CGD Networks: Shaping The Future, Lessons From The Past

Aspects related to the laying, building, operating and expanding of City or Local Natural Gas Distribution Networks require expertise and assistance from an oil, gas and energy law firm or legal advisor.

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 much-discussed 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') in the context of the bigger picture of significantly increasing the share of natural gas in the total energy basket. The 2024 Regulation has 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 set up in 2006 under the Petroleum and Natural Gas Regulatory Board Act, 2006 (‘PNGRB Act') with the stated objective of:

1. promoting investment from public as well as private sector in natural gas pipelines and city or local natural gas distribution networks, 
2. facilitating open access for all players to the pipelines network on a non-discriminatory basis, 
3. promoting competition among entities thereby avoiding any abuse of the dominant position by any entity, and 
4. securing the consumer interest in terms of gas availability and reasonable tariff of natural gas pipelines and city or local natural gas distribution networks.

The Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Networks, 2006 (‘Policy') was formulated to permit and encourage market forces to enhance competition and produce a more competitive and efficient industry structure. 

The Policy recognises that generally speaking, monopoly is not in the interests of the consumers; however, considering the situation (then, i.e., 2006), the customers would be served better by a regulated monopoly than by introducing competition at such an early stage. 

The policy across jurisdictions has been that it is in the best interests of the gas consumers to have an environment of natural monopoly concerning gas transmission and distribution, rather than have an environment of competition which might lead to reduced efficiency and increased costs. 

Thus, the exercise of unbundling was not a priority when the Policy was issued. The focus was to ensure that adequate gas transportation infrastructure was implemented. The Government was of the view that since the share of natural gas in the energy basket was significantly less than the world average, only entities engaged in the business of marketing gas would have interests or could be incentivised to develop the infrastructure for the transmission of gas. The policy, among other things, discusses the concept of ‘Unbundling of Operations' and states;

• that entities need to ensure an arm's length relationship between its pipeline-related activities and its market related activities,
• An Affiliate Code of Conduct between the authorized and related entities or between the gas pipeline activity and other activities of the authorized entity, as formulated by the Board under the regulations, will have to be followed. 
• that the Board will have the right to enquire and determine that such a relationship is actually at arm's length. 
• In the long run and with the maturing of gas markets, it is envisaged that the authorized entities will have natural gas transportation as their sole business activity and will not have any business interests in the gas marketing or city or local gas distribution networks. Thus, the Board may intervene at an appropriate stage to ensure unbundling of transportation activity from other entity activities.

Engaging a skilled oil, gas and energy law firm may be considered to ensure that unbundling at various levels, that include accounting, management, legal and ownership can be implemented for achieving policy goals. 

The concept of unbundling was also introduced by the proviso to Section 21(1) of the PNGRB Act relating to the right of first use in the following words: 

“Provided that in case of an entity engaged in both marketing of natural gas and laying, building, operating or expanding a pipeline for transportation of natural gas on a common carrier or contract carrier basis, the Board shall require such entities to comply with the affiliate code of conduct as may be specified by regulations and may require such entity to separate the activities of marketing of natural gas and the transportation including ownership of the pipeline within such period as may be allowed by the Board and only within the said period, such entity shall have right of first use.”

The exclusivity issue concerning CGD network infrastructure and marketing is intertwined with the issue of unbundling. Presently, Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Authorisation Regulations, 2008') provides for mandated accounting separation between transportation and marketing activities as part of its service obligations post-commissioning. Legal unbundling of the marketing and transportation activities is envisaged at the policy level and indeed, at some stage, will find its way into the law.

CGD networks and exclusivity

The PNGRB Act specifies the functions of the Petroleum and Natural Gas Regulatory Board (‘Board'), which among other things, are;

• to authorize entities to lay, build, operate or expand a common carrier or contract carrier; 
• to lay, build, operate or expand city or local natural gas distribution network; and 
• to declare pipelines as common carrier or contract carrier. 

Any entity desirous of laying, building, operating or expanding a city or local natural gas distribution network has to apply in writing to obtain authorisation under the PNGRB Act. Such application has to be made in the form and manner prescribed under the Authorisation Regulations, 2008.

The Authorisation Regulations, 2008 contemplate that the period of exclusivity to lay, build, operate or expand a city or local natural gas distribution shall be as per the provisions in the  Petroleum and Natural Gas Regulatory Board (Exclusivity for City or Local Natural Gas Distribution Networks) Regulations, 2008 (‘Exclusivity Regulations, 2008').

