Oil and
Natural Gas Commission & Anr Vs. Association of Natural Gas Consuming
Industries of Gujarat [1990] INSC 189 (4 May 1990)
Rangnathan,
S. Rangnathan, S. Ojha, N.D. (J) Verma, Jagdish Saran (J)
CITATION:
1990 AIR 1851 1990 SCR (3) 157 1990 SCC Supl. 397 JT 1990 (2) 516 1990 SCALE
(1)900
ACT:
Constitution
of India, 1950: Articles 14, 32 and 226--OGC--A statutory corporation--Whether
State agency--'Public utility' concern --Obliged to supply gas at reasonable
rates--Price fixation--Interference by Court--Permissibility of.
Oil
and Natural Gas Commission Act, 1959: Section 14-- ONGC--Whether 'public
utility' undertaking--Whether obliged to supply gas for consumption of public.
Words
and Phrases: 'Public utility'--'Reasonableness of rates' meaning of.
HEAD NOTE:
The
appellant, Oil & Natural Gas Commission. is a statu- tory corporation
constituted by and under the Oil and Natu- ral Gas Commission Act, 1959. In
most of its oil fields situated in Gujarat, gas comes out along with crude oil as "free gas".
The
appellant had agreed to supply this gas to the Gujarat State Electricity Board
(GSEB) and the Gujarat State Fertiliser Corporation (GSFC) at a price related
to fuel oil price on the basis of thermal value equivalence, without any
reference to the cost of production of gas as such. Public discontent over the
alleged high price charged was expressed and eventually the dispute was
referred to the sole arbitra- tion of Dr. V.K.R.V. Rao who gave his award. Dr. Rao
made the "cost plus" method the basis of his award in preference to
the basis of thermal equivalence of alternate fuel (thermal equivalence basis).
In
July 1967, the supply of gas to some of the indus- tries in and around Vadodara
city was started, on the basis of individual annual contracts. Aggrieved by the
steady rise in the prices, the respondents Association of Natural Gas Consuming
Industries and Others--moved the Bombay High Court in March 1979 by way of a
writ petition- In the petition it was, inter alia, prayed that the ONGC be
directed
(i) to
158 continue to supply the gas to the respondents despite the contracts in
their favour having lapsed;
(ii) to
discuss and negotiate a fair, reasonable and just price for supply of gas;
(iii) to
stop charging discriminatory prices for the supply of gas to the respondents in
comparison with the price charged to public sector undertakings; and
(iv) to
restrict the minimum guaranteed quantity of offtake.
The
High Court passed an interim order directing the ONGC to continue the supply of
gas to the respondents, at the existing rate of Rs.504 per unit which was later
raised by the Court to Rs.1000 per unit.
The
High Court held;
(i)
The Oil and Natural Gas Commission is a public Utility Undertaking and has a
duty to supply gas to anyone who requires it so long as there is enough supply
available;
(ii)
Price fixation is generally a legislative function. But the Oil and Natural Gas
Commission being a State instrumentality, is bound to act reasonably in the
matter of fixation of price; such price is bound to be determined by following
any one of the modalities suggested in the judgment of the High Court;
(iii)
There was no dis- crimination by the Oil and Natural Gas Commission between the
public sector undertakings on the one hand and the respondents' undertakings on
the other in charging differen- tial prices; and
(iv)
The clause regarding minimum guaran- teed offtake was valid and enforceable.
Before
this Court. the appellant primarily challenged the finding of the High Court
that the ONGC was a 'public utility undertaking' which was bound to supply gas
at the request of any member of the public at large. The appellant also
contested the correctness of the High Court's conclu- sion that the price of
gas must be determined on the basis of cost of production plus a reasonable
return for the investment made. The appellant submitted that
(i) the
prices under the contracts entered into with the respondents had been
determined on the basis of a wellknown principle. viz. the ruling prices for an
alternate fuel and this could not be said to be either arbitrary or
unreasonable particularly when a large number of industries were willing to
take the supply of gas at the prices fixed on that basis;
(ii) while
public sector units and State instrumentalities ought not to be allowed to
exploit the consumers. it was equally neces- sary to ensure that such units and
instrumentalities were enabled to make reasonable profits;
(iii) in
the context of the integrated activity of production of crude oil and gas. it
was almost impossible to work out the cost in respect of any particular area or
of a particular bye-product;
(iv)
the cost plus basis was fixed by the Award several years ago and that too in
the context of supply to certain State 159 undertakings which, in turn, supplied
essential commodities like electricity and fertilizers; and
(v) the
onus of show- ing that the prices charged were unreasonable or arbitrary was on
the respondents and they had done nothing to dis- charge this onus.
On
behalf of the respondents it was contended that a public utility undertaking
could not arbitrarily discontinue its supply or services merely because the
customer was unwilling to pay the price asked for as unconscionable and
unreasonable. It was further contended that the price fixed must be reasonable
and fair so as to give the undertaking a reasonable return on the capital
employed and that there could not be any discrimination against industrial consum-
ers. According to the respondents. this was the only reason- able way of price
fixation and referred to the Award in support of this proposition- The
respondents further urged that to allow Oil and Natural Gas Commission to sell
gas at a higher price than this merely because. otherwise. but for the
availability of gas, the consumers would have to spend more for their sources
of energy. will really amount to introduction an irrelevant element in the
process of price fixation and result in allowing the Oil and Natural Gas
Commission to make unreasonable profits at the expense of unhappy consumers. It
was argued that these principles were applicable with greater force in the
context of the consti- tutional discipline over state instrumentalities under
Article 38 & 39 of the Constitution.
Bolt
v. Stennett CJ E.R.__Revised--p. 1572; Allnutt v. Inglis CIV E.R.--Revised--p. 206;
Ira Y. Munn v. People, 24 L.Ed. 77: United Fuel Gas Co. v. Railroad Commission,
73L. Ed. 390; Los Angeles Gas & Electric Corporation v. Railroad
Commission. 77 L.Ed. 1180; Leo Nabbia v. People. 78 L.Ed. 940; Harold E. West
v. Chesapeake & Potomac Telephone Com., 79 L.Ed. 1640; Federal Power
Commission v. Hope Natural Gas Co., 88 L.Ed. 333; premier Automobiles v. Union,
[1972] 2 S.C.R. 526; Panipat Cooperative Sugar Mills v. Union, [1973] 2 S.C.R.
860; Shree Meenakshi Mills v. Union, [1974] 2 S.C.R. 398; Saraswati Industrial
Syndicate v. Union, [1975] 1 S.C.R. 956; Prag Ice and Oil Mills v. Union,
[1978] 3 S.C.R. 293; Union of India v. Cynamide India Ltd., [1987] 2 S.C.C.
720, relied upon.
Allowing
the appeals and upholding the prices charged by the Oil and Natural Gas
Commission, this Court,
HELD:
(1)
The Oil and Natural Gas Commission does not satisfy the primary conditions for
being a public utility undertaking as it has not so far held itself out or
under- taken or been obliged by any law to 160 provide gas supply to the public
in general or to any par- ticular crosssection of the public. The proviso to
Section 14(1)(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 Oil and Natural
Gas Commission without the Central Government's 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 Government's approval. Perhaps a stage
in the developmental activities of the Oil and Natural Gas Commission will soon
come when such an obligation could be inferred but, at present, the Oil and
Natural Gas Commission supplies gas only to certain selected contractees.
[181E-G]
(2) It
is however not necessary in this case to express any final opinion on the issue
whether the ONGC was a public utility undertaking except to say, prima facie,
that it could not be placed on par with a public utility undertak- ing. All
that the respondents wanted was a declaration that they were entitled to the
supply of gas at a reasonable price. It was sufficient, for disposing of this
claim, to deal with this aspect of the matter and the larger aspect of Oil and
Natural Gas Commission being a public utility under- taking could be left out
of account. [183E-F]
(3)
The treatment of the Oil and Natural Gas Commission 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 contro- versy
to a totally different and wider plane. The Court would then be constrained to
hold that the present system of supply was inconsistent with public law and the
constitu- tional requirements of a public utility undertaking. [183C- D]
(4)
The main activity of the Oil and Natural Gas Commis- sion is that of
exploration and prospecting for petroleum and petroleum products. So far as
gas, which is a bye product, is concerned, the Oil and Natural Gas Commission
has not so far been able to voluntarily or constrained statutorily to harness
and utilise its production for con- sumption by the public. [181H; 182A]
(5)
There is no doubt that Dr. Rao made the cost plus method the basis of his award
in preference to the basis of thermal equivalence of alternate fuel (thermal
equivalence basis). But, the cost plus basis fixed by Dr. Rao in the background
of the real nature of the dispute before him three decades ago could not be
taken as conclusive in the present 161 situation. Dr. Rao was concerned
primarily with an issue raised by the public of Gujarat as against the Oil and Natural Gas Commission. He was
really adjudicating upon the price which the Oil and Natural Gas Commission
should charge to public sector undertakings catering to the essential needs of
the State. In that context, his objective was, understandably, to fix the price
as low as possible. The consumer under consideration by him represented the
public need of the State of Gujarat and,
as against such public interest, the Oil and Natural Gas Commission's profit
re- quirements paled into insignificance. [189C; G; D-E]
(6)
Here, the Court is dealing with a price to be fixed under a contract between
the Oil and Natural Gas Commission and one set of industries in the State who
wish to make a change over from the furnance oil system to that of gas supply
with a view to increase their own profitability and gain an advantage, if
possible, over other industries in the State. In this context, Oil and Natural
Gas Commission is entitled to a larger latitude and charge a price which the
market can bear. The only restriction is that, being a State instrumentality,
it should not be a whimsical or capricious price but should be one based on
relevant considerations and on some recognised basis. [189H; 190A]
(7)
Cost plus is not a satisfactory basis in all situa- tions. May be the cost plus
is an ideal basis where the commodity supplied is the product of a monopoly
vital to human needs. In that context the price fixed should be minimum
possible as the customer or consumer must have the commodity for his survival
and cannot afford more than the minimum. Per Contra, there can be situations
where the need of the consumer is not so vital and the requirements of the
economic scene are such that the needs of the producer should be given greater
consideration. In such situations, the "plus" element in the cost
plus basis (namely, the allowable profit margin) should not be confined to
"a rea- sonable return on the capital" but should be allowed to have
a much larger content depending on the circumstances. Given a favourable area
of operation, commercial profits need not be either anathema or forbidden fruit
even to public sector enterprises- [191D-E; G-H] Anakapallee Case, [1973] 2
S.C.R. 882; Venkatachalam v. Deputy Transport Commissioner, [1977] 2 S.C.R.
