Introduction

On October 12 2015 the State Council, together with the Communist Party Central Committee, promulgated the Opinions on Promotion of the Price Mechanism Reform to accelerate market-oriented energy pricing. As an important step in the implementation of the opinions, on October 21 2015 the National Development and Reform Commission (NDRC) issued the amended Central Government Pricing Catalogue, which reduced the categories of commodities subject to central government pricing by 46% and specific items subject to pricing by 80%. On November 20 2015 the NDRC promulgated the Notice on Reducing the Natural Gas City-Gate Price for Non-residential Usage and Further Promotion of Market-oriented Pricing. The NDRC is reportedly expediting the drafting process for pricing reform special action plans and amendments to the Price Law. Although the natural gas sector in China is largely under a monopoly, a significant breakthrough is expected as the reform progresses. A decision of the Qingyan City Intermediate People's Court(1) may herald the forthcoming changes to be implemented through the reform.

Facts

On December 23 2010 plaintiff Qingyang Chuanqing Zuanyu Gas Limited Liability Company (Chuanqing Company) signed the second West-to-East Gas Pipeline gas sale and purchase agreement with Petro China Co, Ltd, whereby Chuanqing Company would purchase the gas sold by Petro China.

On August 1 2012 Chuanqing Company (as seller) signed the Qingyang City Pinxi Pipeline gas sale and purchase agreement with Qingyang Wanshi Gas Company Limited (Wanshi Company). The contract stipulated that:

  • the gas sale price would be temporarily set at Rmb2.3 per standard cubic foot (tax inclusive); and
  • after Chuanqing's confirmation of the clearing price for the west-to-east natural gas transmission project, both parties would sign a supplementary agreement following consultation.

The quantity was set according to Wanshi's planned weekly, monthly, quarterly and annual gas needs; if these ever exceeded the gas use plan, the excess quantity would be subject to the excess gas price of the second West-to-East Gas Pipeline. If any price adjustment were made in the second West-to-East Gas Pipeline project, both parties would negotiate a new gas price. This would be implemented according to the second West-to-East Gas Pipeline gas sale and purchase agreement between Chuanqing Company and Petro China. The stipulated place of delivery was the original pressure control metering station in Zhenyuan County, Qingyang City, at the end of the outbound enclosure wall of the natural gas pipeline in Xifengmen Station, Xifeng District. The means of transport, arrival station (port) and cost were set on a cost, insurance and freight basis covering pipeline transportation, with transportation costs and related expenses borne by Chuanqing Company (as the seller).

On expiration of the contract in April 2013, Chuanqing Company and Wanshi Company once again signed a Qingyang Pingxi Pipeline natural gas sale and purchase contract. The contract set the following sale prices:

  • Rmb1.90 per standard cubic foot for natural gas from the gas filling column in the compressed natural gas parent station; and
  • Rmb2.12 per standard cubic foot (tax inclusive) for the remainder.

The contract period was set from January 26 2013 to December 25 2013. The rest of the agreement was consistent with the sale and purchase contract previously signed by both parties in 2012.

In 2014 Chuanqing Company and Wanshi Company signed a natural gas pre-settlement agreement concerning the Pingxi Pipeline. The main provisions of this agreement were as follows:

  • Because the upstream gas sale price for the West-to-East Gas Pipeline was in the process of adjustment, after consultation, the parties would temporarily agree on pre-settlement in connection with the price terms provided in the natural gas sale and purchase contract for the Pingxi Pipeline (signed by both parties in 2013). After the new West-to-East Gas Pipeline sale price was introduced, both parties would once again sign the 2014 sale and purchase contract and confirm the sale price.
  • The pre-settled portion would be subject to the price stipulated in the 2014 sale contract and a refund for any overpayment, or a supplemental payment for any deficiency, would be made.
  • The specific terms of the contract would be subject to the second West-to-East Gas Pipeline sale and purchase agreement between Chuanqing Company and Petro China.

On April 13 2014 Petro China West-East Gas Sales Company issued a letter of confirmation to Chuanqing Company. According to the NDRC Notice on Adjusting the Natural Gas Price issued in June 2013, the clearing price of natural gas was temporarily set at Rmb1.7109 per cubic metre. The price for the next fiscal year would be cleared in accordance with industry conditions. Should the NDRC promulgate new regulations on natural gas, the new regulations would prevail.

Chuanqing Company claimed that on April 13 2014 Petro China West-East Gas Sales Company had issued a letter of confirmation raising the natural gas price. Chuanqing Company conducted several price negotiations with Wanshi Company as prescribed in the contract, but Wanshi Company rejected the new price for various reasons. Since the establishment of the contractual relationship with Wanshi Company, Chuanqing Company had not ceased to fulfil its gas transport obligations; nevertheless, Wanshi Company did not make full payment under the contract. Therefore, Chuanqing Company filed suit against Wanshi Company, asking the court to order Wanshi Company to:

  • adjust its payments and compensate for the price difference in light of the 2014 price adjustment; and
  • pay the outstanding amount in full, as well as bank loans and interest arrears, totalling more than Rmb2.8 million.

