Exclusivity in city gas distribution network to affect competition

The transportation charges for usage of the network by third parties is determined by the PNGB. Accordingly, PNGB had sought to determine the network charges for Indraprastha Gas Limited (IGL) as a CGD network. However, this was challenged by IGL wherein the Supreme Court ultimately decided that PNGB has no power to determine the network charges of CGD network operator under the PNGRB Act and PNGB can only determine the charges for common carrier or contract carrier.

This raises interesting issues in terms of the scope of competition and level playing field amongst CGD network developers and third party suppliers through the CGD network after expiry of exclusivity period. Considering the fact that the pricing of supply of gas by a CGD network developer is not subject to any scrutiny by PNGB, the developer has the ability and statutory protection to charge any price that it wants (subject to normal economic principles of price-demand ratio) from the consumer and thereby recover majority of the cost of the network in the initial years. 

However, once the period of exclusivity comes to an end, the developer can then claim transportation charges according to the depreciated value of the network, which may be much higher than the cost that has already been recovered by him during the exclusivity period, thereby subjecting his competitors to higher transportation charges. 

At the same time, since the CGD network developer has already recovered a major portion of the network cost, it can discount this cost from its own cost of supply, and thus remain more competitive than a third party supplier. This will ultimately act as an entry barrier for a third party supplier since on the one hand he has to end up paying higher transportation charges and on the other, he will not be in a position to match the discounted price of supply by the CGD network developer.

While one of the stated purposes of the PNGRB Act is to protect consumer interest and promote competition, the law as it stands, in fact does not have adequate mechanism to check anti-competitive conduct by CGD network developers. The position would be very different, if PNGB has the ability to check the extent to which network costs are recovered as part of gas price. Of course, the fact remains that the period of exclusivity is provided to ensure that the developer who is investing significant amounts in building the CGD network can commercially exploit the market in the initial years. However, there should be a mechanism to ensure that network pricing in such case remains neutral at the end of the exclusivity period.

With the Competition Commission of India (CCI) at the helm of issues affecting competition, it may consider developing appropriate guidelines in this respect in consultation with PNGB, to ensure fair and proper disclosure of network costs during exclusivity period to prevent overcharging to consumers.

While the CGD network developer is entitled to commercially exploit the network in the initial years, it cannot be allowed to profiteer on natural gas, which is a natural resource, at the cost of consumers.

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Sakya Singha Chaudhuri is partner at HSA Advocates 

Shivam Sinha is the associate at HSA Advocates