Case: Oil &amp; Natural Gas Commission &amp; Another Vs. Association of Natural Gas Consuming Industries of Gujarat &amp; Others

( 2 ) THE ONGC was initially a Department of the Government of India but, in view of its expanding activities in the search for strategic and vital materials like oil, petroleum and its products it was set up as a body corporate. It is now a statutory corporation constituted by and under the Oil and Natural Gas Commission Act, (Central Act 43 of 1959, hereinafter referred to as the Act ). The Act provides for the establishment of a Commission "for the development of petroleum and petroleum products produced by it and for matters connected therewith". Section 2 (f) of the Act defines petroleum as having the same meaning as inthe Petroleum Act, 1934 (Act 30 of 1934) and as including natural gas. The Commission established under the Act took over the previously existing organisation with effect from 18-9-59( 3 ) SOME of the provisions of the Act which are relevant for our present purposes may be set out here. Chapter III which deals with the powers and functions of the Commission consists of Sections 14 and 15. S. 14 reads thus:"14. Functions of the Commission (1) Subject to the provisions of this Act, the functions of the Commission shall generally be to plan, promote, organise and implement programmes for the development of petroleum resources and the production and sale of petroleum and petroleum products produced by it and to perform such functions as the Central Government may, from time to time, assign to the Commission(2) In particular and without prejudice to the generality of the foregoing provision, the Commission may take such steps as it thinks fit-(a) for the carrying out of geological and geophysical surveys for exploration of petroleum;(e) for the transport and disposal of natural gas and refinery gases produced by the CommissionProvided that no industry, which will use any of these gases as a raw material, shall be set up by the Commission without the previous approval of the Central Government(h) to perform any other function which is supplemental, incidental or consequential to any of the functions aforesaid or which may be prescribed. "Section 15 empowers the Commission to exercise all such, powers as may be necessary or expedient for the purpose of carrying out its functions under the Act. Such powers include the disposal of any property, right or privilege, the original or book value of which exceeds such amount as may be prescribed, or where no such amount has been prescribed, exceeds ten lakhs of rupees and this power could be exercised after obtaining the previous approval of the Central Government (Clause (c) ). Chapter IV of the Act deals with finance, accounts, audit and reports. Sections 16 and 17 deal with the capital of the Commission and the vesting, in the Commission, of the previous set up in this regard. Section 23 of the Act requires the Commission to furnish to the Central Government such returns and statements and such particulars in regard to any proposed or existing programme for the development of petroleum resources and the production and sale of petroleum and petroleum products produced by the Commission as the Central Government may, from time to time, require. Section 24 in Chapter V (Miscellaneous) enacts that any land required by the Commission for carrying out its function under the Act shall be deemed to be needed for a public purpose and such land can be acquired by the Commission under the provisions ofthe Land Acquisition Act, 1894. S. 31 confers rule making powers on the Central Government, in pursuance of which have been framed the Oil and Natural Gas Commission Rules, 1960. The only rule relevant for our present purposes is Rule 25, dealing with contracts. It reads as follows:(1) The Commission may enter into contracts for the purpose of performing its functions under this Act;Provided that provision therefor exists in the budget approved by the Government(2) Contracts made on behalf of the Commission shall not be binding on it unless they are executed by a person duly authorised by it(3) A person authorised by the Commission to enter into any contract on its behalf shall not be personally liable for any assurance or contract made on its behalf and any liability arising out of such assurance or contract shall be discharged from the Fund. "The statute, it may be observed, neither imposes a specific duty on the O. N. G. C. to supply its products to consumers at large nor contains any provisions regarding the fixation of prices for the commodities made available by the O. N. G. C. for sale( 4 ) IN the course of its drilling and exploration of oil, the ONGC discovered oilbearing fields in Cambay and Ankleswar region in 1959 and 1961 respectively. In most of the Oil fields situated in Gujarat, gas comes out along with crude oil and is commonly known as "associated gas". In Cambay area, gas is unaccompanied by crude oil and is known as "free gas". This is easily combustible and can be used as domestic as well as industrial fuel. We are concerned here with both these commodities which are generally known as "natural gas" and we shall refer to them compendiously as gas( 5 ) IN October, 1961, ONGC first thought of the idea of using natural gas in addition to fuel oil in industries. It had detailed discussions with the Gujarat State Electricity Board (GSEB) and it was agreed between them that gas should be supplied to the GSEB at a price related to fuel oil price on the basis of thermal value equivalence. On this basis, an agreement was entered into between them in March, 1963 whereunder the price of fuel oil was fixed at Rs. 77. 