CCI introduces Leniency “Plus” regime in India- Will it suffice?
CCI finds no abuse of dominance by GAIL in enforcing one-sided clauses in long-term supply contracts for natural Gas market , disagrees third time with DG findings
The Competition Commission of India (CCI/Commission) vide its order dated 08.11.2018 exonerated GAIL (India) Ltd (Opposite Party/OP) from allegations of imposing seven unfair and one sided conditions in the Gas Supply Agreements signed with seven companies by abusing its dominant position as the sole supplier of Re-gasified Liquified Natural Gas (RLNG). This is the third recent order in which the Commission has disagreed with the findings of the Director General (DG) to the contrary and closed the case .
Brief facts
Seven separate informations were filed by Rico Auto Industries Limited (Rico Auto)[1], Omax Autos Limited (Omax Autos)[2], Rico Castings Limited (Rico Castings)[3], M/s Mohan Meakin (Mohan Meakin)[4], M/s Rathi Steel (Dakshin) Limited (Rathi Steel)[5], M/s K L Rathi Steel Ltd. (KLRSL)[6] and Rathi Bars Ltd. (RBL)[7] (collectively known as Informants) under Section 19(1) (a) of the Competition Act, 2002 (the Act) against the Opposite Party alleging contravention of the provisions of Section 4 of the Act.
The Commission vide its separate orders clubbed the individual cases after considering similarity of allegations in the information. The Informants had separately signed a Gas Sale Agreement (GSA) with OP to procure RLNG for their industrial units of manufacturing TMT Bars. The allegations in the informations can be categorized into two heads i.e. imposing unfair terms and conditions by OP under GSA entered by it with the informants and unfair conduct of the OP. The main allegations of the informants are listed as follows:
- OP has not acted strictly in accordance with the clauses of GSA and thereby prevented the buyer to discharge its reciprocal obligations and yet liability has been cast on the Informants.
- OP had demanded maintenance of Letter of Credit (LC) in a manner not envisaged under GSA i.e. the OP invoked LC for an amount beyond the value prescribed under GSA.
- The specific issue with regard to Case No. 17 & 18/2016 is that as per Article 19 of the GSA, the OP could suspend the supply of gas on the ground that the buyer does not maintain LC. But such suspension can be initiated by giving 7 days prior written notice. But OP has suspended the supply of gas without any prior notice.
- If any grievance arises out of the GSA, the recourse available is laid down in Article 15.1 of GSA i.e. through amicable settlement. Accordingly, the Informants wrote letters to OP seeking amicable settlement of the dispute but the OP did not respond to the letters. Later, on the continuous efforts of Informant, the OP invited the Informant to discuss the issue in the meeting on 23.04.2014, but the meeting could not take place as none of the officials of OP turned up.
- The OP vide its letter dated 01.05.2015 informed the Informant that supplies were suspended to the Informant due to non-submission of the renewed LC.
On consideration of the allegations made in the informations and after hearing the parties during the preliminary conference, the Commission vide its order dated 03.10.2016 passed u/s 26(1) of the Act directed DG to cause investigation into the matter. However, OP moved a review/recall application on 17.11.2016 which the Commission dismissed on 16.01.2017 stating though new facts are brought into light through the review/recall application but still the Commission did not negate its prima facie view regarding alleged violation of Section 4 of the Act.
Further while directing the DG to file a consolidated Investigation Report vide its order dated 17.07.2018 for the Case Nos. 16-20/2016, Case No. 02/2017 and Case No. 45/207, the Commission noted that the conduct of OP in implementing the “Take or Pay” liability (ToP liability) as per the GSA agreement from the year 2015 appears to be to ensure de facto exclusivity of the contractual arrangement.
DG’s Investigation Report
The DG filed a common investigation report on 04.07.2018. Let us discuss the DG’s finding:
Relevant Market
The DG classified the relevant product market into two categories i.e. (a) natural gas used for domestic consumption and (b) natural gas used for industrial use. While delineating the relevant product market the DG took into account the following aspects:
- The DG undertook the conventional test of Small but Significant Non-transitory Increase in Prices (SSNIP test) while determining the relevant market and noted that all the consumers in Rewari and Gurgaon regions submitted before the DG that they would not shift their consumption from natural gas to any other fuel in case of an increase in price of natural gas by 5-10 %. But in the district of Alwar in relation to Case NO 02/2017, the consumers indicated that they would shift to alternatives if price of natural gas increases by 10 %.
