| Date | Version | April 05, 2023 | 2.0 |
| Keywords | ‘common carrier’, ‘contract carrier’, ‘Declaration’, ‘PNGRB’, ‘Authorization’, ‘natural gas pipeline’. |
| List of Legislation Referred |
|
| Jurisdiction | Republic of India |
Introduction
Natural Gas Pipelines are, without a doubt, critical infrastructure. A robust pipeline infrastructure is necessary to ensure efficient delivery of natural gas to its industrial users and consumers.
For more reasons than one, it is crucial to ensure that pipeline infrastructure is accessible to large numbers and redundancy is avoided. It only requires little imagination to understand the consequence if access to pipelines was controlled wholly by the owners, who are likely to be organizations with deep pockets and who may or may not engage in practices not conducive to competition and fair play.
This is a complex issue, especially given that petroleum and natural gas marketing and distribution was initially confined only to a few public sector undertakings and thereafter included a few private players, and merits a separate study.
The Petroleum and Natural Gas Regulatory Board (‘The Board’) was established under the PNGRB Act through a notification by the Central Board on October 1, 2007 (‘appointed day’).
The Board regulates the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas, excluding the production of crude oil and natural gas.
This write up draws focus on the process involved in authorization and declaration of a ‘natural gas pipeline’ under the 2008 Regulations.
Any entity that intends to lay, build, operate or expand a pipeline as a ‘common carrier’ or ‘contract carrier’ is required to obtain authorization under the PNGRB Act, by applying in writing to the Board.
The PNGRB Act grants certain powers to the Board, including the power to declare an existing pipeline as a ‘common carrier’ or ‘contract carrier’ and regulate such a pipeline.
The authorization in respect of a pipeline as granted by the Board to an entity, determines its status and the charges and tariff rates applicable to it. Therefore, the legal status of a natural gas pipeline is relevant.
The write up discusses the procedure of authorization and declaration of a natural gas pipeline as a common carrier or a contract carrier and the consequences that may follow if such procedures are not being followed or adhered to by the entities or the Board.
The authorization and declaration of City Gas Distribution (‘CGD’) network and the technical criteria for the determination of a pipeline as a common carrier or contract carrier is outside the scope of this write up.
Common Carrier and Contract Carrier
- The terms ‘common carrier’ and ‘contract carrier’ have been defined under Section 2 of the PNGRB Act:
“(j) “common carrier” means such pipelines for transportation of petroleum, petroleum products and natural gas by more than one entity as the Board may declare or authorize from time to time on a non-discriminatory open access basis under subsection (3) of section 20, but does not include pipelines laid to supply—
- petroleum products or natural gas to a specific consumer; or
- crude oil;
Explanation.- For the purposes of this clause, a contract carrier shall be treated as a common carrier, if—
- such contract carrier has surplus capacity over and above the firm contracts entered into; or
(b) the firm contract period has expired.
…
(m) “contract carrier” means such pipelines for transportation of petroleum, petroleum products and natural gas by more than one entity pursuant to firm contracts for at least one year as may be declared or authorized by the Board from time to time under sub-section (3) of section 20;”
- The 2009 Regulations detail the common carrier and contract carrier system as under:
- Under the contract carrier system, the capacity above the authorized entity’s own requirement is made available to any other entity upon entering into a firm contract for the transportation of a volume of natural gas for a minimum of one year, subject to terms of applicable regulations and payment of natural gas pipeline tariff under the 2008 Tariff Regulations [i]
- Under the common carrier system, the capacity above the entity’s own requirement, is made available to any other entity upon entering into a contract for the transportation of a volume of natural gas for a period of less than one year, subject to terms of applicable regulations and payment of natural gas pipeline tariff under the 2008 Tariff Regulations.
- The available capacity shall be allocated to any entity on a non-discriminatory ‘first-come-first-served’ basis.[ii]
- It is to be noted that the definition of ‘contract carrier’ under the PNGRB Act specifies transportation of petroleum, petroleum products and natural gas by more than one entity pursuant to firm contracts.
- However, the 2009 Regulations do not specify the minimum number of entities required to have a firm contract for transportation of petroleum, petroleum products and natural gas in case of a contract carrier.
- The entity laying, building, operating, or expanding a pipeline for transportation of natural gas, if engaged in marketing natural gas as well, shall be required by the Board to comply with the affiliate code of conduct.