26 per tonne including rail freight; and, based on this price and thermal value equivalence, the price of Cambay gas was fixed at Rs. 80. 14 per 1000 cubic metres (hereinafter referred to as the Unit) and of Ankleshwar gas at Rs. 106. 66 per unit, rounded off to Rs. 80 and Rs. 100/- per unit respectively. The ONGC began to supply gas from Cambay region to Dhruvan Power Station in 1964 and from Ankleshwar to Uttaran Power Station in 1965. The ONGC also entered into discussions with the Gujarat State Fertiliser Corporation (GSFC) and ultimately it was agreed, on the footing of the price of Rs. 76 per tonne in respect of Koyali Naphtha, that associated gas should be supplied to the GSFC at between Rs. 88 and Rs. 90 per unit on the principle of thermal equivalence. This was in 1966. It may be mentioned here that the three parties concerned viz. the ONGC, GSEB and GSFC, had more or less. agreed to the principle of determining the price of gas on the basis of thermal equivalence with an alternative fuel or feedstock emanating from the processing of crude oil. There was no reference to the cost of production of gas as such( 6 ) DESPITE the above agreements, however, the concerned parties were not all very happy. The GSFC resented the fact that discount was not given to them as bulk purchasers and that the prices charged for the Trombay fertiliser factory and power house at Bombay were substantially lower than the prices that the ONGC charged them. Eventually, public discontent was expressed over the alleged high price that was being charged for gas by the ONGC to these organisations. It was felt that the ONGC was denying to them the advantage they should have obtained by the discovery of gas in the region of their operation. It was also felt that this treatment resulted in discrimination against them in comparison with advantages enjoyed by other States due to the availability of fuel resources such as coal or hydro-power within their areas. In view of these expressions of public feeling, the question of fixing a proper price for the gas was taken up by the Government of Gujarat with the Government of India. Eventually, as no agreement could be arrived at, the dispute was referred to the sole arbitration of Dr. V. K. R. V. Rao who gave his award (hereinafter referred to as the award) on 23-9-1967. He determined the price of natural gas at Rs. 50. 00 per unit ex-well-head, to which were added royalty, sales tax, depreciation and the transport charges. This award was to be enforced for a period of five years i. e. up to 31-3-1971. Between April 1971 and December 1975, the well-head price was increased and fixed at Rs. 66/ - per unit, we are all told, on the intervention of the then Gujarat Governor. These prices were revised subsequently. The supply to GSEB was revised to Rs. 155 and the rate of supply to GSFC was revised to Rs. 320 per unit( 7 ) AT that time, there were very few industries set up in and around Vadodara and these depended, besides electricity, on other forms of energy generated through coal or furnace oil. In July 1967, the supply of gas to some of these industries in and around Vadodara city was started, initially as a temporary measure pending the effective materialisation of the Gujarat Fertiliser Corporation demand, after which the industries were to go over to fuel oil if gas could no longer be supplied. After a series of discussions, the Federation of Gujarat Mills and Industries agreed to a price of Rs. 100 per unit of Ankleswar gas for this supply. The charging of ten rupees less per unit supplied to the Fertiliser Corporation was justified on the ground that such differentiation was consistent with general practice where a petroleum feed stock is used for chemical industry. Among the industries that thus received gas supply were the ten respondents (respondents 2 to 10 in these appeals) who have formed themselves, in September,1978, into an association called "the Association of Natural Gas Consuming Industries of Gujarat", which is respondent No. 1. The supply to these industries - extended later to a few more - was based on individual contracts entered into with each one of the concerns. Initially, the ONGC entered into contracts valid for a period of five years at a time but subsequently - it is said, due to a fear of possible shortage in the availability of enough gas - this was changed and the contracts were, generally, made annual, except in regard to certain public sector undertakings and, it is said, a few companies. The rates of supply were also slowly stepped up as can be seen from the following table:Period Price of supplyJanuary 1,1976 to March 31,1976 Rs. 322. 