392, referred to.
(8) It
would not be right to insist that the Oil and Natural Gas Commission should fix
oil prices only on cost plus basis. Indeed, its policy of pricing should be
based on the several factors peculiar to the industries and its current
situation. and so long as such a policy is not 162 irrational or whimsical, the
court may not interfere. [195D] (9) Price fixation is generally a legislative
function.
But
Parliament generally provides for interference only at a stage where in
pursuance of social and economic objectives or to discharge duties under the
Directive Principles of State Policy, control has to be exercised over the distribu-
tion and consumption of the material resources of the commu- nity. [195F] M/s. Shri
Sitaram Sugar Company Ltd. & Anr. v. Union, J.T. 1990 (1) S.C. 452; Jagadamba
Paper Industries v. Har- yana State Electricity Board, [1984] 1 S.C.R. 165; Kerala
State Electricity Board etc. v. M/s. S.N. Govinda Prabhu & Bros. & Ors.
etc., [1986] 4 S.C.C. 1968, referred to.
(10)
It cannot be said that the Oil and Natural Gas Commission 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 to be considered is as to whether the Oil and Natural Gas Commission
has fixed a price based on relevant materials and on some known principle.
[200C]
(11)
The manufacture, distribution and consumption of gas has yet not attained the
status of an essential commodi- ty till recently. At present, the industry is
in the penum- bral region where the commodity is free to be distributed at the
manufacturer's choice, but yet where such manufacturer being a State
instrumentality, has to conform to Articles 14 and 19 of the Constitution. At
this stage of development of the industry a much wider latitude is permissible
in the fixation of prices than the imposition of a "no profit, no
loss" basis or a "cost plus" basis on the producer. [200E-G]
(12)
It is now well settled that a favourable treatment of public sector organisations,
particularly ones dealing in essential commodities or service, would not be discriminato-
ry. No tangible material has been brought to the Court's notice which would
support the plea of unfair discrimina- tion. [203E-F] (13) The High Court
rightly upheld the Oil and Natural Gas Commission's right to insist on a munimum
off take guar- antee. [202G] Amalgamated Electricity Co. Ltd. v. Jalgaon
Borough Municipality, [1976] 1 S.C.R. 636.
163
CIVIL
APPELLATE JURISDICTION: Civil Appeal Nos. 8530-40 of 1983.
Appeals
by Certificate from the Judgment and Decree dated 30.7.1983 of the Gujarat High
Court in Special Civil Application Nos. 883 of 1979, 913 of 1979, 1897 of 1981,
2316 of 1982, 2384of 1982, 2445 of 1982, 2470 of 1982, 2977 of 1982, 4194 of
1982, 4520 of 1982 and 2542 of 1982.
K. Parasaran,
Attorney General, B. Sen, A.K. Ganguli, Dr. Y.S. Chitley, T.S. Krishnamurthy Iyer,
N. Nettar, G.S. Narayana, p. Parameshwaran, T.V.S.N. Chaff and N.N. Sharma for
the Appellants.
Anil
B. Diwan, K.J. Kazi, Dr. L.M. Singhvi, Ms. M. Arora, Mrs. B. Chib, M. Singhvi,
D.A. Dave, Mrs. M. Karanja- wala, R.N. Karanjawala, Mr. P.H. Parekh, Mr. C.A. Cazi
and Mrs. H.S. Anand for the Respondents- D.N. Misra for the Intervenor.
The
Judgment of the Court was delivered by RANGANATHAN, J. These are eleven appeals
preferred by the Oil and Natural Gas Commission (ONGC, for short) from a
judgment and order, dated 30th July, 1983, of a Division Bench of the High
Court of Gujarat at Ahmedabad in a batch of writ petitions, since reported in 1983-24(2)
Gujarat Law Reporter 1437. The appeals are pursuant to a certificate of fitness
granted by the High Court.
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 de- fines 'petroleum' as
having the same meaning as in the 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.
Some
of the provisions of the Act which are relevant for our 164 present purposes
may be set out here. Chapter III which deals with the powers and functions of
the Commission con- sists 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 func- tions 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 refin- ery gases produced by the
Commission:
Provided
that no industry, which will use any of these gases as a raw material, shall be
set up by the Com- mission without the previous approval of the Central Govern-
ment.
(h) to
perform any other function which is supplemental, incidental or consequential
to any of the functions afore- said 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 in- clude 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 exer- cised after obtaining the previous approval of the Central
Government 165 [Clause (c)I. 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 Com- mission, 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 shah be deemed to be needed for a
public purpose and such land can be acquired by the Commis- sion under the
provisions of the 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:
"25.
Contracts:
(1)
The Commission may enter into contracts for the purpose of performing its
functions under this Act;
Provided
that provision therefore exists in the budget ap- proved by the Government.
(2)
Contracts made on behalf of the Commission shah 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 liabil- ity 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.
In the
course of its drilling and exploration of oil, the ONGC discovered oil-bearing
fields in Cambay and Ankles- war region in 1969 166 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 unaccompa- nied by crude oil
and is known as "free gas". This is easily combustible and can be
used as domestic as well as industri- al 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'.
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 frieght; 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 of Dhruvan Power Station in 1964 and from Ankleshwar
to Uttaran Power Station in 1965. The ONGC also entered into discussions with
the Gujarat State Fertilizer 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.
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 dis- content 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 treat- ment resulted in discrimination against 167 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 disputes was referred to
the sole arbitra- tion 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 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. upto 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 interven- tion 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.
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 furnance oil. In July 1967, the supply of gas to some of these indus-
tries in and around Vadodara city was started, initially as a temporary measure
pending the effective materialisation of the Gujarat Fertilizer 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 Ferti- liser
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 avail-
ability 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:
168
Period Price of supply 1.1.1976 to 31.03.1976 Rs.322.63.
1.4.1976
to 31.12.1976 Rs.341.45 1.1.1977 to 31.03.1977 Rs.351.00 1.4.1977 to 31.12.1977
Rs.371.16 1.1.1978 to 31.03.1978 Rs.382.15 1.4.1978 to 31.03.1979 Rs.504.00
According to the ONGC, the price demanded from these industries and 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, upto
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 calcula- tion of price was revised on the basis of the thermal equiv- alence
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.
Aggrieved
by the steady rise in the prices, writ peti- tion 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 quan- tity of offtake 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 undertak-
ings. Pending the hearing and final disposal of the peti- tion, 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.
169 On
30.3.1979, the Court passed an interim order permit- ting the petitioners to
continue to pay "on the same terms as at present" ie. at Rs.504 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
Amount 1.4.1981 to 31.12.1981 Rs. 741.00 01.1.1982 to 31.12.1982 Rs.2095.70
01.1.1983 Rs.2403.03 15.2.1983 Rs.2503.03 17.3.1985 Rs.2878.00 We are told that
the sudden jump in prices w.e.f. 1.1.1982 was consequent on the decision of the
ONGC 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 November 30, 1983 (unless
the petition was disposed of in the mean- while), 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 ONGC 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. 1,000 per unit
without prejudice to the rights and contentions of the parties and directed the
appeals to be expedited.
It has
taken six years since then for these petitions to come up for heating and till
now the respondents have continued to pay at the rate of Rs. 1,000 per unit. It
has been stated before us that some of the respondents have failed to pay even
at the rate of Rs. 1,000 as directed 170 by this Court and that this Court had
to direct, by its orders dated 15.4.87 and 30.10.87, that the respondents
"will not charge, encumber or alienate, except with the leave of this
Court, any of their immovable assets included in the respective undertakings
and that they will make their immovable assets available for discharging the
respective liabilities on account of the difference in the price of (all) the
gas supplied to them (and) further during the pendency of the appeals as
determined by the orders made by the Court while disposing of the
appeals." In order to complete the narration of relevant facts, it may be
mentioned here that, though natural gas, being a "petroleum product"
falls within the scope of the Essential Commodities Act and though control
orders have been issued under the said Act regulating the supply and
distribution of several petroleum products, it is only by an order dated
30.1.1987 that the price of gas has been fixed by the Gov- ernment at Rs. 1400
per unit which, together with taxes, comes to about Rs. 1848 per unit. It may
also be mentioned that, while on the one hand the said fixation of price has
been challenged by the petitioners and certain other indus- tries before the
Gujarat High Court, the Government, on the other hand, is in the process of
revising the prices, per- haps to a higher figure, in consultation with the
Bureau of Industrial Costs and Prices. In the petitions which are pending
before the Gujarat High Court an interim price of Rs. 1,000 has been fixed
following the orders in the matters now before us. The result is that, ever
since January 1983 and till today, most of the petitioners have been paying for
the gas supplied only at the rate of Rs. 1,000 per unit and some of the
industries have defaulted even in doing this.
A
prayer was made by the Union of India to transfer to this Court the writ
petition subsequently filed challenging the price fixation of 30.1.87 but this
request was declined on 4th August, 1988. This court observed that, after these
appeals are disposed of, the High Court can proceed to dispose of the said writ
petitions in accordance with the judgment. The position, therefore, is that we
are not con- cerned in these appeals with the period beyond 30.1.1987 when the
jurisdiction to fix prices came to be vested in the Central Government. We are
concerned in these matters only with the period from the date of expiry of the
contracts in favour of each of the respondents to 30.1.1987 and with the
following questions: (a) whether the O.N.G.C. is at liberty to fix its own
price for the gas or should be directed to fix the price in any particular
manner; (b) whether the O.N.G.C. can be directed to supply data and the
break-up for the price charged and to negotiate the price with the par- ties
concerned; (c) whether the 171 O.N.G.C. can be compelled to continue to supply
gas to the various petitioners at the interim prices fixed by the court subject
to adjustment on fixation of prices determined in accordance with the
directions of the court; and (d) whether the minimum guarantee of off-take
could be raised by the O.N.G.C. to 90 per cent instead of 75 per cent.
It is
unnecessary at this stage to set out the various contentions raised by the
parties before the High Court as they will have to be discussed in some detail
later. Here it may be sufficient to summarise the effect of the High Court's
judgment in disposing of these writ petitions. The High Court held:
(i)
The O.N.G.C. is a public utility undertaking and has a duty to supply gas to
anyone who requires it so long as there is enough supply available;
(ii)
Price fixation is generally a legislative func- tion. But the O.N.G.C., being a
State instrumentality, is bound to act reasonably in the matter of fixation of
price;
such
price is bound to be determined by following any one of the modalities
suggested in the judgment of the High Court;
(iii)
There was no discrimination by the O.N.G.C. between the public sector
undertakings on the one hand and the respondents' undertakings on the other in
charging differential prices;
(iv)
The clause regarding minimum guarantee was valid and enforceable.