- Further the DG also took into account the limitation imposed by the Hon’ble Supreme Court on the use of furnace oil and pet coke in National Capital Region (NCR) as a relevant factor in determining the relevant product market as “supply and distribution of natural gas to industrial consumers”.
Finally after taking into consideration the other factors like distribution facility, transport cost, consumer preference and etc. the DG concluded the following markets to be the relevant market for the purpose of the case:
- Case No. 16, 17 & 20/2016: market for “supply and distribution of natural gas to industrial consumers in the district of Gurgaon”;
- Case No. 18 & 19/2016: market for “supply and distribution of natural gas to industrial consumers in the district of Rewari”;
- Case No. 45/2016: market for “supply and distribution of natural gas to industrial consumers in the district of Ghaziabad”; and
- Case No. 02/2017: market for “supply and distribution of natural gas to industrial consumers in the district of Alwar”.
Dominant Position
While delineating the dominant position of the OP the DG took into account the factors laid down u/s 19(4) of the Act and made the following findings:
- Market share:
- The market share of the OP in relevant markets i.e. Rewari, Alwar, Ghaziabad and Gurgaon was significant, in fact, no other supplier were present in the stated locations.
- OP had 72% of the market share in gas transportation in the country and 70% market share in overall natural gas transmission pipeline network in India (i.e. (overall 15,800 kilometers as of 2016, out of which 11000 kilometers was of OP)
- OP has the largest pipeline network, having presence in 22 states. It has access to both industrial and domestic consumers.
- Average Gas Price during 2014-2016:
After analyzing the average gas price of the each relevant year the DG found that the OP was selling RLNG through Long term GSA, Mid- term GSA and through spot market. The data revealed that price of spot market industrial customers were higher compared to price of RLNG from Long term GSA industrial customers during the period prior to December, 2014 to April, 2016. But OP charged less price of RLNG from Long term GSA industrial customers as compared to SPOT market industrial customers during the period 2009-2016 except for the period of December, 2014 to April, 2016, when SPOT market prices were lower.
Abuse of dominant position: The DG concluded abuse of dominant position on the following grounds:
- OP forced Informants to maintain LC to cover the amount of Minimum Guarantee Offtake (MGO) and ToP liability. The DG found that the concept of MGO and ToP liability were synonymous but the standard LC terms of the Informants only mentioned ‘MGO’. The DG concluded that OP being in the dominant position should have taken higher responsibility by restricting the application of LC terms only to the terms emanating from GSA. Therefore such a lapse amounts to contravention of Section 4(2)(a)(i) of the Act.
- The Informant alleged that the LC could be drawn to an amount equal to 16 days of supply of gas but the LCs were valued for a period of 3 fortnights. The DG concluded that OP invoked the LCs beyond the contractual terms of GSA which amounts to a one -sided unilateral conduct and in violation of Section 4(2)(a)(i) of the Act.
- As per GSA the payment should be made within 4 banking days from the receipt of invoice but the invoices issued by the Opposite Party reduced the time period to three days. The DG concluded that such conduct is in violation of Section 4(2)(a)(i) of the Act.
- The OP had unilaterally done away with the period of 7 banking days for the payment as stipulated under Article 19 of the Act. The OP modified the contents of GSA and overruled the conditions agreed upon between the two sides by the stipulating in invoice that gas supplies would be disconnected, if payment was not made within 3 days. DG found such an act is in violation of Section 4(2)(a)(i) of the Act.
- DG noted that the word disconnected is nowhere mentioned in the GSA and OP by stating that the gas supplies will be disconnected without any further notice if the amount of invoice was not paid within 3 days of its receipt has imposed arbitrarily and unilaterally terms on Informants which is a clear violation of Section 4(2)(a)(i) of the Act.
