- (1.) THE present information has been filed by M/s. Saint Gobain Glass India Ltd. (hereinafter, the 'Informant') under section 19(1)(a) of the Competition Act, 2002 (the 'Act') against M/s. Gujarat Gas Company Limited (hereinafter, the 'Opposite Party/GGCL') alleging, inter alia, contravention of the provisions of section 4 of the Act.
(2.) FACTS The brief facts of the case, as stated in the information, are as follow: "2.1 The Informant is one of the eight companies of Saint Gobain Group and has been engaged in manufacturing and marketing of float glass. The Informant acquired the float glass plant of Sezal Glass Ltd. (hereinafter, "SGL") on 31.05.2011 on a slump sale basis. 2.2 The Opposite Party, Gujarat Gas Company Ltd. (GGCL), is a City Gas Distribution (CGD) entity, engaged in the distribution of natural gas to end customers in the industrial, commercial, domestic and CNG segments, in three districts of Surat (excluding, Hazira), Bharuch (excluding Vagra Taluka) and Veloda & Vyara Taluka of Tapi, in the State of Gujarat. Further, GGCL also operates a transmission pipeline network for the transmission of natural gas, which constitutes less than 5% of GGCL's business as its primary business is distribution of natural gas via the CGD network. 2.3 GGCL was formed in 1980 under the name of Gujarat Amico Chem Ltd. (GACL). In 1988 GACL signed a joint venture with Mafatlal group for supply of gas in Gujarat; name of the company was changed to GGCL. Subsequently, in June 2013 GSPC Distribution Network Limited (GDNL) acquired majority shares of GGCL. GDNL was established on 21.02.2012 and it is a wholly -owned subsidiary of Gujarat State Petroleum Corporation (GSPC). The main operations of GDNL include sale, purchase, supply, distribution, transportation and trading in natural gas, in the form of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG). 2.4 As per the information, SGL had entered into a Gas Supply Agreement (hereinafter, 'GSA') with the Opposite Party on 15.06.2007 for supply of natural gas to its float glass plant located in Jhagadia. It is averred that since execution of the said GSA, the Opposite Party has amended it on several occasions, the second amendment to original GSA was made on 23.01.2009 and the last amendment was made on 27.01.2011 (hereinafter, "amended GSA"). 2.5 The Informant alleged that following clauses of the "amended GSA" are abusive, being unfair in terms of section 4 of the Act: 2.5.1 The Informant has submitted that, Clause 2 of the original GSA dated 15.6.2007, stated that the agreement will be for a period of 7 years from 15.06.2007 to 14.07.2014. However, the amended GSA dated 27.01.2011, revised the period of contract from 15.06.2007 to 31.07.2019. Thus, the duration of contract now being for a period of twelve years was in the nature of a long term contract. 2.5.2 It has been submitted that although such long term contracts may produce efficiency gains as they have a risk -reducing effect, protect the customers against volatile prices and the supplier against any quantity risk thereby offering stability, these long -term contracts may also reduce the potential for the competitive market structure to emerge, as they largely result in market foreclosure for competing suppliers. Such long -term downstream contracts may also reduce, if not eliminate, the ability of the customer to choose its supplier. In the present case the efficiency gains are outweighed by the adverse effects of the long term contract. 2.5.3 The Informant has further submitted that, in this matter, the contract between SGL and Opposite Party is for a period of twelve years (increased from seven years under the original GSA) with no exit option and the entire demand of SGL for natural gas is being supplied by Opposite Party leaving no options available to SGL and foreclosing the market to other suppliers. 2.5.4 It is alleged that by incorporating "Clause 5" in the "amended GSA" the Opposite Party imposed minimum guaranteed off -take (hereinafter, "MGO") liability on the Informant. As per the Informant, the MGO liability was imposed even for the period during which the Opposite Party had not laid the natural gas pipeline connecting to its plant. It is submitted that even though "Clause 5.1" stipulates that the seller shall sell the natural gas from 02.09.2008 and "Clause 5.2" stipulates that MGO liability would commence from 01.12.2008, "Clause 5.3" of the amended GSA prescribes that the MGO liability would be from 01.02.2009. It is averred that since SGL was unable to off -take the minimum guaranteed quantity of natural gas from the Opposite Party with effect from 01.02.2009 due to some technical and financial difficulties, it was required to pay nearly a sum of Rs. 100 crores to the Opposite Party as MGO liability. It