However,
in view of its finding that the ONGC is a public utility undertaking, the Court
took the view that it should supply gas to the respondents subject to the
availability of gas supply and also that such supply should be made at a price
which was to be determined in one of the four differ- ent methods set out in
paragraph 36 of the judgment. It was also observed by the Court that, the
respondents were agree- able to price fixation by anyone of three of the said meth-
ods. The concluding portion of the judgment, reads thus:
"36.
Now we come to the last part of this judgment. It is regarding what relief
should be granted in this group of petitions. We have already said above that
the action of the ONGC in charging the rate in the respective cases is 172
ex-facie unreasonable and to that extent their demand for the said price is
set. aside. The ONGC however, shall be at liberty to get the price for that
period and subsequent period fixed according to the reasonable and rational
norms and for that purpose it is open to the ONGC to follow any one of the
following three courses:
(i)
They may request the Central Government to appoint a Commission for the purpose
of deciding the prices of gas from time to time, including the time for which
we have set aside their demand of price, invoking the provisions of the Commission
of Inquiry Act or any other law;
(ii)
They may invoke the arbitration of some eminent econo- mist in consultation
with the petitioners; or (iii) They may themselves decide the price, after
bringing to their consideration all relevant factors and for that purpose they
may hear fully and effectively the petitioners and other persons likely to be
affected thereby:
If the
last of the above three courses is adopted by the ONGC for deciding the price
structure afresh, it would be in their interest to give hearing to the persons
likely to be affected so that the possibility of a new round of litiga- tion is
avoided. We reiterate that as far as the petitioners are concerned, they are
amenable to any of the three modes which the ONGC may choose to adopt.
"37.
We accordingly set aside the prices demanded by the ONGC from these petitioners
in this group of petitions, leaving it open to the ONGC to deal with the
question of price fixation in any one of the three modes suggested by us. The
petitions are accordingly partly allowed. Rule is accordingly made absolute in
all these petitions with costs.
38.
The civil applications, in view of the final decision, do not survive and stand
disposed of and till the new price fixation is had, the price charged last from
these petition- ers under the respective contracts with them shall continue to
operate between the parties, subject to adjustments in future after prices are
fixed as stated above." 173 Shri B. Sen, who appeared for the ONGC, made R
clear at the outset that he was not disputing the propositions (a) that the
ONGC is 'State' within the meaning of Article 12 of the Constitution; and (b)
that it has a duty to act reasona- bly and fairly so as not to infringe the
provisions of Articles 14 and 19 and also in consonance with the directive
principles of State policy set out, inter alia, in Articles 38 and 39 (b) of
the Constitution. His challenge is, pri- marily, to the finding of the High
Court that the ONGC is a 'public utility undertaking' which was bound to supply
gas at the request of any member of the public at large and to its direction
that it should continue to supply gas to the respondents at an uncertain price
till the price is fixed in accordance with the procedure outlined by it, notwithstand-
ing that the contracts under which the respondents procured such supplies have
expired long ago. He also contests the correctness of the High Court's
conclusion that the price of gas must be determined on the basis of cost of
production plus a reasonable return for the investments made, (herinaf- ter
referred to broadly as the "cost plus" basis). He sub- mits that the
prices under the contracts entered into with the respondents have been
determined on the basis of a well-known principle viz. the ruling prices for an
alternate fuel and this cannot be said to be either arbitrary or unreasonable
particularly when a large number of industries are even today willing to take
the supply of gas at the prices fixed on that basis. He also complains that the
High Court overlooked that the respondents are not domestic but industrial
consumers. If the ONGC were to be treated as a public utility bound to supply
an essential commodity of this nature to any one for the asking subject to availabili-
ty, it may be that the price for such supply should be fixed on a cost plus
basis. But where the supply is limited to certain industries and other
similarly placed industries have to produce similar goods by consuming furnance
oil or other equivalent alternate fuel, it is quite reasonable for the O.N.G.C.
to stipulate--indeed, it would be discriminato- ry, were it not to
stipulate--that its prices would be based on the cost of alternate fuel which
would have to be in- curred by these industries otherwise and which is in fact
being incurred by other industries engaged in the production of similar goods
to which the O.N.G.C. is not making any supplies at all. Sri Sen urges that
while public sector units and State instrumentalities should not be allowed to
exploit the consumers, it is equally necessary to ensure that such units and
instrumentalities are enabled to make reasonable profits and made good as
commercial enterprises by charging prices which the "traffic can
bear" so that they can also contribute substantially to national development.
It is
submitted that, as against the respondents who are receiving supplies at the
rate of Rs. 1,000 per unit, there are 29 industries paying the Govern- 174 ment-fixed
price of Rs. 1840 (since 1987), 12 other parties who have earlier signed
contracts at the furnace oil equiva- lent rate and 65 industries which are
willing to sign con- tracts at the aforesaid Government rates. It should not
also be overlooked that, even if the cost plus basis were to be contemplated,
the prices would require substantial revision considering the huge expenditure
incurred by the Government of India in recent years in prospecting for oil and
the need for heavy capital investment for meeting which the Govern- ment has
had to obtain huge loans from the World Bank and other organisations. In the
context of this integrated activity, it is almost impossible to work out the
costs in respect of any particular area or of the particular bye- product with
which we are here concerned. The cost plus basis was fixed by the award several
years ago and that too in the context of supply to certain State undertakings
which, in turn, supplied essential commodities like elec- tricity and fertilisers.
Subsequent enquiry commissions (such as the Damle award) do not price
commodities on the basis of cost. The ONGC, if it is to function effectively
and make reasonable profit on the supply of this commodity, should be allowed
the latitude atleast to fix its own prin- ciple of pricing. So long as such
principle is a recognised one and is not per se unfair or unreasonable the
court should not interfere. Else, Sri Sen submits, a controversy regarding
fixation of price will be raging eternally as the industries would raise some
objection or other to the price fixation, whatever it be, and the interests of
the public will suffer if the ONGC is constrained to stick to the throw-away
prices fixed in outdated contracts until prices can be fixed on a basis
agreeable to the consumer indus- tries, as has indeed happened in this case
during the past ten years. Sri Sen concluded by urging that the onus of showing
that the price charged was unreasonable or arbitrary was on the respondents and
they had done nothing to dis- charge this onus, except saying that the prices
have been stepped up from time to time and that the increase in prices has been
steep. Rather they have, in their pleadings, sought to throw the onus on the
ONGC to prove that the prices charged by it are fair and reasonable. Even this,
says Sri Sen, the ONGC has done.
The
discussions in the judgment of the High Court and, to some extent, the
discussions before us have touched several aspects of the principles to be kept
in mind for price fixation of essential commodities basic to public need and,
in doing so, have, in our opinion, travelled beyond the framework and scope of
the questions that arises for consid- eration in this case. It is necessary to
remember that the writ petitioners are a few industrial houses which had
entered into con- 175 tracts with the ONGC for supply of natural or associated
gas. These were ordinary commercial contracts entered into by private treaty
between the ONGC and these respondents to sell and buy certain goods produced
by the ONGC at the prices stipulated in the contracts. Looked at purely from
the contractual angle, the ONGC was perfectly at liberty to stop the supply on
the expiry of the relevant contract and refuse to supply further unless a fresh
contract could be entered into agreeing upon a price for such supply. Assuming
that the ONGC is a State instrumentality and the price demanded by it is
susceptible to judicial review, the court may, where a contract has been
entered into, consider the sustainability of the price agreed upon or where no
contract has been entered into, injunct the ONGC from demanding a price for
supply which is found unreasonable. But we doubt whether it is open to the
Court to direct the ONGC to con- tinue the supply indefinitely without a
contract and without any price fixation.
It is
clear that, in giving directions as above, the Court was considerably weighed
by its conclusion that the ONGC is a public utility undertaking which is bound
to supply gas to all who demand such supply subject only to the availability of
enough gas. Dr. Chitale, for the respond- ents, strongly supported this
viewpoint. He urged that it is well settled law that a public utility cannot
arbitrarily discontinue its supply or services merely because the cus- tomer is
unwilling to pay the price asked for as unconscion- able and unreasonable. He
submitted that this, indeed, is not a modern rule of constitutional law but an
ancient rule of public law. He referred in this context to the early decisions
of the King's Bench Division in Bolt v. Stennett, CI E.R.-Revised--p. 1572
followed in Allnutt v. Inglis, CIV E.R.--Revised-p. 206 as laying down the
basic principle in this regard. This principle, he said, has also been applied
by the American Courts in Ira Y. Munn v. People, 24 L.Ed. 77; United Fuel Gas
Co. v. Railroad Commission, 73 L.Ed. 390; Los Angeles Gas & Electric
Corporation v. Railroad Commission, 77 L.Ed. 1180; Leo Nebbia v. People, 78 L.Ed.
940;
Harold E. West v. Chesapeake & Potomac Telephone Co., 79 L.Ed. 1640 and
Federal Power Commission v. Hope Natural Gas Co., 88 L.Ed. 333). These
decisions clearly lay down, according to him, that the price fixed must be
reasonable and fair, that the price should be so fixed as to give the
undertaking a reasonable return on the capital employed and that there cannot
be any discrimination against industrial consumers. These principles, he
argued, are applicable with greater force in the context of the Constitutional disci-
pline over State Instrumentalities under Articles 38 and 39 of the Constitution
which mandate the State to direct their policy towards securing "that the
176 ownership and control of material resources of the community are so
distributed as to subserve the common good." As already stated, the ONGC
does not dispute the propo- sition that it is a State instrumentality and that
its actions are subject to review under Articles 14 and 19 of the Constitution;
it only refutes the suggestion that it has become a public utility undertaking
with an obligation to supply gas to any consumer on reasonable conditions as to
price etc. It is contended by Sri K. Parasaran and Sri B. Sen that the ONGC is
not a 'public utility' under a duty to supply gas to members of the public. It
is argued that in English common law, the expression has a specific connota- tion;
it refers to an entity dealing in a commodity which is commonly used by the
members of the public and under a duty, in terms of a statute, licence or
franchise obliging it to supply the commodity to the public at large. Thus, for
example, in England the Public Health Act, 1936, the Elec-
tricity Act, 1947 and the Gas Act, 1948 provide examples of a duty cast on
suppliers of water, electricity or gas. So also, in India, the Indian Electricity Act spells
out a duty on the part of the licensee to supply electricity to members of the
public. There are also other public utility undertak- ings providing for water,
sewage connections, transport and the like which are under a statutory
obligation to supply goods and services to members of the society at large,
subject to the fulfilment of reasonable conditions pre- scribed therefore. The
supply of gas by the ONGC, it is urged, has not attained this
"status" yet.
