| Reference Date | Version | March 22, 2024 | 1.0 |
| Keywords | Exclusivity, Associated Equipment, CGD Network, LNG, Alternate Sourcing |
| Legislation(s) |
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| Jurisdiction | India |
Introduction
In 2006, the Government of India introduced the Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks (‘2006 Policy’).
The 2006 Policy was and continues to be an enabler for the growth of pipeline infrastructure across the country to facilitate the evolution of a nationwide gas grid and growth of city or local gas distribution networks and aims to:
- promote investment from public as well as private sector in natural gas pipelines and city or local natural gas distribution networks,
- facilitate open access for all players to the pipeline network on a non-discriminatory basis,
- promote competition among entities, thereby avoiding any abuse of the dominant position by any entity, and
- secure the consumer interest regarding gas availability and reasonable tariffs for natural gas pipelines and city or local natural gas distribution networks.
The Petroleum and Natural Gas Regulatory Board (‘PNGRB’) was established per the Petroleum and Natural Gas Regulatory Board Act, 2006 (‘PNGRB Act’) to facilitate investments in the pipeline infrastructure sector while protecting the customers’ interests.
Private sector participation in the development of the CGD network is sought to be incentivised by a grant of exclusivity to the entity authorised under the Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 (‘Exclusivity Regulations’)
for laying, building or expansion of the CGD network during the economic life of the project.
Further, the Board may provide exclusivity to an entity proposing to lay, build, operate or expand a CGD network from the purview of a common carrier or contract carrier for a limited period of time as long as the entity meets service obligations under the Exclusivity Regulations.
The said service obligations include the obligation to:
(i) provide domestic PNG connections as per the bid;
(ii) lay and build steel pipeline as per the inch-kilometre bid;
(iii) reach all charge areas or wards in the authorized area through pipelines of adequate size to meet the demand of the consumers in these charge areas or wards; and
(iv) provide piped natural gas connection on demand to a domestic consumer for cooking purposes within a distance of twenty-five meters of the metering unit at the consumer’s end till the tap-off in the pipeline:
In the case of AGP City Gas Private Limited and Ors. v. Petroleum and Natural Gas Regulatory Board and Ors. (MANU/DE/1829/2023) before the single judge bench of Delhi High Court, among other matters, the issue of ‘exclusivity’ and ‘associated equipment’ in relation to the CGD network was discussed in fair detail. Interesting and not-so-interesting arguments were extended on both sides. This article examines the provisions relating to ‘exclusivity’ under the Exclusivity Regulations and offers observations in light of the decision of the Delhi High Court.
Background
On June 09, 2022, PNGRB passed an Order stating:
‘AGP (read, Appellant or Petitioner No. 1) does not have the CGD Network in terms of Section 2(i) of the Act and, therefore, AGP is not ready to supply to the ECIL (read, Respondent No. 3) through their CGD network, and the plea for infrastructure exclusivity is not accepted as infrastructure exclusivity is limited to laying, building or operating a CGD network, and since cascade/truck mode transportation do not form part of CGD networks hence there is no encroachment of AGP’s infrastructure exclusivity. Thus, the right of the entity does not outweigh the rights of the consumer as per the PNGRB Act and extant Regulations framed thereunder.’
A Writ Petition was filed before the High Court of Delhi against the foregoing Order by AGP, the Appellant.
Chronology of Events:
April 06 ,2018: PNGRB issued bid documents for the 9th CGD Bid Round.
May 31, 2018: An Addendum to the aforesaid bid document was published, which stipulated that the terms ‘CNG Stations’, ‘compressed natural gas’, and ‘natural gas’ would have to be understood in light of Sections 2(k), 2(l) and 2(za) of the PNGRB Act.
