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TMI Blog2015 (3) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration Act, 1860 situated in Faridabad having about 500 members. The members' industries comprise auto component, medical devices, steel, alloys, textile, chemical etc. 3. The opposite party i.e. M/s Adani Gas Ltd. (AGL) is a company incorporated and registered under the provisions of the Companies Act, 1956 and is engaged inter alia in the business of setting up distribution network in various cities to supply natural gas to industrial, commercial, domestic and CNG customers. 4. It is averred in the information that about 90 members of the informant association consume natural gas supplied by the opposite party to meet their fuel requirements. 5. It is further alleged in the information that the opposite party by grossly abusing its dominant position in the relevant market of supply and distribution of natural gas in Faridabad has put unconscionable terms and conditions in Gas Sales Agreement (GSA), which are unilateral and lopsided, besides being heavily tilted in favour of AGL. The opposite party (AGL), in the garb of executing GSA, has imposed its diktat upon the buyers of natural gas, who are members of FIA. 6. It is also alleged that terms of GSA have been dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to the DG 11. The Commission after considering the entire material available on record vide its order dated 27.12.2012 directed the Director General (DG) to cause an investigation to be made into the matter and to submit a report within a period of 60 days from receipt of the order. Investigation by the DG 12. The DG, after receiving the directions and subsequent extensions from the Commission, investigated the matter and filed the investigation report on 07.02.2014. The findings and conclusions of the DG have been summarized in the succeeding paras. 13. The DG identified Relevant Market in the instant matter to be the market of supply and distribution of natural gas to industrial consumers in district Faridabad in terms of the definition of Relevant Market as provided in section 2(r) of the Act. 14. Investigation also concluded that the opposite party is in a dominant position in the said relevant market in terms of Explanation (a) to section 4 of the Act. 15. The DG concluded that sub-clause 9.4 of Clause 9 (Quality), sub-clauses 10.2, 10.5 10.6 of Clause 10 (Measurement and Calibration), sub-clause 11.2.4 of Clause 11 (Shutdown and Stoppage of Gas), sub-cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DG report by the Commission 20. The Commission in its ordinary meeting held on 19.02.2014 considered the investigation report submitted by the DG and decided to forward copies thereof to the parties for filing their replies/ objections thereto. The Commission also directed the parties to appear for oral hearing, if so desired. Subsequently, arguments of the parties were heard on 19.03.2014. Replies/ Objections/ Submissions of the parties 21. On being noticed, the parties filed their respective replies/ objections to the report of the DG besides making oral submissions. Replies/ objections/ submissions of the informant 22. The informant, while agreeing with the findings of the DG where contraventions were found, filed its objections to the report with reference to other findings. The informant, at the outset, submitted that it is presumed that only in case of duress a buyer signs a sale agreement with unfair or discriminatory conditions incorporated by a dominant enterprise and that such act of the dominant enterprise amounts to abuse of dominance under the Act. It was submitted that in such cases what needs to be ascertained is whether those clauses directly o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that clause 10.6's stipulation that seller's decision in all such matters shall be final and binding makes the opposite party the sole judge in the dispute and that such stipulation amounts to abuse of dominance. That the abusive nature of clause 10.6 cannot be disregarded by mere reasoning that the informant has the option of clauses 19 and 20 in the agreement for recourse. 26. With regard to the DG's finding that the informant's allegation of the opposite party revising gas prices arbitrarily was an outcome of its ignorance of full facts, the informant submitted that the DG failed to analyse the specific instances of arbitrary pricing quoted in the information provided by the informant. The informant submitted that the price of the gas charged by the opposite party from a consumer should have the component of cost price, tariff for transporting the gas in the CGD network in Faridabad and profit charged by the opposite party at a reasonable percentage of the cost price. That as per the established principle, reasonable tariff rate for CGD network is applied since no exact amount has been fixed by PNGRB till date and that the said tariff must remain constant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the transmission charges are not constant and fluctuates with the sale price are termed to be unfair. The informant also submitted that the DG has failed to touch upon the transportation and the profit margin charged by the opposite party which are integral parts of the gas pricing. That the DG did not make any effort to explore the constancy of the transmission charges and the percentage marketing margin. 