As far
as we have been able to see, there is no statuto- ry definition of 'public
utility' in the context of any Indian enactment that may be relevant for our
present pro- pose. There is a definition of "public utility service"
in s. 2(n) of the Industrial Disputes Act, 1947 which, inter alia, covers
"any industry which supplies power, light or water to the public" and
certain notified industries. It is arguable whether supply of natural gas is
included in this definition for, though 'power' connotes generally any form of
energy available for doing work, it is normally related to such energy made
available by mechanical or electrical means (vide, Webster Comprehensive, Vol.
2, p. 990). It is also a moot question whether that definition can be appro- priate
in the context with which we are concerned.
Dr. Chitale
cited profusely from American Jurisprudence (2nd Edition, Vol. 64) on the
subject of public utilities.
Some
of these passages may be usefully quoted. At page 549, it discusses the
definition and nature of a public utility.
The
passage runs thus:
177
1.
Definition and nature A "public utility" is a business or service
which is engaged in regularly supplying the public with some commodi- ty or
service of public consequence, such as electricity, gas, water, transportation,
or telephone or telegraph serv- ice. Publicly owned utilities are those owned
by public corporations such as municipal public utility districts and public utility
districts. Apart from statutes which define the public utilities which are
within the purview of such statutes, it would be difficult to construct a
definition of a public utility which would fit every conceivable case, but
there are certain considerations that are of aid in deter- mining whether a
specific organization or business is a public utility. As its name indicates,
the term "public utility" implies a public use and service to the
public, and indeed, the principal determinative characteristic of a public
utility is that of service to, or readiness to serve, an indefinite public (or
portion of the public as such) which has a legal right to demand and receive
its services or commodities." There must be a dedication or holding out,
either express or implied, of produce or services to the public as a class. The
term precludes the idea of service which is private in its nature and is not to
be obtained by the public, although a public utility may perform acts in its
private, as distinguished from the public, capacity, in which case it is
subject to the same rules as any other private person so acting. Some courts,
however, reject the notion that in order to be a public utility subject to
governmental regulation the nature of the service must be such that all members
of the public have an enforceable right to demand it, and declare that business
to be a public utility which in fact serves such a substantial part of the
public as to make its operations a matter of public concern.
This
view is in close accord with what has been termed the historic basis of
classification of some businesses as public callings, that is, economic
conditions, or the impor- tance of the business to the public. While the terms
"public service corporation" and "quasipublic corporation"
are used to describe public utility corporations, and the term "public
service commission" to describe the body regulating such utilities, some
courts distinguish between a public sector corporation and a public utility on
the basis that the latter is required to serve the 178 public generally,
whereas the former may be required to serve members only.
The
mere fact that a corporation declares itself to be a public utility does not
make it such. In determining whether or not a company is a public utility, the
law looks at what is being done, not what it asserts it is doing. Nor will the
legislative declaration that a certain business shall be deemed a public
utility make it such if, in fact, the business as conducted is not impressed
with a public use or carried on for the public benefit, since it is beyond the
power of the state by legislative edict to make that a public utility which in
fact is not, and to take private property for public use by its fiat that the
property is being devoted to public use. Furthermore, a dedication of private
property to public utility service will not be presumed from the fact that the
product and service of the use of such property is the usual subject matter of
utility service; neither does such presumption arise from the sale by private
contract of such product and service to utility corporations for purposes of
resale. Such dedication is never presumed without evidence of unequivocal
intention.
A
business affected with a public interest is not necessarily a public utility or
public service commission.
The
fact that a business is affected with a public interest means that it may be
regulated for the public good but does not imply that is under a duty to
service the public." Black's Law Dictionary (Fifth Edition) defines a
"public utility" thus at p. 1108:
"Public
Utility: A privately owned and operated business whose services are so
essential to the general public as to justify the grant of special franchises
for the use of public property or of the right of eminent domain, in con- sideration
of which the owners must serve all persons who apply, without discrimination.
It is always a virtual monop- oly.
A
business or service which is engaged in regularly supply- ing the public with
some commodity or service which is of public consequence and need, such as
electricity, gas, water, transportation or telephone or telegraph service.
179 Gulf States Utilities Co. v. State, Tex.
Civ. App., 46 S.W. 2d 1018, 1021. Any agency, instrumentality, business, indus-
try or service which is used or conducted in such manner as to affect the
community at large, that is, which is not limited or restricted to any
particular class of the commu- nity. The test for determining if a concern is a
public utility is whether it has held itself out as ready, able and willing to
serve the public. A term implies a public use of an article, product, or
service, carrying with it the duty of the producer or manufacturer, or one
attempting to fur- nish the service, to serve the public and treat all persons
alike, without discrimination. It is synonymous with "public use",
and refers to persons or corporations charged with the duty to supply the
public with the use of property or facil- ities owned or furnished by them. Euder
v. First Nat. Bank in St.
Louis, C.C.A. Mo., 16
F. 2d 990, 992. To constitute a true "public utility", the devotion
to public use must be of such character that the public generally, or that part
of it which has been served and which has accepted the service, has the legal
right to demand that that service shall be conducted, so long as it is
continued, with reasonable efficiency under reasonable charges. The devotion to
public use must be of such character that the product and service is available
to the public generally and indiscriminately, or there must be the acceptance
by the utility of public franchises or calling to its aid the police power of
the State - ' ' The Corpus Juris Secundum (Vol. 73, p- 990) also carries like
definitions.
Once a
concern is found to be a public utility, at least two consequences follow. One
is a general duty to serve which is described in American Jurisprudence thus:
"16.
General duty to serve The primary duty of a public utility is to serve on reasona-
ble terms all those who desire the service it renders, and it may not choose to
serve only the portion of the territory covered by its franchise which is
presently profitable for it to serve. Upon the dedication of a public utility
to a public use and in return for the grant to it of a public franchise, 180
the public utility is under a legal obligation to render adequate and
reasonably efficient service impartially, without unjust discrimination, and at
reasonable rates, to all members of the public to whom its public use and scope
of operation extend who apply for such service and comply with the reasonable
rules and regulations of the public utility. This obligation is one implied at
common law and need not be expressed by statute or contract, or in the charter
of the public utility. The fact that the franchises granted to the company do
not expressly impose upon it the obligation to serve all persons in the
locality does not relieve the company, nor does the fact that the person
applying for gas is already supplied with gas by another company. The fact that
a pipe laid by a water company along a street in the exercise of its franchise
was laid under an agreement, with certain persons who paid the expenses, that
they should have the exclusive use of water, and that the company should not
tap the pipe without their consent unless it first repaid them for the pipe,
does not relieve the company from its obligation to supply water, on reasonable
terms, to all persons living on such street who may apply for it. A provision
in an ordinance granting a franchise to an electric light company, that the
city should not require the company to make "extensions" except upon
certain condi- tions does not affect the right of a resident in an estab- lished
service zone to invoke the aid of the courts to compel the company to connect
his premises with its line.
This
duty to serve all applicants without discrimination cannot be evaded by a
natural gas company on the ground that the gas pressure has fallen so low that
existing customers cannot be adequately supplied, new applicants are entitled
to share equally in such supply as can be furnished. Fur- thermore, the
obligation of a public utility, such as a gas, water, or electric company, to
supply a given district is inclusive of the duty, under reasonable limitations,
to carry the mains or lines of the utility to a point on the consumer's
premises where use can be made of the service.
However,
neither by common law nor by statute is a public utility required to serve all;
the conduct prohibited on the part of a public utility is unjust
discrimination, unfair rates or practices, or unreasonable rules." The
second constraint is in regard to the rates that can be charged by such an
undertaking:
181 A
public utility may, in the absence of a legislative pre- scription or limitation
of rates, fix and exact reasonable rates for services furnished, in which
respect the reasona- bleness of the rate is to be considered in relation to the
value of the property used by the utility in the public service. Thus, in the
absence of legislation, carriers are ordinarily entitled to establish such
rates and to adopt such policy of ratemaking as they may deem best. They may
voluntarily render service for less than they could be compelled to accept.
The
right of a public utility or carrier to set its own rates is subject to the
limitation that such rates must be nondiscriminatory and reasonable.
xxx xxx
xxx This obligation to furnish service at a reasonable price is implied by law
and is incurred by acceptance of the fran- chise and privilege to serve the
public. Furthermore, there is authority to the effect that a public utility
must give a consumer the benefit of the most favourable rate which he is
entitled to receive." We do not think that ONGC satisfies the primary condi-
tions enunciated above for being a public utility undertak- ing 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(1)(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 Government's 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 envis- aged as a further expansion to be
initiated with Central Government's approval. Perhaps a stage in the
developmental activities of the ONGC will soon come when such an obliga- tion
can be inferred but, at present, the O.N.G.C. 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 shah now touch upon.
The
main activity of the ONGC is that of exploration and 182 prospecting for
petroleum and petroleum products. So tar 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
3,000 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 utilisa-
tion 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 catego-
ries of public consumers. There is no doubt that the expan- sion 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 individu-
al contracts and it is in regard to these consumers alone that the question of
price has been raised before us.
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 contin- uance
of the present system followed by the ONGC of supply- ing gas to select
customers on the basis of contracts en- tered into with them. They only want
the price to be regu- lated 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 domes- tic supply, at its sweet will and pleasure. It
would then be open 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 respon- 183 dents, merely because they had entered into temporary
con- tracts 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 per- sons
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 under-
taking.
In
this context, we should like to point out once again that the ONGC does not
dispute that the price to be charged by it for gas supply should have some
basis and not be arbitrary or unconscionable. Their stand before the High Court
(vide para 29 of the judgment) and before us has been that the prices are fixed
by them from time to time on a well-recognised principle viz. on the basis of
the alterna- tive fuel cost which the consumers may have to incur had they not
been in receipt of gas supply. Assuming this to be correct, is there any
illegality in the procedure adopted by them?--that is the question. The
respondents contend, and the High Court has held, that there is.
184
According to them, a public sector undertaking must supply its goods at a price
which will cover their cost and leave them a reasonable margin of profit and no
more. Dr. Chitale says that this is the only reasonable way of price fixation
and refers to the award in support of this proposition. He points out that this
is the basis incorporated in several statutory instruments, such as the
Sugarcane Price Control order or the Drug Prices Control order or other orders
passed under the Essential Commodities Act. He cites the following decisions of
this Court in. relation to the fixation of such prices: Premier Automobiles v.
