Competition Order on Natural Gas Pricing and Distribution

COMPETITION COMMISSION OF INDIA

Case No. 08 of 2024

In Re:

M/s AGI Greenpac Limited (Formerly HSIL Ltd.) 2, Red Cross Place, Kolkata-700001 Informant

And

M/s Bhagyanagar Gas Limited, 2nd Floor, Parishram Bhavan, APIDC Building, Basheer Bagh, Hyderabad, Telangana-500004. Opposite Party

CORAM

Ms. Ravneet Kaur Chairperson

Mr. Anil Agrawal Member

Ms. Sweta Kakkad Member

Mr. Deepak Anurag Member

Order under Section 26(2) of the Competition Act, 2002

1. The present Information has been filed by M/s AGI Greenpac Limited (‘Informant’) under Section 19(1)(a) of the Competition Act, 2002 (‘Act’) alleging contravention of the provisions of Section 4 by M/s Bhagyanagar Gas Limited (‘Opposite Party’/ ‘OP’).

2. The Informant has stated that it is a company incorporated under the Companies Act, 1956 having registered office at 2, Red Cross Place, Kolkata-700001 and corporate office at Glass Factory Road, Sanathnagar, Hyderabad, Telangana-500018. It is stated to be a unit of AGI Glaspac, which operates the second largest container glass manufacturing facility in the country with factories located at Hyderabad and Bhongir in Telangana. The Opposite Party is a company registered under the Companies Act, 1956 and is engaged in the business of distribution and marketing of natural gas and implementation of City Gas Distribution (‘CGD’) project in the states of Telangana and Andhra Pradesh.

3. As per the Informant, the Opposite Party has been authorized by Petroleum and Natural Gas Regulatory Board (‘PNGRB’/ ‘Board’) for implementation of CGD project in Hyderabad/Secunderabad, Vijayawada & Kakinada vide authorization dated 23.06.2009 (‘Authorized Entity’). In accordance with Regulation 5(1)(a) of the PNGRB (Exclusivity for City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Exclusivity Regulations’), the Authorized Entity shall have exclusivity for laying, building and operation of the City or Local Natural Gas Distribution network (‘CGD Network’) for a period of 25 years from the date of authorization.

4. It has been stated by the Informant that in accordance with Regulation 6(1) of Exclusivity Regulations, the CGD network is provided exclusivity from the purview of Common Carrier or Contract Carrier for a period of five years from the date of authorization under the PNGRB (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Authorizing Regulations’) which may be extended by the PNGRB upto eight years. The effect of exclusivity from Common Carrier or Contract Carrier is that no entity other than the authorized entity can market natural gas in the given geographical area. In accordance with Regulation 3(2)(a) of Authorizing Regulations, the customers like the Informant, having requirement of natural gas upto 50,000 SCMD, shall be supplied natural gas through the Authorized Entity only.

5. The Authorizing Regulations and Exclusivity Regulations provide for a monopoly to the Authorized Entity in the given geographical area for sale, distribution and marketing of natural gas to the various consumers and hence the Opposite Party is a dominant player in the geographical area of Hyderabad/Secunderabad, Vijayawada & Kakinada.

6. The Informant has averred that the glass manufacturing involves melting of sand, soda ash and some chemicals collectively called a batch along with the cullet (broken glass). The Informant is stated to use furnace oil, LPG, natural gas etc. as the source of fuel for melting the broken glass. As per the Information, the fuel used is not environment friendly and causes pollution, therefore, in order to bring down the pollution content, the Informant decided to substitute part of its fuel requirements to natural gas for its furnace at Hyderabad.

7. The Informant entered into a Gas Sale Agreement (‘GSA’) dated 19.02.2019 with the Opposite Party, in the given geographical area, for sale and purchase of 30,000 SCMD of natural gas. Clause (g) of the GSA provided for the price of gas as set out in the Price Side Letter which was based on the spot RLNG Price that varied from month-to-month. The price of natural gas was determined in terms formula set out in the Price Side Letter and depending on the relevant indices, the price of natural gas under the GSA was arrived at and communicated by the Opposite Party to the Informant by the last day of the month. The method as stipulated in the Price Side Letter is provided as under:

"9. PRICE OF GAS

(a) The Price which Buyer shall pay for quantities at Gas to be sold and purchased shall be as set out in the Price Side Letter, which is based on spot RLNG Price, which generally varies from month to month."