(k) “CNG station” means filling station where one or more dispensing units are provided for sale of compressed natural gas;
(l) “compressed natural gas or CNG” means natural gas used as fuel for vehicles, typically compressed to the pressure ranging from 200 to 250 bars in the gaseous state;
(za)”natural gas” means gas obtained from bore-holes and consisting primarily of hydrocarbons and includes-
(i) gas in liquid state, namely, liquefied natural gas and degasified liquefied natural gas,
(ii) compressed natural gas,
(iii) gas imported through transnational pipe lines, including CNG or liquefied natural gas,
(iv) gas recovered from gas hydrates as natural gas,
(v) methane obtained from coal seams, namely, coal bed methane, but does not include helium occurring in association with such hydrocarbons;
September 28, 2018: A consortium of AG&P LNG Marketing Pte. Ltd. and Atlantic Gulf and Pacific Company of Manila Inc. was declared successful in respect of the GAs of Jaisalmer, Jodhpur, Kanchipuram and Ramanathpuram. The aforesaid authorisation was subsequently amended in favour of Petitioner No. 2.
November 06, 2018: The 10th CGD Bid round was launched. This included the AKT Geographic Area (‘GA’) (GA of Alappuzha, Kollam and Thiruvananthapuram Districts).
February 26, 2019: Authorisation was made in favour of the bidding consortium and subsequently amended in favour of Petitioner No. 1.
August 19, 2019: Petitioner No. 1 submitted its Detailed Feasibility Report (‘DFR’) for the AKT GA. DFR indicated that the supply of Liquefied Natural Gas (‘LNG’) would also be effected by trucks and that the aforesaid mode would form part of the CGD Network of the AKT GA.
June 02, 2020: PNGRB issued a clarification that any entity could set up and operate an LNG Station in a GA even if it were not the Authorized Entity (“AE”).
July 23,2020: PNGRB clarified that entities would be free to operate LNG Stations only to distribute LNG in a liquid state to the transport sector. It further stipulated that other than the supplies being made to the transport sector, only the AE identified for distribution and supply of natural gas to consumers with a demand of up to 50,000 SCMD would be entitled to make supplies.
The aforesaid public notices came to be assailed by Gujarat Gas Ltd. by way of W.P. (C) 1711/2021. While dealing with the said Writ Petition, the High Court of Delhi noted the essence of the challenge laid by the Petitioner there, which had asserted that by virtue of being the AE, it would have exclusive rights of running the CGD Network in the city of Rajkot and that the public notices issued impinged upon the exclusivity which stood conferred upon it for the entire economic life of the project.
While dealing with the said challenge, the Court on February 16, 2021, while disposing of the Writ Petition held:
‘..insofar as the two impugned public notices are concerned, if any industrial consumer has requirements up to 50,000 SCMD, such industrial consumers would only receive natural gas from the Petitioner and not from any third party. With this direction, the exclusivity of the Petitioner is adequately protected. The said exclusivity would, however, not extend to LNG stations dispensing natural gas in liquid form..’
August 18, 2020: PNGRB, while responding to communication of August 08, 2020, addressed by Honda Motorcycle & Scooter India Pvt. Ltd., took the position that as per Regulation 3(2)(a) of the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Authorization Regulations’), customers having requirement of natural gas up to 50,000 SCMD are to be supplied through the CGD Network. It further clarified that until the CGD Network is ready to supply natural gas, a customer, other than domestic, PNG and CNG consumers, shall have the right to source its supply from any other alternate source or supplier with the prior permission of the Board. It further stated that the aforesaid alternate source of supply would terminate once the CGD Network is ready to supply natural gas to the said customer.
December 16, 2020: By way of a letter dated December 16, 2020, Respondent No. 3 (i.e., EICL) approached the Board seeking permission to source LNG through tankers from Petronet Limited, Kochi or Indian Oil Corporation Ltd., Ennore, since no natural gas pipeline connection was available in the vicinity of its factory.
December 24, 2020: Responding to the aforesaid letter, the PNGRB apprised Respondent No. 3 that its request had been forwarded to the AE, namely, Petitioner No. 1.
January 04, 2021: In response to the aforesaid letter of the PNGRB, Petitioner No. 1 apprised PNGRB that it had already created the necessary infrastructure in the AKT GA to supply natural gas in liquid form to LNG customers. It also disclosed that it had initiated supply in the AKT GA to other LNG customers since January 2020. The said letter further apprised the PNGRB that Respondent No. 3 had finally been able to commission its LNG storage facility only on December 05, 2020.Thus, its letter seeking permission to seek supply of natural gas from an alternative source on the ground that no natural gas pipeline connection is available is incorrect and misleading. It also asserted that it was ready and willing to supply natural gas to Respondent No. 3. The Petitioner No. 1 also brought to the notice of the PNGRB that an LNG supply agreement had already been submitted for the consideration of Respondent No. 3. It disclosed further that it had in December 2020 itself supplied 154 MT of LNG to Respondent No. 3.
