| Reference Date | Version | March 22, 2024 | 1.0 |
| Keywords | Exclusivity, Associated Equipment, CGD Network, LNG, Alternate Sourcing |
| Legislation(s) |
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| Jurisdiction | India |
Introduction
In 2006, the Government of India introduced the Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks (‘2006 Policy’).
The 2006 Policy was and continues to be an enabler for the growth of pipeline infrastructure across the country to facilitate the evolution of a nationwide gas grid and growth of city or local gas distribution networks.
The Policy aims to:
- Promote investment from public as well as private sector in natural gas pipelines and city or local natural gas distribution networks.
- Facilitate open access for all players to the pipeline network on a non-discriminatory basis.
- Promote competition among entities and avoid abuse of dominant position.
- Secure consumer interest regarding gas availability and reasonable tariffs.
The Petroleum and Natural Gas Regulatory Board (‘PNGRB’) was established under the Petroleum and Natural Gas Regulatory Board Act, 2006 (‘PNGRB Act’).
The Board was constituted to facilitate investments in pipeline infrastructure while protecting customer interests.
Private sector participation in the development of CGD networks is incentivised through exclusivity granted under the Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 (‘Exclusivity Regulations’).
Such exclusivity is granted for laying, building or expansion of the CGD network during the economic life of the project.
The Board may additionally provide exclusivity to an entity from the purview of common carrier or contract carrier for a limited period, provided service obligations are fulfilled.
These service obligations include:
- Providing domestic PNG connections as per bid commitments.
- Laying and building steel pipelines as per inch-kilometre bid.
- Reaching all charge areas or wards through adequate pipeline infrastructure.
- Providing PNG connections within prescribed distance parameters.
In AGP City Gas Private Limited and Ors. v. Petroleum and Natural Gas Regulatory Board and Ors. (MANU/DE/1829/2023), the Delhi High Court examined issues relating to exclusivity and associated equipment under the CGD network framework.
This article examines the provisions relating to exclusivity and offers observations in light of the Delhi High Court decision.
Background
On June 09, 2022, PNGRB passed an Order stating that AGP did not possess a CGD Network in terms of Section 2(i) of the PNGRB Act.
The Board observed that cascade or truck mode transportation did not form part of the CGD Network and therefore AGP’s infrastructure exclusivity was not encroached.
Accordingly, the rights of consumers outweighed the claimed exclusivity rights of AGP.
AGP challenged the Order before the Delhi High Court.
Chronology of Events
April 06, 2018
PNGRB issued bid documents for the 9th CGD Bid Round.
May 31, 2018
An Addendum clarified definitions relating to:
- CNG Stations
- Compressed Natural Gas (CNG)
- Natural Gas
Natural gas was clarified to include:
- Liquefied Natural Gas (LNG)
- Compressed Natural Gas (CNG)
- Imported gas through transnational pipelines
- Coal Bed Methane
September 28, 2018
A consortium of AG&P LNG Marketing Pte. Ltd. and Atlantic Gulf and Pacific Company of Manila Inc. was declared successful for multiple geographical areas including Jaisalmer, Jodhpur, Kanchipuram and Ramanathapuram.
November 06, 2018
The 10th CGD Bid Round was launched including the AKT Geographical Area comprising Alappuzha, Kollam and Thiruvananthapuram districts.
February 26, 2019
Authorisation was granted in favour of the bidding consortium.
August 19, 2019
Petitioner No. 1 submitted its Detailed Feasibility Report indicating that LNG supply through trucks would form part of the CGD Network.
June 02, 2020
PNGRB clarified that any entity could establish and operate LNG Stations even if it was not the Authorised Entity (‘AE’).
July 23, 2020
PNGRB clarified that LNG Stations could distribute LNG in liquid form to the transport sector.
Supply to customers requiring up to 50,000 SCMD would however remain within the rights of the Authorised Entity.
August 18, 2020
PNGRB clarified that customers with demand up to 50,000 SCMD were entitled to alternate sourcing until the CGD Network was ready.
December 16, 2020
EICL sought permission from PNGRB to source LNG through tankers due to absence of pipeline connectivity.
January 04, 2021
Petitioner No. 1 informed PNGRB that it had infrastructure ready to supply LNG and had already supplied LNG to EICL.
