| Reference Date | Version | May 30, 2024 | 1.0 |
| Keywords | Exclusivity, Authorization, CGD Network, Common Carrier, Contract Carrier, Unbundling |
| Legislation(s) |
|
| Jurisdiction | India |
Introduction
The Government of India has set a target to increase the share of natural gas in the energy mix from the current levels of about 6.5% to 15% by 2030 to make India a gas-based economy.
To achieve the stated target, among other things, India would need to augment its natural gas transmission and distribution infrastructure, source and generate more natural gas, and take steps to ensure the long-term viability of a gas-based economy.
An experienced sustainability law firm would be able to assist in navigating the various components, such as transmission and distribution, in the natural gas sector.
This article examines the provisions of the recently introduced Petroleum and Natural Gas Regulatory Board (Guiding Principles for Declaring City or Local Natural Gas Distribution Networks as Common Carrier or Contract Carrier) Regulations, 2024 (‘2024 Guiding Principles’).
The 2024 Regulations substituted the Petroleum and Natural Gas Regulatory Board (Guiding Principles for Declaring City or Local Natural Gas Distribution Networks as Common Carrier or Contract Carrier) Regulations 2020 (‘2020 Guiding Principles’).
PNGRB Objectives & the Unbundling Vision
The Petroleum and Natural Gas Regulatory Board (‘PNGRB’) was established in 2006 under the Petroleum and Natural Gas Regulatory Board Act, 2006 (‘PNGRB Act’).
The stated objectives of the PNGRB include:
- Promoting investment from public and private sector in natural gas pipelines and CGD networks.
- Facilitating open access for all players to the pipeline network on a non-discriminatory basis.
- Promoting competition among entities and avoiding abuse of dominant position.
- Securing consumer interests in terms of gas availability and reasonable tariff.
The Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks, 2006 was formulated to encourage market forces and improve industry efficiency.
The Policy recognised that while monopoly may generally not be in the interest of consumers, at the early stage of infrastructure development, regulated monopoly may better serve consumers.
Accordingly, the focus at that stage was not unbundling but development of gas transportation infrastructure.
The Government was of the view that only entities engaged in gas marketing would have sufficient incentive to develop gas infrastructure.
The Policy also discussed the concept of “Unbundling of Operations” and required:
- Arm’s length relationship between pipeline activities and market-related activities.
- Compliance with Affiliate Code of Conduct.
- Board’s right to verify whether the relationship is genuinely at arm’s length.
- Long-term separation of transportation activities from gas marketing activities.
The Board may intervene at an appropriate stage to ensure unbundling of transportation activities from other entity activities.
Engaging a skilled oil, gas and energy law firm may therefore be considered to ensure proper implementation of accounting, management, legal and ownership unbundling.
Right of First Use and Unbundling
The concept of unbundling was also introduced under the proviso to Section 21(1) of the PNGRB Act.
The provision empowers the Board to require entities engaged in both marketing and transportation activities to separate such operations within a prescribed period.
The exclusivity issue concerning CGD network infrastructure and marketing is closely intertwined with the issue of unbundling.
The Authorisation Regulations, 2008 presently provide for accounting separation between transportation and marketing activities post commissioning.
Legal unbundling of marketing and transportation activities is already envisaged at policy level and may eventually become a statutory requirement.
CGD Networks and Exclusivity
The PNGRB Act empowers the Board to:
- Authorize entities to lay, build, operate or expand common carrier or contract carrier pipelines.
- Authorize entities to lay, build, operate or expand city or local natural gas distribution networks.
- Declare pipelines as common carrier or contract carrier.
Any entity desirous of laying, building, operating or expanding a CGD network must obtain authorisation under the PNGRB Act.
Applications must be made in the prescribed form under the Authorisation Regulations, 2008.
The Authorisation Regulations provide that exclusivity periods are governed by the Exclusivity Regulations, 2008 .
Over time, amendments have extended marketing exclusivity on grounds such as timely achievement of minimum work programme and delays not attributable to authorised entities.
