Supreme Court Upholds PNGRB Regulations on City Gas Distribution: Adani Gas vs. Union of India (28 September 2021)

Introduction

Date of the Judgment: 28 September 2021

Citation: (2021) INSC 622

Judges: Uday Umesh Lalit, J., S. Ravindra Bhat, J., Hrishikesh Roy, J. The judgment was authored by S. Ravindra Bhat, J.

Can a company claim automatic authorization to operate a city gas distribution network simply because it was doing so before the regulatory board came into power? The Supreme Court of India recently addressed this crucial question in a case involving Adani Gas Limited and the Union of India. This judgment clarifies the scope of “deemed authorization” under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB Act) and upholds the validity of regulations framed by the Petroleum and Natural Gas Regulatory Board (PNGRB).

The core issue revolved around whether Adani Gas Limited was entitled to “deemed authorization” for its city gas distribution network in certain areas of Ahmedabad, Gujarat, and whether the PNGRB’s regulations were valid. The Supreme Court’s decision has significant implications for the regulation of the natural gas sector in India.

Case Background

The case arose from a dispute between Adani Gas Limited (hereafter referred to as “Adani”) and the Petroleum and Natural Gas Regulatory Board (PNGRB) regarding the authorization to lay, build, operate, or expand city or local natural gas distribution networks. Adani had been operating a gas distribution network in Ahmedabad based on a policy of the Gujarat Government. After the PNGRB Act came into effect, Adani sought authorization for its network.

The PNGRB, after considering Adani’s application, granted provisional authorization for Ahmedabad city and Dascroi area, but excluded certain disputed areas (Sanand, Bavla, and Dholka). Adani challenged this exclusion and the validity of Regulation 18 of the CGD Regulations, which governs the authorization process for entities not authorized by the Central Government before the PNGRB Act came into force.

Adani contended that it was entitled to “deemed authorization” under Section 16 of the PNGRB Act and that Regulation 18 was ultra vires the Act. The PNGRB and Gujarat Gas, who were also respondents, argued that Adani’s petition was liable to be dismissed due to delays, and that Adani was not entitled to claim the reliefs it sought due to its conduct.

Timeline

Legal Framework

The judgment extensively discusses the following legal provisions:

• Section 16 of the PNGRB Act: This section mandates authorization from the PNGRB for laying, building, operating, or expanding any city or local natural gas distribution network. The proviso states that entities already engaged in such activities before the “appointed day” (1.10.2007) are “deemed to have such authorization,” subject to the provisions of Chapter IV of the Act.
  “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 authorization under this Act: Provided that an entity, – (i) laying, building, operating or expanding any pipeline as common carrier or contract carrier’ or (ii) laying, building, operating or expanding any city or local natural gas distribution network, immediately before the appointed day shall be deemed to have such authorisation subject to the provisions of this Chapter, but any change in the purpose or usage shall require separate authorization granted by the Board.”
• Section 17 of the PNGRB Act: This section outlines the procedure for applying for authorization. It distinguishes between entities authorized by the Central Government before the appointed day, who are required to furnish particulars of their activities, and other entities, who must apply for authorization.
  “17. Application for authorisation. (1) An entity which is laying, building, operating or expanding, or which proposes to lay, build, operate or expand, a pipeline as a common carrier or contract carrier shall apply in writing to the Board for obtaining an authorisation under this Act: Provided that an entity laying, building, operating or expanding any pipeline as common carrier or contract carrier authorised by the Central Government at any time before the appointed day shall furnish the particulars of such activities to the Board within six months from the appointed day. (2) An entity which is laying, building, operating or expanding, or which proposes to lay, build, operate or expand, a city or local natural gas distribution network shall apply in writing for obtaining an authorisation under this Act: Provided that an entity laying, building, operating or expanding any city or local natural gas distribution network authorised by the Central Government at any time before the appointed day shall furnish the particulars of such activities to the Board within six months from the appointed day.”
• Regulation 18 of the CGD Regulations, 2008: This regulation specifies the criteria for granting authorization to entities not authorized by the Central Government before the appointed day. These criteria include financial commitment, physical progress, and technical capabilities.
  “18. Entity not authorized by the Central Government for laying, building, operating or expanding CGD network before the appointed day. (1) An entity laying, building, operating or expanding CGD network at any time before the appointed day but not duly authorized to do so by the Central Government shall apply immediately for obtaining an authorization in the form as at Schedule I. (2) The Board may take into consideration the following criteria while considering the application for grant of authorization, namely: – (a) the entity meets the minimum eligibility criteria as specified in clauses (a) to (e) and (i) of sub regulation (6) of regulation 5 before the appointed date and is possessing all necessary statutory clearances, permissions, no objection certificates from the Central and State Governments and other statutory authorities; (b) an entity which is not registered under the Companies Act, 1956 at the time of submitting the application for grant of authorization shall undertake to become a company registered under the Companies Act, 1956: Provided that the Board may exempt an entity to register under the Companies Act, 1956 on such conditions as it may deem appropriate; (c) a satisfactory assessment of the actual physical progress made and the financial commitment thereof till immediately before the appointed day in comparison with the entity’s DFR appraised by the financial institution funding the project. In case the project has not been funded by any financial institution, the Board may appraise the DFR. The DFR of the entity should clearly indicate the specified geographical area of the project and also specify the coverage proposed for CNG and PNG. In case upon scrutiny of the DFR by the board by taking into account the geographical area, customer segments, infrastructure requirements, etc. proposed by the entity, the DFR is found to be sub -optimal and unacceptable, the Board may not consider the case of the entity for issuing the authorization; (d) in respect of the actual physical progress made and the financial commitment thereof referred to in clause (c), a physical progress of at least twenty five percent and a financial commitment of at least twenty five percent of the capital expenditure identified for the CGD project as per the DFR immediately before the appointed day may be considered as adequate; (e) the entity should have arranged, by way of acquisition or lease, land for CGS and procured the necessary equipment for erecting the CGS before the appointed day; (f) the Board reserves the right to get the actual physical progress and the financial commitment certified and depending upon the progress achieved, the Board may consider authorizing the entity for the authorized area – i) as per the geographical area in its DFR; ii)as per the geographical area actually covered under implementation till the appointed day; or ii) the geographical area as specified by the Board; (g) in relation to laying, building, operating or expanding the CGD network, it is for the entity to satisfy the Board on the adequacy of its ability to meet the applicable technical standards, specifications and safety standards as specified in the relevant regulations for technical standards and specifications, including safety standards and the quality -of-service standards as specified in regulation 15; (h) assessment of the financial position of the entity in timely and adequately meeting the financial commitments in developing the CGD network project as appraised by a financial institution and an examination of the audited books of accounts of the entity; (i) firm arrangement for supply of natural gas to meet the demand in the authorized area to be covered by the CGD network; (j) any other criteria considered as relevant by the Board based on the examination of the application.”

