Supreme Court of India
OIL AND NATURAL GAS COMMISSION AND ANR.versusASSOCIATION OF NATURAL GAS CONSUMING INDUSTRIES OF GUJARAT AND ORS., ETC. ETC.
- Citation
- 1990 INSC 187
- Decided
- 4 May 1990
- Disposal
- Appeal(s) allowed
- Bench
- S RANGANATHAN
Holding
ONGC is not a public utility undertaking and its price fixation based on thermal equivalence is reasonable; therefore the High Court's order setting aside the prices is reversed.
Summary
The Oil and Natural Gas Commission (ONGC), a statutory corporation under the Oil and Natural Gas Commission Act, 1959, supplied natural gas to certain Gujarat industries under contracts whose prices were based on thermal equivalence with alternate fuels. The respondents, forming an association of gas‑consuming industries, challenged the price hikes, sought continuation of supply, and alleged discrimination and unreasonable rates. The Gujarat High Court held ONGC to be a public utility obligated to supply gas at reasonable rates, directing it to continue supply at interim prices. ONGC appealed, contesting the public‑utility label and the requirement to fix prices on a cost‑plus basis. The Supreme Court examined whether ONGC qualifies as a public utility, whether it must supply gas to the public at large, and whether the price fixation method was arbitrary. It concluded that ONGC does not meet the criteria of a public utility and that price fixation based on thermal equivalence is a recognised, reasonable method; the cost‑plus formula is not mandatory. Consequently, the Court upheld ONGC's price structure and dismissed the High Court’s orders.
Issues considered
- Whether the Oil and Natural Gas Commission qualifies as a 'public utility undertaking' under the Oil and Natural Gas Commission Act, 1959.
- Whether ONGC is obligated to supply gas to any member of the public at reasonable rates.
- Whether price fixation for gas must be on a cost‑plus basis or can be based on thermal equivalence with alternate fuels.
- Whether the prices charged by ONGC are arbitrary, unreasonable, or discriminatory.
- Whether the court can compel ONGC to continue supply at interim rates pending price determination.
- Whether the minimum guaranteed off‑take clause can be raised to 90%.
Legislation cited
- Constitution of Indias. Article 12, s. Article 14, s. Article 19, s. Article 226, s. Article 32, s. Article 38, s. Article 39
- Essential Commodities Act, 1955
- Industries (Development & Regulation) Act, 1951
- Land Acquisition Act, 1894
- Oil and Natural Gas Commission Act, 1959s. 14, s. 15, s. 23, s. 24, s. 2(f), s. 31
Subjects
public utilityprice fixationcost-plus methodthermal equivalencestatutory corporationconstitutional lawArticles 14, 19, 38, 39discriminationcontractual supplyjudicial review
Judgment
OIL AND NATURAL GAS COMMISSION AND ANR.
A
v.
ASSOCIATION OF NATURAL GAS CONSUMING INDUST-
RIES OF GUJARAT AND 9 ORS., ETC. ETC.
MAY 4, 1990 B
[S. RANGANATHAN, N.D. OJHA AND J.S VERMA, JJ.]
Constitution of India, 1950: Articles 14, 32 and 226-0GC-A
statl'.tory corporation-Whether State agency-'Public utility' concern
-Obliged to supply gas at reasonable rates-Price fixation-Inter-
ference by Court-Permissibility of. c
Oil and Natural Gas Commission Act, 1959: Section 14-
0NGC-Whether 'public utility' undertaking-Whether obliged to sup-
~- ply gas for consumption of public.
D
Words and Phrases: 'Public utility'-'Reasonab/eness of rates'
meaning of.
The appellant, Oil & Natural Gas Commission, is a statutory
corporation constituted by and under the Oil and Natural Gas Commis-
sion Act, 1959. In most of its oil fields situated in Gujarat, gas comes E
out along with crude oil as "free gas".
The appellant had agreed to supply this iias to the Gujarat State
Electricity Board (GSEBl and the Gujarat State Fertiliser Corporation
(GSFC) at a price related to fuel oil price on the basis of thermal value
equivalence, without any reference to the cost of production of gas as F
such. Public discontent over the alleged high price charged was expres-
sed and eventually the dispute was referred to the sole arbitration of
.~ - Dr. V.K.R.V. Rao who gave his award. Dr. Rao made the "cost plus"
method the basis of his award in preference to the basis of thermal
equivalence of alternate fuel (thermal equivalence basis).
G
In July 1967, the supply of gas to some of the industries in and
around Vadodara city was started, on the basis of individual annual
contracts. Aggrieved by the steady rise in the prices, the respondents--
Association of Natural Gas Consuming Industries and Others-moved
the Bombay High Court in March 1979 by way of a writ petition. In the
petition it was, inter alia, prayed that the UNGC be directed (i) to H.
157
158 SUPREME COURT REPORTS [1990] 3 S.C.R.
continue to supply the gas to the respondents despite the contracts in
A
their favour having lapsed; (ii) to discuss and negotiate·a fair, reason- '->(
able and just price for supply of gas; (iii) to stop charging discrimina-
tory prices for the supply of gas to the respondents in comparison with
the price charged to public sector undertakings; and (iv) to restrict the
minimum guaranteed quantity of offtake. ·
B
The High Court passed an interim order directing the ONGC to
continue the supply of gas to the respondents, at the existing rate of x
1''
Rs.50~ per unit which was later raised by the Court to Rs.1000 per unit.
The Hiizh Court held; (i) The Oil and Natural Gas Commisson is
c
a public Utility t:ndertaking and has a duty to supply gas to anyone who
requires it so long as there is enough supply available; (ii) Price fixation
is gmerally a legislative function. But the Oil and Natural Gas Commis-
-
-
sion being a State instrumentality, is bound to act reasonably in the
matter of fixation of price; such price is bound to be determined by
following any one of the modalities suggested in the judgment of the
D High Court; (iii) There was no discrimination by the Oil and Natural
Gas Commission between the public sector undertakings on the one
hand and the respondents' undertakings on the other in charging diffe-
rential prices; and (iv) The clause regarding minimum guaranteed off-
take was valid and enforceable.
E Before this Court, the appellant primarily challenged the finding
of the High Court that the ONGC was a 'public utility undertaking'
"
which was bound to supply gas at the request of any member of the
public at large. The appellant also contested the correctness of the High
Court's conclusion that the price of gas must be determined on the basis
ol cost of production plus a reasonable return for the investment made.
F The appellant submitted that (i) the prices under the contracts entered
into with the respondents had been determined on the basis of a well- - J..,
known principle, viz .. the ruling prices for an alternate fuel. and this
could not be said to be either arbitrary or unreasonable particularly
when a large number of industries were willing to take the supply of gas
at the prices fixed on that basis; (ii) while public sector units and State
G instrumentalities ought not to be allowed to exploit the consumers. it
was equally necessary to. ensure that such units and instrumentalities
were enabled to make reasonable profits; (iii) in the context of the
integrated activity of production of crude oil and gas, it was almost
impossible to work out the cost in respect of any particular area or of a
particular bye-product; (iv) the cost plus basis was fixed by the Award
H seHral years ago and that too in the context of supply to certain State
0.N.G.C. v. ASSOCIATION 159
undertakings which, in turn, supplied essential commodities like elect-
A
ricity and fertilizers; and (v) the onus of showing that the prices charged
were unreasonable or arbitrary was on the respondents and they had
done nothing to discharge this onus.
On behalf of the respondents it was contended that a public utility
undertaking could not arbitrarily discontinue its supply or services B
merely because the customer was unwilling to pay the price asked for as
unconscionable and unreasonable. It was further contended that the
price fixed must be reasonable and fair so as to give the undertaking a
reasonable return on the capital employed and that there could not be
any discrimination against industrial consumers, According to the
respondents, this was the only reasonable way of price fixation and
referred to the Award in support of this proposition. The respondents c
further urged that to allow Oil and Natural Gas Commission to sell gas at
a higher price than this merely because. otherwise, but for the availabi-
lity of gas. the consumers would have to spend more for their sources of
energy, will really amount to introduction an irrelevant element in the
process of price fixation and result in allowing the Oil and Natural Gas D
Commission to make unreasonable profits at the expense of unhappy
consumers. It was argued that these principles were applicable with
greater force in the context of the constitutional discipline over. state
instrumentalities under Article 38 & 39 of the Constitution.
Bolt v. Stennell CJ E.R.-Revised-p.1572; Al/null v. Inglis CIV E
E.R.-Revised-p. 206; Ira Y. Munn v. Peovle, 24 L.Ed. 77: United
Fuel Gas Co. v. Railroad Commission, 73L. Ed. 390; Los Angeles Gas
& Electric Corporation v. Railroad Commission. 77 L.Ed. 1180; Leo
Nabbia v. People, 78 L.Ed. 940; Harold E. West v. Chesapeake &
Potomac Telephone Com., 79 L.Ed. 1640; Federal Power Commission
v. Hope Natural Gas Co., 88 L.Ed. 333; Premier Automobiles v. Union, F
[1972] 2 S.C.R. 526; Panipat Cooperative Sugar Mills v. Union, [1973]
2 S.C.R. 860; Shree Meenakshi Mills v. Union, [1974] 2 S.C.R. 398;
Saraswati Industrial Syndicate v. Union, [1975] 1 S.C.R. 956; Prag Ice
and Oil Mills v. Union, [1978] 3 S.C.R. 293; Union of India v.
Cynamide India Ltd,, [1987] 2 S.C.C. 720, relied upon.