Over the years, the Authorisation Regulations, 2008 have been amended to extend marketing exclusivity on the grounds of timely achievement of minimum work programme and on the grounds of delays due to reasons not attributable to the authorized entity. This trend of granting concessions to CGD networks may not align with India's ambitious goals for 2030. Granted, these concessions have played a role in India's growth in the initial phase of infrastructure development. However, there is a need to re-evaluate these concessions and strike a balance between having a competitive market and incentivizing investment. 

The foregoing concessions are an exception to the rule laid down in Regulation 12 of the Authorisation Regulations, 2008, which states as under:

“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 to this Regulation 12 states as under:

“For the purpose of this sub-regulation, it is clarified that, the exclusivity for laying, building or expansion of CGD networks, in all cases, shall remain twenty-five years from the date of authorisation.”

Declaring City or Local Natural Gas Distribution Networks as Common Carrier or Contract Carrier

The 2020 Guiding Principles were introduced to implement the provisions of the PNGRB Act to achieve the objectives stated therein, namely:-

1. protecting the interests of consumers by fostering fair trade and competition amongst the entities;
2. promoting competition among entities;
3. avoiding infructuous investment; or
4. maintaining or increasing supplies or for securing equitable distribution, or ensuring adequate availability of natural gas to consumers.

The 2020 Guiding Principles were strongly objected to by the stakeholders on various grounds, including a fundamental ground that the said Guidelines did not contain any ‘guiding principle' for the declaration of the CGD network as a common or contract carrier. 

The stakeholders raised concerns about no opportunity of hearing to authorized entity whose network is to be declared as common or contract carrier before the Board forms an opinion on whether it intends to declare an existing pipeline or CGD as common carrier or contract carrier or it intends to regulate or allow access to such pipeline or network. In this regard, it is relevant to note that Section 20(1) of the PNGRB Act states that the Board may form an opinion to declare a CGD network as a common carrier or contract carrier and also invite objections and suggestions (which would also include the authorised entity). Section 20(2) of the PNGRB Act does state that an opportunity of being heard shall be provided to the authorised entity as well. However, it cannot be construed to mean that this opportunity is given before the Board forms an opinion in this regard or that an exclusive hearing be provided to the authorised entity in this regard. It is pertinent to note that any such orders in relation to this shall be passed having regard to the public interest, competitive transportation rates and right of first use, thereby alluding to the concept of unbundling of operations and in line with the Policy. 

The stakeholders also raised concerns that the declaration of CGD networks as common or contract carrier may lead to a situation of ‘cherry picking' of customers and lead to reduced PNG connections. 

To address the concerns in the 2020 Guiding Principles, the 2024 Guiding Principles have been introduced for declaring a City or Local Natural Gas Distribution Network of an authorised area as Common Carrier or Contract Carrier. The 2024 Guiding Principles supersede the 2020 Guiding Principles. 

Impact of the 2024 Guiding Principles

Objectives: The 2024 Guiding Principles reiterate the objectives set forth in Section 20(5) of the PNGRB Act, which were also reiterated in the 2020 Guiding Principles.

The 2024 Guiding Principles also introduce explanatory paragraphs in relation to these objectives and the service obligations to be met by the authorized entity during the period of exclusivity. The explanatory paragraphs explain the existing legal position. 

Principles: The 2024 Guiding Principles, just like the 2020 Guiding Principles, state that

‘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 to be followed by the Board for declaring the CGD network as a common carrier or contract carrier under section 20 of the Act.'

The 2024 Guiding Principles also reiterate the concepts of ‘marketing exclusivity' and ‘infrastructure exclusivity' specified under the Authorisation Regulations, 2008 and the rationale for the grant of exclusivity under the Exclusivity Regulations, 2008. 

The following provisions are important to note in respect of the Principles set forth in the 2024 Guiding Principles:

The key guiding principles introduced under the 2024 Guiding Principles: 

• ‘Clause (a) of section 11 of the Act provides for the function of the Board to “protect the interest of consumers by fostering fair trade and competition amongst the entities.”  Accordingly, 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 so that the functions of clause (a) of section 11 of the Act can be implemented.' 

• ‘Since every CGD networks are different in terms of geography, population, demand, availability of natural gas and like other gas,  one principle cannot be implemented to all CGD networks. Accordingly, the Board shall be guided by the factors as given under Section 20 (5) of the Act while declaring a CGD network as common carrier or contract carrier under these regulations.' 

