of the Complainant, and the Board in unusual situation, feels not appropriate to pass direction to remove the said pipeline, therefore, it will be foremost obligation of the Respondent to be cautious in future and lay further work under the supervision of the Responsible Officer and strictly comply with Safety Standards laid down by the Board and not to further infringe the infrastructure exclusivity of the Complainant. An affidavit to the effect that no commercial activity will be carried out in the GA authorized to the Complainant has already been filed and the Respondent must ensure the undertaking given in the affidavit be observed at all times by the Respondent and its Officers.

…

The Board is of the view that the Respondent by laying the pipeline has not only violated the terms and conditions of the authorization letter dated 29.03.2019 but also infringed the infrastructure exclusivity of the Complainant in the subject GA…..

(b) The Respondent shall ensure that no further violation is to be made in the GA of the Complainant and parties to strictly complies with the Safety Standards laid down by the Board.”

March 4, 2023: HPCL again resumed laying pipeline in their GA, which was the subject matter of dispute. CUGL asked HPCL to stop the activities; however, HPCL did not respond.

March 06, 2023: CUGL filed an application under Section 44 of the Petroleum and Natural Gas Regulatory Board Act, 2006 (‘PNGRB Act’) for directions against HPCL for violation of the order dated February 17, 2023.

April 06, 2023: In compliance with the order dated February 17, 2023, HPCL deposited the penalty amount of INR 5 lakh, which was later acknowledged by the PNGRB.

April 25, 2023: PNGRB rejected the interim prayer sought by CUGL in its application filed on March 06, 2023, and directed both the parties to explore the possibility of arriving at a settlement.

May 11, 2023: CUGL filed an appeal before the APTEL seeking the following reliefs:

quash the order dated February 17, 2023, passed by the PNGRB, and
direct HPCL to remove the illegal pipeline laid by it.

Issues

The two primary issues before the APTEL were:

(i) Whether or not paragraph 18 of the impugned PNGRB Order dated February 17, 2023, has restrained HPCL from laying carbon steel pipelines in the Bareilly GA authorized to CUGL as mentioned.

(ii) Whether or not HPCL has infringed the infrastructure exclusivity of CUGL by passing through the GA of CUGL with the activity of laying carbon steel pipelines in the Bareilly GA authorized to CUGL. If so, its effect.

Judgment

(i) Whether or not paragraph 18 of the impugned order dated February 17, 2023, has restrained HPCL from laying carbon steel pipelines in the Bareilly GA authorized to CUGL as mentioned.

The APTEL observed that while the PNGRB did conclude that HPCL had violated the terms and conditions of the authorization letter dated March 29, 2019, and also infringed the infrastructure exclusivity of the Appellant in the subject GA, because of which penalty of INR 5 lakh was also imposed, no direction to discontinue the activities or removal of pipeline was given by the PNGRB.

The PNGRB was not inclined towards directing HPCL to remove the pipelines, considering that first, HPCL had already invested approximately INR 50 crore in laying the said pipeline, and grave loss would be caused to the public exchequer if it was removed and second, removal of the said pipeline would lead to delay in laying the CGD Network of Bareilly (EAAA) District, Pilibhit and Rampur Districts.

The APTEL further observed that in paragraph 22 of the impugned PNGRB Order, the phrase ‘no further violation’ to be made in the GA could only mean any violation other than the line already laid down to a substantial extent. If the PNGRB had intended that HPCL should not complete the pipeline construction, it would have specifically restrained them from completing the activities for laying the pipeline.

The APTEL held that it was clear that in paragraph 18 of the impugned order dated February 17, 2023, HPCL had not been restrained by the PNGRB from the activity of laying carbon steel (CS) pipelines in the Bareilly GA authorized to CUGL.

The APTEL did not deal with the issue of exclusivity granted to CUGL and only dealt with the ‘infringement issue’.