30. The informant has further argued that the DG in its report and the opposite party by its own admission have concluded that natural gas is not substitutable with any other source of energy. Reference was made to the opposite party's response dated 15.02.2013 wherein the opposite party has stated that alternative fuel is one of the factors to be considered for pricing natural gas for industrial consumers. The informant submitted that apart from the DG's conclusion that natural gas is not substitutable, it also noted that it is not the industry practice to determine gas price for industrial consumers on the basis of any linkage with any alternative/competing fuel prices like furnace oil, LPG, etc. Prices are altered taking into account change of price of crude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the DG's conclusion that the market of natural gas in Faridabad is the relevant market. It was argued that the DG has made an incorrect assessment of the relevant market and has wrongly held AGL guilty of abusing its dominance. It was submitted that since the primary application of natural gas is for heating, chilling and electricity generation, it can be interchanged with alternate fuels like coal and lignite, liquid fuels and grid electricity. It further added that many industrial consumers maintain multi-fuel systems simply to retain flexibility to shift to another fuel based on economic viability. Further, the opposite party accounts for merely 5-6% of Faridabad's industrial consumers and 90-95% of them still use alternate fuels are ample evidence to indicate that natural gas is not the only choice of the consumers. 37. The opposite party further submitted that the DG has incorrectly considered price as the criteria to segregate gas as a separate market. It was also highlighted that the opposite party has provided a list of lower off-takes by customers on account of shift to other fuels or due to closure of certain applications for natural gas which indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital requirement, which the opposite party borrows from the banks at interest. Therefore , it is in the larger interest of all the customers that a fine balance in the flow of resource is not disrupted as otherwise increased operational costs incurred by the opposite party will (need to) be passed to the customers through revision in gas prices for all. The opposite party further submitted that irrespective of the language of clause 13 of the GSA, if customer had any issue they had the recourse under clauses 19 and 20 of the same. 41. The opposite party further submitted that the intention behind the said clause is not to restrict competition in the market but to protect its interest and avoid any free riders .To substantiate its submission, the opposite party has referred to cases i.e. Association of Indian Mini Blast Furnaces v .National Mineral Development Corporation Limited, M/s Raunaq International Ltd. I.V.R. Construction Ltd and United Brands cases (EU) where the emphasis was laid on the fact that in order to protect its commercial interest an enterprise is free to take prudent and sound commercial decisions. 42. The opposite party has further clarified that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of all the opposite party's downstream whereas in case when a customer defaults on its contractual obligations the effect of the same is restricted to the business of such customer and not on other industrial units. The fact that natural gas cannot be stored by the gas distribution company, the level of financial risk undertaken by the opposite party is much higher than any retail customer. Thus, it was suggested that any direction to alter the terms of GSA will amount to interference with the opposite party's commercial relationship with customers which is beyond the scope of the DG's investigation. 45. The opposite party further contended that the clause was to protect its interest for commercial reasons and in practice it has not terminated any agreement with its customers on this basis. The DG has failed to show any illegal object or effect of the impugned clauses on the customers and has certainly not shown any adverse effect on competition in the relevant market. 46. With regard to clauses 11.2.1 and 16.3, the opposite party submitted that the DG did not mention them in its request for information. The opposite party was not provided any opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st for force majeure, the opposite party submitted that the conclusion was wrong based on the following grounds: (a) No instance of accepting/rejecting such request. (b) Purely commercial issue and beyond the scope of the Commission. (c) Such clause is intended to protect the opposite party from illegitimate claims of customers and the opposite party has the expertise to know under what circumstances such claim can be availed of. (d) Given the nature of the industry it is important for the opposite party to determine the merits of the customer's claims. (e) Similar clauses exist in agreements of other service providers such as insurance, electricity, water, etc. 50. The opposite party has also drawn comparison of the said clause with the agreement the opposite party has with its supplier stating that customers have been given wider scope. 