Regulation5 (Guiding Principles for Declaring the City or Local Natural Gas Distribution Network of an authorised area as Common Carrier or Contract Carrier) of the 2024 Guiding Principles states that since one principle cannot be implemented to all CGD networks, the PNGRB shall be guided by factors as given under Section 20(5) of the PNGRB Act. Said section 20(5) lays out the objectives which are reiterated in Regulation 4 of the 2024 Guiding Principles and states that the Board shall follow principles as the Board may by regulations determine. Thus, the provisions are circular. The bottom line is that the principles for declaring the city or local natural gas distribution network of an authorised area as a common carrier or contract carrier will emerge and be applied by the PNGRB on a case-by-case basis.

Procedure for Declaring the CGD Network as a Common Carrier or Contract Carrier or Regulating or Allowing Access:

It would seem that the 2024 Guiding Principles address one of the objections to the 2020 Guiding Principles by giving the authorised entity an opportunity of being heard, before the Board forms an opinion for declaring a CGD Network as Common Carrier or Contract Carrier. 

It is useful to note that this opportunity is in addition to one afforded to all persons and entities (including the authorised entity) after the Board issues a public notice of its intention to declare the CGD network as a common carrier or contract carrier or regulate or allow access to such CGD network and invites objections and suggestions. Giving an opportunity of being heard to the authorised entity alone may potentially undermine the legitimacy of the decision with respect to the procedure and also goes against the provision of the Board deciding the exclusivity period in a transparent manner while fully protecting the consumer interests, as stated under Section 20(4) of the PNGRB Act. 

The purpose served by this additional opportunity of being heard given to the authorised entity before the Board forms an opinion for declaring a CGD Network as a Common Carrier or Contract Carrier is not clear in light of new Regulation 4 of the 2024 Guiding Principles which expressly states that upon completion of the expiry period, the respective CGD networks shall be declared as common carrier/contract carrier. Arguably, the expression ‘shall' is intended to be read as ‘may' if one were to harmoniously interpret the said two regulations, i.e., Regulation 4 and Regulation 5. 

Viewpoint

It would appear that while all stakeholders recognise and acknowledge at some level that the period of exclusivity is and shall be limited, there is stiff resistance from certain quarters. The 2024 Guiding Principles, as they presently read, do not help the situation – the guiding ‘principles' set out in Regulation 5 of the 2024 Guiding Principles allude to the ‘objectives' under Section 20 (5) of the PNGRB Act and vice-versa. 

The' exclusivity' issue in the CGD network context cannot be viewed in isolation. While these discussions around the exclusivity of the CGD network are crucial, other pressing concerns need to be addressed in parallel. It is time to examine the entire gas supply value chain in a comprehensive manner in the context of the ambitious targets declared by the Government where natural gas will be used as a transition fuel in India's journey towards net-zero. Presently, the share of natural gas in the energy mix is significantly lower than the global average – the demand for natural gas will only increase in the coming years, widening the gap between demand and supply of gas across the country. In light of the price fluctuations on a global scale, there is a need to explore all options for increasing domestic production and supply of natural gas in the country. Pricing of natural gas also impacts capacity utilisation.

Exclusivity will only address a single aspect relating to the CGD network, while it neglects the interconnectedness of the entire value chain. A sole focus on exclusivity would limit the ability of the Board and the stakeholders to identify and resolve broader inefficiencies. In this context, the observations and recommendations of the Standing Committee on Petroleum & Natural Gas (2021-22) (Seventeenth Lok Sabha) may be looked into:

• The Committee feel that there is an urgent need to review and update for City or Local Natural Gas Distribution Networks be declared as common carrier or contract carrier to provide non-discriminatory open access to third party entities.

• It should be opened to increase the competition in providing the Piped Natural Gas (PNG) so as to benefit to the maximum number of people. Also, the people should be given the choice to shift to any operator after the exclusivity period…

• The Committee had observed that the entities are allowed marketing exclusivity period of 5/8/10 years from the date of authorization in terms of an exemption from the purview of the contract carrier or common carrier for the respective CGD Network. This deadline has already expired in many areas. The Committee had, therefore, recommended that there is a need for more players to participate in CGD networks which is a growing sector and hence when the exclusivity period is over, the entire process of inviting, allotting and operating of new players should be anticipated and acted well in advance.

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