2015 (3) TMI 725 - Commission - Indian Laws

Abuse of dominant position in supply and distribution of natural gas - Contravention of the provisions of section 4 of the Competition Act - Report of the DG - Unilaterally terms and conditions in Gas Sales Agreement - Held that - In the result, the Commission is of opinion that the relevant market in the present case is the market of supply and distribution of natural gas to industrial consumers in the district Faridabad. In the present case, the Commission observes that the opposite party has 100% market share in the relevant market being the only entity authorized by Government of Haryana to set up and operate CGD network in Faridabad. Further, it appears that distribution of natural gas is regulated by the Petroleum and Natural Gas Regulatory Board (PNGRB) established under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB Act). As per the provisions of the PNGRB Act and the regulations framed thereunder, PNGRB is empowered to register and authorize downstream market activities such as laying, building and operating natural gas distribution networks, ensure access to customers on a common carrier basis, register entities to market natural gas subject etc. It may also be noticed that the regulations contain provisions to grant 25 years infrastructure exclusivity to lay, expand or operate a CGD network. Moreover, the Authorization Regulations provide up to three years marketing exclusivity from the date of authorization to an existing CGD networks and five years from the date of authorization to a new CGD network from the purview of common or contract carrier, after which there is a provision for open access , which allows competition and choice to the consumer. In the aforesaid circumstances and after further taking into account the absence of any countervailing buying power, market structure and size thereof as also the entry barriers, the Commission holds the opposite party to be in dominant position in the defined relevant market. It may be noted that though clause 11.2.4 absolves the opposite party from consequential damages in the event of disruption of supply, clause 21.5 (Exclusion of Consequential Loss) of GSA executed between the opposite party and its industrial consumers provides that neither party shall be liable for any indirect, incidental or consequential loss or damage or loss of opportunity or profits. Moreover, this clause is a reflection of the upstream agreement of the opposite party with its supplier i.e. GAIL. In these circumstances, it may be observed that the impugned clause, in light of conspectus of various clauses as discussed, appears to be evenly balanced and no contravention of the Act can be found on this count. The Commission is of the opinion that the clause regarding likely termination of contract by the opposite party on account of failure to off-take 50% or more of the cumulative DCQ by the buyer during a period of 45 consecutive days as against the longer period available to the opposite party from GAIL, amounts to imposition of unfair conditions in contravention of section 4(2)(a)(i) of the Act. As the opposite party had uniformly stipulated the said condition in the GSAs executed with all its industrial consumers, the allegations of the informant regarding discriminatory conduct of the opposite party in terms of section 4(2)(a)(i) of the Act is not made out. In view of the above discussion, the Commission is of opinion that the opposite party has contravened the provisions of section 4(2)(a)(i) of the Act by imposing unfair conditions upon the buyers under GSA. Order issued to opposite party to cease and desist from indulging in conduct which is in contravention of the provisions of the Act and to modify in gas supply agreement accordingly.

Summary

Issues Involved:
1. Relevant Market
2. Dominance in the Relevant Market
3. Abuse of Dominant Position

Issue-wise Detailed Analysis:

1. Relevant Market:
The Commission defined the "relevant market" as the market of supply and distribution of natural gas to industrial consumers in the district Faridabad. It was determined based on the characteristics, intended use, and price of natural gas, which differ for industrial, domestic, commercial, and transportation consumers. The Commission agreed with the DG that natural gas is distinct from other energy sources due to its characteristics, such as being a cleaner and more efficient fuel that does not require storage facilities. The relevant geographic market was determined as Faridabad because the Government of Haryana authorized only one service provider (the opposite party) to build and operate a CGD network in the district, making the conditions of competition homogeneous.

2. Dominance in the Relevant Market:
The Commission found the opposite party to be dominant in the relevant market as it held a 100% market share, being the only entity authorized by the Government of Haryana to set up and operate a CGD network in Faridabad. The dominance was further supported by the absence of any countervailing buying power, market structure, and entry barriers. The Commission noted that the distribution of natural gas is regulated by the Petroleum and Natural Gas Regulatory Board (PNGRB), which grants infrastructure exclusivity and marketing exclusivity to authorized entities, reinforcing the dominant position of the opposite party.

3. Abuse of Dominant Position:
The Commission examined various clauses of the Gas Sales Agreement (GSA) and found some of them to be abusive and in contravention of the Act:

- Clauses 9 (Quality of Gas) and 10 (Measurement and Calibration): The Commission concluded that the clauses regarding the certification of gas quality and measurement were not abusive as the opposite party relied on certificates from its supplier (GAIL) and provided mechanisms for dispute resolution through mutual consultation and arbitration.

- Clause 11 (Shut Down and Stoppage of Gas): The Commission found that the clause absolving the opposite party from liability for disruption of gas supply was not abusive, as it was a reflection of the upstream agreement with GAIL and was evenly balanced.

- Clause 12 (Contract Price): The Commission agreed with the DG that the clause allowing the opposite party to revise gas prices was not abusive due to the peculiarities of the gas industry and the market-driven nature of gas prices.

- Clause 13 (Billing and Payment): The Commission found sub-clauses 13.5 and 13.7 to be abusive as they imposed unfair conditions on buyers, such as the unilateral right of the opposite party to decide interest rates on delayed payments and the absence of an obligation to pay interest on excess payments made by buyers.

- Clause 14 (Payment Security): The Commission did not find the clause requiring buyers to maintain a security deposit or bank guarantee to be abusive, as it was necessary for the inter-dependent nature of the business and the opposite party was paying interest on cash deposits.

- Clause 17 (Expiry and Termination): The Commission found the clause allowing the opposite party to terminate the agreement if the buyer failed to take 50% or more of the cumulative Daily Contracted Quantity (DCQ) for 45 consecutive days to be abusive, as it imposed unfair conditions compared to the longer period available to the opposite party from GAIL.

- Clause 16 (Force Majeure) and Clause 11.2.1 (Shutdown, Unplanned Interruption, and Disruption): The Commission found these clauses to be abusive as they allowed the opposite party to unilaterally accept or reject force majeure requests and obliged buyers to meet Minimum Guaranteed Off-take (MGO) payment obligations even during emergency shutdowns.

Conclusion:
The Commission concluded that the opposite party had contravened the provisions of section 4(2)(a)(i) of the Act by imposing unfair conditions on buyers under the GSA. The Commission directed the opposite party to cease and desist from such conduct, modify the GSA in light of the findings, and imposed a penalty of 4% of the average turnover of the last three years, amounting to Rs. 2567.2764 lakhs. The opposite party was also directed to file an undertaking and deposit the penalty amount within specified periods.