By an order(1) dated April 23 2015 the Competition Commission exonerated Gujarat Gas Company Limited (GGCL) for alleged abuse of dominance, despite the director general's finding that GGCL had abused its dominant position.
Saint Gobain Glass India Limited filed information with the Competition Commission against GGCL for imposing unfair conditions in its gas supply agreement and charging differential pricing. The main allegations related to alleged unfair amendments in the original gas supply agreement in South Gujrat, which was not only extended unilaterally from seven years to 12 years with no exit option (making it a long-term contract), but also included unfair and restrictive conditions (eg, a minimum guaranteed off-take clause, elimination of the buyer's right to terminate the contract and a right of first refusal for GGCL). The informant also submitted that in South Gujarat, GGCL's market share was more than 80%. In 2009 GGCL had 875 industrial customers, which accounted for 81% of its gas volume. This increased to 82.9% in 2010. In 2011 its natural gas sale volume increased by 3%, compared to the previous year. GGCL was one of the most profitable companies in the country.
The Competition Commission referred the matter to the director general for investigation. The director general distinguished between the market for the supply of natural gas under the administered pricing mechanism (APM) and the market for the non-APM supply of natural gas.
The director general found that since the informant was a non-APM natural gas user, the relevant market was suppliers of non-APM natural gas to industrial customers located in Bharuch (excluding Vagra Taluka) and Surat (excluding Hazira). The director general found that GGCL had the highest market share in terms of sales volume and value. GGCL had the advantage of vertical integration and had exclusivity in the marketing and infrastructure network. Further, the director general found that it was difficult for consumers to switch to other suppliers, as it was not viable for new suppliers to lay down dedicated gas pipelines. Thus, the director general concluded that GGCL was a dominant enterprise in the relevant market. The director general then examined the alleged unfair clauses in the original and amended gas supply agreement in relation to:
- the minimum guaranteed off-take liability;
- the long-term nature of the contract;
- the elimination of the buyer's right to terminate the contract; and
- the introduction of the right of first refusal, arbitration and differential pricing.
The director general concluded that GGCL's imposition of unfair clauses on the informant infringed Sections 4(2)(a)(i) and (ii) and 4(2)(c) of the Competition Act (ie, unfair terms and conditions leading to likely denial of market access).
In its reply to the director general's investigation report, GGCL objected to the market definition adopted by the director general. It submitted that the relevant product market was wrongly confined to natural gas, whereas based on end use, natural gas competes with other fuels (eg, furnace oil, electricity, high speed diesel and coal); and that customers could switch to these alternative fuels without incurring substantial costs. Therefore, the relevant market was broader than the director general had stated.
After examining GGCL's objections, the commission agreed with the director general's definition of the relevant market, holding that "the market for the supply of non-APM natural gas to industrial customers in the geographic areas of Bharuch (excluding Vagra Taluka) and Surat (excluding Hazira) districts of Gujarat" was the relevant market.
However, the commission disagreed with the investigative report with regard to GGCL's dominant position. The commission observed that the director general's conclusion in this regard was largely based on GGCL's market share, and other factors (eg, size, resources, the importance of competitors, vertical integration of enterprises and the dependence of GGCL's consumers) were not properly analysed. According to the commission, the director general failed to assess whether GGCL operated independently of competitive forces in the relevant market or had the ability to influence consumers, competitors or the relevant market. The commission also observed that other players (eg, Gujarat State Petroleum Corporation Ltd, IndianOil Corporation Ltd and GAIL (India) Limited) were operating and competing with GGCL in the relevant market (with regard to customers requiring more than 50,000 standard cubic metres of gas per day). As the director general had calculated GGCL's market share in terms of the total value and volume of sales – considering the entire spectrum of GGCL's customers, while excluding the supply of APM gas by GAIL and IndianOil – the director general's conclusion did not represent a true picture of the market shares of the parties. The result of these factors showed that, on the one hand, GGCL's market share was calculated without applying any equaliser; and on the other hand, the presence of two heavyweights (IndianOil and GAIL (India) Limited) which were consistently ranked second and third in the relevant market undoubtedly constrained GGCL's behaviour.
The commission also noted that GGCL had only one customer (ie, the informant) which required more than 1 million standard cubic metres of gas per day. With the presence of large companies (including public sector undertakings of the government in the relevant market), GGCL could not be considered dominant merely on the basis of questionable higher market share (based on the sales volume and value). Further, in terms of their scale of operations, size, resources and economic power, GGCL's competitors were far ahead of GGCL.
The commission thus concluded that since various companies were producing, transmitting and distributing natural gas throughout the country, GGCL could not operate independently in the relevant market or influence the relevant market. As such, the commission ruled that there was no question of any abuse of dominance by GGCL in the relevant market.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (firstname.lastname@example.org). The Vaish Associates website can be accessed at www.vaishlaw.com.
(1) Competition Commission order dated April 23 2015, available at www.cci.gov.in.
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