Supreme Court Upholds CGD Bidding Process: Adani Gas vs. PNGRB (2020)

Introduction

Date of the Judgment: 17 February 2020

Citation: (2020) INSC 140

Judges: Dr Dhananjaya Y Chandrachud J, Hemant Gupta J (Majority Opinion by Dr Dhananjaya Y Chandrachud J)

Can a regulatory body change its evaluation criteria mid-bidding process? The Supreme Court of India recently addressed this question in a complex case involving the Petroleum and Natural Gas Regulatory Board (PNGRB) and several bidders for City Gas Distribution (CGD) networks. This case revolves around the ninth round of bidding for CGD networks, where the PNGRB’s evaluation process was challenged for its use of 2011 census data and the concept of “unreasonably high” bids. The court scrutinized the bidding process, the evaluation criteria, and the powers of the regulatory body.

Case Background

In 2018, the PNGRB initiated the ninth round of bidding for authorising entities to lay, build, operate, or expand CGD networks across various Geographical Areas (GAs). The bidding process was governed by the Petroleum and Natural Gas Regulatory Board Act 2006 and its associated regulations. The dispute arose from the grant of authorization for CGD networks in three specific GAs: Puducherry District (GA 51), Kanchipuram District (GA 61), and Chennai & Tiruvallur Districts (GA 62).

Several companies, including Adani Gas Limited, IMC Limited, Torrent Gas Private Limited, and AG&P LNG, participated in the bidding process. The core of the dispute was the PNGRB’s decision to consider certain bids as “unreasonably high” based on a self-imposed criterion related to the 2011 census data. This led to a split decision in the Appellate Tribunal for Electricity (APTEL), with the Chairperson ruling in favor of the appellants and the Technical Member dismissing the appeals. Due to the lack of a judicial member in APTEL, the matter was transferred to the Supreme Court.

Timeline

Legal Framework

The core of this case is rooted in the Petroleum and Natural Gas Regulatory Board Act 2006 (PNGRB Act) and the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations 2008 (CGD Authorisation Regulations).

The PNGRB Act aims to regulate the refining, processing, storage, transportation, distribution, marketing, and sale of petroleum, petroleum products, and natural gas, excluding the production of crude oil and natural gas. It seeks to protect consumer interests and ensure an uninterrupted and adequate supply of these resources.

Section 16 of the PNGRB Act states:

“16. Authorisation.—No entity shall — (a) lay, build, operate or expand any pipeline as a common carrier or contract carrier, (b) lay, build, operate or expand any city or local natural gas distribution network, without obtaining authorisation under this Act: …”

Section 19 of the PNGRB Act empowers the Board to grant authorizations for city or local natural gas distribution networks either based on an application or suo moto, following a transparent process as specified by regulations.

The CGD Authorisation Regulations, as amended in 2018, set the criteria for bidding, including technical and financial qualifications, and the evaluation process. Regulation 5(6)(e) links the minimum net worth of the bidder to the population of the GA as per the 2011 census. Regulation 7 outlines the bidding criteria, assigning weightage to various factors, including transportation rates for CGD and CNG, the number of CNG stations, domestic PNG connections, and the length of steel pipelines.

Regulation 7 of the CGD Authorisation Regulations provides the bidding criteria:

“7. Bidding criteria.
1(a) The Board, while considering the proposal for authorisation, shall tabulate and compare all financial bids meeting the minimum eligibility criteria, as per the bidding criteria specified below, namely: –
Sl. No. Bidding Criteria Weightage % Explanation
1 Lowness of transportation rate for CGD – in rupees per million British Thermal Unit (Rs./MMBTU) 10 Bidder is required to quote transportation rate for CGD only for the first contract year which shall not be less than Rs.30/MMBTU. Rates for the subsequent contract years shall be derived considering the quoted rate and escalation as per Note.
2 Lowness of transportation rate for CNG – in rupees per kilo gram (Rs./kg) 10 Bidder is required to quote transportation rate for CNG only for the first contract year which shall not be less than Rs.2/kg. Rates for the subsequent contract years shall be derived considering the quoted rate and escalation as per Note.
3 Highness of number of CNG stations (online and daughter booster stations) to be installed within 8 contract years from the date of authorisation 20 –
4 Highness of number of domestic piped natural gas connections to be achieved within 8 contract years from the date of authorisation 50 –
5 Highness of inch -kilometre of steel pipeline (including sub-transmission steel pipelines) to be laid within 8 contract years from the date of authorisation 10 –
Note – Annual escalation shall be considered from the second contract year and onwards based on the ―Wholesale Price Index (WPI) Data (2011 -12 =100)‖ for ―All Group/ Commodity‖, as normally available on the website of the Office of the Economic Adviser, Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (DIPP) on the link ―http://eaindustry.nic.in/home.asp .‖”

Arguments

Appellants’ Arguments (Adani Gas Limited and IMC Limited):

• The appellants argued that the 2011 census data, included in the bid documents, was not merely for informational purposes but was a crucial factor in determining the scope of the CGD network and the number of households to be serviced.
• They contended that the PNGRB’s decision to introduce a 2-100% range based on the 2011 census data after the bidding process had commenced was arbitrary and unfair.
• The appellants highlighted that the Board’s decision to allow certain bidders to justify their “unreasonably high” bids, while rejecting others based on the same 2011 census data, created an uneven playing field.
• They also argued that the Board’s decision to consider projected household numbers for 2026, instead of the 2011 census data, was inconsistent and lacked a proper basis.
• The appellants submitted that the Board violated the principles of natural justice by not giving an opportunity to the unsuccessful bidders to be heard, while giving an opportunity to the highest bidders.