G
Allowing the appeals and upholding the prices charged by the Oil
and Natural Gas Commission, this Court,
HELD: (1) The Oil and Natural Gas Commission does not satisfy
the primary conditions for being a public utility undertaking as it has not
so far held itself out or undertaken or been obliged by any law to H
160 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
A provide gas supply to the public in general or to any particular cross-
-.(
section of the public. The proviso to Section 14(1)(e) of the Act which
lays down that the setting up of industries to be run with the aid of gas
was not to be undertaken by the Oil and Natural Gas Conunission
without the Cent•al Government's approval also gives an indication
that the supply of gas to various industries on a general basis was not in
B the immediate contemplation of the Act but was envisaged as a future
expansion to be initiated with Central Government's approval. Perhaps ~
a stage in the developmental activities of the Oil and Natural Gas Com- -f
mission will soon come when such an obligation could be inferred but,
at present, the Oil and Natural Gas Commission supplies gas only to
certain selected contractees. [ISIE-G)
~
c (2) It is however not necessary in this case to express any final
opinion on the issue whether the ONGC was a public utility undertaking
except to say, prima facie, that it could not be placed on par with a
_.,
public utility undertaking. AU that the respondents wanted was a decla-
ration that they were entitled fo' the supply of gas at a reasonable price.
D It was sufficient, for disposing of this claim, to deal with this aspect of
the matter and the larger aspect of Oil and Natural Gas Conunission
beinll..!!__ public utility undertaking could be left out of account. [183E-F)
.......-~ -·
(3) The treatment of the Oil and Natural Gas Conunission as a
public utility undertaking for the supply of gas will raise innumerable
E basic questions totally inconsistent with the present system of selective
supply which the respondents want to be continued. It will transpose
the area of controversy to a totally different and wider plane. The Court
would then be constrained to hold that the present system of supply was
inconsistent with public law and the constitutional requirements of a
public utility undertaking. [J83C-D)
F
(4) The main activity of the Oil and Natural Gas Commission is --'
that of exploration and prospecting for petroleum and petroleum
products. So far as gas, which is a bye product, is concerned, the Oil
and Natural Gas Commission has not so far been able to voluntarily or
constrained statutorily to harness and utilise its production for con-
G sumption by the public. llSIH; 182A]
(5) There is no doubt that Dr. Rao made the cost plus method the ')..
basis of his award in preference to the basis of thermal equivalence of
alternate fuel (thermal equivalence basis). But, the cost plus basis Oxed
by Dr. Rao in the background of the real nature of the dispute before
H him three decades ago could not be taken as conclusive in the present
O.N.G.C. v. ASSOCIATION 161
situation. Dr. Rao was concerned primarily with an issue raised by the
A
public of Gujarat as against the Oil and Natural Gas Commission. He
was really adjudicating upon the price which the Oil and Natural Gas
Commission should charge to public sector undertakings catering to the
essential needs of the State. In that context, his objective was, under-
standably, to fix the price as low as possible. The consumer under
consideration by him represented the public need of the State of B
Gujarat and, as against such public interest, the Oil and Natural Gas Com-
mission's profit requirements paled into insignificance. [189C; G; D-E]
(6) Here, the Court is dealing with a price to be fixed under a
contract between the Oil and Natural Gas Commission and one set of
industries in the State who wish to make a change over from the furn·
ance oil system to that of gas supply with a view to increase their own
c
profitability and gain an advantage, if possible, over other industries in
the State. In this context, Oil and Natural Gas Commission is entitled to
a larger latitude and charge a price which the market can bear. The
only restriction is that, being a State instrumentality, it should not be a
whimsical or capricious price but should be one based on relevant con- D
siderations and on some recognised basis. [189H; 190AJ
(7) Cost plus is not a satisfactory basis in all situations. May be
the cost plus is an ideal basis where the commodity supplied is the
product of a monopoly vital to human needs. In that context the price
fixed should be mumimum possible as the customer or consumer must E
have the commodity for his survivial and cannot afford more than the
minimum. Per Conti"' there can be situations where the need of the
consumer is not so vital and the requirements of the economic scene are
such that the needs of the producer should be given greater considera-
tion. In such situations, the "plus" element in the cost plus basis
(namely, the allowable profit margin) should not be confmed to "a F
reasmmble return on the capital'" but should be allowed to have a much
"larger content depending on the circumstances. Given a favourable
area of operation, commercial profits need not be either anathema or
forbidden fruit even to public sector enterprises. [191D-E; G-H]
Anakapallee Case, [1973] 2 S.C.R. 882; Venkatachalam v. De- G
puty Transport Commissioner, [1977] 2 S.C.R. 392, referred to.
(8) It would not be right to insist that the Oil and Natural Gas
Commission should fix oil prices only on cost plus basis. Indeed, its
policy of pricing should be based on the several factors peculiar to the
industries and its current situation. and so long as such a policy is not H
162 SUPREME COURT REPORTS [1990) 3 S.C.R.
irrational or whimsical, the court may not interfere. [195D)
A
(9) Price fixation is generally a legislative function. But Parlia-
ment generally provides for interference only at a stage where in
pursuance of social and economic objectives or to discharge duties
under the Directive Principles of State Policy, control has to be exer-
B cised over the distribution and consumption of the material resources
of the community. [195F]
Mis. Shri Sitaram Sugar Company Ltd. & Anr. v. Union, J.T.
1990 (1) S.C. 452; Jagadamba Paper Industries v. Haryana State Electr-
icity Board, [1984) l S.C.R. 165; Kerala State Electricity Board etc. v.
Mis. S.N. Govinda Prabhu & Bros. & Ors. etc., [1986) 4 S.C.C. 1968,
c referred to.
(10) It cannot he said that the Oil and Natural Gas Commission
has acted arbitrarily in fixing the prices on the thermal equivalence
basis; the fact that it has not done it on cost plus basis does not vitiate
D the price fixation. The only question to he considered is as to whether
the Oil and Natural Gas Commission has fixed a price based on relevant
materials and on some known principle. l200C]
(ll) The manufacture, distribution and consumption of gas has
yet not attained the status of an essential commodity till recently. At
E present, the industry is in the penumbra( region where the commodity is
free to be distributed at the manufacturer's choice, but yet where such
manufacturer beinJ? a State instrumentality, has to conform to Articles
14 and 19 of the Constitution. At this stage of development of the
industry a much wider latitude is permissible in the fixation of prices
than the imposition of a "no profit, no loss" basis or a "cost plus" basis
F on the producer. f200E-G)
(12) It is now well settled that a favourable treatment of public
sector organisations, particularly ones dealing in essential commodities
or service, would not he discriminatory. No tangible material has been
brought to the Court's notice which would support the plea of unfair
G discrimination. [203E-F)
( 13) 1be High Court rightly npheld the Oil and Natural Gas
Commission's right to insist on a munimum offtake guarantee. [202G)
Amalgamated Electricity Co. Ltd. v. Jalgaon Borough Munici-
H pality, [1976] 1S.C.R.636.
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.J 163
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
A
8530-40 of 1983.
Appeals by Certificate from the Judgment and Decree dated
30.7 .1983 of the Gujarat High Court in Special Civil Applicatior. Nos.
883 of 1979, 913 of 1979, 1897 of 1981, 2316 of 1982, 2384 of 1982, 2445
of 1982, 2470 of 1982, 2977 of 1982, 4194 of 1982, 4520 of 1982 nnd 2542 B
of 1982.
K. Parasaran, Attorney General, 8. Sen, A.K. Ganguli, Dr.
Y.S. Chitley, T.S. 'Krishnamurthy Iyer, N. Nettar, G.S. Narayana,
P. Parameshwaran, T.V.S.N. Chari and N.N. Sharma for the Appellants.
Anil B. Diwan, K.J. Kazi, Dr. L.M. Singhvi, Ms. M. Arora, Mrs.
c
B. Chib, M. Singhvi, D.A. Dave, Mrs. M. Karanjawala, R.N. Karan-
jawala, Mr. P.H. Parekh, Mr. C.A. Cazi and Mrs. H.S. Anand for the
Respondents.
D .N. Misra for the Intervenor. D
The Judgment of the Court was delivered by
RANGANATHAN, J. These are eleven appeals preferred by the
Oil and Natural Gas Commission (ONGC, for short) from a judgment
and order, dated 30th July, 1983, of a Division Bench of the High E
.Y Court of Gujarat at Ahmedabad in a batch of writ petitions, since
reported in 1983-24(2) Gujarat Law Reporter 1437. The appeals are
pursuant to a certificate of fitness granted by the High Court.
The ONGC was initially a Department of the Government of
India but, in view of its expanding activities in the search for strategic F
and vital materials like oil, petroleum and its products it was set up as a
JI>-- body corporate. It is now a statutory corporation constituted by and
under the Oil and Natural Gas Commission Act, (Central Act 43 of
1959, hereinafter referred to as 'the Act'). The Act provides for the
establishment of a Commission "for the development of petroleum
and petroleum products produced by it and for matters connected G
therewith". Section 2(f) of the Act defines 'petroleum' as having the
same meaning as in the Petroleum Act, 1934 (Act 30 of 1934) and as
including 'natural gas'. The Commission established under the Act
took over the previously existing organisatiOn with effect from 18. 9.59.
Some of the provisions of the Act which are relevant for our H
164 SUPREME COURT REPORTS [1990) 3 S.C.R.
present purposes may be set out here. Chapter III which deals with the
A powers and functions of the Commission consists of Sections 14 and
15. S. 14 reads thus:
"14. Functions of the Commission-
B (1) Subject to the provisions of this Act, the functions of
the Commission shall generally be to plan, promote,
organise and implement programmes for the development
of petroleum resources and the production and sale of
petroleum and petroleum products produced by it and to
perform such functions as the Central Government may,
from time to time, assign to the Commission.
c
(2) In pamcular and without prejudice to the generality of
the foregoing provision, the Commission may take such
steps as it thinks fit-
D (a) for the carrying out of geological and geophysical
surveys for exploration of petroleum;
xxx xxx xxx
(e) for the transport and disposal of natural gas and refi-
E nery gases produced by the Commission:
Provided that no industry, which will use any of these
gases as a raw material, shall be set up by the Commission
without the previous approval of the Central Government.