Union, [1972] 2 SCR 526; Panipat Cooperative Sugar Mills v. Union, [1973] 2 SCR
860; Shree Meenakshi Mills v. Union, [1974] 2 SCR 398; Saraswati Industrial
Syndicate v. Union, [1975] 1 SCR 956; Prag Ice and Oil Mills v. Union, [1978] 3
S.C.R. 293 and Union of India v. Cynamide India Ltd., [1987] 2
S.C.C. 720. He urges that, to allow the ONGC to sell gas at a higher price than
this merely because, otherwise, but for the availability of gas, the consumers
would nave to spend more for their sources of energy, will really amount to
introducing an irrelevant element i the process of price fixation and result in
allowing the ONGC to make unreasona- ble profits at the expense of unhappy
consumers. The ques- tion for consideration is whether this argument is
correct.
Is the
ONGC bound to adopt only the cost plus basis in fixing its prices or can it
also invoke any other well-known and reasonable, if commercial, formula in
fixing its prices? We shall first consider the findings in the award. Dr.
V.K.R.V. Rao was arbitrating on a dispute between the ONGC and the Gujarat
State Government as to the price at which gas was to be supplied by the ONGC.
Though the dispute arose as a result of the dissatisfaction of the GSEB and the
GSFC with the prices charged by the ONGC, the terms of reference to Dr. Rao
were very much wider. They read:
"The
point at issue is the price that should be charged by the ONGC for gas that may
be supplied after taking into consideration the volume and pressure of gas
supplied to any particular party and the distance to which it has to be
carried. You may also indicate if ONGC should offer any differential rates in
respect of gas supplied to:
(a)
Undertakings for the generation of power
(b) Fertiliser
plants
(c)
State projects 185
(d)
Private sector industries
(e)
Domestic fuel"
The
contentions urged by the two parties arrayed before the arbitrator and set out
in sections IV and V of the award also covered a very wide ground. The award
starts with a discussion of certain general considerations and while doing so,
dealing with a contention comparing the price fixation in Assam and Gujarat, the award says:
"The
Gujarat contention that in fixing the price
of gas in Gujarat, note should be taken of the price
fixed by Oil India for the sale of Assam gas to the Assam Electricity Board
at 25 paise per cubic foot cannot be dismissed as lightly as the O.N.G.C. seem
to have done. Nor can it be contended by Gujarat that if a mistake has been made once in one area, that therefore it
should be extended to other areas. It must be added also that the price of gas
in Assam and in Gujarat is not on all fours for the reasons
that I shall mention later. All the same, one cannot ignore the relevance of
the Assam gas price, even though the remedical
action required is perhaps more on the Assam side than on the ONGC attitude in Gujarat. I shall have something to say on the question later on in this report,
though it is not strictly within the terms of reference given to the arbitra- tor.
I am
not prepared to accept the ONGC contention that because they are All India
agency expected to function as a commercial undertaking in the public sector,
they are entitled to take no account of the fact that the cost of power
generation is high in Gujarat, that this has hampered the possible development
of some industries for which Guja- rat has natural resources and that public
opinion in Gujarat has a natural expectation of a reduction in the cost of
power production on account of the discovery of gas in their area. After all
the ONGC is an enterprise in the public sector and is expected to take public
interest into account and not be exclusively concerned with commercial considera-
tions that would be more appropriate to a private enter- prise. Moreover,
there, as in the United
States, the gas
industry is in the private sector, there is also governmen- tal regulation
through the Federal Power Authority in the public interest. I believe that
Gujarat has a valid point in 186 urging that advantages that accrue to the
coal-bearing provinces by way of low cost in fuel or power generation should
also apply to Gujarat because of the discovery of gas in its area and its
protected use for power generation. I propose therefore to take into account
the pit-head price of Bengal coal and its thermal equivalence with Gujarat gas
in determining my award on the price of gas. I must add that this will not be
the primary basis for my award, though it will certainly be treated as a
relevant consideration.
At p.
16 the report deals with the contention that the price of gas should be based
on the price of substitute products in the following words:
"As
regards the ONGC contention that the price of gas should be based on the price
of substitute products and that this is the practice generally followed in the
oil industry, I am not prepared to accept the ONGC constention. While the price
of substitutes undoubtedly would determine the demand price for gas, the
position becomes different when prices are sought to be fixed and not left to
market forces; and prices have to be fixed because the ONGC is virtually a
monopoly at least as far as Gujarat is concerned; there is no market price in
the normally understood sense of the term as emerg- ing from sales by competing
sellers; the ONGC is a public sector enterprise, and considerations of public
policy cannot be considered irrelevant in the fixation of prices.
Above
all it has always been the practice in India, when prices are fixed. to base it
on the cost of production plus a reasonable profit and this has been what the
Tariff Com- mission has been doing all these yeas in regard to other
commodities. Under the circumstances, while the price of substitutes is
undoubtedly a relevant (factor?) in the fixation of the price of gas, I have no
doubt that it cannot be treated as the primary factor under the Indian circum-
stances referred to earlier." Again, at p. 18, the basic formula is
expounded as follows:
"I
have already indicated my thinking on the question of ..... prices of
substitute materials on the basis of thermal equivalence in the concluding para
of the previous section. Gas pricing in relation to the prices of substitute
materials 187 understandable in foreign countries, where gas has been
deliberately pushed into the fuel market by pipe line compa- nies which have
constructed long and expensive pipe lines and sold gas at a price lower than
that of alternative fuels in order to capture and retain the market. In fact,
the price of gas in the initial stage was much less than that of competing
alternative fuels and not on par with their prices. With the growing
recognition of the special advan- tages obtained by the use of gas in
manufacturing operation where close control of heat and cleanliness of
operation are essential and worth paying for or in commercial and residen- tial
cooking, water heating and space heating, gas prices have been steadily rising
over the last few years. Thus while crude oil wholesale prices have moved
downward since 1957, gas prices have recorded a steady rise throughout the
post-war period. At the same time, drilling of gas wells is increasing and so
is the place of gas in world energy con- sumption. It is therefore not correct
to suggest that the oil companies were selling gas on the basis of the price
and thermal equivalence of alternative fuels. Gas was sold at the price which
it could fetch and not on the basis of either cost of production or parity with
substitute fuels.
As regard
the price of gas in the field, Prof. Adleman has pointed out that it is not
correct to expect any particular ceiling for this price. He adds "if the
special advantage uses could generate enough effective demand, the field price
of gas in the United States or elsewhere could conceivably
equal or surpass the thermal- equivalent of the crude oil; otherwise it will
not". In actualfact, the principal use of gas is till not (now?) in its
field of special advantages.
There
is validity therefore for his view that "Since gas costs roughly three
times to deliver, per BTU as oil the price of gas in the producing area could
not possibly equal the price of oil. Scarce resources are best used of this
fuel expensive to transport, is used to the maximum, nearest its source of
supply, whiles the transport--cheap oil moves greater distances". Thermal
equivalence with substitute fuels and a price based thereon could therefore
only be a ceiling on the price of gas rather than a parity basis for its price
fixation. Moreover, in the case of Gujarat, the substitute fuel comes from long
distance and bears heavy frieght charges, while the gas is found within the
State. It must also be remembered that unlike in the case of foreign oil
companies, cost 188 data are more readily available in the case of ONGC, as it
is a public sector enterprise and subject to the control of Parliament and the
scrutiny of its Public Accounts Commit- tee. All cost data have been made
available to the Arbitra- tor by the ONGC. Under the circumstances, it is my consid-
ered judgment that formula of fixing the price of gas on the basis of the
thermal equivalence and price of substitute fuel or feedstock should not be
accepted, though the price resulting from such a formula certainly is a
relevant con- sideration as indicating the ceiling below which the price of gas
should be fixed by the Arbitrator. I would therefore reject the ONGC proposal
that "the formula to be used for the price of gas should be based on the
price of the avail- able alternative fuels or feedstock." The only other
basic formula is the one advanced by the Gujarat Government, namely, "that
the only rational approach to the pricing of gas is via the cost plus profits
formula". And it is the cost plus profit formula that I propose to adopt
as the primary base for determining my award on the price of gas in Gujarat.
Having said this, I must hasten to add that this does not mean my acceptance
either of the connotation that the Gujarat Government gives to this formula in
terms of the content postulated for the cost of production and profit or the
figures they have put forward for the price of gas on the basis of their interpre-
tation of the content of cost of production and profit. What I accept is the
principle of cost of production plus reason- able profit and not the
interpretation that is sought to be given to this principle by the Gujarat
Government".
The
second part of the issue referred to the arbitration was disposed of summarily
by the award, in a few words:
"Finally,
on the question whether there should be any dif- ferentiation between the
prices to be charged for power generation, fertilisers, and other industries, I
am not in favour of any such differentiation, as it would only intro- duce an
unnecessary complication in the pricing machinery and my award is primarily
based on estimated cost of produc- tion plus reasonable profit. If, however, in
order to regu- late supplies in adjustment to different intensities of demand
from the different users of gas, some premium or 189 discount becomes necessary
on the price suggested by me, this would not be inconsistent with my award
provided the total receipts do not exceed the amount that would accrue from the
application of my award on the price of gas.
Dr. Chitale
naturally placed considerable reliance on this award. He contended that the
reasoning of the award is impeccable and that the considerations that impelled
Dr. Rao to adopt the cost plus basis are more weighty in today's context and in
the background of the State's duties under Articles 38 and 39(b) of the
Constitution.
There
is no doubt that Dr. Rao made the cost plus method the basis of his award in
preference to the basis of thermal equivalence of alternate fuel (which we
shall refer to as thermal equivalence basis). But at least two important
aspects have to be kept in mind in assessing the applicabil- ity of the same
principle in the present context. In the first place, as explained earlier, Dr.
Rao was concerned primarily with an issue raised by the public of Gujarat as
against the ONGC. He was really adjudicating upon the price which the ONGC
should charge to public sector undertaking catering to the essential needs of
the State. In the con- text, his objective was, understandably, to fix the
price as low as possible. The consumers under consideration by him represented
the public need of the State of Gujarat and, as against such public interest,
the ONGC's profit requirements paled into insignificance. He proceeded, more or
less, on the footing that the ONGC was obliged to supply gas for meeting those
essential purposes. Secondly, Dr. Rao also agrees that the thermal equivalence
basis is a recognised method for fixation of price, that it has a relevance and
that it has to be taken into account in determining the price for gas supply.