is stated that the MGO liability clause and several other clauses were deliberately inserted in the "amended GSA" by the Opposite Party to derive benefits and extract payment in the name of MGO liability. The Informant submitted that the Opposite Party did not incur any loss due to failure on behalf of SGL as the contracted quantity of gas was sold in the spot market for a higher price. The same is evident from the balance sheets of the Opposite Party for the years 2008 and 2009 which do not account for any losses occurred due to burning of gas. It is alleged that, despite selling the contracted quantity of natural gas in the spot market at a premium, the Opposite Party forced the SGL and the Informant to pay Rs. 11 crores as MGO liability in monthly instalments of Rs. 17 lakhs. 2.5.5 It is averred that through amended "Clause 15", the Opposite Party removed the buyer's right to terminate the contract. As per the Informant, this condition in the "amended GSA" deprives the buyer of the right to terminate the contract even in case the seller is not able to meet Informant's natural gas requirements. The Informant has no option to approach another supplier in spite of the fact that stoppage of even one minute of natural gas by the seller can lead to huge financial loss to it. 2.5.6 The Informant further averred that by incorporating "Clause 22", the Opposite Party introduced the right of first refusal to the Opposite Party. Accordingly, in case the buyer requires any additional quantity of natural gas for its plant during the term of agreement, a written proposal will have to be made to the Opposite Party to meet such additional requirement, prior to making any proposal or offer to any third party (natural gas supplier) for entering into any agreement/arrangement. 2.5.7 It is also averred that at the time of acquisition of its float glass plant from SGL, the Opposite Party (through a tri -partite agreement between the SGL, the Informant and the Opposite Party on 30.09.2011) compelled the Informant to mandatorily obtain a "No Objection Certificate" from the Opposite Party to proceed with the acquisition and to accept all the unfair terms and conditions of the GSA and amended GSA. The Opposite Party also compelled the Informant to submit an incremental bank guarantee of Rs. 1,50,61,000 towards security deposit and an additional bank guarantee of Rs. 20,50,00,000 by 15.06.2011. Further, the Opposite Party asked the Informant to make timely payment of instalment of Rs. 17,00,000 due on a monthly. 17, 00,000 due on a monthly basis from 01.06.2011 as per the "amended GSA". 2.6 The Informant has submitted that in South Gujarat the market share of the Opposite Party is more than 80%. In 2009, it had 875 industrial customers which accounted for 81% of its gas volume which increased to 82.9% in 2010. In 2011, its natural gas sale volume increased by 3% compared to the previous year and it is one of the most profitable companies in the country. Accordingly, the Informant averred that the Opposite Party holds a dominant position in the market for supply and distribution of natural gas (other than the gas covered by allocation policy of the Government of India) in south Gujarat. 2.7 Accordingly, the Informant has alleged that the Opposite Party has abused its dominant position which is in contravention of the provisions of section 4(2)(a)(i), 4(2)(b)(i) and 4(2)(c) of the Act. 2.8 Based on the above submissions, the Informant prayed the Commission to: investigate the matter; direct the Opposite Party to introduce exit clause in its GSA; direct the Opposite Party to remove "Clause 22" which was introduced in the "amended GSA"; grant interim injunction on the payment of the monthly instalment of Rs. 17 Lakhs towards MGO liability till the matter is decided by the Commission; direct the Opposite Party to remove "Clause 11.6.b" of the GSA imposing MGO liability; direct the Opposite Party not to discontinue or reduce the natural gas supply to the Informant's float glass plant during the pendency of the matter; direct the Opposite Party to provide transparent pricing mechanism in GSA; and pass any such order as the Commission may deem fit in the light of the facts and circumstances of the case." The Commission, upon examining all aspects of the case, vide its order dated 31.05.2013 under section 26(1) of the Act held that the conduct of the Opposite Party was indicative of the existence of a prima facie contravention of the provisions of the Act and accordingly, directed the Director General (hereinafter, the 'DG') to investigate the matter.