F xxx xxx xxx
(h) to perform any other function which is supplemental, --'..
incidental or consequential to any of the functions
aforesaid or which may be prescribed."
G Section 15 empowers the Commission to exercise all such powers as
may be necessary or expedient for the purpose of carrying out its
' functions under the Act. Such powers include the disposal of any pro-
perty, right or privilege, the original or book value of which exceeds
such amount as may be prescribed, or where no such amount bas been >
prescribed, exceeds ten lakbs of rupees and this power could be exer-
H cised after obtaining the previous approval of the Central Government
O.N.G.C. v. ASSOCIATION [RANGANATHAN, J.[ 165
[Clause (c)J. Chapter IV of the Act deals with finance, accounts, audit
A
and reports. Sections 16 and 17 deal with the capital of the Commis-
sion and the vesting, in the Commission, of the previous set up in this
regard. Section 23 of the Act requires the Commission to furnish to the
Central Government such returns and statements and such particulars
in regard to any proposed or existing programme for the development
of petroleum resources and the production and sale of petroleum and B
petro!eu!!! products produced by the Commission as the Central
Government may, from time to time, require. Section 24 in ChapterV
(Miscellaneous) enacts that any land required by the Commission for
carrying out its function under the Act shall be deemed to be needed
for a public purpose and such land can be acquired by the Commission
under the provisions of the Land Acquisition Act, 1894. S. 31 confers
rule making powers on the Central Government, in pursuance of
c
which have been framed the Oil and Natural Gas Commission Rules,
1960. The only rule relevant for our present purposes is rule 25, deal-
ing with contracts. It reads as follows:
"25. Contracts: D
(1) The Commission may enter into contracts for the
purpose of performing its functions under this Act;
Provided that provision therefor exists in the budget
approved by the Government. E
(2) Contracts made on behalf of the Commission shall not
be binding on it unless they are executed by a: person duly
authorised by it.
(3) A person authorised by the Commission to enter into F
any contract on its behalf shall not be personally liable for
any assurance or contract made on its behalf and any liabi-
lity arising out of such assurance or contract shall be dis..
charged from the Fund."
The statute, it may be observed, neither imposes a specific duty on the G
O.N.G.C. to supply its products to consumers at large nor contains
any provisions regarding the fixation of prices for the commodities
made available by the O.N.G.C. for sale.
In the course of its drilling and exploration of oil, the ONGC
discovered oil-bearing fields in Cambay and Ankleswar region in 1969 H
166 SUPREME COURT REPORTS [1990] 3 S.C.R.
and 1961 respectively. In most of the oil fields situated in Gujarat, gas
A
comes out along with crude oil and is commonly known as "associated
gas". In Caml!ay area, gas is unaccompanied by crude oil and is known
as ''free gas". This is easily combustible and can be used as domestic as
well as industrial fuel. We are concerned here with both these com-
modities which are generally known as 'natural gas' and we shall refer
B to them compendiously as 'gas'.
In October, 1961 ONGC first thought of the idea of using natural
gas in addition to fuel oil in industries. It had detailed discussions with
the Gujarat State Electricity Board (GSEB) and it was agreed between
them that gas should be supplied to the GSEB at a price related to fuel
oil price on the basis of thermal value equivalence. On this basis, an
c agreement was entered into between them in March, 1963 whereunder
the price of fuel oil was fixed at Rs. 77 .26 per tonne including rail
frieght; and, based on this price and thermal value equivalence, the
price of Cambay gas was fixed at Rs.80.14 per 1000 cubic metres
(hereinafter referred to as 'the Unit') and of Ankleshwar gas at
D Rs.106.66 per unit, rounded off to Rs.80 and Rs.100 per unit respec-
tively. The ONGC began to supply gas from Cambay region ofDhru-
van Power Station in 1964 and from Ankleshwar to Uttaran Power
Station in 1965. The ONGC also entered into discussions with the
Gujarat State Fertilizer Corporation (GSFC) and ultimately it was
agreed, on the footing of the price of Rs. 76 per tonne in respect of
E Koyali Naphtha, that associated gas should be supplied to the GSFC at
between Rs.88 and Rs.90 per unit on the principle of thermal equiva-
lence. This was in 1966. It may be mentioned here that the three
parties concerned viz. the ONGC, GSEB and GSFC, had more or less
agreed to the principle of determining the price of gas on the basis of
F
thermal equivalence with an alternative fuel or feedstock emanating
from the processing of crude oil. There was no reference to the cost of
production of gas as such.
1
-4
Despite the above agreements, however, the concerned parties
were not all very happy. The GSFC resented the fact that discount was
not given to them as bulk purchasers and that the prices charged for
G the Trombay fertiliser factory and power house at Bombay were sub-
stantially lower than the prices that the ONGC charged them. Eventu-
ally, public discontent was expressed over the alleged high price that
was being charged for gas by the ONGC to these organisations. It was
felt that the ONGC was denying to them the advantage they should
have obtained by the discovery of gas in the region of their operation.
H It was also felt that this treatment resulted in discrimination against
O.N.G.C. v. ASSOCIATION {RANGANATHAN, J.] 167
them in comparison with advantages enjoyed by other States due to A
the availability of fuel resources such as coal or hydro-power within
their areas. In view of these expressions of public feeling, the question
of fixing a proper price for the gas was taken up by the Government of
·Gujarat with the Government of India. Eventually, as no agreement
could be arrived at, the disputes was referred to the sole arbitration of
B
Dr. V.K.R.V. Rao who gave his award (hereinafter referred to as 'the
award') on 23.9.1967. He determined the price of natural gas at Rs.50
per unit ex-well-head, to which were added royalty, sales-tax, depre-
ciation and the transport charges. This award was to be enforced for a
)-· period of five years i.e. upto 31.3.1971. Between April 1971 and
December 1975, the well-head price was increased and fixed at Rs.66
per unit, we are all told, on the intervention of the then Gujarat c
Governor. These prices were revised subsequently. The supply to
GSEB was revised to Rs.155 and the rate of supply to GSFC was
revised to Rs.320 per unit.
At that time, there were very few industries set up in and around
D
Vadodara and these depended, besides electricity, on other forms of
energy generated through coal or fumance oil. In July 1%7, the supply
of gas to some of these industries in and around Vadodara city was
started, initially as a temporary measure pending the effective
materialisation of the Gujarat Fertilizer Corporation demand, after
- which the industries were to go over to fuel oil if gas could no longer be
supplied. After a series of discussions, the Federation of Gujarat Mills
and Industries agreed to a price of Rs.100 per unit of Ankleswar gas
E
for this supply. The charging of ten rupees less per unit supplied to the
Fertiliser Corporation was justified on the ground that such differenti-
ation was consistent with general practice where a petroleum feed
stock is used for chemical industry. Among the industries that thus
F
received gas supply were the ten respondents (respondents 2 to 10 in
these appeals) who have formed themselves, in September, 1978, into
an association called "The Association of Natural Gas Consuming
Industries of Gujarat", which is respondent No. 1. The supply to these
industries-extended later to a few more-was based on individual
contracts entered into with each one of the concerns. Initially, the
G
ONGC entered into contracts valid for a period of five years at a time
but, subsequently-it is said, due to a fear of possible shortage in the
availability of enough gas-this was changed and the contracts were,
generally, made annual, except in regard to certain public sector
undertakings and, it is said, a few companies. The rates of supply were
also slowly stepped up as can be seen from the following table: H
168 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
Period Price of supply
A
1.1.1976 to 31.03.1976 Rs.322.63.
1.4.1976 to 31.12.1976 Rs.341.45
1.1.1977 to 31.03.1977 Rs.351.00
1.4.1977 to 31.12.1977 Rs.371.16
B 1.1.1978 to 31.03.1978 Rs.382.15
1.4.1978 to 31.03.1979 Rs.504.00
According to the ONGC, the price demanded from these
industries and initially been based on alternative fuel cost i.e., the cost.
which these industries would have had to pay for fuel oil if no supply of
gas had been available. Later, upto December 1975, the price was
c based on the cost of production, as determined by the award. After the
expiry of the period of operation of the award, the basis for calculation
of price was revised on the basis of the thermal equivalence of coal
price. The rates of supply from 1.4. 78 as fixed above from time to time
were also made subject to an automatic annual escalation at 5%. The
D contracts, as already mentioned, were annual and contained no term
for renewal. On the expiry of each contract, a fresh contract had to be
entered into and, naturally, the new contract stipulated prices for sup-
ply that were prevalent at the time of the respective contracts. It may
be mentioned that the existing contracts with the various consumers
had lapsed by efflux of time on 31.3.79 in some cases, 30.1.80 in some
E other cases and in 1982 in respect of others.
Aggrieved by the steady rise in the prices, writ petition No. 883
of 1979 was filed by the respondents in the Bombay High Court in
March 1979. In this writ petition it was prayed that the ONGC should
be directed (a) to continue to supply the gas to them despite the
F contracts in their favour having lapsed; (b) to supply the break-up and
the data on the basis of which the price structure was arrived at and to
fix the price after giving reasonable opportunity to the concerned
industries or their associations; (c) to discuss and negotiate a fair,
reasonable and just price for supply of gas; (d) to restrict the minimum
guaranteed quantity of offtake to 75 per cent of the contracted
G quantity (this was because the ONGC had been insisting on raising the
said guarantee to 90 per cent) and; (e) to stop charging discriminatory
prices for the supply to the respondents in comparison with the price
charged to public sector undertakings. Pending the hearing and final
disposal of the petition, an interim order was sought restraining the
ONGC from discontinuing the supply of gas to the petitioners on such
H terms as the Court may think fit and proper.