We also wonder whether, in the present set up of the ONGC with a vast expansion
of its exploratory activities, enough data are available to work out a price on
the cost plus basis. Any such computation will have to provide adequately for
future explorations, infructuous expenditure, expenditure on modern uptodate
machinery and research and above all expenditure that will be necessary to
reach the gas to the consumers. In these circumstances, the cost plus basis
fixed by Shri Rao in the background of the real nature of the dispute before
him three decades ago cannot be taken as conclusive in the present situation.
Here we are dealing with a price to be fixed under a contract between the ONGC
and one set of industries in the State who wish to make a change over from the
furnace oil system to that of gas supply with a view to increase their own prof-
itability and gain an advantage, if possible, over other industries in the
State. In this context, we think, ONGC is entitled to a 190 larger latitude and
charge a price which the market can bear. The only restrictions is that, being
a State instru- mentality, it should not be a whimsical or capricious price but
should be one based on relevant considerations and on some recognised basis.
While
the cost plus basis is a recognised basis for fixation of prices of essential
commodities or for the services rendered by a public utility undertaking, it
would not, in our view, be correct to treat it as the only permis- sible basis
in all situations. On behalf of the ONGC it has been pointed out that even in
the fixation of prices of essential commodities like levy sugar, the concept of
cost plus is not necessarily the only method of fixing the price for the
commodity. In considering the question whether the price fixation in that case
was based on proper principles and by following correct methods in accordance
with section 3(3C) of the Essential Commodities Act, this Court observed in the
Anakapallee case, [1973] 2 SCR 882 at p. 899:
"While
examining question No. 3 learned Solicitor General has reminded us that 'cost
plus' cannot always be the proper basis for price fixation. Even if there is no
price control each unit will have to compete in the market and those units
which are uneconomic and whose cost is unduly high will have to compete with
others which are more efficient and the cost of which is much lower. It may be
that uneconomic units may suffer losses but what they cannot achieve in the
open market they cannot insist on where price has to be fixed by the government.
The Sugar Enquiry Commission in its 1965 report expressed the view that
'cost-plus' basis for price fixation perpetuates inefficiency in the industry
and is, therefore, against the longterm interest of the country.
The
Court quoted from a study prepared in collaboration with the Institute of
Chartered Accountants of India.
"Costs
alone do not determine the prices. Cost is only one of the many complex factors
which together determine prices.
The
only general principle that can be stated is that in the end there must be some
margin in prices over total costs, if capital is to be unimpaired and
production maximised by the utilisation of internal surpluses ..... while the
cost plus pricing method is the most common, it may be argued that it is not
the best available method 191 because it ignores 'demand or fails to adequately
reflect competition or is based upon a concept of cost which is not solely
relevant for pricing decision in all cases. What is essential is not so much of
current of past costs but fore- cast of future cost with accuracy .....
Generally pricing should be such as to increase production and sales and secure
an adequate return on capital employed." Again, in a somewhat different
context in relation K, a State transport undertaking, this Court observed, in Venka-
tachalam v. Deputy Transport Commissioner, [1977] 2 SCR 392:
"
..... the special status of a Government owned transport undertaking is obvious
..... Its functional motto is not more profits at any cost but service to
citizens first and, in a far larger measure than private companies and individu-
als, although profitability is also a factor even in public utilities.
(emphasis
added) These passages indicate that cost plus is not a satis- factory basis in
all situations. The basis may need to be made more stringent in some situations
and more broad-based in others. May be the cost plus is an ideal basis where
the commodity supplied is the product of a monopoly vital' to human needs. In
that context the price fixed should be minimum possible as the customer or
consumer must have the commodity for his survival and cannot afford more than
the minimum. The producer should not, therefore, be allowed to get back more
than a minimum profit. Indeed, in certain situations, it may even be inequitable
to fix varying prices on the basis of the cost of each individual manufacturer
and thus encourage inefficiency; it may be necessary to base it uniformly for a
whole industry on the cost of the most efficient manufacturer as has been done
in the case of drugs (vide: Cynamide case, [1987] 2 S.C.C. 720. It was so vital
that the goods should be available to the common man that the prices were
statutorily fixed so low as to drive away inefficient producers and so as to
make it possible only for the most efficient manufacturers to survive. Per
contra, there can be situations where the need of the consumer is not so vital
and the requirements of the economic scene are such that the needs of the
producer should be given greater consideration. In such situations, the
"plus" element in the cost plus basis (namely, the allowable profit
margin, should not be confined to "a reasonable return on the
capital" but should be allowed to have a much larger content depending on
the circumstances.
192
The notion that the cost plus basis can be the only criterion for fixation of
prices in the case of public enterprises stems basically from a concept that
such enter- prises should function either on a no profit-no loss basis or on a
minimum profit basis. This is not a correct ap- proach. In the case of vital
commodities or services, while private concerns must be allowed a minimial
return on capi- tal invested, public undertakings or utilities may even have to
run at losses, if need be and even a minimal return may not be assured. In the
case of less vital, but still basic, commodities, they may be required to cater
to needs with a minimal profit margin for themselves. But given a favourable
area of operation, "commercial profits" need not be either anathema
or forbidden fruit even to public sector enter- prises.
A
publication on "Public Enterprises" by the Indian Institute of Public
Administration, produced before us elaborates on the above aspects. It also
gives an interest- ing analysis of pricing policies adopted in respect of
various commodities. It is unnecessary to touch upon all the details. It is
sufficient, for our present purposes, to say that the monograph points out, a
propos such pricing policy, that several state undertakings are already earning
profits and the general policy has been accepted that the maximum economic
returns should be secured from all public enter- prises, whether these are
operated by the Central or State Governments directly or through corporation or
companies and that the surplus of public enterprises will have to play an
increasing part in financing economic development under the various National
Plans. It proceeds to say (at p. 173):
"A
growing source of governmental revenue in many countries is the profits of
public undertaking. In under developed countries public enterprises fostered on
public revenues are expected to play a more positive role in financing the
countries' development than similar enterprises do in de- veloped economies. In
determining the price policies of these undertakings considerations of maximising
revenue will not play as important a part as profits do in private enter- prises,
but within the limits set by the necessity to foster economic development,
their price policies are designed to bring in some profits to the countries'
general revenues.
Public
enterprises in the under-developed areas are to break ground in projects which
are the core of development. If such projects are to be financed on an
increasing scale, the price policies have to be so designed that significant
surpluses are left with the projects 193 to be employed either for their own
expansion or for financing the expansion of other projects. In other words,
there should be an element of profit in the prices of their products or in the
cost of their services to the public." The Krishna Menon Committee on
State undertakings (November 1959), the booklet proceeds. to point out, enunci-
ated the following pricing policy for public enterprises:
"We
have stressed in these pages the importance of incentive and healthy
competition and emphasised that concerns must be able to stand on their own
legs for efficient and proper conduct of business ..... The considerations that
should govern prices appear to be the following. Consumer prices nave to be
based upon general market prices and other fac- tors as well. The decision as
to what economy in cost has to be passed on to the consumer on the one hand or
should benefit the taxpayer on the other and the likelihood of
non-availabilities and, therefore, of scarcities in the near future has also to
be considered. The principle of 'what the traffic can bear' has also to be
taken into account. ' ' Dr. V.K.R.V. Rao has been quoted again as saying:
"As
regards profits, it should be pointed out that contrary to some popular notions
on the subject, profits have an important place in a socialist society, the
difference between the economic price and the social price would be what may be
called the planned profit and this would largely correspond to the excise
duties and sales tax and other indirect taxes that are imposed in a capitalist
society.
These
planned profits being no more than a way of mobilising resources and making
them available to the community for purposes both of investment and maintenance
expenditure.
Profits
also have another important role to play in so far as they relate to the
economic price itself. The economic price fixed at any particular moment of
time is obviously based on the capital, technique and productivity of the given
base period when this price is fixed; any improvement in productivity is bound
to lead to a decrease in the cost production and in turn this would lead to the
emergence of a surplus within the economic price itself and that would be a 194
surplus which will represent a measure of the nation's increase in productivity
this surplus would not be the result of the policies laid down at national
level as in the case of difference between the economic price and the social
price. On the contrary, it would represent the result of the motivations and
efforts of a larger number of persons en- gaged in productive activity. Hence
the importance of ar- ranging for proper incentive to stimulate the creation of
this kind of surplus. That is the reason why in socialist societies now-adays,
individual enterprises are permitted to retain a larger share of such surpluses
as they may create by an increase in productivity, this larger share to be used
by them partly for increasing individual incomes of those engaged in the
enterprises and partly for giving an opportu- nity to the enterprises in
question to build up the finan- cial resources needed to following their own
independent investment policies. Public enterprise must be carried on a profitmaking
basis, not only in the sense that public enter- prise must yield an economic
price in the terms described in a previous section but must also get for the
community sufficient resources for financing a part of the investment and
maintenance expenditure of government. Increasingly, the share of the profits of
public enterprises in financing the investment and maintenance expenditure of
government must keep on increasing. It is not only the expenditure on the
public sector as such that will indicate the march of the economy towards its
socialist goal. Even more important is the increasing role that the public
sector must play for finding the resources needed for meeting both the mainte- nance
and investment expenditure of government. This in- volves a price and profit
policy in regard to public enter- prise which goes against accepted opinion so
far in regard to public enterprise. The theory 'no profit, no loss' in public
enterprise is particularly inconsistent with a so- cialist economy, and if
pursued in a mixed economy it will hamper the evolution of the mixed economy
into a socialist society. The sooner, therefore, this theory of 'no profit no
loss' in public enterprise is given up and the policy ac- cepted of having a
price and profit policy for public enter- prise such as will make the State
increasingly reliant on its own resources (as distinguished from taxing the
personal incomes of its citizens), the quicker will be the evolution of a
socialist society".
195 In
another article on "The Public sector in India", quoted in
"Issues in Public Enterprise" by Sri K.R. Gupta, Dr. Rao is quoted as
saying (at p. 84):
"
..... the pricing policy should be such as to promote the growth of national
income and the rate of this growth .....public enterprises must make profits
and the larger the share of public enterprises in all enterprises, the greater
is their need for making profits. Profits con- stitute the surplus available
for savings and investment on the one hand and contribution to national social
welfare programme on the other; and if public enterprises do not make profits
the national surplus available for stepping up the rate of investment and the
increase of social welfare will suffer a corresponding reduction; .... Hence
the need for giving up the irrational belief that public enterprise should, by
definition, be run on a no-profit basis." In the light of the foregoing
discussion, we are of opinion that it would not be right to insist that the
ONGC should fix oil prices only on cost plus basis. Indeed, its policy of
pricing should be based on the several factors peculiar to the industry and its
current situation and so long as such a policy is not irrational or whimsical,
the court may not interfere.