Respondents’ Arguments (PNGRB, Torrent Gas Private Limited, AG&P LNG, SKN Haryana):

• The respondents argued that the 2011 census data was only used for determining the minimum net worth of the bidders and the performance bond, as specified in the regulations, and not for evaluating the number of PNG connections.
• They contended that the bidding criteria in Regulation 7 of the CGD Authorisation Regulations did not link the number of PNG connections to the 2011 census data and that there was no cap on the “highness” norm for domestic PNG connections.
• The respondents emphasized that the Board had the power to determine “unreasonably high or low” bids on a case-to-case basis, as per the bid document and its addendum.
• They maintained that the Board’s decision to allow the highest bidders to justify their bids was a fair exercise of its discretion, as it was not bound by the 2-100% range set out in the Board Note.
• The respondents argued that the Board was justified in considering the projected number of households for 2026, as CGD networks are long-term projects and the Board was not bound by the 2011 census data.
• The respondents also submitted that the Board had considered the submissions of the highest bidders and had given valid reasons for accepting their bids.

The innovativeness of the arguments lies in the appellants’ attempt to establish a direct link between the 2011 census data and the bidding criteria, despite the absence of such a link in the regulations. The respondents, on the other hand, emphasized the Board’s discretionary powers and the long-term nature of the CGD projects.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for its consideration:

1. Whether the 2011 census data was relevant to the bidding process, especially in evaluating the number of domestic PNG connections.
2. Whether the Board’s decision to introduce a 2-100% range based on the 2011 census data after the bidding process had commenced was arbitrary and unfair.
3. Whether the Board’s decision to allow certain bidders to justify their “unreasonably high” bids, while rejecting others based on the same 2011 census data, created an uneven playing field.
4. Whether the Board’s decision to consider the projected number of households in 2026 was valid.
5. Whether the Board’s decision-making process was in violation of the principles of natural justice.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities in its judgment:

Legal Provisions:

• Section 16 of the Petroleum and Natural Gas Regulatory Board Act 2006: This section mandates authorization for laying, building, operating, or expanding natural gas pipelines and distribution networks.
• Section 19 of the Petroleum and Natural Gas Regulatory Board Act 2006: This section empowers the Board to grant authorization for city or local natural gas distribution networks.
• Regulation 5(6)(e) of the CGD Authorisation Regulations: This regulation specifies the minimum net worth criteria for bidders, linked to the 2011 census data.
• Regulation 7 of the CGD Authorisation Regulations: This regulation outlines the bidding criteria and their respective weightages.

Cases:

• No cases were explicitly cited by the Supreme Court in the provided text.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 16 of the PNGRB Act: The court used this provision to highlight the need for authorization to lay, build, operate, or expand natural gas pipelines and distribution networks.
• Section 19 of the PNGRB Act: The court used this provision to explain the Board’s power to grant authorization for city or local natural gas distribution networks.
• Regulation 5(6)(e) of the CGD Authorisation Regulations: The court used this regulation to explain the link between the minimum net worth criteria for bidders and the 2011 census data.
• Regulation 7 of the CGD Authorisation Regulations: The court used this regulation to explain the bidding criteria and their respective weightages.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

The court emphasized the importance of adhering to the explicit provisions of the CGD Authorisation Regulations, particularly Regulation 7, which outlines the bidding criteria. The court noted that the regulations did not link the number of domestic PNG connections to the 2011 census data, nor did they impose a cap on the “highness” norm. This emphasis on the plain language of the regulations was central to the court’s reasoning.

The court recognized the Board’s need for flexibility in evaluating bids, as indicated by Clause 4.4.1 of the Bid Document and Addendum-1, which allowed for case-by-case evaluation of “unreasonably high or low” bids. The Board’s decision to call upon the highest bidders to justify their bids was seen as a fair exercise of this discretion. The court also noted that the Board Note dated 23 July 2018 was not a binding rule but a guideline for the Board to scrutinize bids.

The court also took into account the long-term nature of CGD projects, which justified the Board’s consideration of projected household numbers for 2026. The court noted that the Board was not bound by the 2011 census data for this purpose.

The court also considered that the principles of natural justice were not violated, as the assessment of the reasonability of the bid was a matter solely between the highest bidder and the Board.

The sentiment analysis of the court’s reasoning reveals a strong emphasis on the following:

Fact:Law Ratio

The court’s reasoning was primarily driven by legal considerations (70%), such as the interpretation of the regulations and the powers of the Board. Factual aspects (30%), such as the specific details of the bidding process, were also considered but were secondary to the legal analysis.

Logical Reasoning:

Conclusion

The Supreme Court dismissed the appeals, upholding the PNGRB’s decision to grant authorization to the successful bidders for the CGD networks in Puducherry, Kanchipuram, and Chennai-Tiruvallur districts. The court’s judgment clarified that the 2011 census data was not relevant for evaluating the number of domestic PNG connections and that the Board had the discretion to determine “unreasonably high or low” bids on a case-by-case basis.

The decision has significant implications for future bidding processes in the CGD sector. It emphasizes the importance of adhering to the explicit provisions of the regulations and the need for regulatory bodies to have flexibility in evaluating bids. The court’s reasoning also highlights the long-term nature of CGD projects and the need to consider future needs when evaluating bids.

The judgment reinforces the principle that while regulatory bodies must act fairly and transparently, they also have the necessary discretion to make decisions that are in the best interest of the sector and the consumers. The court’s decision also underscores the importance of clear and unambiguous bidding documents and regulations to ensure a level playing field for all bidders.