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 169
On 30.3.1979, the Court passed an interim order permitting the A
petitioners to continue to pay "on the same terms as at p~esent" Le. at
Rs.504 in some cases and a slightly different figure in other cases.
Subsequently, however, with the passage of time the price of gas was
stepped up by the ONGC in the following manner:
Period Amount B
1.4.1981to31.12.1981 Rs. 741.00
~-
7 1. 1. 1982 to 31. 12. 1982 Rs.2095.70
.... 1.1.1983 Rs.2403.03
15.2.1983 Rs.2503.03
17.3.1985 Rs.2878.00
c
We are told that the sudden jump in prices w.e.f. 1.1.1982 was conse-
quent on the decision of the ONGC to change the basis of fixation of
price, once again, to furnace oil equivalence. In view of this increase in
~ · the prices demanded by it from other parties, who according to the
ONGC were willing to pay the price asked for, an application was D
made to vacate or modify the interim order dated 30.3.1979. On
5.11.1982, the Division Bench of the High Court, after pointing out
the various difficulties and questions raised by the case thought it
would be fit and proper to direct the ONGC not to discontinue the
supply of gas but to continue to supply it at the rate of Rs.1,000 per
unit till November 30, 1983 (unless the petition was disposed of in the E
meanwhile), subject to adjustment being made in case this Court or
the machinery evolved at the time of final disposal of the petition
determined the price of gas at a different rate. ·In other words, if,
ultimately, the price of gas should be determined at a higher rate, the
writ petitioners would be obliged to make good the difference. In case
a lower rate should be determined, the ONGC would be obliged to F
r6fund the excess amount collected or adjust it against future supplies,
as the Court may direct at the time of disposing of the matter finally. A
similar order was passed Qn 29.12.1982 in another batch of cases.
When these appeals were filed a Bench of this Court, on 6.10.1983,
continued the interim price of Rs.1,000 per.unit without prejudice to
the rights and contentions of the parties and directed the appeals to be G
expedited.
It has taken six years since then for these petitions to come up for
....... .hearing and till now the respondents have continued.to pay at the rate
of Rs.1,000 per unit. It has been stated before us that some of the
respondents have failed to.pay even at the rate of Rs.1,000 as directed H
170 SUPREME COURT REPORTS [1990] 3 S.C.R.
by this Court and that this Court had to direct, by its orders dated
A
15.4.87 and 30.10.87, that the respondents "will not charge, encumber
or alienate, except with the leave of this Court, any of their immovable
assets included in the respective undertakings and that they will make
their immovable assets available for discharging the respective liabili-
ties on account of the difference in the price of (all) the gas supplied to
B them (and) further during the pendency of the appeals as determined
by the orders made by the Court while disposing of the appeals."
In order to complete the narration of relevant facts, it may be
mentioned here that, though natural gas, being a "petroleum product"
falls within the scope of the Essential Commodities Act and though
control orders have been issued under the said Act regulating the
c supply and distribution of several petroleum products, it is only by an
order dated 30.1.1987 that the price of gas has been fixed by the
Government at Rs.1400 per unit which, together with taxes, comes to
about Rs.1848 per unit. It may also be mentioned that, while on the
one hand the said fixation of price has been challenged by the peti-
D tioners and certain other industries before the Gujarat High Court, the
Government, on the other hand, is in the process of revising .the
prices, perhaps to a higher figure, in consultation with the Bureau of
Industrial Costs and Prices. In the petitions which are pending before
the Gujarat High Court an interim price of Rs.1,000 has been fixed
following the orders in the matters now before us. The result is that,
E ever since January 1983 and till today, most of the petitioners have
been paying for the gas supplied only at the rate of Rs.1,000 per unit
and some of the industries have defaulted even in doing this.
A prayer was made by the Union of India to transfer to this
Court the writ petition subsequently filed challenging the price fixation
F of 30.1.87 but this request was declined on 4th August, 1988. This
court observed that, after these appeals are disposed of, the High
Court can proceed to dispose of the said writ petitions in accordance
with the judgment. The position, therefore, is that we are not con-
cerned in these appeals with the period beyond 30.1.1987 when the
jurisdiction to fix prices came to be vested in the Central Government.
G We are concerned in these matters only with the period from the date
of expiry of the contracts in favour of each of the respondents to
30.1.1987 and with the following questions: (a) whether the O.N.G.C.
is at liberty to fix its own price for the gas or should be directed to fix
,l .
the price in any particular manner; (b) whether the O.N.G.C. can be
directed to supply data and the break-up for the price charged and to
H negotiate the price with the parties concerned; (c) whether the
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 171
0.N.G.C. can be compelled to continue to supply gas to the various
A
petitioners at the interim prices fixed by the court subject to adjust-
ment on fixation of prices determined in accordance with the direc-
tions of the court; and (d) whether the minimum guarantee of off-take
could be raised by the O.N .G.C. to 90 per cent instead of75 per cent.
It is unnecessary at this stage to set out the various contentions B
raised by the parties before the High Court as they will have to be
discussed in some detail later. Here it may be suffici£nt to summarise
the effect of the High Court's judgment in disposing of these writ
petitions. The High Court held:
(i) The 0 .N .G .C. is a public utility undertaking and has a
duty to supply gas to anyone who requires it so long as there is
c
enough supply available;
(ii) Price fixation is generally a legislative function. But
the O.N.G.C., being a State instrumentality, is bound to act
reasonably in the matter of fixation of price; such price is bound D
to be determined by following any one of the modalities sug-
gested in the judgment of the High Court;
(iii) There was no discrimination by the 0.N.G.C.
between the public sector undertakings on the one hand and the
respondents' undertakings on the other in charging differential E
prices;
-- (iv) The clause regarding minimum guarantee was valid
and enforceable.
However, in view of its finding that the ONGC is a public utility F
"~ undertaking, the Court took the view that it should supply gas to the
respondents subject to the availability of gas supply and also that such
supply should be made at a price which was to be determined in one of
the four different methods set out in paragraph 36 of the judgment. It
was also observed by the Court that, the respondents were agreeable
to price fixation by anyone of three of the said methods. The conclud- G
ing portion of the judgment, reads thus:
: ;.. "36. Now we come to the last part of this judgment. It is
regarding what relief should be granted in this group of
petitions. We have already said above that the action of the
ONGC in charging the rate in the respective cases is H
172 SUPREME COURT REPORTS [1990] 3 S.C.R.
ex-f~ unreasonable and to that extent their demand for -('
A
the said price is set.aside. The ONGC however, shall be at
liberty to get the price for that period and subsequent
period fixed according to the reasonable and rational
norms and for that purpose it is open to the ONGC to
follow
_., ..'
any
.
one of the following three courses:
B
(i) They may request the Central Government to appoint a ';":
Commission for the purpose of deciding the prices of gas 4
from time to time, including the time for which we have set
aside their demand of price, invoking the provisions of the
Commission of Inquiry Act or any other law;
c (ii) They may invoke the arbitration of some eminent
economist in consultation with the petitioners; or
--<.
(iii) They may themselves decic;le the price, after bringing
to their consideration all relevant factors and for that
D purpose they may hear fully and effectively the petitioners
and other persons likely to be affected thereby:
If the last of the above three courses is adopted by the
ONGC for deciding the price structure afresh, it would be
in their interest to give hearing to the persons likely to be
E affected so that the possibility of a new round of litigation is
avoided. We reiterate that as far as the petitioners are con-
cerned, they are amenable to any of the three modes which
the ONGC may choose to adopt.
--
"37. We accordingly set aside the prices demanded by the
F -ONGC from these petitioners in this group of petitions,
leaving it open to the ONGC to deal with the question of
price fixation in any one of t!ie three modes suggested by
us. The petitions are accordingly partly allowed. Rule is
accordingly made absolute in all these petitions with costs.
G 38. The civil applications, in view of the final decision, do
not survive and stand disposed of and till the new price
fixation is had, the price charged last from these petitioners
under the respective contracts with them shall continue to
9perate between the parties, subject to adjustments in
future after prices are fixed as stated above."
H
O.N.G.C. v. ASSOCIATION [RANGANAIBAN, J.] 173
Shri B. Sen, who appeared for the ONGC, made it clear at the A
outset that he was not disputing the propositions (a) that the ONGC is
'State' within the meaning of Article 12 of the Constitution; and (b)
that it has a duty to act reasonably and fairly so as not to infringe the
provisions of Articles 14 and 19 and also in consonance with the direc-
tive principles of State policy set out, inter alia, in Articles 38 and 39 (b)
of the Constitution. His challenge is, primarily, to the finding of the B
-,. · High Court that the ONGC is a 'public utility undertaking' which was
..-- bound to supply gas at the request of any member of the public at large
and to its direction that it should continue to supply gas to the respon-
dents at an uncertain price till the price is fixed in accordance with the
procedure outlined by it, notwithstanding that the contracts under
which the respondents procured such supplies have e; )ired long ago. C
He also contests the correctness of the High Court's conclusion that
the price of gas must be determined on the basis of cost of production
,.. plus a reasonable return for the investments made, (herinafter refer-
red to broadly as the "cost plus" basis). He submits that the prices
under the contracts entered into with the respondents have been
determined on the basis of a well-known principle viz. the ruling priet:s D
for an alternate fuel and this cannot be said to be either arbitrary or
unreasonable particularly when a large number of industries are even
today willing to take the supply of gas at the prices fixed on that basis.