The APTEL observed that “the vision & value of the PNGR is to create a vibrant energy market with rapid and orderly growth through facilitation of flow of investments into the basic infrastructure for efficient transportation and distribution of petroleum, petroleum products and natural gas at minimum cost and high level of protection of consumer interests through fair trade practices and competition amongst the entities so as to ensure the enhanced competitiveness of Indian economy and customer satisfaction.”

Under Regulation 2(c) of the Authorizing Regulations, 2008

“(c) “authorised area” means the specified geographical area for a city or local natural gas distribution network (hereinafter referred to as CGD network) authorized under these regulations for laying, building, operating or expanding the CGD network which may comprise of the following categories, either individually or in any combination thereof, depending upon the criteria of economic viability and contiguity as stated in Schedule A, namely:

(i) geographic area, in its entirety or in part thereof, within a municipal corporation or municipality, any other urban area notified by the Central or the State Government, village, block, tehsil, sub- division or district or any combination thereof; and

(ii) any other area contiguous to the geographical area mentioned in sub- clause (i);”

The APTEL observed that for the said purpose, the authorized area, depending upon the criteria of economic viability and contiguity as stated in Schedule A, GA may comprise of the following categories, either individually or in any combination thereof, namely geographic area, in its entirety or in part thereof, within a municipal corporation or municipality, any other urban area notified by the Central or the State Government, village, block, tehsil, sub-division or district or any combination thereof; and any other area contiguous to the geographical area.

The APTEL examined Regulation 3 of the Authorizing Regulations, 2008, and observed that the CGD network is basically designed to operate at a pressure as specified in the relevant regulations for technical standards and specifications, including safety standards for maintaining the volumes of supply of natural gas on a sustained basis to meet the customer requirements of natural gas up to 50,000 SCMD. Customers having requirements of natural gas of more than 50,000 SCMD and up to 100,000 SCMD can also be supplied through the CGD network or through a pipeline not forming part of the CGD network at the discretion of the customer.

The APTEL then proceeded to look into the proviso to the definition of ‘CGS’ under Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Natural Gas Distribution Networks and Compression Charge for CNG) Regulations, 2008 (‘Tariff Regulations, 2008’), which states “Provided that if CGS is established outside the authorized Geographical Area then pipeline connecting from CGS to authorized CGD network shall be considered as a part of CGD network, however the authorized entity shall not supply natural gas to any customer from the pipeline outside its geographical area” and held that, it is an enabling provision allowing authorized CGD entities to pass through the GA of another entity with the proviso of not doing any business in other entity’s GA. It does not restrict the entity from laying a pipeline outside their GA to connect CGS irrespective of the fact whether that outside GA is authorized or not by other entity. However, this right is restricted and is subject to not supplying natural gas to any customer from the said pipeline outside its GA.

It was further observed that under the definition of CGS, there is no provision for taking permission from the PNGRB for laying the pipeline for connecting from CGS to the authorized CGD network, and the same shall be considered as a part of CGD network with the only condition to comply that the authorized entity shall not supply natural gas to any customer from the pipeline outside its GA. It was concluded that the entity is only required to take statutory permission from municipal authorities or NOC from the district authorities for laying the pipeline if the outside area is not authorized by other entity. Similarly, even if an outside area is authorized to some other entity, there is no provision under Section 2(1)(g) of the Tariff Regulations, 2008 of taking permission from the PNGRB or from other entity.

The APTEL then proceeded to examine the provisions in respect of exclusivity under Regulation 12 of Authorizing Regulations read with Regulations 5 and 6 of the Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Networks) Regulations,

2008 (‘Exclusivity Regulations, 2008’), which provide for two types of exclusivities to the entity authorized to develop the CGD Network as under:

(i) The authorized entity is granted exclusivity for developing the CGD Network in the authorized GA for a specified period from the date of authorization (commonly referred to as ‘Infrastructure Exclusivity’).

(ii) The authorized entity is granted exclusivity from the purview of common carrier/contract carrier for a specified period from the date of authorization.