- The Board may also require the entity to separate the marketing activities and transportation activities, including ownership of the pipeline, within such period as may be allowed by the Board, and only within the said period shall the entity have the right of first use.[iii]
The Board
- Section 11 of the PNGRB Act lists the various functions to be performed by the Board.
- To declare and authorize natural gas pipelines as common carrier or contract carrier, the Board shall:
- authorize entities to lay, build, operate or expand a common carrier or contract carrier;[iv]
- declare pipelines as common carrier or contract carrier;[v]
- regulate access to common carrier or contract carrier to ensure fair trade and competition amongst entities;[vi]
- regulate transportation rates for common carrier or contract carrier.[vii]
- The Board shall keep a Petroleum and Natural Gas Register at its head office, which shall include the details of entities authorized for laying, building, operating, or expanding a common carrier.[viii]
- An entity may apply for authorization for laying, building, operating or expanding a common carrier or contract carrier in writing to the Board under the PNGRB Act.[ix]
- No entity shall lay, build, operate or expand any pipeline as a common carrier or contract carrier without obtaining authorization from the Board under the PNGRB Act.[x]
- The Board also may, on suo motto basis, form an opinion to lay, operate or expand a common carrier or contract carrier.
- In such a case, the intention of the Board may be made public and applications may be invited from the interested entities.[xi]
- The Board may select an entity in an objective and transparent manner as specified by regulations for such activities.[xii]
- Failure to obtain authorization to lay, build, operate or expand a pipeline as a common carrier or contract carrier under the PNGRB Act shall attract punishment with imprisonment for a term which may extend to three years or a penalty of twenty-five crore rupees or with both.
- If the contravention continues, an additional fine of upto ten lakh rupees for every such day of contravention may also be imposed.[xiii]
Authorization and Declaration Framework
- The 2008 Regulations define a ‘natural gas pipeline’ as:
“any pipeline including spur lines for transport of natural gas and includes all connected equipments and facilities, such as, compressors, storage facilities, metering units, etc. but excludes—
- dedicated pipeline laid to transport natural gas to a specific customer to meet his requirement and not for resale;
- pipelines in a city or local natural gas distribution network which are regulated by the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008.”
- The 2008 Regulations state that an expression of interest shall be submitted to the Board by any entity desirous of laying, building, operating or expanding a natural gas pipeline.
- The Board also has the power to initiate a suo moto proposal inviting entities to participate in the process of selection of an entity for laying, building, operating or expanding natural gas pipeline.[xiv]
- The proposal by an entity desirous of laying, building, operating or expanding a natural gas pipeline is governed by Regulation 4(1) of the 2008 Regulations.
- Entities that had obtained authorization from the Central Government before the appointed day are required to submit relevant information and supporting documents under Schedule H of the 2008 Regulations.[xv]
- The entity shall abide by technical standards and safety standards under applicable regulations.[xvi]
- The Board shall approve the tariff under the 2008 Tariff Regulations.[xvii]
- If the status of the natural gas pipeline has not been specified as a common carrier or contract carrier, the Board may intervene and declare such pipeline accordingly.[xviii]
- Entities operating without prior Central Government authorization must apply for grant of authorization to the Board under Schedule I of the 2008 Regulations.
- The 2009 Regulations apply to all entities covered under the 2008 Regulations.
- The objectives for declaration of pipelines include:
- Promoting customer interest through competition and optimum utilization of infrastructure.[xix]
- Developing competitive gas markets by incentivizing independent shippers.[xx]
- The common carrier and contract carrier capacities available shall be published on the entity’s website in accordance with the Access Code Regulations.
- Capacity allocation shall be transparent.[xxi]
- Entities booking capacity may assign or trade such capacity in the open market.[xxii]
Procedure for Declaration
Regulation 10 of the 2009 Regulations lays down the procedure for declaring an existing pipeline for transportation of natural gas as a common or contract carrier.
Such declaration may take place if the Board is of the opinion that it is necessary or expedient to do so.
The Board may:
- Give wide publicity inviting objections and suggestions within not less than three weeks.
- Provide the entity owning the natural gas pipeline an opportunity of being heard.
Section 20(2) of the PNGRB Act uses the expression ‘shall’ instead of ‘may’ while providing opportunity to be heard.
After considering objections and hearing the concerned entity, the Board may declare the pipeline as a common carrier or contract carrier.
An entity may also apply suo moto to seek declaration.[xxiii]
The Board may thereafter issue notification under Section 20(3) of the PNGRB Act.