He also complains that the High Court overlooked that the respon-
dents are not domestic but industrial consumers. If the ONGC were to
be treated as a public utility bound to supply an essential commodity of E
this nature to any one for the asking subject to availability, it may be
that the price for such supply should be fixed on a cost plus basis. But
where the supply is limited to certain industries and other similarly
placed industries have to produce similar goods by consuming furn-
ance oil or other equivalent alternate fuel, it is quite reasonable for the
O.N .G .C. to stipulate-indeed, it would be discriminatory, were it not F
to stipulate-that its prices woulct'·be based on the cost of alternate fuel
which would have to be incurred by these industries otherwise and
which is in fact being incurred by other industries engaged in the
production of similar goods to which the O.N.G.C. is not making any
supplies at all. Sri Sen urges that while public sector units and State
instrumentalities should not be allowed to exploit the consumers, it is G
equally necessary to ensure that such units an!l instrumentalities are
enabled to make reasonable profits and made good as commercial
enterprises by charging prices which the "traffic can bear" so that they
can also contribute substantially to national development. It is submit-
ted that, as against the respondents who are receiving supplies at the
rate of Rs. 1,000 per unit, there are 29 industries paying the Govern- H
174 SUPREME COURT REPORTS [1990] 3 S.C.R.
ment-fixed price of Rs.1840 (since 1987), 12 other parties who have
A earlier signed contracts at the furnace oil equivalent rate and 65
industries which are willing to sign contracts at the aforesaid Govern-
ment rates. It should not also be overlooked that, even if the cost plus
basis were to be contemplated, the prices would require substantial
revision considering the huge expenditure incurred by the Govern-
B ment of India in recent years in prospecting for oil and the need for
heavy capital investment for meeting which the Government has had
to obtain huge loans from the World Bank and other organisations. In _,'-<,
the context of this integrated activity, it is almost impossible to work
out the costs in respect of any particular area or of the particular
bye-product with which we are here concerned. The cost plus basis was
fixed by the award several years ago and that too in the context of
c supply to certain State undertakings which, in tum, supplied essential
commodities like electricity and fertilisers. Subsequent enquiry com-
missions (such as the Damle award) do not price commodities on the ~
basis of cost. The ONGC, if it is to function effectively and make
reasonable profit on the supply of this commodity, should be allowed
D the latitude atleast to fix its own principle of pricing. So long as such
principle is a recognised one and is not per se unfair or unreasonable.
the court should not interfere. Else, Sri Sen submits, a controversy
regarding fixation of price will be raging eternally as the industries
would raise some objection or other to the price fixation, whatever it
be, and the interests of the public will suffer if the ONGC is con-
E strained to stick to the throw-away prices fixed in outdated contracts
until prices can be fixed on a basis agreeable to the consumer
industries, as has indeed happened in this case during the past ten
years. Sri Sen concluded by urging that the onus of showing that the
price charged was unreasonable or arbitrary was on the respondents
and they had done nothing to discharge this onus, except saying that
F the prices have been stepped up from time to time and that the
increase in prices has been steep. Rather they have, in their pleadings,
sought to throw the onus on the ONGC to prove that the prices
charged by it are fair and reasonable. Even this, says Sri Sen, the
ONGC has done.
G The discussions in the judgment of the High Court and, to some
extent, the discussions before us have touched several aspects of the
principles to be kept in mind for price fixation of essential com- ;.._
modi ties basic to public need and, in doing so, have, in our opinion,
travelled beyond the framwork and scope of the questions that arises
for consideration in this case. It is necessary to remember that the writ
H petitioners are a few industrial houses which had entered into con-
O.N.G.C. v. ASSOCIATION [RANGANATHAN, J] 175
tracts with the ONGC for supply of natural or associated gas. These
>· were ordinary commercial contracts entered into by private treaty bet· A
ween the ONGC and these respondents to sell and buy certain goods
produced by the ONGC at the prices stipulated in the contracts.
Looked at purely from the contractual angle, the ONGC was perfectly
at liberty to stop the supply on the expiry of the relevant contract and
refuse to suppply further unless a fresh contract could be entered into B
agreeing upon a price for such supply. Assuming that the ONGC is a
>- State instrumentality and the price demanded by it is susceptible to
>- judicial review, the court may, where a contract has been entered into,
consider the sustainability of the price agreed upon or where no con-
tract has been entered into, injunct the ONGC from demanding a
price for supply which is found unreasonable. But we doubt whether it
is open to the Court to direct the ONGC to continue the supply inde- c
finitely without a contract and without any price fixation.
It is clear that, in giving directions as above, the Court was
considerably weighed by its conclusion that the ONGC is a public
utility undertaking which is bound to supply gas to all who demand D
such supply subject only to the availability of enough gas. Dr. Chitale,
for the respondents, strongly supported this viewpoint. He urged that
it is well settled law that a public utility cannot arbitrarily discontinue
its supply or services merely because the customer is unwjlling to pay
. the price asked for as unconscionable and unreasonable. He submitted
/ that this, indeed, is not a modem rule of constitutional law but an E
ancient rule of public law. He referred in this context to the early
decisions of the King's Bench Division in Bolt v. Stennett, CI E.R.-
~ Revised-p. 1572 followed in Allnutt v. Inglis, CIV E.R.-Revised-
~, p. 206 as laying down the basic principle in this regard. This principle,
he said, has also been applied by the American Courts in Ira Y. Munn
v. People, 24 L.Ed. 77; United Fuel Gas Co. v. Railroad Commission, F
;._ 73 L.Ed. 390; Los Angeles Gas & Electric Corporation v. Railroad
I
Commission, 77 L.Ed. 1180; Leo Nebbia v. People, 78 L.Ed. 940;
Harold E. West v. Chesapeake & Potomac Telephone Co., 79 L.Ed.
1640 and Federal Power Commission v. Hope Natural Gas Co., 88
L.Ed. 333). These decisions clearly lay down, according to him, that
the price fixed must be reasonable and fair, that the price should be so G
fixed as to give the undertaking a reasonable return on the capital
employed and that there cannot be any discrimination against indust-
. -'"' rial consumers. These principles, he argued, are applicable with grea-
ter force in the context of the Constitutional discipline over State
Instrumentalities under Articles 38 and 39 of the Constitution which
mandate the State to direct their policy towards securing "that the H
176 SUPREME COURT REPORTS [1990] 3 S.C.R.
ownership and control of material resources of the community are so
A
distributed as to subserve the common good."
As already stated, the ONGC does not dispute the proposition
that it is a State instrumentality and that its actions are subject to
review under Articles 14 and 19 of the Constitution; it only refutes the
B suggestion that it has become a public utility undertaking with an
obligation to supply gas to any consumer on reasonable conditions as
to price etc. It is contended by Sri K. Parasaran and Sri B. Sen that the '"'\
ONGC is not a 'public utility' under a duty to supply gas to members of-<
the public. It is argued that in English common law, the expression has
a specific connotation; it refers to an entity dealing in a commodity
which is commonly used by the members ot the public and under a
c duty, in terms of a statute, licence or franchise obliging it to supply the
commodity to the public at large. Thus, for example, in England the
Public Health Act, 1936, the Electricity Act, 1947 and the Gas
Act, 1948 provide examples of a duty cast on suppliers of water, electr- ..-:
icity or gas. So also, in India, the Indian Electricity Act spells out a
D duty on the part of the licensee to supply electricity to members of the
public. There are also other public utility undertakings providing for
water, sewage connections, transport and the like which are under ,.
statutory obligation to supply goods and services to members of the
society at large, subject to the fulfilment of reasonable conditions
prescribed therefor. The supply of gas by the ONGC, it is urged, has
E not attained this "status" yet. '·
As far as we have been able to see, there is no statutory definition
of 'public utility' in the context of any Indian enactment that may be
relevant for our present purpose. There is a definition of "public utility
service" ins. 2(n) of the Industrial Disputes Act, 1947 which, inter alia,
F covers "any industry which supplies power, light or water to the
public" and certain notified industries. It is arguable whether supply of
natural gas is included in this definition for, though 'power' connotes· ·-\
generally any form of energy available for doing work, it is normally
related to such energy made available by mechanical or electrical
means (vide, Webster Comprehensive, Vol. 2, p. 990). It is also a
G moot question whether that definition can be appropriate in the con-
text with which we are concerned.
Dr. Chitale cited profusely from American Jurisprudence (2nd >..
Edition, Vol. 64) on the subject of public utilities. Some of these
passages may be usefully quoted. At page 549, it discusses the defini-
H ti on and nature of a public utility. The passage runs thus:
O;N.G.C. v. ASSOCIATION IRANGANATHAN. J.J 177
1. Definition and nature A
A "public utility" is a business or service which is
engaged in regularly supplying the public with some com-
modity or service of public consequence, such as electri-
city, gas, water, transportation, or telephone or telegraph
service. Publicly owned utilities are those owned by public B
corporations such as municipal public utility districts and
public utility districts. Apart from statutes which define the
public utilities which are within the purview of such
statutes, it would be difficult to construct a definition of a
public utility which would fit every conceivable case, but
there are certain considerations that are of aid in determin-
ing whether a specific organization or business is a public
c
utility. As its name indicates, the term "public utility"
>- implies a public use and service to the public, and indeed,
the principal determinative characteristic of a public utility
is that of service to, or readiness to serve, an indefinite
public (or portion of the public as such) which has a legal D
right to demand and receive its services or commodities."