Arguments

Arguments by Adani Gas Limited:

• Adani argued that the proviso to Section 16 of the PNGRB Act should be interpreted broadly to include all entities involved in laying, building, operating, or expanding city gas distribution networks before the appointed day, irrespective of whether they had Central Government authorization.
• Adani contended that Section 17 of the PNGRB Act did not create a distinction between entities authorized by the Central Government and others, and that all entities were required to apply for authorization.
• Adani submitted that Regulation 18 of the CGD Regulations was ultra vires the PNGRB Act, as it imposed additional eligibility criteria not contemplated by the Act, and that the PNGRB had acted arbitrarily in its application.
• Adani argued that the authorization order excluding the disputed areas was a non-speaking order, violating natural justice and Section 17(5) of the PNGRB Act.
• Adani contended that it had undertaken substantial work in the disputed areas and fulfilled the criteria under Regulation 18, and that the PNGRB had wrongly curtailed its authorized area.
• Adani argued that its acceptance of a restricted authorization and participation in the tender process did not amount to acquiescence or waiver of its rights.

Arguments by the Respondents (Union of India, PNGRB, and Gujarat Gas):

• The respondents argued that the “deemed authorization” under Section 16 of the PNGRB Act applied only to entities authorized by the Central Government before the appointed day, in line with the Supreme Court’s opinion in Special Reference No. 1 of 2001.
• They contended that Section 17 of the PNGRB Act distinguished between entities authorized by the Central Government and others, with different procedures for each.
• The respondents submitted that Regulation 18 was valid and necessary to evaluate the viability and progress of projects by entities not authorized by the Central Government.
• They argued that Adani’s petition was liable to be dismissed due to delays, laches, and the principle of approbate and reprobate.
• The respondents contended that Adani had accepted the terms and conditions of the authorization, including the exclusion of the disputed areas, and could not challenge it later.
• They pointed out that Adani had participated in the bidding process for the disputed areas without protest, and only challenged the exclusion after being unsuccessful.
• The respondents highlighted that Adani had accepted authorizations awarded to it by following the procedure which it now challenged, without asserting its “deemed authorization” status at any stage.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. The scope of the “deemed authorisation” clause under the proviso to Section 16 of the PNGRB Act;
2. Validity of Regulation 18; and
3. Whether the exclusion of the disputed areas from the authorisation granted to Adani was justified.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Decision

The Supreme Court dismissed the appeals filed by Adani Gas Limited, upholding the judgment of the Gujarat High Court. The Court held that:

• The “deemed authorization” under Section 16 of the PNGRB Act applies only to entities authorized by the Central Government before the appointed day.
• Regulation 18 of the CGD Regulations is valid and within the powers of the PNGRB.
• The exclusion of the disputed areas from Adani’s authorization was justified, and Adani was barred by the principle of approbate and reprobate from challenging it.

Implications

This judgment has significant implications for the city gas distribution sector in India:

• Clarity on “Deemed Authorization”: The Supreme Court’s interpretation of “deemed authorization” clarifies that entities operating before the PNGRB Act came into force, but without Central Government authorization, cannot claim automatic authorization.
• Validation of PNGRB Regulations: The judgment upholds the validity of the PNGRB’s regulations, giving the regulatory board more authority to oversee and regulate the natural gas sector.
• Emphasis on Regulatory Compliance: The decision underscores the importance of complying with regulatory requirements and the need for entities to seek proper authorization for their activities.
• Principle of Approbate and Reprobate: The Court’s reliance on the principle of approbate and reprobate highlights that entities cannot accept benefits under a regulatory framework and then challenge the framework itself.
• Impact on Future Disputes: This judgment sets a precedent for future disputes related to the interpretation of the PNGRB Act and the validity of its regulations.

Authorization Flowchart

Conclusion

The Supreme Court’s judgment in Adani Gas vs. Union of India provides a crucial interpretation of the “deemed authorization” clause under the PNGRB Act. The Court’s decision upholds the regulatory authority of the PNGRB and clarifies the process for granting authorization to city gas distribution networks. The ruling underscores the importance of regulatory compliance and the need for entities to adhere to the established legal framework. By dismissing Adani’s appeals, the Supreme Court has strengthened the regulatory landscape for the natural gas sector in India, ensuring a more transparent and accountable environment for all stakeholders.