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