8. The Informant has alleged that the Opposite Party does not purchase RLNG directly from foreign supplier but purchases natural gas from GAIL whose supplies of natural gas are based on pool of gases of different prices viz; domestic gas, RLNG supplies under long term contract, spot RLNG etc. Hence, the resultant price at which GAIL sells to the Opposite Party is much lesser than the price of natural gas available on spot RLNG basis and therefore, the inclusion of spot RLNG Price in the Price Side Letter is deliberately done to make huge profit at the cost of consumers like the Informant.

9. It has been alleged that the Opposite Party has failed to provide a copy of the Price Side Letter as mentioned in clause 9 of the GSA rather the Opposite Party has been providing a price for each month either in the last week of the previous month or the first week of the given month which is not in accordance with GSA.

10. It has also been alleged that initially the Opposite Party was supplying gas at a reasonable price, however, since May, 2022, the Opposite Party has been supplying gas at an unreasonably high price ranging from Rs. 57/SCM to Rs. 66/SCM. Further, the Informant has stated that it has another plant at Bhongir in Telangana where the supply of natural gas is being made by GAIL and at times the supply is arranged from third party like IGX, Shell, HPCL, India Gas, etc. wherein the prices are comparatively much cheaper.

11. It has been stated that a report published by IGX (India's first automated national-level Gas Exchange for physical delivery of natural gas) shows that for the majority of the months in the year, the average price available at the IGX was hovering around US$ 15/- MMBTU while the prices that have been charged by the Opposite Party was approximately US$ l8/MMBTU. It has been further alleged that the Opposite Party does not have any direct contract for purchase of spot LNG and therefore, in order to abuse its dominant position has priced the natural gas at spot RLNG basis and also to make huge profit at the cost of the consumers like the Informant.

12. The Informant as early as in 2020 requested the Opposite Party to enter into a Tri-partite Agreement wherein the Informant would purchase natural gas from a third party and would use the pipelines of the Opposite Party for supply of the same to its plant for a reasonable transportation price to the Opposite Party. However, the Opposite Party vide its letter dated 25.06.2020 informed that such an arrangement was not feasible and that they will take it up with the Ministry of Petroleum and Natural Gas at an appropriate time. The Informant subsequently vide emails dated 24.10.2022, 04.11.2022 and 13.12.2022, reminded the Opposite Party of the above proposal and requested a meeting to discuss the same. However, the Opposite Party vide email dated 16.12.2022, citing the Authorization Regulations and Exclusivity Regulations, expressed its inability to allow its pipeline for use of transportation of natural gas to third parties.

13. The Informant is aggrieved that the Opposite Party is not sharing the basis for fixation of price of natural gas in a transparent manner. The Opposite Party at the end of every month informs through email the price of natural gas that would be applicable for the following month without sharing the basis of arriving at such a price because of which the Informant has been forced to cancel the GSA and has been relying on alternative fuels. It buys natural gas from the Opposite Party only on need basis. It has been stated that the Opposite Party has failed to provide the details of the method of fixing the price of gas despite the Informant seeking such details. It has also been alleged that the conduct of the Opposite Party has deprived the Informant from using the clean fuel in its manufacturing unit.

14. As per the Informant, the relevant geographic market for the instant information is the area of Hyderabad wherein the Informant manufactures glass bottles for a wide spectrum of industries such as spirits, food and beverages, pharmaceuticals, etc. while the relevant product market is the supply of natural gas to consumers having requirements upto 50,000 SCMD of gas.

15. The Informant has alleged that it had no choice or other effective alternate fuel supply than to buy from the Opposite Party who is the only supplier of natural gas in the given geographical area. This has put the Informant in a situation where it either has to pay the price demanded by the Opposite Party or it will have to close its business.

16. The Informant has sought the following relief from the Commission:

• (i) To direct the Opposite Party to cease and desist from charging excessive prices of natural gas and declare the pricing of natural gas strictly as per the Price Side Letter in a transparent manner;
• (ii) To declare that the Opposite Party has charged excessive prices by imposing unfair, discriminatory and arbitrary means by abusing its dominant position; and
• (iii) Pass any or such other order/s as the Hon'ble Commission deems fit in the interest of justice.

17. The Informant also sought interim relief, under Section 33 of the Act, from the Commission to direct the Opposite Party to charge the price of gas in a transparent manner.