51. Finally the opposite party concluded by stating that it has given enough flexibility to the customers to make judicious decisions in choosing the fuel types, source and manage their business effectively. It has provided few instances where the customers were allowed to draw gas upto 110% of their DCQ without any additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DG, is flawed and based on an incorrect appreciation of facts and competitive constraints that operate on the supply of natural gas. The DG's assessment of the relevant market also lacks economic analysis. It was argued that the relevant product market would not only constitute the product or service in question, but would also include all the products/services which are regarded as interchangeable or substitutable. It was pointed out that for the purpose of the present case, the relevant market has been restricted to the market for supply of natural gas to industrial customers. Furthermore, it was argued that once the market determination has identified 'industrial' customers as the focal point, the relevant product market must be analyzed from the perspective of the specifically identified customers i.e. industrial customers, and must take into account the end-use of natural gas as used by the customers, characteristics and the influence that pricing plays on fuel choices of the customers. It was pointed out that based on the end-use, natural gas competes with other fuels available in the market such as Furnace Oil (FO), electricity, High Speed Diesel (HSD), coal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al consumers. 59. Further, relevant geographic market has been defined in section 2(s) of the Act meaning as a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas. To determine the 'relevant geographic market', the Commission is to have due regard to all or any of the following factors viz., regulatory trade barriers, local specification requirements, national procurement policies, adequate distribution facilities, transport costs, language, consumer preferences and need for secure or regular supplies or rapid after-sales services. 60. It was noted by the DG that the Government of Haryana having authorized only one service provider (the opposite party) to build and operate a CGD network in district Faridabad makes district Faridabad the relevant geographic market in the instant case. The Commission agrees with the DG that there being no other authorized entity in Faridabad permitted to lay its CGD network, the opposite party faces no competition from any other entity in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers; countervailing buying power; market structure and size of market; social obligations and social costs; relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition; and any other factor which the Commission may consider relevant for the inquiry. 67. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying out such check of the MRS, it is discovered that the error in the readings of the MRS exceeds 2.0% the MRS shall be re-calibrated at Sellers cost. 10.6 If on carrying out the check/re-calibration of the MRS as aforesaid it is discovered that either the percentage of inaccuracy exceeds 2 % (Two percent) or that the MRS is out of service, the following procedure in order of priority, whichever is feasible, for arriving at the computation, of quantity of Gas during the period between the last calibration and the present, shall be followed: (a) By correcting the error if the percentage of error is ascertainable by calibration, tests or mathematical calculation; or (b) By estimating the volume of Gas delivered by comparison with deliveries during the period under similar conditions when the MRS was registering accurately. Seller's decision in all such matters shall be final and binding. 70. The DG upon analysis concluded that the allegations of the informant regarding unilateral self-declaration of the quality/measurement of the gas supplied by the seller and the stipulation regarding the opposite party's decision being final and binding are not based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the opposite party. 73. It was alleged by the informant that the above clause absolved the seller of any liability for its failure to supply gas and the phrase 'due to any reason whatsoever' was clearly reflective of the abuse of dominance by the opposite party in as much as no contract entered into by parties who were on the same pedestal could concede to such a clause. 74. Per contra, the opposite party submitted its clarifications to the DG with respect to the alleged unfairness of clause 11 of GSA stating that gas supply disruption could occur due to varied reasons, the most common being damage caused to pipelines by third parties and the unauthorized digging of roads in city limits over which the opposite party had no control. 75. The Commission has perused the clause. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f generation of disputed invoice, and if such claims are found correct, the Seller shall adjust the same against the next invoice. It is further agreed that no interest will be payable by the Seller on any such amounts adjusted in the subsequent invoices. 13.5 The Buyer shall pay interest on all payments delayed beyond Due Date of invoices at the uniform rates equivalent to PLR of SBI + 2.0% p.a. or any such rates as may be decided by the Seller in future. 13.6 If full payment of the invoice is not made by the Buyer as stipulated in Section 13 (Section 13 Billing Payment) by due date, the Seller may, in its sole discretion and without prejudice to any other rights under this Agreement, discontinue the supply of Gas to the Buyer and shall be entitled to invoke the Security Instrument for any unpaid amounts which shall be replenished in accordance with this Agreement. The Seller shall be under no obligation to resume supply of Gas to the Buyer till such time that the Buyer has paid all amounts due to Seller as per the Invoices, interest and any penalty applicable thereon and security instrument replenished in accordance with the terms of this Agreement and to the satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest, whereas a delayed payment by the buyer renders him liable to pay interest on 'such rates as may be decided by the seller in future'. 