63April 1,1976 to December 31,1976 Rs. 341. 45January 1,1977 to March 31,1977 Rs. 351. 00April 1,1977 to December 31,1977 Rs. 371. 16January 1,1978 to March 31,1978 Rs. 382. 15April 1,1978 to March 31,1979 Rs. 504. 00( 8 ) ACCORDING to the ONGC, the price demanded from these industries had initially been based on alternative fuel cost i. e. , the cost which these industries would have had to pay for fuel oil if no supply of gas had been available. Later, up to December 1975, the price was based on the cost of production, as determined by the award. After the expiry of the period of operation of the award, the basis for calculation of price was revised on the basis of the thermal equivalence of coal price. The rates of supply from 1-4-78 as fixed above from time to time were also made subject to an automatic annual escalation at 5%. The contracts, as already mentioned, were annual and contained no term for renewal. On the expiry of each contract, a fresh contract had to be entered into and, naturally, the new contract stipulated prices for supply that were prevalent at the time of the respective contracts. It may be mentioned that the existing contracts with the various consumers had lapsed by efflux of time on 31-3-79 in some cases, 30-1-80 in some other cases and in 1982 in respect of others( 9 ) AGGRIEVED by the steady rise in the prices, Writ Petition No. 883 of 1979 was filed by the respondents in the Bombay High Court in March 1979. In this writ petition it was prayed that the ONGC should be directed (a) to continue to supply the gas to them despite the contracts in their favour having lapsed; (b) to supply the break-up and the data on the basis of which the price structure was arrived at and to fix the price after giving reasonable opportunity to the concerned industries or their associations; (c) to discuss and negotiate a fair, reasonable and just price for supply of gas; (d) to restrict the minimum guaranteed quantity of off take to 75 per cent of the contracted quantity (this was because the ONGC had been insisting on raising the said guarantee to 90 per cent); and (e) to stop charging discriminatory prices for the supply to the respondents in comparison with the price charged to public sector undertakings. Pending the hearing and final disposal of the petition, an interim order was sought restraining the ONGC from discontinuing the supply of gas to the petitioners on such terms as the Court may-think fit and proper( 10 ) ON 30-3-1979, the Court passed an interim order permitting the petitioners to continue to pay "on the same terms as at present" i. e. at Rs. 504. 00 in some cases and a slightly different figure in other cases. Subsequently, however, with the passage of time the price of gas was stepped up by the ONGC in the following manner:Period AmountApril 1, 1981 to December 31, 1981 Rs. 741. 00January 1, 1982 to December 31, 1982 Rs. 2095. 70January 1, 1983 Rs. 2403. 03February 15, 1983 Rs. 2503. 03March 17, 1985 Rs. 2878. 00We are told that the sudden jump in prices w. e. f. 1-1-1982 was consequent on the decision of the O. N. G. C. to change the basis of fixation of price, once again, to furnace oil equivalence. In view of this increase-in the prices demanded by it from other parties, who according to the ONGC were willing to pay the price asked for, an application was made to vacate or modify the interim order dated 30-3-1979. On 5-11-1982, the Division Bench of the High Court, after pointing out the various difficulties and questions raised by the case thought it would be fit and proper to direct the ONGC not to discontinue the supply of gas but to continue to supply it at the rate of Rs. 1,000/- per unit till 30/11/1983 (unless the petition was disposed of in the meanwhile), subject to adjustment being made in case this Court or the machinery evolved at the time of final disposal of the petition determined the price of gas at a different rate. In other words, if, ultimately, the price of gas should be determined at a higher rate, the writ petitioners would be obliged to make good the difference. In case a lower rate should be determined, the O. N. G. C. would be obliged to refund the excess amount collected or adjust it against future supplies, as the Court may direct at the time of disposing of the matter finally. A similar order was passed on 29-12-1982 in another batch of cases. When these appeals were filed a Bench of this Court, on 6-10-1983, continued the interim price of Rs. 1000 / - per unit without prejudice to the rights and contentions of the parties and directed the appeals to be expedited.