January 29, 2021: Petitioner No. 1 is stated to have submitted its LNG price proposal for the month of February 2021. Respondent No. 3 alleged that the offered price was nearly double over what was claimed for January 2021. Petitioner No. 1 and the Respondent No . 3 are stated to have held several rounds of negotiation, and as a consequence, Petitioner No. 1 is stated to have reduced the basic price by USD 1. Respondent No. 3 further alleged that upon due enquiry , Petitioner No. 1 had sourced their supply from IOCL at Ennore, as opposed to the previous supplies that had been procured from Petronet, Kochi. They also alleged that the Petitioner No.1 had fraudulently invoiced them at a much higher rate and far in excess of the procurement price.
March 10, 2021: PNGRB, taking cognizance of the complaints which were raised by Respondent No . 3, addressed a communication to the Petitioner No. 1 asserting that since it had failed to lay in place the requisite pipeline infrastructure in the AKT GA, any customer would consequently have the right to obtain natural gas supply from an alternate source or supplier.Accordingly, it permitted and authorised Respondent No. 3 to source its supplies from alternate entities untill the CGD Network is ready.
March 13, 2021: Petitioner No. 1 addressed a letter dated to PNGRB stating that it had always been ready and willing to supply gas to customers in the AKT GA who had their own facilities to receive natural gas in its liquid form. It was essentially asserted that since it was the AE, the permission accorded to Respondent No. 3 was wholly illegal and in violation of the Authorization Regulations. It also referred to the public notice dated August 23, 2013, in terms of which supply and distribution of natural gas through cascades was permitted. A request was accordingly made for the communication of March 10, 2021, being withdrawn.
The petitioners’ stand principally rested on the order dated February 16 ,2021, rendered by the High Court of Delhi in Gujarat Gas.
The Petitioners ultimately assailed the validity of the communication dated March 10, 2021, by preferring W.P. (C) 5283/2021 before this Court.
June 30, 2021: PNGRB issued yet another public notice soliciting comments from all stakeholders with regarding the supply of natural gas, including LNG, either by way of cascades or through any mode other than pipelines. Comments were also sought regarding the interpretation to be accorded to the concept of exclusivity in a CGD Network. Gujarat Gas Ltd. assailed the said public notice by way of W.P. (C) 7001/2021.
January 11, 2022: Taking into consideration the stand taken by PNGRB in the Public Notice dated 23.07.2020 and the assurance of the authorised entity that it is willing to supply natural gas to entities within its Geographical Area, PNGRB withdrew the letter dated 10.03.2021, with liberty to pass appropriate directions based on the decisions which PNGRB may take in respect of the issues in relation thereto.
February 04, 2022: After the issuance of the letter dated March 10, 2021, Respondent No. 3 entered into an agreement with Gas Authority of India Limited (GAIL), Respondent No. 4, for natural gas supply. GAIL terminated its agreement with Respondent No. 3 dated November 03, 2021, referring to the PNGRB having withdrawn the letter of March 10, 2021.
February 28, 2022: Respondent No. 3 filed a Writ Petition before the Kerala High Court assailing the validity of the Board’s decision as embodied in its January 11, 2022 letter. On February 28, 2022, an interim order was passed on the said Writ Petition, with that High Court directing GAIL to continue to supply gas to the third respondent until the next date fixed.
April 08, 2022: The Kerala High Court set aside the communication of the Board dated January 11, 2022, and accorded it liberty to draw proceedings afresh after placing all concerned parties on notice. While framing the directions for remand, the Kerala High Court continued the interim order passed on the said Writ Petition on February 28, 2022. Pursuant to the aforesaid remit, PNGRB commenced proceedings and granted parties time to file their respective submissions. It is in the aforesaid proceedings and after hearing the respective sides that the Impugned Order of June 09, 2022, has come to be passed. The petition, which had been retained on the board of that High Court, was ultimately disposed of on June 13, 2022.