18. The Commission considered the Information in its ordinary meeting and observed that PNGRB is a sectoral regulator for regulating matters in respect of the natural gas. Accordingly, the Commission, vide its order dated 24.07.2024, sought reasons from the Informant for not approaching PNGRB on the issues arising in the present matter. The Commission also decided that a copy of the Information be forwarded to the Opposite Party for filing its comments/response.

19. In compliance of the order dated 24.07.2024, Informant filed its response on 27.08.2024, which is summarized as under:

• (i) The Commission has dealt with similar issue of abuse of monopoly by a CGD entity in Case No. 71 of 2012, wherein the Commission, vide its order dated 03.07.2014, held the conduct of the CGD entity to be violative of the provisions of Section 4 of the Act and imposed penalty which was upheld by the Appellate Tribunal. The issue pertaining to the jurisdiction and competencies to adjudicate on the issue raised in the instant information is no more res-integra.
• (ii) PNGRB lacks jurisdiction so far as pricing of natural gas is concerned and the same is also not res-integra. The Hon’ble Supreme Court in Civil Appeal No 4910 of 2015, upheld the Hon’ble High Court of Delhi’s judgement in WP (C) No.2034 of 2012 whereby the Division Bench ruled that PNGRB is not empowered to fix or regulate the maximum retail price at which gas is to be sold by entities such as Indraprastha Gas Ltd., to the consumers and further the Board is also not empowered to fix any component of network tariff or compression charge for an entity having its own distribution network.
• (iii) The functions of PNGRB have been provided in Section 11 of the PNGRB Act, 2006 wherein it is empowered to regulate the various aspects of transportation of natural gas, authorization of entities to lay, build, operate natural gas pipeline or CGD network etc. However, the PNGRB Act does not provide authority for fixing the price of natural gas or to examine the abuse of dominant position by the CGD entities. It was submitted that the above-mentioned judgements and provisions of the PNGRB Act indicate that the Board is not empowered to deal with the situation as complained of in the instant Information filed by the Informant and that the same may be considered in light of the provisions of the Act.

20. The OP filed its response on 03.09.2024. Summary of its response is as under:

• (i) The Informant has an alternative remedy before the PNGRB which is a sectoral regulator, with the power to deal with the grievances of the Informant, keeping in view the nuances of the sector. Section 11 of the PNGRB Act prescribes its functions, one of which is to monitor prices and take corrective measures to prevent restrictive trade practice by the entities. The Informant further has an option to invoke arbitration proceedings under the terms of the GSA.
• (ii) The exclusivity granted to the entities such as the OP is not perpetual in nature but till the time an entity is declared as a common carrier under Section 20 of the PNGRB Act by the Board. The exclusivity is provided to an entity which is peculiar to the sector considering the safety concerns and high investment in the projects in form of capex and slow revenue flow.
• (iii) In response to the Informant’s claim that the relevant product market is the supply of natural gas to consumers having requirements upto 50,000 SCMD of gas, it is submitted that CGD entities can cater to the gas requirements of any consumer in its geographical area upto 1,00,000 SCMD as per PNGRB Act and regulations framed thereunder.
• (iv) The Informant was not taking PNG and switching to alternate fuels during the period between April to June 2024, including the currency of GSA. It is also submitted that the GSA was signed in February 2019, with a validity of 5 years and on expiry of GSA, the extension is yet to be signed with the Informant.
• (v) GSA is based on RLNG price however the Informant has been offered best available price for the month based on which it took a commercial decision to buy or not to buy PNG, the choice of which is stated to be always available to the Informant and is being exercised by it during the currency of GSA. It is also submitted that the prices submitted to the Informant in email are same as required to be submitted in the Price Side Letter.
• (vi) In response to the claim of the Informant about inclusion of spot RLNG price in the Price Side Letter to make huge profits at the cost of consumers, it is submitted that as per the gas allocation policy of Government of India, domestic gas/ APM gas (which is cheaper in comparison to RLNG) is not available for the industrial PNG customers. The said gas must be sold only to domestic PNG customers i.e., household customers and to the transportation sector as Compressed Natural Gas. Hence, the price charged to IPGN customers is non APM price, which is based on basket of sourcing prices available in market and is linked to RLNG prices. It is also submitted that the Informant talks about spot RLNG prices, however, its own data provided in the Information shows that the prices offered to it are not linked to spot RLNG price. Further, the price is advised to the Informant in advance and hence there is no default of the Opposite Party. It is stated that the Informant is subject to strict proof of claim that the prices offered to them are based on the spot RLNG price and that OP is making huge profits. It is