In its defence, Wanshi Company noted that the natural gas price is set by the government and determined according to the law. As stipulated in Article 1(2) of the NDRC Notice on Adjusting the Natural Gas Price (1246/2013), natural gas prices are to be adjusted from the ex-factory stage to the city-gate stage. City-gate prices are guided by the government and subject to a cap, below which the parties may negotiate the price. Where the natural gas is transmitted and sold together in a mixed manner in long-distance gas pipelines (ie, where the transmitter and seller are the same entity), the city-gate price shall apply. Where the natural gas is transmitted in a mixed manner in long-distance gas pipelines but sold separately, the gas source price shall be negotiated by the supplier and the user, while transportation expenses shall be paid to the pipeline transportation enterprise at the pipeline transportation price as prescribed by the state. The NDRC Notice on Adjusting the Natural Gas Pipeline Transportation Price (789/2010) expressly stipulates that where the gas transmission distance is between 51 and 100 kilometres, the adjusted pipeline carrier cost is Rmb0.121 per cubic metre.

The abovementioned provisions expressly stipulate that the city-gate price will be guided by government prices (ie, what the West-to-East Gas Pipeline Project offered to Chuanqing Company). As such, Chuanqing Company could charge pipeline transportation costs only in accordance with government pricing. According to Chuanqing Company's complaint, the price of the gas supplied by the West-to-East Gas Pipeline Project to the Pingquan station was Rmb1.71 per cubic metre, plus Rmb0.121 per cubic metre for pipeline transportation from Pingquan to Xifeng South Zuomen Station. In 2014 the price of the natural gas supplied by Chuanqing Company to Wanshi Company was set at Rmb1.831 per cubic metre according to the law.

Wanshi Company contended that Chuanqing Company had illegally overpriced the natural gas. Further, according to the relevant legal provisions, Chuanqing Company – as the pipeline transportation enterprise – could charge pipeline transportation costs only in accordance with government pricing and any extra charges should be returned.

Decision

The Qingyan City Intermediate People's Court acknowledged that the natural gas terminal sale price is determined by the government. Before the natural gas price sold by Chuanqing Company to Wanshi Company was set by the relevant regulator, it could be negotiated by the parties within a range between Chuanqing Company's purchase price and Wanshi Company's sale price; the court thus had no power to set this price. In 2012 and 2013 Wanshi Company (the buyer) and Chuanqing Company (the seller) signed the Pingxi Pipeline natural gas sale and purchase contract. The court held that this contractual relationship was authentic and did not violate the law or relevant administrative regulations - nor did it harm state, collective or public interests - and was therefore legally valid. The court held that the parties should accordingly fulfil their obligations in accordance with the contract. The court also held that the Pingxi Pipeline natural gas pre-settlement agreement between the parties was also a complete and valid contract, and that the parties should fulfil their respective obligations under it.

After reviewing the payment settlement vouchers and payment vouchers, the court issued its judgment, holding that Wanshi Company owed Chuanqing Company Rmb2,626,458.73 for the period from April 2014 to May 2014, as well as interest arrears to the date of payment. The court dismissed Chuanqing Company's other claims and Wanshi Company's counterclaim.

Comment

The court's ruling in this case is well reasoned. According to the NDRC Notice on Adjusting the Natural Gas Price (effective June 28 2013), the city-gate price refers to the price at the point of ownership transfer from the supplier of onshore or imported pipeline natural gas to the downstream buyer (which can include provincial natural gas pipeline operating enterprises, urban natural gas pipeline operating enterprises and direct users). The city-gate price is the settled combined price of the factory price and the pipeline transmission price, and is determined based on government guidance. In this case, the city-gate price was the price at which Petro China's West-to-East Sales Company sold natural gas to Chuanqing Company. The natural gas transaction price agreed between Chuanqing Company and Wanshi Company was not the city-gate price, but rather the sale price set after the city-gate price. According to the applicable NDRC regulations, the sale price is determined by the local price administrative department; the court chose to give due respect to the contractual stipulations of the agreement between both parties before such price was determined by the relevant regulator.

Based on the facts, Chuanqing Company was not intended to play the role of natural gas pipeline transmission company (ie, carrier); rather, it was intended to be the seller. Therefore, it was inappropriate for Wanshi Company to contend that Chuanqing Company was entitled to charge only the pipeline transportation fee and not the price stipulated in a valid contract under Chinese law.

In future, as the price reforms extend further into the gas pipeline business, the gas pipeline carrier function will be separated from the carrier's own trading business in the natural gas enterprise and will be transformed into the role of independent natural gas pipeline transmission entity. As such, the carrier will charge only a carrier fee or transmission fee.

For further information on this topic please contact Libin Zhang or Guanggui Yao at Broad & Bright by telephone (+86 10 8513 1818) or email (libin_zhang@broadbright.com or guanggui_yao@broadbright.com). The Broad & Bright website can be accessed at www.broadbright.com.

Endnotes(1) Qingyang Chuanqing Zuanyu Gas Limited Liability Company v Qingyang Wanshi Natural Gas Co, Ltd, Qingyan City Intermediate People's Court (Gansu Province), Case (2014) Qing Zhong (Civil) Chu ZiNo 40 (October 19 2014).

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