Issues
The various issues are in the context of ‘exclusivity’.
a. Scope and extent of exclusivity under the Act and the Exclusivity Regulations, particularly:
- Whether ‘exclusivity’ as a concept applies to the CGD network or is exclusivity granted to the AE.
- Whether ‘exclusivity’ is granted in respect of the GA as a whole or only to specific pockets of the GA.
b. Whether the phrase ‘associated equipment’ under the definition of ‘CGD Network’ under the Act includes transmission of LNG through cryogenic trucks and CNG through cascades.
c. Whether Section 2(i) of the Act and Regulation 2(1)(i) of the Authorization Regulations are to be read conjointly to interpret the scope of the proviso to Regulation 3(2)(a) of the Authorization Regulations dealing with sourcing natural gas from alternate sources.
Scope and extent of exclusivity
Regulation 5 (1) of the Exclusivity Regulations empowers the Board to allow an entity exclusivity for laying, building or expanding the CGD Network over the economic life of the project subject to terms and conditions.
One of the conditions laid down in said Regulation 5 (1) under clause (a) is that during the economic life of the CGD network consisting of a network of pipelines, online compressors for compressing natural gas into CNG and other allied equipments and facilities, the authorized entity shall carry out further expansions required through pipeline capacity building and CNG infrastructure as well as carry out replacements and upgradation of assets and facilities as and when necessary.
Another condition laid down in Said Regulation 5 (1) under clause (b) is that the economic life of a project shall commence from the date of grant of authorization to the entity by the PNGRB under the Authorisation Regulations.
Yet another condition laid down in Said Regulation 5(1) under clause (d) is that non-compliance of the said clause (a) shall be dealt through levy of a penalty and termination of the exclusivity period as per Regulation 10 of the Exclusivity Regulations.
Said Regulation 10 states that exclusivity allowed under Regulation 5 shall be terminated, either for the entire authorized area or part thereof, in case the entity either refuses or fails to lay, build or expand the CGD network to meet the natural gas demand requirements, including the requirements of other entities allowed to use the CGD network post exclusivity provided under Regulation 6.
It is apparent from a reading of the preceding provisions that;
a. Exclusivity is granted to an authorised entity, and exclusivity commences from the date of grant of authorization to the entity.
b. Exclusivity can be terminated either for the entire authorised area or part thereof.
c. Exclusivity can be terminated if an entity fails to lay, build or expand the CGD network to meet the natural gas demand requirements.
CGD network
Under Section 2(i) of the Act, a ‘CGD network’ means an interconnected network of gas pipelines and the associated equipment used for transporting natural gas from a bulk supply high-pressure transmission main to the medium-pressure distribution grid and subsequently to the service pipes supplying natural gas to domestic, industrial or commercial premises and CNG stations situated in a specified geographical area.
The expression ‘associated equipment’ is qualified as ‘used for transporting natural gas from a bulk supply high-pressure transmission main to the medium pressure distribution grid and subsequently to the service pipes supplying natural gas to domestic, industrial or commercial premises and CNG stations’.
Therefore, cascades and cryogenic trucks would need to qualify as equipment ‘used for transporting natural gas from a bulk supply high-pressure transmission main to the medium pressure distribution grid and subsequently to the service pipes supplying natural gas to domestic, industrial or commercial premises and CNG stations‘ to be considered as forming part of the CGD network – which is not the case. Arguably, cascades and cryogenic trucks are used for the transportation of CNG and LNG, respectively, and do not fall within the meaning of ‘associated equipment’ as used in the definition of ‘CGD network’.
The argument that the definition of ‘piped natural gas’ in the subordinate legislation (i.e., Authorization Regulations) should be used harmoniously to interpret the meaning of ‘CGD network’ contained in the primary legislation (i.e., PNGRB Act), especially when the definition is clear, does not appeal to logic.