Commission’s Analysis:
After considering the objections filed by GAIL to the above findings in the DG investigation report, CCI framed and decided a number of contentious issues , as discussed under :
- Whether Long Term Re-gasified Natural Gas (LTRNG) contracts entered into by the Opposite Party are anti-competitive and forecloses competition.
The Commission while analyzing the nature of the LTRNG contracts had stated that Long-term ‘Take or pay’ liability are common in energy sector including the natural gas markets, therefore, LTRNG contracts are not inherently anti-competitive or entails foreclosure of competition. Even though the Informants had the choice to enter into a short-term contract of 3 years, 5 years and other periods less than 20 years but still the Informants willingly chose to a LTRNG contract foreseeing the commercial advantage like assured and steady supply, taking care of price volatility etc. attached to the contract.
Further, the contract entered by the OP is very old but it presently faces enough competition. The Commission relied on the case of Tata Power Distribution Ltd Vs NTPC Ltd[8] in order to understand the nature of the long term contracts, wherein the Commission held:
“ In view of the foregoing, the Commission is of the opinion that even if it is assumed that the OP was in a dominant position in the relevant market as identified by the Informant, a prima facie case of abuse of dominance in terms of the provisions of Section 4(2)(a)(i) of the Act is not made out in the instant matter because, firstly the Informant has entered into the PPAs with the OP being fully aware of the terms of the PPAs including the long term obligation stipulated thereunder, secondly there is a rational basis for binding the Informant and other procurers in the long term PPAs as the generating companies invest in establishing the generating stations based on allocation and the PPAs entered into with the parties (which are to be served through period agreed upon) and lastly, the Informant and other procurers have the option to approach the central government for reallocation of power allocated to them”
The Commission held that the long term gas contract i.e. GSA entered by OP with the Informants is not in nature of foreclosing competition.
- Whether the manner in which operation of the ‘Take or Pay’ liability clause under the GSA has been imposed, is an abuse of dominant position by the Opposite Party and violative of provisions of Section 4(2)(a)(i) of the Act?
The Informants did not challenge the ToP liability clause but they contended that the calculation of liability by OP is violative of GSA. Let us understand the context of ToP liability, so the ToP liability kicks in when the buyer is not able to take the contracted quantity of gas for the year and there is less off take of gas at its end, but is required to pay for such gas not taken, which it can demand from the seller at a later point in time, during the contract period.
The Commission while dealing with the instant issue stated that none of the parties adhered to the nominations that were required to be made and still OP continued the supply of gas, at that time the Informants did not point a finger towards the OP. Later there were under-drawals from the Informants and ,therefore, the contracted amount of gas was not being taken in terms of GSA. The OP never complained and sold such gas in spot market and recouped its losses or even would have earned profits. But when the spot market prices fell below the contracted price under GSA, during the period December 2014 till early 2016, and when the OP was unable to sell under-drawn gas, commensurate to or over the contracted price, in the spot market, that it demanded the differential from the Informants.
Therefore, the conduct where the OP tried to mitigate its losses, purely on account of under-drawal by Informants cannot be said to be in the nature of raising any real competition concern and this does not fell foul of Section 4(1)(a)(i) of the Act.
The Commission further observed that the Informants did not raise the red flag till the time OP were operating in their favor, but as soon as the OP imposed ToP liablity on Informants, the Informants woke up and raised the issue. The Commission relied on the case of Paharpur Cooling Towers Lts V GAIL (India) Ltd[9] which was based on the similar facts and the Commission in that case held that :
“It appears that the Informant is aware of the gas consumed by it during the impugned period from which one could reasonably ascertain the deficiency and ‘Take or Pay’ liability and also verify the claims raised by the OP in this regard. Further in terms of the GSA, the Informant can also exercise the makeup gas facility for the shortfall in the off-take. Under these circumstances, the invocation of ‘Take or Pay’ liability by OP does not appear to be abusive. Rather the conduct of OP appears to be rational and not arbitrary in view of the fact that the amount demanded by OP was substantially lower than the actual liability. Safeguarding commercial interest or invoking contractual cases which are not unfair per se cannot be termed as unfair just because they are invoked by one of the parties to the contract”.