Mahanagar Gas Ltd. v. PNGRB
- ONGC applied for a pipeline to be declared as a dedicated pipeline.
- The Board directed ONGC to apply under the 2008 Regulations seeking declaration as a common carrier.
- ONGC subsequently obtained acceptance of authorization as a common carrier.[xxv]
- The Board fixed transportation tariff retrospectively.[xxvi]
- A debit note was raised on GAIL for recovery of retrospective tariff.[xxvii]
- The Appellant argued that procedures under Sections 20 and 21 were not followed.[xxix]
- The Tribunal focused only on tariff determination and upheld the declaration.
Gujarat Gas Company Limited v. PNGRB
- The Tribunal examined whether a pipeline could automatically become a common carrier.
- The Appellant argued that the sub-transmission line formed part of its CGD network.
- The Board argued that once the line served multiple customers, it effectively became a common carrier pipeline.
- The Tribunal held that granting common carrier status requires proper determination and declaration by the Board.[xxxvi]
- There cannot be automatic conversion of a pipeline into a common carrier.
- The Tribunal emphasized compliance with Section 20 and the 2009 Regulations.
- The Tribunal also referred to Saint Gobain Pvt. Ltd. v. Gujarat Gas Limited where it was held that CGD networks do not automatically become common carriers.
View Point
- Declaration of a pipeline as a common or contract carrier has significant implications in tariff determination.
- The status of a captive pipeline remains unclear in several respects.
- The nexus between ownership, operation and access of natural gas pipelines requires deeper analysis.
- Legal unbundling of marketing and transportation activities may improve transparency and competition.
References
[i] Reg. 6, PNGRB Regulations, 2009.
[ii] Reg. 5, PNGRB Regulations, 2009.
[iii] Sec. 21, PNGRB Act, 2006.
[iv] Sec. 11(c), PNGRB Act, 2006.
[v] Sec. 11(d), PNGRB Act, 2006.
[vi] Sec. 11(e)(i), PNGRB Act, 2006.
[vii] Sec. 11(e)(ii), PNGRB Act, 2006.
[viii] Sec. 14(b)(i), PNGRB Act, 2006.
[ix] Sec. 17(1), PNGRB Act, 2006.
[x] Sec. 16(a), PNGRB Act, 2006.
[xi] Sec. 19(1), PNGRB Act, 2006.
[xii] Sec. 19(2), PNGRB Act, 2006.
[xiii] Sec. 48, PNGRB Act, 2006.
[xiv] Reg. 4, PNGRB Regulations, 2008.
[xv] Reg. 17(1), PNGRB Regulations, 2008.
[xvi] Reg. 17(2), PNGRB Regulations, 2008.
[xvii] Reg. 17(3), PNGRB Regulations, 2008.
[xviii] Reg. 17(5), PNGRB Regulations, 2008.
[xix] Reg. 4(a), PNGRB Regulations, 2009.
[xx] Reg. 4(b), PNGRB Regulations, 2009.
[xxi] Reg. 7(c), PNGRB Regulations, 2009.
[xxii] Reg. 7(b), PNGRB Regulations, 2009.
[xxiii] Reg. 10(3), PNGRB Regulations, 2009.
[xxiv] MANU/ET/0095/2019.
[xxv] Para 13, Mahanagar Gas Ltd. v. PNGRB.
[xxvi] Para 15, Mahanagar Gas Ltd. v. PNGRB.
[xxvii] Para 17, Mahanagar Gas Ltd. v. PNGRB.
[xxviii] Para 14, Mahanagar Gas Ltd. v. PNGRB.
[xxix] Para 14, Mahanagar Gas Ltd. v. PNGRB.
[xxx] MANU/ET/0017/2021.
[xxxi] Para 3.8, Gujarat Gas Company Limited v. PNGRB.
[xxxii] Para 83, Gujarat Gas Company Limited v. PNGRB.
[xxxiii] Para 4.1.2, Gujarat Gas Company Limited v. PNGRB.
[xxxiv] Para 5.1, Gujarat Gas Company Limited v. PNGRB.
[xxxv] Para 83, Gujarat Gas Company Limited v. PNGRB.
[xxxvi] Para 101, Gujarat Gas Company Limited v. PNGRB.
[xxxvii] Case no. Legal/156/2015, Petroleum and Natural Gas Regulatory Board.
Suniti Kaur (Ms) and Ashwini Panwar (Mr)
Co-Founder & Managing Partner at Alaya Legal
