The Suppliers Perspective Mohit Saraf Partner Luthra & Luthra Law Offices 14 th November Arrival of Gas: Regulatory Imperatives

Luthra and Luthra Law Offices 2 Sanctity of contracts - Dhabol Gas Actually Reaches Consumer  Pipeline – Common Carrier Principle Gas remaining competitive under the present taxation regime Level Playing Field  Regassified LNG v Natural Gas  Natural Gas Pricing Policy Key Concerns of a Supplier

Luthra and Luthra Law Offices 3 Validity of Take or Pay Obligation under Indian Law Independence of Regulator Payment under SPA  Repatriation of Sale Proceeds  Credit Enhancement Mechanisms Key Concerns of a Supplier (contd.)

Luthra and Luthra Law Offices 4 Expected Features of Regulation Regulations need statutory basis  Certainty, Consistency & Constitutionality. Must be Comprehensive Participatory and Consensual Processes. Independent Regulator The Regulatory Imperative

Luthra and Luthra Law Offices 5 The Existing Legal Framework Indian Petroleum Act, 1934 – Rules for import by Central Government Oilfield (Regulatory & Development) Act, 1948 – Oilfield and development of mineral & oil resources Petroleum and Natural Gas Rules, 1959 – Petroleum Exploration License and Mining Lease Petroleum & Mineral, Pipelines (Acquisition of Right of User in Land) Act, 1962 – Right of User Oil Industry (Development) Act, 1974 – Levy duty of excise on natural gas Petroleum Rules, 1976 – Importation, Transportation and Handling FDI Policy - LNG under open general license (OGL) - 100% foreign direct investment is permitted (import regassification, distribution and marketing)

Luthra and Luthra Law Offices 6 The Proposed Regulatory Framework Petroleum Regulatory Board Bill 2002 (“Bill”) (as proposed to be amended based on Standing Committee recommendations )  Pipeline access- Common Carrier.  Check Anti-Competitive Practices.  No Government role in technical/ administrative matters.  Stringent penalties for tampering with infrastructure.  Data Bank and Information system.

Luthra and Luthra Law Offices 7 The Proposed Regulatory Framework Draft Pipeline Policy (“Policy”)  Common Carrier  Obligation to expand capacity if Regulator feels there is necessity.  Authorization for pipeline.  Interstate pipeline notified entity to construct – GAIL to build until entity notified

Luthra and Luthra Law Offices 8 General Regulatory Framework Dispute Settlement Mechanisms  Clause 13, 23, Central Bill - Regulator to arbitrate disputes  Significant disincentive for investment  Parties should have freedom to include arbitration clauses  S.158 TEA 2003

Luthra and Luthra Law Offices 9 General Regulatory Framework Multiplicity of Regulation and Regulator  Bill does not contain repealing/ overriding provisions.  Need for parent statute to clarify relationship with existing State and Central laws.

Luthra and Luthra Law Offices 10 Regulatory Framework for Gas Centre v. State  Need for Central Regulations  Prevent proliferation of state laws  Prevent inconsistency in laws  Intra State pipelines.  Conflicting Entries – Legalistic Interpretation might not allow Central law.  Presidential Reference pending  Options before Centre in case of negative opinion  Constitutional Amendment Article 368 – Consent of ½ of the States.  Common Law under Article 252 – Consent of the concerned State legislatures

Luthra and Luthra Law Offices 11 Gas Regulation Independence of the Regulator  Bill proposes that Selection Committee to select members of Regulatory Board from persons of eminence in petroleum industry, management, finance, law, administration and consumer affairs.  To ensure that all suitable persons are screened the Selection Committee itself should contain at least one or two members outside of government officers.

Luthra and Luthra Law Offices 12 Pipeline Policy Laying pipelines  Policy mentions regulator as authorising agency – Same not mentioned in bill – no statutory basis  Policy states that Inter-State pipelines/ High Pressure Gas Pipelines should be built by most cost effective entity – Incumbent should not be unduly favoured  Cross holding between transmission and distribution entities should not be permitted. Both Bill and policy silent – so de facto permission. Electricity bill prohibits.

Luthra and Luthra Law Offices 13 Pipeline Policy Declaration of common carriers  Every Pipeline (Policy) v. Regulators Decision (Bill) ? Inconsistency  Guidelines in bill - competition, duplication, wastage. maintaining & increasing supplies, equitable distribution Access to associated infrastructure  Bill does not extend common carrier principle to associated infrastructure  Principles Utility diminished.

Luthra and Luthra Law Offices 14 Pipeline Policy Tariff  Regulator to fix upper limit – rate of return approach.  Clarity required in policy on whether tariff should be distance based or postage stamp type.

Luthra and Luthra Law Offices 15 Conclusion Both Pipeline Policy and Petroleum Regulatory Bill 2002 are forward looking initiatives Conflicting interests of various players: Independence of Regulators is essential Participatory and consensual process Important that the Statutory Framework is put in place before the first consignment of LNG reaches India early next year