The Commission held that there is no evidence to support that OP has limited or restricted production of goods/markets by abusing its dominant position.
- Whether the Opposite Party had forced the Informants to make payments against incomprehensible invoices, drawn up arbitrarily by the Opposite Party without indicating the requisite necessary details stipulated in the GSA.
The Commission differed from the DG’s finding in holding OP liable for contravention of Section 4(2)(a)(i) of the Act by using MGO and ToP liability synonymously. The Commission observed that OPs have erred by mentioning the term “MGO” in the LC and such a mistake cannot be construed as an abuse, which caused any serious prejudice to the Informants. Therefore, no contravention of provisions of Section 4(2)(i)(a) of the Act, is found against the Opposite Party.
- Whether the Opposite Party invoked LC beyond the limits prescribed under the GSA.
The Commission differed from DG’s finding in holding OP for contravention of Section 4 for invoking the LCs beyond the contractual terms of GSA as it amounted to a one sided unilateral conduct. The Commission noted that though such invocation of LC is against the terms of the GSA but Informants could not establish that why such multiple invocations has caused loss to the, and therefore the allegation against OP of contravening Section 4 is not made out.
- Whether the Opposite Party has arbitrarily advanced the ‘Buyers Due Date’ to the detriment of the buyers in violation of the GSA?
The Commission differed from the DG findings in holding OP in contravention of Section 4 because as per GSA the payment should be made within 4 banking days from the receipt of invoice but the invoices issued by the Opposite Party reduced the time period to three days. The DG concluded that such conduct is in violation of Section 4(2)(a)(i) of the Act.
The Commission stated that that OP had not acted in contravention of the terms of the GSA in terms of the timelines to be allowed to Informants in making payments, post raising such invoice.
- Whether the Opposite Party has arbitrarily and unilaterally done away with the period of 7 banking days after buyer’s due date, before notice of suspension could be issued?
AND
Whether the Opposite Party has arbitrarily and unilaterally substituted the term “disconnection” in place of “suspension of connection”?
The Commission differing from the DG’s findings has stated that there is no evidence to support the justify the Informants allegation and DG’s findings and therefore, OP was not held for violating the GSA terms.
Therefore, the Commission exonerated GAIL on the allegations of abuse of dominant position. Since, the OP is not found guilty under Section 4 of the Act, so allegations with regard to holding OP’s office bearers liable under Section 48 of the Act was also struck down by the Commission.
Comment : This case the third recent case decided by CCI by passing an “order” without mentioning the section under which the order is passed . This case is also included under the category of “Grey area “ cases since , under the scheme of the Act, no appeal lies against such order . CCI , though disagreed with the findings of abuse of dominance by GAIL in the long term supply contracts for RNLG , on merits, has recommended unbundling of gas transmission and gas distribution segments of the gas supply market to avoid monopolistic behavior by lone suppliers . CCI has absolved GAIL from allegations of ,apparently, one sided and unfair conditions in the GSA , considering the unique market structure of such long terms gas supply contracts for supply of imported RNLG ,finding ,of instance, objective justifications , for lop sided condition such as ToP liability or MGO etc.
This case is important because the Commission while deciding the issues had comprehensively taken into account the economic factors and the foreign jurisprudence on the issue of long term gas supply contracts . The Commission while justifying the long-term contracts has emphasized that long-term contracts and spot transaction would coexist and the optimal mix of the two would be determined by a number of factors i.e. such as the stage of evolution of gas markets, maturity of secondary markets, number of suppliers, upstream market arrangement, local production vis-à-vis imports etc. Due to the absence of a matured secondary market for spot prices, the one-sided conditions in such long term gas supply contracts can not be held as abusive per se.
[1] Case No. 16 of 2016 & Case No. 19 of 2016
[2] Case No. 17 of 2016 & Case No. 18 of 2016,
[3] Case No. 20 of 2016
[4] Case No. 45/2016
[5] Case No. 02/2017
[6] Case No. 62 of 2017
[7] Case No. 63 of 2017
[8] Case 20 of 2017
[9] Case No.99 of 2015
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