There must be a dedication or holding out, either express
or implied, of produce or services to the public as a class.
The term precludes the idea of service which is private in its
nature and is not to be obtained by the public, although a
public utility may perform acts in its private, as disting- E
uished from the public, capacity, in which llase it is subject
to the same rules as any other private person so acting.
Some courts, however, reject the notion that in order to be
a public utility subject to governmental regulation the
nature of the service must be such that all members of the
public have an enforceable right to demand it, and declare F
that business to be a public utility which in fact serves such
a substantial part of the public as to make its operations a
matter of public concern. This view is in close accord with
what has been termed the historic basis of classification of
some businesses as public callings, that is, economic condi-
tions, or the importance of the business to the public. G
While the terms "public service corporation" and "quasi-
public corporation" are used to describe public utility
corporations, and the tenn Hpublic service commission'' to
describe the body regulating such utilities, some courts dis-
tinguish between a public sector corporation and a public
utility on the basis that the latter is required to serve the H
178 SUPREME COURT REPORTS (1990) 3 S.C.R.
public generally, whereas the former may be required to
A serve members only. -<'
The mere fact that a corporation declares itself to be
a public utility does not make it such. In determining
whether or not a company is a public utility, the law looks
B at what is being done, not what it asserts it~s doing. Nor
will the legislative declaration that a certain business shall . -<;
be deemed a public utility make it such if, in f act, the -I
business as conducted is not impressed with a public use or
carried on for the public benefit, since it is beyond the
power of the state by legislative edict to make that a public
uti!ity which in fact is not, and to take private property for
c public use by its fiat that the property is being devoted to
public use. Furthermore, a dedication of private property
to public utility service will not be presumed from the fact _..
that the product and service of the use of such property is
the usual subject matter of utility service; neither does such
D presumption arise from the sale by private contract of such
product and service to utility corporations for purposes of
resale. Such dedication is never presumed without evi-
dence of unequivocal intention.
A business affected with a public interest is not neces-
E sarily a public utility or public service commission. The fact
that a business is affected with a public interest means that
it may be regulated for the public good but does not imply
that is under a duty to service the public."
Black's Law Dictionary (Fifth Edition) defines a "public utility" thus
F at p. 1108:
"Public Utility: A privately owned and operated business
whose services are so essential to the general public as to
justify the grant of special franchises for the use of public
property or of the right of eminent domain, in considera-
G tion of which the owners must serve all persons who apply,
without discrimination. It is always a virtual monopoly.
A business or service which is engaged in regularly supply-
ir.g the public with some commodity or service which is of
public consequence and need, such as electricity, gas,
H water, transportation or telephone or telegraph service.
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 179
Gulf States Utilities Co. v. State, Tex. Civ. App., 46 S.W.
2d 1018, 1021. Any agency, instrumentality, business, A
industry or service which is used or conducted in such
manner as to affect the community at large, that is, which is
not limited or restricted to any particular class of the com-
munity. The test for determining if a concern is a public
utility is whether it has held itself out as ready, able and B
willing to serve the public. A term implies a public use of
an article, product, or service, carrying with it the duty of
the producer or manufacturer, or one attempting to furnish
the service, to serve the public and treat all persons alike,
without discrimination. It is synonymous with "public
use", and refers to pel'Sons or corporations charged with
the duty to supply the public with the use of property or c
facilities owned or furnished by them. Euder v. First Nat.
Bank in St. Louis, C.C.A. Mo., 16 F. 2d 990, 992. To
constitute a true "public utility", the devotion to public use
must be of such character that.the public generally, or that
part of it which has been served and which has accepted the D
service, has the legal right to demand that that service shall
be conducted, so long as it is continued, with reasonable
efficiency under reasonable charges. The devotion to
public use must be of such character that the product and
service ts available to the oublic generally and indiscrimi-
nately, or there must be the acceptance by the utility of E
public franchises or calling to its aid the police power of the
State."
The Corpus Juris Secundum (Vol. 73, p. 990) also carries like
definitions.
F
Once a concern is found to be a public utility., at least two conse-
>. · quences follow. One is a general duty to serve which is descnDed m
American Jurisprudence thus:
"16. General duty to serve
G
The primary duty of a public utility is to serve on reason-
able terms all those who desire the service it renders, and it
may not choose to serve only the portion of the territory
covered by its franchise which is presently profitable for it
to serve. Upon the dedication of a public utility to a public
use and in return for the grant to it of a public franchise, H
180 SUPREME COURT REPORTS [1990] 3 S.C.R.
the public utility is under a legal obligation to render
A adequate and reasonably efficient service impartially, with-
out unjust discrimination, and at reasonable rates, to all
members of the public to whom its public use and scope of
operation extend who apply for such service and comply
with the reasonable rules and regulations of the public uti-
B lity. This obligation is one implied at common law and need
not be expressed by statute or contract, or in the charter of
the public utility.The fact that the franchises granted to the
company do not expressly impose upon it the obligation to
serve all persons in the locality does not relieve the com-
pany, nor does the fact that the person applying for gas is
ah eady supplied with gas by another company. The fact
c that a pipe laid by a water company along a street in the
exercise of its franchise was laid under an agreement, with
certain persons who paid the expenses, that they should
have the exclusive use of water, and that the company ·--<
should not tap the pipe without their consent unless it first
D repaid them for the pipe, does not relieve the company
from its obligation to supply water, on reasonable terms, to
all persons living on such street who may apply for it. A
provision in an ordinance granting a franchise to an electric
light company, that the city should not require the com-
pany to make "extensions" except upon certain conditions
E does not affect the right of a resident in an established
service zone to invoke the aid of the courts to compel the
company to connect his premises with its line. This duty to
serve all applicants without discrimination cannot be
evaded by a natural gas company on the ground that the gas
pressure has fallen so low that existing customers cannot be
F adequately supplied, new applicants are entitled to share
equally in such supply as can be furnished. Furthermore,
the obligation of a public utility, such as a gas, water, or
electric company, to supply a given district is inclusive of
the duty, under reasonable limitations, to carry the mains
or lines of the utility to a point on the consumer's premises
G where use can be made of the service. However, neither by
common law nor by statute is a public utility required to
serve all; the conduct prohibited on the part of a public
utility is unjust discrimination, unfair rates or practices, or
unreasonable rules."
The second constraint is in regard to the rates that can be charged by
H
such an undertaking:
O.N.G.C. v. ASSOCIATION [RANGANATIIAN, J.) 181
A public utility may, in the absence of a legislative pre- A
scription or limitation of rates, fix and exact reasonable
rates for services furnished, in which respect the reason-
ableness of the rate is to be considered in relation to the
value of the property used by the utility in the public
service. Thus, in the absence of legislation, carriers are
ordinarily entitled to establish such rates and to adopt such B
policy of ratemaking as they may deem liest. They may
voluntarily render service for less than they could be com-
pelled to accept.
The right of a public utility or carrier to set ns own
rates is subject to the limitation that such rates must be C
nondiscriminatory and reasonable.
xxx xxx xxx
This obligation to furnish service at a reasonable price is
implied by law and is incurred by acceptance of the fran- D
chise and privilege to serve the public. Furthermore, there
is authority to the effect that a public utility must give a
consumer the benefit of the most favourable rate which he
is entitled to receive."
We do not think that ONGC satisfies the primary conditions E
enunciated above for being a public utility undertaking as it has not so
far held itself out or undertaken or been obliged by any law to provide
gas supply to the public in general or to any particular cross-section of
the public. The proviso to sec. 14( 1)(e) of the Act which lays down that
the setting up of industries to be run with the aid of gas was not to be
undertaken by the ONGC without the Central Government's approval F
). also gives an indication that the supply of gas to various industries on a
general basis was not in the immediate contemplation of the Act but
was envisaged as a further expansion to be initiated with Central
Government's approval. Perhaps a stage in the developmental activi-
ties of the ONGC will soon come when such an obligation can be
inferred but, at present, the O.N.G.C. supplies gas only to certain G
selected contractees. It does not supply gas to the public either in the
sense that any individual member of the public or any identifiable
cross-section of the public is entitled to demand and receive such sup-
ply due to various limitations we shall now touch upon.
The main activity of the ONGC is that of exploration and H
182 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
prospecting for petroleum and petroleum products. So tar as gas,
A
which is a bye product, is concerned the ONGC has not so far been ~·
able voluntarily or constrained statutorily to harness and utilise its
production for consumption by the public. Even as per the information
placed on record by the respondents about 3 ,000 million cubic metres
of gas were burnt in 1985-86 due to the inability of the ONGC to
B harness it for industrial or domestic use. Such large scale utilisation
will involve capital outlay to a considerable extent particularly for the
laying of pipe lines to convey the gas to sites of its user. The quantity of "·
gas which is put to such use at present is an insignificant part of the gas -f
that is being produced and so far the Government does not appear to
have called upon the ONGC to draw up or submit to the Government
under s. 23 of the Act any programme of sale of natural gas to the
c public generally or even to some categories of public consumers.
There is no doubt that the expansion of the oil sector in recent years,
including the recent construction of the HBJ pipeline, will eventually
require the ONGC to set up and devise a rational and equitable -<
scheme of distribution and supply of gas to various types of consumers
D situate over various parts of India. But, as yet, the ONGC has not
embarked on any such scheme. It has been supplying gas to certain
consumers on the basis of individual contracts and it is in regard to
these consumers alone that the question of price has been raised
before us.
