Oil asia journal exclusivity in cgd network and competition concerns

By Sakya Singha Chaudhuri, Partner, Shivam Sinha, Associate

City Gas Distribution (“CGD”) networks and pipelines for carrying natural gas and petroleum are essential facilities. Laying of CGD network is authorized by the Petroleum and Natural Gas Board (“Board”) under the Petroleum and Natural Gas Regulatory Board (“PNGRB Act”). The CGD network developer enjoys natural monopoly due to the cost of creating CGD network/ pipelines, usage, availability of space and various factors. Person laying CGD network is entitled to exclusive use of the network for a specified period. Section 20(4) of the PNGRB Act empowers the Board to decide on the period of exclusivity to lay, build, operate or expand a city or local natural gas distribution network. The Board has issued regulations (“CGD Regulations”) which prescribes the period of exclusivity to be three years or five years. Once the period of exclusivity comes to an end, the CGD network is to be declared as a common carrier or contract carrier, which means that access to the CGD network will be available to third party users for supplying natural gas. The transportation charges for usage of the network by third parties is determined by the Board. Accordingly, the Board had sought to determine the network charges for Indraprastha Gas Limited (“IGL”) as a CGD network. However, this was challenged by IGL wherein the Supreme Court ultimately decided that the Board has no power to determine the network charges of CGD network operator under the PNGRB Act and the Board can only determine the charges for common carrier or contract carrier.

This raises interesting issues in terms of the scope of competition and level playing field amongst CGD network developers and third party suppliers through the CGD network after expiry of exclusivity period. Considering the fact that the pricing of supply of gas by a CGD network developer is not subject to any scrutiny by the Board, the developer has the ability and statutory protection to charge any price that it wants (subject to normal economic principles of price-demand ratio) from the consumer and thereby recover majority of the cost of the network in the initial years. However, once the period of exclusivity comes to an end, the developer can then claim transportation charges according to the depreciated value of the network, which may be much higher than the cost that has already been recovered by him during the exclusivity period, thereby subjecting his competitors to higher transportation charges.

At the same time, since the CGD network developer has already recovered a major portion of the network cost, it can discount this cost from its own cost of supply, and thus remain more competitive than a third party supplier. This will ultimately act as an entry barrier for a third party supplier since on the one hand he has to end up paying higher transportation charges and on the other, he will not be in a position to match the discounted price of supply by the CGD network developer.

While one of the stated purposes of the PNGRB Act is to protect consumer interest and promote competition, the law as it stands, in fact does not have adequate mechanism to check anti-competitive conduct by CGD network developers. The position would be very different, if the Board has the ability to check the extent to which network costs are recovered as part of gas price. Of course, the fact remains that the period of exclusivity is provided to ensure that the developer who is investing significant amounts in building the CGD network can commercially exploit the market in the initial years. However, there should be a mechanism to ensure that network pricing in such case remains neutral at the end of the exclusivity period.

With the Competition Commission of India at the helm of issues affecting competition, it may consider developing appropriate guidelines in this respect in consultation with the Board, to ensure fair and proper disclosure of network costs during exclusivity period to prevent overcharging to consumers. While the CGD network developer is entitled to commercially exploit the network in the initial years, it cannot be allowed to profiteer on natural gas, which is a natural resource, at the cost of consumers.

This article has been published in Oil Asia Journal, India’s Leading Journal in the Petroleum Sector since 1981.

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