March 10, 2021
PNGRB permitted alternate sourcing by EICL on grounds that the CGD Network was not ready.
March 13, 2021
Petitioner No. 1 challenged the alternate sourcing permission and argued that exclusivity rights were violated.
June 30, 2021
PNGRB issued another public notice seeking stakeholder comments regarding LNG supply through cascades or non-pipeline modes.
January 11, 2022
PNGRB withdrew the March 10, 2021 permission with liberty to reconsider the matter.
April 08, 2022
The Kerala High Court set aside the Board’s communication and remanded the matter back to PNGRB for reconsideration.
Issues
The primary issues revolved around the concept of exclusivity.
- Whether exclusivity applies to the CGD Network itself or exclusively to the Authorised Entity.
- Whether exclusivity extends to the entire Geographical Area or only specific parts thereof.
- Whether “associated equipment” includes LNG cryogenic trucks and CNG cascades.
- Whether alternate sourcing rights exist until the Authorised Entity is ready or until the CGD Network itself is ready.
Scope and Extent of Exclusivity
Regulation 5(1) of the Exclusivity Regulations empowers PNGRB to grant exclusivity for laying, building or expanding the CGD Network during the economic life of the project.
The Regulations specify that:
- Exclusivity commences from the date of authorisation.
- The authorised entity must continue expansion, replacement and upgradation of infrastructure.
- Failure to meet obligations may result in termination of exclusivity.
- Exclusivity may be terminated for whole or part of the authorised area.
Accordingly:
- Exclusivity is granted to the authorised entity.
- Exclusivity may partially terminate where infrastructure obligations are not fulfilled.
- Exclusivity is linked with development of the CGD Network.
CGD Network
Under Section 2(i) of the PNGRB Act, a CGD Network means an interconnected network of gas pipelines and associated equipment used for transporting natural gas from transmission mains to distribution grids and service pipes.
The definition specifically relates to equipment transporting natural gas through the network infrastructure.
Accordingly, cascades and cryogenic trucks do not naturally qualify as “associated equipment” because they transport LNG or CNG independently and not through the CGD pipeline system.
An argument was raised that the amended definition of “piped natural gas” under the Authorisation Regulations included cascades and other permitted modes.
However, using subordinate legislation to expand the meaning of the parent statute was viewed as problematic.
Alternate Sourcing
Regulation 3(2)(a) of the Authorisation Regulations requires the authorised entity to design and operate the CGD Network to meet demand up to 50,000 SCMD.
The proviso grants customers the right to obtain supply from alternate sources until the CGD Network is ready.
Importantly, the proviso refers to readiness of the “CGD Network” and not merely readiness of the authorised entity.
Thus, arguments that the authorised entity was willing to supply LNG through trucks do not override the requirement that the actual CGD Network be operational.
The proviso effectively protects customers until the planned pipeline infrastructure becomes functional.
Viewpoint
The concept of staggered exclusivity appears inconsistent with the plain language of the Exclusivity Regulations.
Exclusivity is granted to the authorised entity for the CGD Network during the economic life of the project.
At the same time, exclusivity may be terminated where the entity fails to develop the network adequately.
The argument that customers must necessarily purchase LNG from the authorised entity merely because the entity is willing to supply does not align with the wording of Regulation 3(2)(a).
The proviso specifically grants rights until the CGD Network itself is ready.
Cryogenic trucks and cascades may supplement the CGD Network but cannot replace the planned network infrastructure.
Customers may eventually transition from LNG transported by trucks to piped natural gas once the CGD Network becomes operational.
The controversy largely arose because:
- The supply involved LNG and not piped natural gas.
- Pipeline infrastructure development was delayed.
- Pricing disputes existed between the authorised entity and customers.
- Customers sought commercially viable alternate supply arrangements.
It is essential that issues relating to exclusivity are resolved effectively because demand for city gas distribution will continue to grow rapidly in India.
In several geographical areas, authorised entities have failed to meet minimum work programme targets, undermining the rationale for exclusivity.
While exclusivity is necessary to incentivise investment, failure to meet infrastructure obligations creates inefficiencies and reduces competition, which is contrary to the objectives of the PNGRB Act.
Suniti Kaur (Ms) and Ashwini Panwar (Mr)
Co-Founder & Managing Partner at Alaya Legal