E We do not, however, think that it is at all necessary for us to '<
delve further into the above concept or express any final opinion as to
whether the ONGC is a public utility or not because the claim of the
respondents is for a continuance of the present system followed by the ~
ONGC of supplying gas to select customers on the basis of contracts -f
entered into with them. They only want the price to be regulated by
F the court; they do not challenge, for obvious reasons, the system of
distribution thus far adopted by the ONGC. If the argument that the
ONGC is a public utility is accepted, then the first consequence to J.,
follow will be that gas should be made available by it to all persons who
need it for use. It cannot be supplied by the ONGC to only a few
public sector undertakings like the GSEB and GSFC or only to a few
G industries like those of the respondents or only to a few municipalities
like the Vadodara Municipality for domestic supply, at its sweet will
and pleasure. It would then be open to all undertakings, industries and
domestic consumers in Bombay, Gujarat and perhaps elsewhere in the j...
country to demand that steps should be taken for the supply of gas to
them also. We are unable to agree with the observation of the High
H Court that, even if the ONGC is treated as a public utility, the respon-
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 183
dents, merely because they had entered into temporary contracts for
A
supply of gas with the ONGC, could still insist on continued supply to
themselves on "the first come, first served" basis, to the exclusion of
later arrivals on the scene. If, as suggested by the respondents, the
· ONGC is to be treated as a public utility and the price of gas is bound
to be on cost plus basis, it may be that quite a few other industries
would like to avail themselves of such supply. They have perhaps kept B
out so far only because the supply price based on alternative fuel price is
not acceptable to them. They are keeping out only because they are
under the impression that the ONGC is entitled to supply gas to
persons with whom it has entered into commercial contracts and on the
terms of supply envisaged in those contracts. The treatment of the
ONGC as a public utility undertaking for the supply of gas will raise
innumerable basic questions totally inconsistent with the present C I
system of selective supply which the respondents want to be con-
~-··
tinued. It will transpose the area of controversy to a totally different
and wider plane. We cannot say that the ONGC is a public utility
undertaking and yet direct that it should supply gas to the respondents
and a few other industries with which it has entered into contracts. The D
court would then be constrained to hold that the present system of
supply is inconsistent with public law and the constitutional require-
ments of a public utility undertaking and direct the ONGC to comp-
letely overhaul its system of public distribution on sound lines qua
types of consumers to be catered to, areas of supply to be covered,
price for supply and all other matters. That is not the relief sought by E
the respondents. All that they want is a declaration that they are
entitled to the supply of gas at a reasonable price. It is sufficient, for
disposing of this claim, to deal with this aspect of the matter and the
larger aspect of ONGC being a public utility undertaking should be
left out of account. We, therefore, do not express any final opinion on
the issue except to say, prima facie, that it cannot be placed on par F
). with a public utility undertaking.
In this context, we should like to pomt out once again that the
ONGC does not dispute that the price to be charged by it for gas
supply should have some basis and not be arbitrary or unconscionable.
Their stand before the High Court (vide para 29 of the judgment) and G
before us has been that the prices are fixed by them from time to time
on a well-recognised principle viz. on the basis of the alternative fuel
cost which the consumers may have to incur had they not been in
receipt of gas supply. Assuming this to be correct, is there any ille-
gality in the procedure adopted by them?-that is the question. The
respondents contend, and the High Court has held, that there is. H
184 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
According to them, a public sector undertaking must supply its goods
A at a price which will cover their cost and leave them a reasonable
margin of profit and no more. Dr. Chitale says that this is the only
reasonable way of price fixation and refers to the award in support of
this proposition. He points out that this is the basis incorporated in
several statutory instruments, such as the Sugarcane Price Control
B order or the Drug Prices Control order or other orders passed under
the Essential Commodities Act. He cites the followinng decisions of
this Court in relation to the fixation of such prices: Premier Auto-
mobiles v. Union, [1972] 2 SCR 526; Panipat Cooperative Sugar Mills
v. Union, [1973] 2 SCR 860; Shree Meenakshi Mills v. Union, [1974] 2
SCR 398; Saraswati Industrial Syndicate v. Union, [1975] 1 SCR 956;
Prag lee and Oil Mills v. Union, [1978) 3 S.C.R. 293 and Union of
c India v. Cynamide India Ltd., [1987) 2 S.C.C. 720. He urges that, to
allow the ONGC to sell gas at a higher price than this merely because,
otherwise, but for the availability of gas, the consumers would nave to
spend more for their sources ot energy, will really amount to introduc-
ing an irrelevant element i the process of price fixation and result in
D allowing the ONGC to ,nake unreasonable profits at the expense of
unhappy consumers. The question for consideration is whether this
argument is correct. Is the ONGC bound to adopt only the cost plus
basis in fixing its prices or can 1t also invoke any other well-known and
reasonable, if commercial, fotmula in fixing its prices?
E We shall first consider the findings in the award. Dr. V.K.R.V. "'
Rao was arbitrating on a dispute between the ONGC and the Gujarat
State Government as to the price at which gas was to be supplied by
the ONGC. Though the dispute arose as a result of the dissatisfaction
of the GSEB and the GSFC with the prices charged by the ONGC, the "-i
--
terms of reference to Dr. Rao were very much wider. They read:
F
"The point at issue is the price that should be charged by ..I.,
the ONGC for gas that may be supplied after taking into
consideration the volume and pressure of gas supplied to
any particular party and the distance to which it has to be
carried. You may also indicate if ONGC should offer any
G differential rates in respect of gas supplied to:
(a) Undertakings for the generation of power
,._I
(b) Fertiliser plants
H (c) State projects
0.N.G.C. v. ASSOCIATION IRANGANATHAN, J.] 185
(d) Private sector industries
A
(e) Domestic fuel"
The contentions urged by the two parties arrayed before the arbitrator
and set out in sections IV and V of the award also covered a very wide
'
ground. The award starts with a discussion of certain general consid- B
erations and while doing so, dealing with a contention comparing the
price fixation in Assam and Gujarat, the award says:
"The Gujarat contention that in fixing the price of gas in
Gujarat, note should be taken of the price fixed by Oil
India for the sale of Assam gas to the Assam Electricity
Board at 25 paise per cubic foot cannot be dismissed as c
lightly as the O.N.G.C. seem to have done. Nor can it be
contended by Gujarat that if a mistake has been made once
in one area, that therefore it should be extended to other
areas. It must be added also that the price of gas in Assam
and in Gujarat is not on all fours for the reasons that I shall D
mention later. AB the same, one cannot ignore the rele-
vance of the Assam gas price, even though the remedical
action required is perhaps more on the Assam side than on
the ONGC attitude in Gujarat. I shall have something to
say on the question later on in this report, though it is not
strictly within the terms of reference given to the arbitrator. E
I am not prepared to accept the ONGC contention
that because they are All India agency expected to function
as a commercial undertaking in the public sector, they are
entitled to take no account of the fact that the cost of power
generation is high in Gujarat, that this has hampered the p
possible development of some industries for which Gujarat
has natural resources and that public opinion in Gujarat
has a natural expectation of a reduction in the. cost of
power production on account of the discovery of gas in
their area. After all the ONGC is an enterprise in the
public sector and is expected to take public interest into G
account and not be exclusively concerned with commercial
considerations that would be more appropriate to a private
enterprise. Moreover, there, as in the United States, the
gas industry is in the private sector, there is also govern-
mental regulation through the Federal Power Authority in
the public interest. I believe that Gujarat has a valid point in H
186 SUPREME COURT REPORTS [1990] 3 S.C.R.
urging that advantages that accrue to the coal-bearing
A
provinces by way of low cost in fuel or power generation
should also apply to Gujarat because of the discovery of
gas in its area and its protected use for power generation. I
propose therefore to take into account the pit-head price of
Bengal coal and its thermal equivalence with Gujarat gas in
B determining my award on the price of gas. I must add that
this will not be the primary basis for my award, though it
will certainly be treated as a relevant consideration.
At p. 16 the report deals with the contention that the price of gas
should be based on the price of substitute products in the following
words:
c
"As regards the ONGC contention that the price of gas
should be based on the price of substitute products and that
this is the practice generally followed in the oil industry, I
am not prepared to accept the ONGC constention. While
D the price of substitutes undoubtedly would determine the .
demand price for gas, the position becomes different when
prices are sought to be fixed and not left to market forces;
and prices have to be fixed because the ONGC is virtually a
nonopoly at least as far as Gujarat is concerned; there is no
market price in the normally understood sense of the term
E as emerging from sales by competing sellers; the ONGC is
a public sector enterprise, and considerations of public
policy cannot be considered irrelevant in the fixation of
prices. Above all it has always been the practice in India,
when prices are fixed. to base it on the cost of production
plus a reasonable profit and this has been what the Tariff
F Commission has been doing all these yeas in regard to other
commodities. Under the circumstances, while the price of
substitutes is undoubtedly a relevant (factor?) in the fixa-
tion of the price of gas, I have no doubt that it cannot be
treated as the primary factor under the Indian circum-
stances referred to earlier."
G
Again, at p. 18, the basic formula is expounded as follows:
"I have already indicated my thinking on the question of
..... prices of substitute materials on the basis of thermal
equivalence in the concluding para of the previous section.
H Gas pricing in relation to the prices of substitute materials
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 187
1s understandable in foreign countries, where gas bas been
deliberately pushed into the fuel market by pipe line A
·~
companies which have constructed long and expensive pipe
lines and sold gas at a price lower than that of alternative
fuels in· order to capture and retain the market. In fact, the
price of gas in the initial stage was much less than that of
competing alternative fuels and not on par with their B
prices. With the growing recognition of the special adv&11-
...,.. . tages obtained by the use of gas in manufacturing operation
.,. . where close control of heat and cleanliness of operation are
essential and worth paying for or in commercial and resi-
dential cooking, water · heating and space heating, gas
prices have been steadily rising over the last few years.