The
question of fixation of a fair and reasonable price for goods placed on the
market has come up for consideration of Parliament and Courts in different
contexts. Price fixa- tion, it is common ground, is generally a legislative func-
tion. But Parliament generally provides for interference only at a stage where
in pursuance of social and economic objectives or to discharge duties under the
Directive Prin- ciples of State Policy, control has to be exercised over the
distribution and consumption of the material resources of the community. Thus
while Parliament has enacted the Essen- tial Commodities Act, it has left it to
the discretion of the Executive to take concrete steps for fixing the prices of
essential commodities as and when necessity arises, by promulgating Control
Orders in exercise of the powers vested in the Act. Various types of foodgrains,
sugarcane and drugs have come under the purview of such control orders and the
modalities of fixation of fair prices thereunder have also come up for
consideration of the Courts. There has also been such fixation of price under
the Industries (Development & Regulation) Act, 1951, vide: Premier
Automobiles v. Union, [1972] 2 SCR 726. In all these
cases, the primary concern of 196 Government and Parliament has been that the
articles in question should be available to the members of the consumer public
at the minimum prices possible and, in that context, these legislations no
doubt adopt the "cost plus reasonable return on investment" test in
the fixation of prices. That, even in respect of such commodities, the
"cost plus" method is not the only reasonable method has been recognised
in judicial decisions. The cases on this topic have been re- viewed and the
limitations on judicial review of price fixations fully discussed recently by a
Constitution Bench of this Court in M/s Shri Sitaram Sugar Company Ltd. &
Another v. Union, JT 19901 SC 462. It is, however,
not necessary here to enter into a discussion of this and the earlier cases
because those cases were primarily concerned with the question whether the
price fixation had been made in consonance with the requirements of the
relevant legisla- tion fixing prices of essential commodities in the interests
of the general public and also because ONGC does not deny that, as a State
instrumentality, its price fixation should be based on relevant material and
should be fair and reason- able. None of these decisions hold that the cost
plus method is the only relevant method for fixation of prices. On the
contrary, there are indications in some judgments to indi- cate that not a
minimum but a reasonable profit margin is permissible. Even in relation to a
public utility undertak- ing like the State Electricity Boards where the duty
not to make undue profits by abusing its monopoly position is clear (vide: Jagadamba
Paper Industries v. Haryana State Electric- ity Board, [1984] 1 SCR 165, this
Court said, in Kerala State Electricity Board etc. v. M/s. S.N. Govinda Prabhu
& Bros. and Ors. etc, [1986] 4 S.C.C. 1988:
"Now,
a State Electricity Board created under the provisions of the Electricity
Supply Act is an instrumentality of the State subject to the same
constitutional and public law limitations as are applicable to the government
including the principle of law which inhibits arbitrary action by the
government (See Rohtas Industries v. Bihar State Electricity Board, [1984] 3
SCR 59). It is a public utility monopoly undertaking which may not be driven by
pure profit motive--not that profit is to be shunned but that service and not
profit should inform its actions. It is not the function of the Board to so
manage its affairs as to earn the maximum profit; even as a private corporate
body may be inspired to earn huge profits with a view to paying large dividends
to its shareholders. But it does not follow that the Board may not and need not
earn profits for the 197 purpose of performing its duties and discharging its obliga-
tions under the statute. It stands to common sense that the Board must manage
its affairs on sound economic principles.
Having
ventured into the field of commerce, no public serv- ice undertaking can afford
to say it will ignore business principles which are an essential to public
service under- takings as to commercial ventures. (See Lord Scarman in Bromely
v. Greater London Council, [1982] 1 All ER 129). If the Board borrows sums
either from the government or from other sources or by the issue of debentures
and bonds, surely the Board must of necessity make provision year after year
for the payment of interest on the loans taken by it and for the repayment of
the capital amounts of the loans.
If the
Board is unable to pay interest in any year for want of sufficient revenue
receipts, the Board must make provi- sion for payment of such arrears of
interest in succeeding years. The Board is not expected to run on a bare
year-to- year survival basis. It must have its feet firmly planted on the
earth. It must be able to pay the interest on the loans taken by it must be
able to discharge its debts; it must be able to give efficient and economic
service; it must be able to continue the due performance of its services by
providing for depreciation etc.; it must provide for the expansion of its
services, for no one can pretend the country is already well supplied with
electricity. Sufficient surplus has to be generated for this purpose. That we
take it is what the Board would necessarily do if it was an ordinary commercial
undertaking properly and prudently managed on sound commer- cial lines. Is the
position any different because the Board is a public utility undertakings or
because of the provi- sions of the Electricity Supply Act? We do not think that
either the character of Electricity Board as a Public Utili- ty Undertaking or
the provisions of the Electricity Supply Act preclude the Board from managing
its affairs on sound commercial lines though not with a profit-thirst.
7. A
plain reading of Section 59 (as amended in 1978) plain- ly indicates that it is
the mandate of Parliament that the Board should adjust its tariffs so that
after meeting the various expenses properly required to be met a surplus is 198
left. The original negative approach of functioning so as not to suffer a loss
is replaced by the positive approach of requiring a surplus to be created.
Under
the above provision, the Board is under a statutory obligation to carry on its
operations and adjust its tariffs in such a way to ensure that the total
revenues earned in any year of account shall, after meeting all expenses
chargeable to revenue leave such surplus as the State Government may, from time
to time, specify. The tariff fixation has, therefore, to be so made as to raise
suffi- cient revenue which will not merely avoid any net loss being incurred
during the financial year but will ensure a profit being earned, the rate of
minimum profit to be earned being such as may be specified by the State
Government.
8. Shri
Potti, learned counsel for the consumers placed great reliance on the
observations of this Court in Kerala State Electricity Board v. Indian Aluminium
Co., [1976] 1 SCR 552; Bihar State Electricity Board v. Workmen, [1976] 2 SCR
42 and P. Nalla Thampy Thera v. Union of India to con- tend that the
Electricity Board was barred from conducting its operations on commercial lines
so as to earn a profit.
We do
not think that any of these observations is in con- flict with what we have
said. Pure profit motive, unjusti- fiable 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 profit's sake but for the purpose
of fulfilling, better and more exten- sively, the obligation of the services
expected of it cannot be said that the public enterprise acted beyond its
authority. The observations in the first case which were refined to us merely emphasised
the fact that the Electrici- ty Board is not an ordinary trading corporation
and that as a public utility 199 undertaking its emphasis should be on service
and not prof- it. 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, (SCC p. 235, para 5):
'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'.
In the
third case, the court appeared to take the view that the railway rate and fares
should cover operational ex- penses, interest on investment, depreciation and
payment of public obligations. It was stated more than once that the total
operational cost would include the interest on the capital outlay out of the
national exchequer. While the court expressed the view that there was no
justification to run a public utility monopoly service undertaking merely as a
commercial venture with a view to make profits, the court did not rule out but
refrained from expressing any opinion on the question whether a public utility
monopoly service undertaking should ever be geared to earn profits to support
the general revenue of the State.
We are
of the view that the failure of the government to specify the surplus which may
be generated by the Board cannot prevent the Board from generating a surplus
after meeting the expenses required to be met. Perhaps, the quan- tum of
surplus may not exceed what a prudent public service undertaking may be
expected to generate without sacrificing the interests it is expected to serve
and without being obsessed by the pure profit motive of the private enterpre- neur.
The Board may not allow its character as a public utility undertaking to be
changed into that of a profit motivated private trading or manufacturing house.
Neither the tariffs nor the resulting surplus may reach such heights as to lead
to the inevitable conclusion that the Bard has shed its public utility
character. When that happens the court may strike down the revision of tariffs
as plainly 200 arbitrary. But not until then. Not merely because a surplus has
been generated, a surplus which can by no means be said to be extravagant. The
court will then refrain from touching the tariffs. After all, as has been said
by this Court often enough "price fixation" is neither the forte nor
the func- tion of the court." We are not called upon here, in the view we
take, to decide whether the cost plus basis or the thermal equiva- lence 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 O.N.G.C. 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 opera- tion. As we said earlier,
the 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 con- tracts. Whether this is any
longer justified and whether there should not 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 manufacturer's choice, but
yet where such manufacturer being a State instrumentality, has to conform to
Articles 14 and 19 of the Constitution.
At
this stage of development of the industry, we think a much wider latitude is
permissible in the fixation of prices than the imposition of a "no profit,
no loss" basis or a "cost plus" basis on the producer. In fixing
the prices, it is legitimate for the O.N.G.C. to take into account the fact
that its supplies are restricted only to a few industries that have entered into
contracts with it. Like industries, producing the same or similar commodities,
are carrying on business with other sources of energy such as coal or fur- nace
oil and the supply of gas is intended to supplement that source of energy. The
supply of 201 gas to a few chosen industries at a much lower rate than what the
companies may have to pay for an alternative fuel may indeed lead to cries of
discrimination as the O.N.G.C. is scarcely in a position to supply gas to all
industries and replace furnace oil as a source of energy altogether.
Also,
it must be kept in mind that exploration of oil is capital-intensive and
money-consuming and the ONGC would be well justified in supplying gas to
voluntary contractors at a price which several parties are willing to accept
and which will enable the ONGC to build up a surplus to meet its manifold
requirements-The surpluses, it should be remem- bered, are not to fatten the
coffers of a private individual but only to strengthen the backbone of the
public enter- prise. To fix its prices on the basis of alternative fuel cannot,
therefore, be described, in the present situation, as irrational or arbitrary.
Our attention has been drawn to a passage from Joan Mitchell on "Price
Determination and Price Policy" where, dealing with the basis of fixation
of gas price by negotiation between the British Gas Commission and companies
producing North Sea gas, it is pointed out hat the
price is set by the nearest alternative fuel, usually fuel oil. This was also
the basis, it will be remembered, on which initially the GSEB and GSFC had
agreed to receive supplies from the ONGC. Thus this is a basis of fixation of
price that is recognised in this field. Fixation of price on this basis is,
therefore, a logical and appropriate one in the circumstances- We should once
again like to emphasise that different considerations may perhaps have to
prevail if the treatment of ONGC as a public utility is taken to its logical conclu-
sion but that is not the basis on which the present writ petitions can be
decided. Even at present the ONGC is sup- plying to public sector undertakings
at a much lower price.