82. In view of the above, the Commission observes that in the event of any dispute regarding amount payable, if any amount eventually becomes payable or reimbursable by the opposite party to consumers, there is no obligation on the part of the opposite party to pay interest on the said amount in terms of sub-clause 13.7. Hence, the provisions of sub-clause 13.7 of GSA are found to impose unfair conditions upon the buyers in contravention of the provisions of section 4(2)(a)(i) of the Act. Further, despite specifying rate of interest to be levied in the event of delayed payment, the further stipulation in sub-clause 13.5 to the effect that the interest rate may also be 'any such rates as may be communicated by the Seller in future' also amounts to imposition of unfair conditions in contravention of section 4(2)(a)(i) of the Act. 83. Further, the Commission also agrees with the finding of the DG in not holding the provisions of clause 13.7 (which mandate the buyer to pay the invoiced amount alongwith interest and penalty b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the Buyer may, at its sole option, terminate the Agreement upon not less than thirty (30) days prior written notice to Seller. 17.4 Buyer's Failure to Take Gas If the Buyer fails (other than as a consequence of Force Majeure or Planned Maintenance) to take fifty percent (50%) or more of the cumulative DCQ during a period of forty - five (45) consecutive days, then without prejudice to any other rights or remedies that the Seller may have under this Agreement or law, the Seller may, at its sole option, terminate this Agreement upon not less than thirty (30) days prior written notice to Buyer. 88. The above clauses were found by the DG to be in contravention of the provisions of section 4(2)(a)(i) of the Act. 89. At the outset, it was contended by the opposite party that it has deleted the clause dealing with Buyer's failure to off-take gas from the revised GSAs it has entered with its customers. This revised GSA is stated to be introduced from 1 April 2013 for all its new customers and to date, 32 new revised GSAs have been executed by AGL with its Customers. Further, all of AGL's earlier GSAs are due to expire on 1 April 2014 and AGL will roll over/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clauses of the agreement executed by the opposite party with its supplier which revealed that a corresponding clause of the said agreement stipulated that in the event of the opposite party failing to off-take 50% or more of the cumulative DCQ during the specified period, the opposite party's supplier can terminate the agreement by giving 30 days prior notice. Thus, it is evident from the two corresponding agreements viz. GSA between the opposite party and its consumers and the agreement between the opposite party and its supplier GAIL, that while the opposite party enjoys longer period from GAIL for meeting the cumulative DCQ obligation, it provides only 45 days to do so for its industrial consumers. The wide disparity between the two periods i.e. as available to the opposite party from GAIL as against the opposite party providing to its consumers, is not warranted by the risk to which the opposite party is exposed due to the nature of gas business where based on the projections/estimates of demand/consumption by the consumers, entities engaged at different levels of the supply chain enter into back to back contracts with upstream suppliers leaving little room for frequent res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at its sole discretion to accept or reject request of customers for force majeure amounts to imposition of unfair conditions in contravention of section 4(2)(a)(i) of the Act. Furthermore, the Commission holds sub-clause 11.2.1 of GSA to the extent that the buyer is obliged to meet its MGO payment obligation even in the event of emergency shutdown calling for complete or partial off-take of gas, amounts to imposition of unfair conditions in contravention of section 4(2)(a)(i) of the Act. Irrational and arbitrary increase in gas prices 99. The informant alleged that the opposite party in abuse of its dominant position had not only reserved to itself the unrestricted right to change/modify/revise the Contract Price and Excess Gas Price in an opaque and non-transparent manner, but was also revising gas prices arbitrarily and irrationally from time to time. The informant on the basis of certain data furnished by it with respect to crude oil prices as correlated with the price of gas being charged by the opposite party from time to time, has alleged that the opposite party had been providing mutually contradictory information to the informant whereby no rational conclusion could p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing parties, as it may deem fit which shall be not more than ten per cent of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse. 107. It is evident that the legislature has conferred wide discretion upon the Commission in the matter of imposition of penalty as can be noticed from the phraseology employed in the provision noted above. 108. It may be noted that the primary objectives behind imposition of penalties are: to impose penalties on infringing undertakings which reflect the seriousness of the infringement; and to ensure that the threat of penalties will deter both the infringing undertakings and other undertakings that may be considering anticompetitive activities from engaging in them. 109. The imposition of penalty has to relate to the mitigating and aggravating circumstances of the case. In the present case, the Commission has also noted the changes effected by AGL during the course of the investigation and pendency of proceedings in the agreements and other flexibilities extended on certain aspects as mentioned in earlier part of the order and the report ..... X X X X Extracts X X X X X X X X Extracts X X X X
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