While these concessions may have helped infrastructure development in the early phase, there is now a growing need to balance market competition and investment incentives.
Regulation 12 of the Authorisation Regulations, 2008 states:
“Notwithstanding anything contained in any other regulation made under the Act, the exclusivity from purview of common carrier or contract carrier shall be eight years.”
The explanation further clarifies:
“The exclusivity for laying, building or expansion of CGD networks, in all cases, shall remain twenty-five years from the date of authorisation.”
Declaring CGD Networks as Common Carrier or Contract Carrier
The 2020 Guiding Principles were introduced to implement the objectives of the PNGRB Act.
The objectives included:
- Protecting consumer interests
- Promoting fair trade and competition
- Avoiding infructuous investment
- Ensuring adequate availability of natural gas
Stakeholders strongly objected to the 2020 Guiding Principles on several grounds.
One major objection was that the Guidelines did not contain actual “guiding principles” for declaring CGD networks as common or contract carriers.
Stakeholders also raised concerns regarding lack of opportunity of hearing before the Board formed an opinion.
Concerns were also raised regarding “cherry picking” of customers and reduction in PNG connections.
To address such concerns, the 2024 Guiding Principles were introduced and superseded the 2020 Guidelines.
Impact of the 2024 Guiding Principles
Objectives
The 2024 Guiding Principles reiterate the objectives specified under Section 20(5) of the PNGRB Act.
The Regulations also introduce explanatory paragraphs relating to service obligations during exclusivity periods.
Principles
The 2024 Guiding Principles state:
“The Board shall, in seeking to declare CGD Network of an authorised entity as a common carrier or contract carrier, follow the provisions of these regulations which constitute the guiding principles.”
The 2024 Regulations reiterate concepts of marketing exclusivity and infrastructure exclusivity.
A key principle introduced under the 2024 Regulations states:
“Post completion of exclusivity period of exemption from the purview of contract carrier or common carrier, the respective CGD networks shall be declared as common carrier/contract carrier.”
However, another provision simultaneously states that one principle cannot be uniformly implemented across all CGD networks because each network differs in geography, population, demand and gas availability.
Thus, the Board will ultimately apply the principles on a case-by-case basis.
Procedure for Declaration
The 2024 Guiding Principles appear to address concerns regarding hearing opportunities.
The authorised entity is now provided an opportunity of hearing before the Board forms an opinion regarding declaration of a CGD network as common carrier or contract carrier.
This opportunity is in addition to the public notice process where objections and suggestions are invited from all stakeholders.
However, questions still remain regarding interpretation of the word “shall” in the regulations, especially where the Regulations simultaneously emphasise case-by-case analysis.
Viewpoint
It appears that while stakeholders recognise that exclusivity is temporary, resistance continues from certain quarters.
The 2024 Guiding Principles do not entirely resolve the ambiguity because the “guiding principles” continue referring back to the objectives under Section 20(5) of the PNGRB Act.
The issue of exclusivity in the CGD network context cannot be viewed in isolation.
A broader examination of the entire gas supply value chain is required in light of India’s ambitious energy transition targets.
Natural gas is expected to play an important role as a transition fuel in India’s journey toward net-zero emissions.
The demand for natural gas is likely to increase significantly in coming years, widening the supply-demand gap.
Pricing of natural gas also impacts infrastructure utilisation and viability.
Focusing only on exclusivity may prevent identification and resolution of broader inefficiencies across the gas ecosystem.
The Standing Committee on Petroleum & Natural Gas (2021-22) recommended:
- Urgent review of CGD exclusivity regulations to facilitate non-discriminatory open access.
- Opening up the market to increase competition and consumer choice.
- Anticipating participation of new players after expiry of exclusivity periods.
The Committee also observed that marketing exclusivity periods had already expired in several authorised areas.
Therefore, the process of inviting and onboarding new players should be planned in advance.
Legal Support in the Oil, Gas and Energy Sector
Alaya Legal Team, Suniti Kaur (Ms) and Ashwini Panwar (Mr)
Co-Founder & Managing Partner at Alaya Legal