Even after the expiry of exclusivity from the purview of common carrier/contract carrier, it is very clear that only the infrastructure laid by authorized entity in the authorized area can be utilized by third party for marketing Natural Gas in the GA. Therefore, no threat was created by passing through the GA of CUGL with respect to infrastructure exclusivity or exclusivity from the purview of a common carrier or contract carrier.

The APTEL concluded that there is no embargo in the PNGRB Act, which restricts the authorized entity from passing through the GA of other entity in order to reach its own GA from CGS. This aspect was emphasized by also delving into the word ‘infringement’ as explained in section 21 of the PNGRB Act, which is with respect to the Right of first use, which says that,

“Explanation: For the purposes of this sub-section “infringement of any right” means doing of any act by any person which interferes with common carrier or contract carrier or causes prejudice to the authorised entity.”

The APTEL held that, “In the present case by passing through the GA of the Appellant, in order to reach its GA from the CGS, has not interfered with the exclusivity right of common carrier or contract carrier granted to the Appellant. Infact Respondent no.1 has always given on an affidavit that they have no intention of undertaking any commercial activities in the Appellant’s GA.”

The APTEL observed that in the current landscape, the geographical size of a GA is becoming large. Hence, a situation may arise wherein the practically available route would be one where the CGD pipeline connecting from its CGS may pass through some sections of other contiguous GA(s).

The APTEL also pointed out that the PNGRB was well aware of such peculiar situations, and a modification had already been proposed in this regard to Section 2(1)(g) of the PNGRB Act to bring in some more clarity and held that “Being an evolving sector, PNGRB as a Regulator is well advised to come up with the guidelines/ regulations in order to deal with these time testing situations.”

Viewpoint

Various elements of the CGD networks traversing one or more GAs are likely to be necessary, especially given the goal of increasing natural gas consumption in the years to follow.

The existing provisions contemplate CGD networks expanding to other areas contiguous to the GA with respect to which authorisation is granted. Such other contiguous areas are other authorised GA(s). The point is illustrated in Regulation 3 of Authorizing Regulations, 2008 and terms such as ‘authorised area’ and ‘CGS’. However, it is time to develop a framework to address issues arising concerning CGD networks expanding beyond the GA, and such a framework should be referred to in the appropriate Regulations and Rules under the Act.

In the instant case, the APTEL was correct to point out that the proviso to the definition of ‘CGS’ does not require an authorized entity to obtain permission from another authorized entity or the PNGRB simply because the former’s pipeline traversed the GA in respect of which the other entity was granted exclusivity.

Since the decision of the APTEL on February 2, 2024, the PNGRB has, vide amendment dated February 16, 2024, amended the said proviso to read as follows,

“Provided that if CGS is established outside the Authorized Geographical Area then pipeline connecting from CGS to authorized CGD network shall be considered as a part of CGD network, If required, subject to prior approval from PNGRB, the authorized entity may set up and operate compression facilities along with such CGS for an initial period of 2 years from the date of its authorization. Upon the expiration of 2 years period, the authorized entity shall immediately cease the operation of such compression facilities. However, in any case, the authorized entity shall not supply natural gas to any customer outside its geographical area.

Provided further that in cases where CGS is established inside or outside the Authorized Geographical Area, but the Board is satisfied that there is necessity or expediency that the pipeline connecting from such CGS shall have to pass through other Geographical Area(s), then the Board may grant approval for such pipelines, and such approved pipelines shall be considered as a part of the authorized CGD network, however the authorized entity shall not supply natural gas to any customer from such pipeline outside its geographical area.”

The amendment to the proviso is limited as it addresses a very specific issue, i.e., the establishment of CGS outside or inside a GA. The overall issue of the CGD network expanding beyond the GA to one or more other GAs remains unaddressed. Also, a common arrangement among relevant authorised entities addressing attendant issues, such as Operation & Maintenance, Asset Integrity, and Emergency Response & Disaster Management Plan is required and needs to be facilitated under the proposed framework.

The success of the natural gas market is heavily reliant on having a robust and efficient regulatory framework in place. A comprehensive framework to address all issues in relation to the traversing of GAs by CGD networks becomes crucial in this regard.