That
has not been challenged by those organisations and the differentiation has also
been upheld, in principle, by the High Court, rightly in our opinion.
Fortunately, with the discovery of more and more oil wells in various parts of
the country the economy of the country is booming and gas supply may also
become more plentifully available in course of time. The time will perhaps soon
come for the evolution of proper schemes of distribution and price control. We
are now concerned, however, with the price fixation regarding supply to a few
parties who considered it all right to enter into contractual agreements for
supply of gas to them on the basis of the price fixed by the ONGC. So far as
the scheme of supply is concerned; the respondents also stand by the existing
contract scheme as they want the supply to contin- ue- It is certainly not
their prayer that the existing supply of gas, such as it is, should be
considered a public utility and rationed to meet the needs of all industries
and consumers in Bombay or Vadodara or 202 elsewhere. Nor is there any
complaint today from any indus- try not receiving gas supply that they are
being discrimi- nated against and that the supply to selective industries
should stop. There is, therefore, no justification to strike down the scheme of
supply on the basis of contracts. The only objection that survives, therefore,
is that the price for the supply should be reasonable and fair. It should be
based on principle, not caprice. We have pointed out that, though the ONGC has
stepped up the prices considerably, it has claimed to have done so on a
principle and the correct- ness of this has not been challenged. The claim of
the respondents only is that prices should not be fixed on that basis but
should, instead, be fixed on the basis of "cost plus". For reasons
indicated earlier, we do not think that the respondents are justified in
challenging this basis of fixation. The basis on which the ONGC has fixed the
prices is a known basis and, as pointed out by us, also a basis permissible at
this stage of the industry where a certain amount of freedom is permitted to
the organisation in sup- plying the gas produced by it. The situation really is
one where the choice is between making the limited supply of gas available to a
few chosen individuals at rock-bottom prices so that they can make huge profits
and making the price higher but competitive so that it subserves the common good
and does not benefit only a chosen few. The ONGC has rightly chosen the second
alternative. We would, therefore, hold that the respondents can insist on a
supply only if they agree to pay the prices fixed by the ONGC. They are also
not entitled to demand supply as of right, without contracts.
But,
as they have in fact had the benefit of the supplies under interim orders of
the Court, this question does not survive and all that we can declare is that
the prices demanded by the ONGC are not unreasonable or capricious and are
binding on the respondents.
Having
dealt with the principal issue, we may now refer to certain subsidiary matters
touched upon in the course of arguments:
(i) A
point was made about the ONGC's right to insist on a minimum offtake guarantee
to the extent of 90%. This has been upheld by the High Court and there is no
appeal (the crossappeals having been dismissed as time barred) by the
respondents. There can, however, be no doubt that the High Court was right in
its conclusion on this issue. If any authority regarding the rationale of such
a clause is needed, it is to be found in the decision of this Court in
Amalgamated Electricity Co. Ltd. v. Jalgaon Borough Munici- pality, [1976] 1
SCR 636.
203
(ii) A statement was filed before us to show that if the prices had been
determined on the basis of the thermal equivalence of coal, they would have
been much smaller. This statement has been filed before us for the first time
and its correctness would need verification. It is, however, unnecessary to go
into this question. The acceptability of this argument may depend, inter alia
on how far the coal basis is relevant for the industries located in Vadodara
where the principal alternate fuel is fuel oil. It is possi- ble that this is
one alternative that may be available and it was open to the petitioners to
have had discuss and mediations with the ONGC for alteration of the prices on
that footing. The ONGC has fixed prices on the basis of the thermal equivalence
of furnance oil which, by an large, was the source of energy tapped by the
local industries. There being no irrationality in adopting this basis, it is
not open to us to say that the basis of thermal equivalence of coal should be
adopted rather than that of furnance oil, particularly in the absence of fuller
material and discus- sion.
(iii)
A point was made that the ONGC is charging differ- ent prices to different
industries. The answer of the ONGC is that, save in the case of certain public
sector enter- prises, their prices are fixed on the basis of the prices
prevalent on the thermal equivalence of fuel oil basis as on the date the
relevant contract is entered into. This has not been shown to be wrong. The
only discrimination urged at the stage of the High Court was in regard to the
disparities in prices between supply to public sector undertakings and private
industries. Though the award, towards the end, suggested that there should be
no such differentiation, it is now well settled that a favourable treatment of
public sector organisations, particularly ones dealing in essential commodities
or services, would not be discriminatory. Also, this differentiation, as
already pointed out, has been upheld by the High Court, we think rightly. No
tangible material has been brought to our notice which would support the plea
of unfair discrimination.
(iv) A
point has been made that the ONGC had entered into a contract for a ten year
period with the Amul dairy for supply of gas at Rs.741 per unit which
demonstrates the unreasonableness of the prices charged to the respondents.
We do
not agree. We have already pointed out that the ONGC is supplying gas, to
certain public sector undertakings at much lower rates and that this
differentiation has been upheld. Though the Amul Dairy is a cooperative society
it deals with a basic need of society and 204 stands on no different footing
from Electricity Boards or Fertiliser Corporations or Municipal Corporations.
The instance of the Amul Dairy cannot, therefore, be treated as an index of the
unreasonableness of the price charged from the respondents, particularly when
the basis of fixation has been explained and is an intelligible and rational
one.
(v)
Reference has been made to the price of gas in Assam and U.S.A. So far as the
former is concerned, the High Court has, rightly in our view, discarded the
comparison. So far as the latter is concerned, the point made by the ONGC was
that Dr. Rao had fixed the price of gas in India in 1967 at 15% below the then
U.S. price and that on the same basis the price of Rs.2000 per unit today could
not be said to be unreasonable as prices in U.S.A. have also shot up about
thirty fold in the meantime. We find no effective reply to this argument. The
High Court has just brushed it aside by reiterating that the well-head prices
alone would be the reasonable basis for fixation of price.
(vi)
The High Court in its judgment has observed:
"if
the ONGC were acting fairly and reasonably, there was nothing to prevent them
from placing all their cards on the table of the court. They did not put the
price structure that possibly be worked out on the lines similar or akin to
those suggested by Dr. V.K.R.V. Rao in his award. Nor did they put forward any
other reasonable criteria for price fixation. All throughout they harped on the
thermal equiva- lence and furnace oil equivalance and the prices in U.S.A. and
the prices of crude, but did not allow the Court to have the bare glimpse of
what could possibly be the well-head price of gas, by making allowances for amortisation
and all other conceivable factors, having their sway in the ultimate price
fixation. This also is indicative of the unreasonable- ness on their part and
we would say that Mr. Singhvi was justified in complaining that the return
filed by the ONGC in this group of petitions was far from being satisfactory
and, therefore, was liable to be brandished as no real return at all" We
think this criticism is not justified. The stand of the ONGC was that it had
fixed the prices on the thermal equiva- lence basis and this has not been controverted
or found against. It was the 205 respondents' case that the cost plus price
would work out much cheaper and the onus was on them to prove it. We fail to
see how the blame for not allowing the court to have a glimpse of what could
possibly be the well-head price of gas can be put at the doors of the ONGC.
However, this aspect is irrelevant as the case throughout has proceeded on the
assumption that the cost plus basis would yield lower fig- ures and the
question debated was whether the ONGC could discard this and adopt the thermal
equivalence basis.
(vii)
Turning now to para 36 of the judgment of the High Court, we may observe that
these directions do not survive in view of the conclusion we have reached that
the prices demanded by ONGC are based on proper and relevant criteria.
However,
we may observe that directions (i) and (ii) in this paragraph virtually throw
open the entire issue for fresh discussion. It may have been helpful if such a
direction had been given before the hearing of the writ petitions but the
exercises would not be futile. Having reached the conclusion that the cost plus
was the only proper basis of fixation of price, the High Court should perhaps
have directed the ONGC to charge prices on that basis and given a reasonable time
to work out the said price and implement the direction.
Instead,
the High Court appears to have, by its directions in para 36, left the matter
at large for it asks the ONGC to get the price fixed "according to the
reasonable and ration- al norms". We do not also see any justification for
provid- ing that the price fixation should be done in consultation with, or
after giving an opportunity to the respondents. It is for the ONGC to fix the
prices and there can be no re- quirement of a prior consultation with the
present respond- ents or with prospective customers. In such cases of price
fixation, as in the case of price fixations by Government (see Cynamide case,
[1987] 2 SCC 720), the only remedy of aggrieved consumers can perhaps be to
have some sort of post-decisional reconsideration by the ONGC after heating the
view points of those affected. But this question does not arise now in the view
we have taken to the ONGC's obli- gations in this regard. We should also like
to add that, now that the prices have been fixed by the Government since
30.1.1987 and gas has already been supplied to the respond- ents till then on
the basis of interim prices, the implemen- tation of the directions contained
in this paragraph would be a prolonged and unmeaningful exercise and it would
have been much better to fix some ad hoc price, for this period, after heating
both parties. In fact, Sri B.
206 Sen
who appeared for the ONGC very fairly stated before us that, so far as this
period was concerned, the ONGC was prepared to leave it to this Court to fix
the price of supply at any figure that the Court might consider reasona- ble.
We also suggested to the respondents, keeping the price fixed by the order
dated 30.3.1987 in mind, a figure which we thought was reasonable but the
respondents were not agreeable to the course suggested. They put forward
certain alternative proposals which were not acceptable to the ONGC.
In
these circumstances, we have been constrained to hear the appeals on merits.
(viii)
On behalf of the ONGC, it has been pointed out that a sum of Rs. 14.35 crores
is outstanding for the period from December 1982 to August 1989 from eighteen
concerns, even on the basis of the interim prices at which the ONGC has been
supplying them gas under the orders of this Court, primarily due to shortfalls
in the guaranteed off-take and that four concerns, who have stopped taking
supply of gas, are in arrears to the tune of about Rs. 12 lakhs. We need hardly
say that the ONGC will be at liberty to take immediate steps to recover the
charges due from the respondents in the light of this judgment.
(ix)
We wish to add that we are not called upon to, and do not, express any opinion
regarding the notification dated 30.1.87 of the Government issued subsequently
fixing the price at Rs. 1,400 plus. We do not know the circumstances or the
statutory authority or the basis on which the said price fixation was made and
that is totally outside the purview of these appeals.
This
concludes a discussion of all the points urged before us. For the reasons
detailed above, we allow these appeals and uphold the prices charged by the
ONGC for supply of gas to the various respondents. We, however, make no order
regarding costs.
R.S.S.
Appeals allowed.
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