(3.) DG 's Investigation 4.1 In accordance with the provisions of section 26(3) of the Act, the DG has submitted the investigation report to the Commission on 21.04.2014. 4.2 The DG has investigated the matter focusing on the alleged contravention of the provisions of section 4 of the Act by the Opposite Party. 4.3 For the purpose of defining the relevant market in the matter, the DG stated that natural gas has distinct characteristics and is cheap compared to other sources of energy. Based on the difference in characteristics, prices, consumer preference and specialised expertise required for its supply and distribution network, the DG has stated that natural gas is a distinct product and it cannot be considered as a substitute for other sources of energy. Further, the DG has opined that natural gas priced under Administered Pricing Mechanism ('APM') and gas falling under Non -Administered Pricing Mechanism ('Non -APM') form different relevant product markets because of the Central Government order dated 01.07.2005 which mandates that a particular group of consumers (consumers of power sector, fertilizers sector, or covered under court orders or having allocations of less than 0.05 MMSCMD) are entitled for supply of gas under APM. Since, the Informant is an industrial customer which falls in the category of non -APM natural gas user, the DG has considered the supply of non -APM natural gas to industrial consumers as the relevant product market in this matter. Considering the Petroleum and Natural Gas Regulatory Board's (hereinafter, 'PNGRB') reply that the Opposite Party comes under the purview of the Petroleum and Natural Gas Regulatory Board Act, 2006 and since it has been granted infrastructure exclusivity and market exclusivity for the city or local natural gas distribution (hereinafter, 'CGD') network in the geographical area of Surat, Bharuch and Ankleshwar, the DG has reported that the condition of competition in the geographic area of Bharuch (excluding Vagra Taluka) and Surat (excluding Hazira) districts of Gujarat is homogenous and can be distinguished from other adjacent areas of Gujarat. Therefore, the DG deduced that the relevant market be considered in this case as 'the supply of non -APM natural gas to industrial customers located in Bharuch (excluding Vagra Taluka) and Surat (excluding Hazira) districts of Gujarat'. 4.4 As per the DG report, there are four players operating in the relevant market i.e., the Opposite Party, GAIL (Gas Authority of India Limited), IOCL (Indian Oil Corporation Limited) and GSPC (Gujarat State Petroleum Corporation) and among these four players, the Opposite Party has the highest market share in terms of volume and value of sale of natural gas. Further, the DG has stated that the size of the Opposite Party is significant with substantial resources at its command. Also, the Opposite Party has the advantage of vertical integration and the exclusivity granted to it for marketing and infrastructure network. Furthermore, it is difficult for the consumers to switch to other suppliers as it may not be viable for the new supplier to lay down dedicated gas pipeline. As per the DG report, the capital intensive nature of this sector, the requirement of financial resources, technical expertise, etc. and the regulatory framework precludes the presence of any entity other than the Opposite Party to enter the market. Thus, the DG concluded that the Opposite Party is a dominant enterprise in the relevant market as defined supra. 4.5 In order to analyse the conduct of the Opposite Party in terms of the provisions of section 4 of the Act, the DG has examined the alleged clauses of GSA as well as "amended GSA" relating to MGO liability, long term nature of the contract, elimination of buyer's right to terminate the contract and introduction of right of first refusal, arbitration, MGO caution deposit facility, differential pricing, etc. and concluded that the conduct of the Opposite Party in imposition of some such unfair clauses on the Informant is in infraction of the provisions of section 4(2)(a)(i) & (ii) and 4(2)(c) of the Act. 4.6 The DG has reported that the structure of the MGO clause in the original GSA dated 15.06.2007 and subsequent amendment in the original GSA dated 23.01.2009, which continues to operate till today, amounts to imposition of unfair and exploitative conditions. It is revealed from amended GSA that in spite of the Opposite Party itself entitled for "make -up" gas from its top three upstream suppliers, it did not provide this facility to SGL. Also, the Opposite Party imposed the MGO liability on SGL even for the period during which the Opposite Party had not laid the natural gas pipeline connecting SGL's plant. As per the DG report, there is no option with SGL to reduce/change MGO quantity and there is no option to the SGL to switch over to non MGO contract. It is further stated in the DG report that the Opposite Party had increased the MGO contracted quantity without even supplying a single molecule of gas to SGL and took away all rights to receive MGO quantity in future. 