To provide context to the above, in 2018, the definition of ‘piped natural gas’ contained in the Authorization Regulations was expanded to include ‘cascades or any other permitted mode’. The definition of ‘piped natural gas’ was modified to read: “natural gas transported through pipelines or cascades or any other permitted mode in a CGD network for consumption by any customer in domestic, commercial or industrial segments and includes natural gas supplied to an online CNG station before its compression.”
Alternate sourcing
Clause (a) of Regulation 3(2) of the Authorization Regulations casts an obligation on the authorised entity to design and operate the CGD network at specified pressure to maintain natural gas supply on a sustained basis to meet the requirements of customers with a requirement of natural gas up to 50,000 SCMD.
There is a proviso to said Clause (a). A proviso, by its very nature, is an exception. This proviso grants a right to the customer. It states that ‘until CGD Network is ready to supply natural gas to a customer (other than domestic PNG and CNG), such customers shall have right to get the supply of natural gas from any other alternate source or supplier, with prior permission of the Board, and if, once CGD Network is ready to supply natural gas to such customer, then, such customer shall cease to get supply of natural gas from such alternate source or supplier after 30 days of receipt of notice of readiness from the CGD network’.
The proviso speaks of a situation when the ‘CGD Network’ is not ready and, in such a situation, grants a right to the customer. It is emphasised that the proviso does not speak of a situation when the ‘authorised entity’ is not ready to supply. Thus, any argument that AGP City Gas Private Limited was ready and willing to supply LNG to the customer and, therefore, the right granted to the customer by the proviso ceases is not supported by the provisions of the legislation.
Viewpoint
The argument of staggered exclusivity appears as an afterthought and out of context. The text of Regulation 5 of the Exclusivity Regulations is evident in as much as it states that exclusivity is granted to the AE for laying, building or expanding the CGD Network over the economic life of the project. Under certain circumstances, exclusivity may be terminated with respect to part or whole of the authorized area if the entity has failed to lay the CGD network to meet the natural gas demand.
The argument that as long as the AE is in a position to supply natural gas to a customer, it would be impermissible for any other alternate supplier to be permitted to supply natural gas to consumers within the GA is incorrect. The proviso to clause (a) of Regulation 3(2) of the Authorisation Regulation states ‘until CGD Network is ready to supply natural gas to a customer’ and not until the authorised entity is ready to supply.If it is argued that natural gas includes gas in its liquid state, and thus, if LNG is made available to the customer (as long as its demand up to 50,000 SCMD is met), such customer is bound to source natural gas/LNG from the authorised entity. The question arises if this logic only applies to locations where pipes forming the CGD network cannot be laid as it is not feasible or if it would apply irrespectively. Indeed, it would not be sound to argue that since the authorised entity has exclusivity as on the date of grant, it shall be free to supply LNG to an LNG customer at a price viable to the authorised entity, without regard to whether or not the CGD Network (as planned) is ready to supply natural gas. Trucks and cascades are not a substitute for the CGD Network but in addition. Arguably, the LNG customer may wish to switch to natural gas (in its gaseous state) once the CGD Network is in place.
The issues and arguments seem simple enough, which begs the reason for any controversy. The simple questions of law appear complicated because the issue was with respect to the supply of LNG and not natural gas, at a price not viable to the LNG customer, and at a time when the laying of the CGD network as planned was delayed, and at a price not feasible to the LNG customer, and at a time when the laying of the CGD network as planned was delayed.
The authorised entity supported its arguments, even though inconsistent with the text of the legislation, on the grounds that the Detailed Feasibility Report for the AKT GA indicated that the supply of LNG would also be effected through trucks and that the aforesaid mode would form part of the CGD Network of the AKT GA. Subsequently, the PNGRB clarified that entities would be free to operate LNG stations only to distribute LNG in liquid state to the transport sector.
It is essential that the issues surrounding ‘exclusivity’ are effectively addressed, especially given that consumption by the city gas distribution network will only rise in the coming years. In numerous cases, AEs across the country have failed to achieve the minimum work programme (MWP) targets, undermining the justification for the grant of exclusivity. While exclusivity (which comes at a cost to customers in some cases) is certainly required to incentivize investment, failing to meet the MWP targets creates inefficiency. It does not lead to a competitive market, which is one of the objectives of the Act.
Co-Founder & Managing Partner at Alaya Legal
