The CCI has been actively involved in checking abuse of dominance under s. 4 of the Competition Act, 2002 (‘the Act’). Recently on July 3, 2014 it imposed a fine of over Rs. 25 crores on Adani Gas Ltd. for abusing its dominant position in the natural gas supply market. [1]
Origin of the case:
Adani Gas Ltd. (‘AGL’) is a company engaged in the business of setting up of distribution network in various cities for supplying natural gas to industrial, commercial and domestic customers. It would purchase natural gas from GAIL and supply them in the Faridabad market. The case came up before the Competition Commission of India (‘CCI’) based on the information filled by Faridabad Industries Association (‘FIA’) alleging contravention of Section 4 of the Act. FIA is an association of industries whose members consume natural gas supplied by AGL. The primary allegations against AGL were that AGL was abusing its dominance in the relevant market of ‘supply and distribution of natural gas in Faridabad’ by incorporating unconscionable and one sided terms in the Gas Supply Agreement (‘GSA’).On this basis they requested the CCI to modify the clauses of GSA, direct AGL to discontinue such practice and to impose penalties for its acts.
Finding a prima facie case the CCI directed the Director General (DG) to cause an investigation into the matter. The DG Report concluded that various clauses of the GSA hinted towards abuse of dominance by AGL.
Reasoning of CCI:
Dominant position as per s. 4, Explanation (a) is a position of strength enjoyed by an enterprise in the relevant market which allows it to operate independently of competitive forces. Thus for determining whether an enterprise is in dominant position three enquiries need to be made, the first what is the relevant market for determination of abuse of dominant position. Second question is whether AGL was in a dominant position in the determined relevant market. The final enquiry whether AGL abused its dominant position by setting unfair terms in GSA.
Relevant Market: Relevant product market has been defined by s. 2(t) as market comprising of all those products which are regarded as interchangeable or substitute by the consumers due to their intended use. Thus in the present case such an analysis would require investigation of industrial consumers and not domestic consumers based on the intended use and price. Therefore the relevant product market was decided by CCI as market of supply and distribution of natural gas to industrial consumers. Relevant Geographic market has been defined as market comprising the area in which conditions of competition of supply of goods distinctly homogenous which can be distinguished from neighboring areas. In the present case since Government of Haryana had authorized only AGL to operate a gas network in Faridabad, Faridabad would be the relevant geographical market.
Thus the relevant market was held to be market of ‘supply and distribution of natural gas to industrial consumers in Faridabad’.
Dominant Position in the relevant market: Dominance is a position of strength defined in terms of operating independently of competitive forces in the relevant market. When an enquiry into dominant position has to be mad the Commission has to keep in regard the following factors enumerated in s. 19(4) like market share of enterprise, market structure and size thereof, Countervailing buying power, dependence of consumers on the enterprise, regulatory entry barriers etc.
CCI observed that AGL had 100% market share due to it being the only enterprise authorized by Haryana Govt. to operate in the market in Faridabad. Further there were regulatory barriers in the form of authorization from Petroleum and Natural Gas Regulatory Board which would provide marketing exclusivity to the product for 3 years. There was also absence of power in the hands of the buyer to create competition between potential suppliers which is often known as countervailing buying power. Thus, after taking into consideration absence of any countervailing buying power, market share thereof as also the entry barriers, the Commission held AGL to be in dominant position in the defined relevant market.
Abuse of dominant position
Abuse of dominance has been defined under s. 4(2)(a)(i) to be a situation where the enterprise in dominant position directly or indirectly imposes unfair or discriminatory conditions in sale of goods, CCI found the following clauses of the GSA as imposing unfair conditions and therefore to be an abuse of dominance:
Clause on Billing and Payment: This clause provided that an excess payment made by the buyer gives rise to no liability on part of AGL to reimburse buyer. However in case of delayed payment, the buyers were liable to pay interest on such rates as may be specified by AGL. Both these terms were found to be unfair and thence in violation of s. 4(2)(a)(i) of the Act.
Expiry and Termination: The clause provide that AGL could terminate the contract on account of failure of buyer to offtake 50% or more of the cumulative Daily Cumulative Quantity during a period of 45 consecutive days with 30 day prior notice. However the DG in his report pointed out that in the supply contract between GAIL and AGL, AGL was given more than 45 days to fulfill its 50% offtake of cumulative Daily Cumulative Quantity. Thus, it was found unfair that AGL provided lesser time for compliance to its buyers while it enjoyed longer period for compliance from its supplier GAIL.
Force Majeure Clause: CCI observed that AGL had reserved the right on its sole discretion to accept/reject the request of the industrial consumers for requesting pardon of non-payment due to reason of force majeure like temporary shutdown of factory and even in event of unplanned emergency shut down the buyer would have to make payment of the Minimum Guaranteed Offtake. Thus, that to the extent AGL had reserved its sole discretion to accept/reject request of customers for force majeure without any rational basis , and the clause requesting for minimum payment even in case of emergency shutdown of the gas plant was found to be unfair condition for sale.
In conclusion the commission issued the following order:
Directing AGL to desist from indulging in such practices and to modify the GSA accordingly.
In pursuance of S. 27(b), imposing a penalty of around Rs. 25.67crore.
This decision can be stated to be a relief to the industries that are often left in the mercy of the hands of a few suppliers/distributors of raw material. However, AGL has approached the COMPAT in appeal against the order. COMPAT after hearing AGL on 6th August 2014 has issued notice to the CCI to appear before it.[2] It would be now for the appellate authority to decide whether the CCI was correct in imposing penalty for abuse of dominance.
Analysis of the order:
This order is a reiteration of the warning that the Commission has consistently been giving to the suppliers enjoying a dominant position in the market to frame fair Supply Agreements. One of the first cases of the commission which dealt with the terms of the supply agreement being violative of s. 4 was Maharashtra State Power Generation Co. Ltd. v. Coal India Limited. In this case the terms of the Fuel Supply Agreement of non-coking coal were found to be discriminatory towards public sector power generators as well as old power generating companies. The court rightly held these terms to be in violation of s. 4(2)(a)(i) because such a conduct would have a serious cascading effect on the entire economy and would impact the consumers ultimately. Once again Coal India Limited was fined in an order dated 15.04.2014 by the CCI for the continuing the unilateral terms in the Fuel Supply agreement without consulting and evolving a new draft through a bilateral process in spite of the previous CCI order directing the same. Thus it can be said that this case is a wakeup call to the Suppliers that the Commission will not take unfair terms in the Supply Agreements lightly.
[1] Order can be accessed here: < http://www.cci.gov.in/May2011/OrderOfCommission/27/712012.pdf>
[2] Order can be accessed here <http://compat.nic.in/upload/PDFs/augustordersApp2014/06_08_14.pdf>
This post has been authored by Sahithya Murali, a third year student at the West Bengal National University of Juridical Sciences.
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