Court's reasoning:
( 22 ) WE do not think that ONGC satisfies the primary conditions enunciated above for being a public utility undertaking as it has not so far held itself out or undertaken-or been obliged by any law to provide gas supply to the public in general or to any particular cross-section of the public. The proviso to Sec. 14 (l) (e) of the Act which lays down that the setting up of industries to be run with the aid of gas was not to be undertaken by the ONGC without the Central Governments approval also gives an indication that the supply of gas to various industries on a general basis was not in the immediate contemplation of the Act but was envisaged as a future expansion to be initiated with Central Governments approval. Perhaps a stage in the developmental activities of the ONGC will soon come when such an obligation can be inferred but, at present, the ONGC supplies gas only to certain selected contractees. It does not supply gas to the public either in the sense that any individual member of the public or any identifiable cross-section of the public is entitled to demand and receive such supply due to various limitations we shall now touch upon( 23 ) THE main activity of the ONGC is that of exploration and prospecting for petroleum and petroleum products. So far as gas, which is a bye product, is concerned the ONGC has not so far been able voluntarily or constrained statutorily to harness and utilise its production for consumption by the public. Even as per the information placed on record by the respondents about 3000 million cubic metres of gas were burnt in 1985-86 due to the inability of the ONGC to harness it for industrial or domestic use. Such large scale utilisation will involve capital outlay to a considerable extent particularly for the laying of pipe lines to convey the gas to sites of its user. The quantity of gas which is put to such use at, present is an insignificant part of the gas that is being produced and so far the Government does not appear to have called ,upon the ONGC to draw up or submit to the Government under S. 23 of the Act any programme of sale of natural gas to the public generally or even to some categories of public consumers. There is. no doubt that the expansion of the oil sector in recent years, including the recent construction of the HBJ pipeline, will eventually require the ONGC to set up and devise a rational and equitable scheme of distribution and supply of gas to various types of consumers situate over various parts of India. But, as yet, the ONGC has not embarked on any such scheme. It has been supplying gas to certain consumers on the basis of individual contracts and it is in regard to these consumers alone that the question of price has been raised before us( 24 ) WE do not, however, think that it is at all necessary for us to delve further into the above concept or express any final opinion as to whether the ONGC is a public utility or not because the claim of the respondents is for a continuance of the present system followed by the ONGC of supplying gas to select customers on the basis of contracts- entered into with them. They only want the price to be regulated by the court; they do not challenge, for obvious reasons, the system of distribution thus far adopted by the ONGC. If the argument that the ONGC is a public utility is accepted, then the first consequence to follow will be that gas should be made available by it to all persons who need it for use. It cannot be supplied by the ONGC to only a few public sector undertakings like the GSEB and GSFC or only to a few industries like those of the respondents or only to a few municipalities like the Vadodara Municipality for domestic supply; at its sweet will and pleasure. It would then be opea to all undertakings industries and domestic consumers in Bombay, Gujarat and perhaps elsewhere in the country to demand that steps should be taken for the supply of gas to them also. We are unable to agree with the observation of the High Court that, even if the ONGC is treated as a public utility, the respondents, merely because they had entered into temporary contracts for supply of gas with the ONGC, could still insist on continued supply to themselves on "the first come, first served" basis, to the exclusion of later arrivals on the scene. If, as suggested by the respondents, the ONGC is to be treated as a public utility and the price of gas is bound to be on cost plus basis, it may be that quite a few other industries would like to avail themselves of such supply. They have perhaps kept out so far only because the supply price based on alternative fuel price is not acceptable to them. They are keeping out