4.7 The DG reported that until 26.01.2011, SGL had the right to terminate the agreement in case the Opposite Party failed to supply natural gas of required quantity, meeting the quality and pressure requirement, etc. However, in the amended GSA, the clause relating to the right of SGL to terminate the GSA in case the Opposite Party failed to supply natural gas was removed. Though the Opposite Party has claimed that the termination clause was removed at the request of SGL, the DG did not find any corroborative evidence in this regard. As per the 'amended GSA', the Informant has no right to exit before the expiry of the term which is highly exploitative and in contravention of the provisions of section 4(2)(a)(i) of the Act. 4.8 After having examined the average time period of the gas supply agreements of the Opposite Party with other industrial customers, the DG noted that the Opposite Party generally signs gas supply agreements for five years, which can be extended through mutual agreement among parties. As per the DG report, long term contracts are common feature of the natural gas supply market. However, in the present case, the extended long term contract has been tied -up with no termination rights to the buyer which has the effect of locking in a buyer to the Opposite Party that leads to foreclosure of the market for other suppliers operating in the same geographic market. Thus, DG deduced that extension of the term of the contract without giving any termination right to the buyer is unfair in terms of section 4(2)(a)(i) of the Act. 4.9 The DG reported that SGL had not requested the Opposite Party to include the clause of right of first refusal in the amended GSA dated 27.01.2011. As per the DG report, imposition of MGO liability without any right to SGL to revise MGO contracted quantity was an abusive conduct on the part of the Opposite Party. Therefore, consequent amendment in the agreement to take over right of first refusal by the Opposite Party is an abuse of conduct as well. By introducing the right of first refusal clause in the GSA, the Opposite Party foreclosed the market to other potential suppliers and thereby reduced competition in the market for supply of natural gas which is in contravention section 4(2)(c) of the Act. 4.10 The DG noted that clause 14 of the original GSA allowed both parties to appoint one arbitrator each to resolve any dispute which arose under the agreement whereas under the amended GSA, the Informant did not have the right to appoint an arbitrator. Under the amended GSA, the Opposite Party has the exclusive right to appoint a sole arbitrator to resolve disputes under the said agreement. As per the DG report, the same is unfair in terms of the provisions of section 4(2)(a)(i) of the Act. 4.11 Regarding the provision of compensation to buyer in case of seller's failure to deliver the daily contracted quantity, it is noted that there was no such provision in the GSA. However, from the agreements executed between the Opposite Party and its top three non -APM gas suppliers, the DG found that such agreements had the option of compensation to buyer in case of shortfall in supply of gas from the seller. Thus, as per the DG report, the fact that the Opposite Party does not provide any compensation to its industrial customers for shortfall in supply of gas, in spite of the Opposite Party itself having been given compensation rights from its upstream suppliers under similar circumstances amounts to imposition of unfair condition in contravention of section 4(2)(a)(i) of the Act. 4.12 The DG observed that the Opposite Party had introduced MGO caution deposit facility to industrial customers from 01.09.2011. Under this facility, the Opposite Party collects MGO caution deposits from its large industrial customers and at the end of each calendar quarter, it issues a credit note to the industrial customers for an amount not exceeding the MGO caution deposit collected after adjusting for its take or pay (MGO) liabilities. This facility gives some flexibility to industrial customers to manage MGO liability. However, this facility has not been provided to SGL which shows discriminatory conduct on the part of the Opposite Party. 4.13 The DG analysed the data related to the cost of gas procured by the Opposite Party from its suppliers and correlated it with the price being charged from the industrial customers. On examination of data, the DG observed that Opposite Party was charging differential pricing and it failed to substantiate the reasons for charging differential pricing. As per the DG, the act of the Opposite Party in charging differential pricing amounts to contravention of section 4(2)(a)(ii) of the Act.;