only because they are under the impression that the ONGC is entitled to supply gas to persons with whom it has entered into commercial contracts and on the terms of supply envisaged in those contracts. The treatment of the ONGC as a public utility undertaking for the supply of gas will raise innumerable basic questions totally inconsistent with the present system of selective supply which the respondents want to be continued. It will transpose the area of controversy to a totally different and wider plane. We cannot say that the ONGC is a public utility undertaking and yet direct that it should supply gas to the respondents and a few other industries with which it has entered into contracts. The court would then be constrained to hold that the present system of supply is inconsistent with public law and the constitutional requirements of a public utility undertaking and direct the ONGC to completely overhaul its system of public distribution on sound lines qua types of consumers to be catered to, areas of supply to be covered, price for supply and all other matters. That is not the relief sought by the respondents. All that they want is a declaration that they are entitled to the supply of gas at a reasonable price. It is sufficient, for disposing of this claim, to deal with this aspect of the matter and the larger aspect of ONGC being a public utility undertaking should be left out of account. We, therefore, do not express any final opinion on the issue except to say, prima facie, that it cannot be placed on par with a public utility undertakingWe do not think that any of these observations is in conflict with what we have said. Pure profit motive, unjustifiable according to us even in the case of a private trading concern, can never be the sole guiding factor in the case of a public enterprise. If profit is made not for profits sake but for the purpose of fulfilling, better and more extensively, the obligation of the services expected of it, it cannot be said that the public enterprise acted beyond its authority. The observations in the first case which were referred to us merely emphasised the fact that the Electricity Board is not an ordinary trading corporation and that as a public, utility undertaking its emphasis should be on service and not profit. In the second case, for example, the Court said that it is not expected to make any profit and proceeded to explain why it is not expected to make a profit by. saying that it is expected to extend the supply of electricity to unserved areas without reference to considerations of loss. It is of interest that in the second case, dealing with the question whether interest cannot be taken into account in working out profits, the Court observed, :the facile assumption by the Tribunal that the interest should not be taken into account in working out the profits is not borne out by the provisions of the statute. ( 37 ) WE are not called upon here, in the view we take, to decide whether the cost plus basis or the thermal equivalence basis is more appropriate. All that we wish to say is that, having regard to the basis on which the claims of the respondents have proceeded thus far, our task is a very limited one. We cannot say, for reasons set out below, that the ONGC has acted arbitrarily in fixing the prices on the thermal equivalence basis; the fact that it has not done it on cost plus basis does not vitiate the price fixation. The only question we have to address ourselves to is as to whether the ONGC has fixed a price based on relevant materials and on some known principle. At the outset, one must notice that the price is not directly and specifically related to or based on any unreasonable margin of profit. There is nothing to indicate that the ONGC was prompted, in fixing its prices, on the one and only consideration of deriving maximum profits for itself. On the other hand, it appears to have been guided by the needs of the situation and the nature of the distribution system that is in operation. As we said earlier, and manufacture, distribution and consumption of gas has yet not attained the status of an essential commodity till recently. It is still at a stage where the goods are being distributed under private contracts. Whether this is any longer justified and whether there should riot be a greater amount of control over the modes of, as. well as price for such, distribution is a larger question with which we are not now concerned. At present, we are in the penumbral region where the commodity is free to be distributed at the manufacturers choice, but yet where such manufacturer being a State instrumentality, has to conform to Articles 14 and 19 of the Constitution.