Thus while ·crude oil wholesale prices have moved down- c
ward since 1957, gas prices have recorded a steady rise
throughout the post-war period. At the same time, drilling
:- . of gas wells is increasing and so is the place of gas in world
energy consumption. It is therefore not correct to suggest
that the oil companies were selling gas on the basis of the D
price and thermal equivalence of alternative fuels. Gas was
sold at the price which it could fetch and not on the basis of
either cost of production or parity with substitute fuels. As
regard the price of gas in Jhe field, Prof. Adleman has
pointed out that it is not co;rect to expect any particular
./ ceiling for this price. He adds-''if the special advantage uses E
could generate enough effective demand, the field price of
gas in the United States or elsewhere could conceivably
~·':i
equal or surpass the thermal eqquivalent of the crude oil;
otherwise it will not". In actualfact, the principal use of gas
is till not (now?) iri its field of special advantages. There is
validity therefore for his view that "Since gas costs roughly F
three times to deliver, per BTU as oil the price of gas in the
).
producing area could not possibly equal the price of oil.
Scarce resources are best used if this fuel expensive to
transport, is used to the maximum, nearest its source of
supply, whiles the transport-cheap oil moves greater
distances". Thermal equivalence with substitute fuels and a G
price based thereon could therefore only be a ceiling on the
price of gas rather than a parity basis for its price fixation.
Moreover, in the case of Gujarat, the substitute fuel comes
-"'- from long distance and bears heavy frieght charges, while
the gas is found within the State. It must also be remem-
bered that unlike in the case of foreign oil companies, cost H
188 SUPREME COURT REPORTS [19901 3 S.C.R.
data are more readily available in the case of ONGC, as it
is a public sector enterprise and subject to the control of
Parliament and the scrutiny of its Public Accounts Commit-
tee. All cost data have been made available to the
Arbitrator by the ONGC. Under the circumstances, it is
my considered judgment that formula of fixing the price of
B gas on the basis of the thermal equivalence and price of
substitute fuel or feedstock should not be accepted, though
the price resulting from such a formula certainly is a rele-
vant consideration as indicating the ceiling below which the
price of gas should be fixed by the Arbitrator. I would
therefore reject the ONGC proposal that "the formula to
be used for the price of gas should be based on the price of
c the available alternative fuels or feedstock."
The only other basic formula is the one advanced by
the Gujarat Government, namely, "that the only rational
approach to the pricing of gas is via the cost plus profits
D formula". And it is the cost plus profit formula that I pro-
pose to adopt as the primary base for determining my
award on the price of gas in Gujarat. Having said this, I
must hasten to add that this does not mean my acceptance
either of the connotation that the Gujarat Government
gives to this formula in terms of the content postulated for
E the cost of production and profit or the figures they have
put forward for the price of gas on the basis of their
interpretation of the content of cost of production and pro-
fit. What I accept is the principle of cost of production plus
reasonable profit and not the interpretation that is sought
to be given to this principle by the Gujarat Government".
F
The second part of the issue referred to the arbitration was disposed of J.,_
summarily by the award, in a few words:
"Finally, on the question whether there should be any
differentiation between the prices to be charged for power
G generation, fertilisers, and other industries, I am not in
favour of any such differentiation, as it would only intro-
duce an unnecessary complication in the pricing machinery
and my award is primarily based on estimated cost of pro-
duction plus reasonable profit. If, however, in order to
regulate supplies in adjustment to different intensities of
H demand from the different users of gas, some premium or
O.N.G.C. v. ASSOCIATION (RANGANATiiAN, J.] 189
discount becomes necessary on tbe price suggested by me,
A
this would not be inconsistent with my award provided the
total receipts do not exceed the amount that would accrue
from the application of my award on the price of gas.
Dr. Chitale naturally placed considerable reliance on this award. He
contended that the ·reasoning of the award is impeccable and that the B
considerations that impelled Dr. Rao to adopt the cost plus basis are
more weighty in today's context and in tbe background of the State's
duties under Articles 38 and 39(b) of the Constitution.
There is no doubt tbat Dr. Rao made the cost plus method the
basis of his award in preference to the basis of tbermal equivalence of
alternate fuel (which we shall refer to as tbermal equivalence basis). c
But at least two important aspects have to be kept in mind in assessing
the applicability of the same principle in the present context. In the
first place, as explained earlier, Dr. Rao was concerned primarily with
an issue raised by the public of Gujarat as against the ONGC. He was
really adjudicating upon the price which the ONGC should charge to D
public sector undertaking catering to the essential needs of the State.
In the context, his objective was, understandably, to fix the price as
low as possible. The consumers under consideration by him represen-
ted the public need of the State of Gujarat and, as against such public
interest, the ONGC's profit requirements paled into insignificance. He
proceeded, more or less, on the footing that the ONGC was obliged to E
supply gas for meeting those essential purposes. Secondly, Dr. Rao
also agrees that the thermal equivalence basis is a recognised metbod
for fixation of price, that it has a relevance and tbat it has to be taken
into account in determining the price for gas supply. We also wonder
whether, in the present set up of the ONGC with a vast expansion of
its exploratory activities, enough data are available to work out a price F
on the cost plus basis. Any such computation will have to provide
adequately for future explorations, infructuous expenditure, expendi-
ture on modern uptodate machinery and research and above all expen-
diture that will be necessary to reach the gas to the consumers. In these
circumstances, the cost plus basis fixed by Shri Rao in tbe background
of the real nature of the dispute before him three decades ago cannot G
be taken as conclusive in the present situation. Here we are dealing
with a price to be fixed under a contract between tbe ONGC and one
set of industries in the State who wish to make a change over from the
furnace oil system to tbat of gas supply with a view to increase tbeir
own profitability and gain an advantage, if possible, over either
industries in the State. In this context, we think, ONGC is entitled to a H
190 SUPREME COURT REPORTS [1990] 3 S.C.R.
larger latitude and charge a price which the market can bear. The only
A
restrictions is that, being a State instrumentality, it should not be a
whimsical or capricious price but should be one based on relevant
--<
considerations and on some recognised basis.
While the cost plus basis is a recognised basis for fixation of
B prices of essential commodities or for the services rendered by a public
utility undertaking, it would not, in our view, be correct to treat it as
the only permissible basis in all situations. On behalf of the ONGC it
1
has been pointed out that even in the fixation of prices of essential
commodities like levy sugar, the concept of cost plus is not necessarily
the only method of fixing the price for the commodity. In considering
"
the question whether the price fixation in that case was based on
c proper principles and by following correct methods in accordance with
section 3(3C) of the Essential Commodities Act, this Court observed
in the Anakapal/ee case, [1973] 2 SCR 882 at p. 899:
--',
"While examining question No. 3 leamed Solicitor General
D has reminded us that 'cost plus' cannot always be the
proper basis for price fixation. Even if there is no price
control each unit will have to compete in the market and
those units which are uneconomic and whose cost is unduly
high will have to compete with others which are more effi-
cient and the cost of which is much lower. It may be that
E uneconomic units may suffer losses but what they cannot
achieve in the open market they cannot insist on where
price has to be fixed by the government. The Sugar
Enquiry Commission in its 1965 report expressed the view
that 'cost-plus' basis for price fixation perpetuates ineffi- ••
. -
ciency in the industry and is, therefore, against the long-
F term interest of the country.
i,
The Court quoted from a study prepared in collaboration with
the Institute of Chartered Accountants of India.
"Costs alone do not determine the prices. Cost is only one
G of the many complex factors which together determine
prices. The only general principle that can be stated is that
in the end there must be some margin in prices over total
costs, if capital is to be unimpaired and production
maximised by the utilisation of internal surpluses .....
while the cost plus pricing method is the most common, it
H may be argued that it is not the best available method
O.N.G.C. v. ASSOCIATION (RANGANATHAN, J.] 191
because it ignores demand or fails to adequately reflect
A
competition or is based upon a concept of cost which is not
solely relevant for pricing decision in all ca5es. What is
essential is not so much of current of past costs but forecast
of future cost with accuracy ..... Generally pricing should
be such as to increase production and sales and secure an
adequate return on capital employed." B
Again, in a somewhat different context in relation IC' a State transport
undertaking, this Court observed, in Venkatachalam v. Deputy Trans-
port Commissioner, [1977] 2 SCR 392:
" ..... the special status of a Government owned transport
undertaking is obvious ..... Its functional motto is not
c
more profits at any cost but service to citizens first and, in a
far larger measure than private companies and individuals,
although profitability is also a factor even in public utilities.
(emphasis added)
D
These passages indicate that cost plus is not a satisfactory basis in
all situations. The basis may need to be made more stringent in some
situations and more broad-based in others. May be the cost plus is an
ideal basis where the commodity supplied is the product of a monopoly
vital to human needs. In that context the price fixed should be
minimum possible as the customer or consumer must have the com- E
modity for his survival and cannot afford more than the minimum. The
producer should not, therefore, be allowed to get back more than a
minimum profit. Indeed, in certain situations, it may even be inequit-
able to fix varying prices on the basis of the cost of each individual
manufacturer and thus encourage inefficiency; it may be necessary to
base it uniformly for a whole industry on the cost of the most efficient F
)
manufacturer as has been done in the case of drugs (vide: Cynamide
case, [1987] 2 S.C.C. 72U. It was so vital that the goods should be
available to the common man that the prices were statutorily fixed so
low as to drive away inefficient producers and so as to make it possible
only for the most efficient manufacturers to survive. Per contra, there
can be situations where the need of the consumer is not so vital and the G
requirements of the economic scene are such that the needs of the
producer should be given greater consideration. In such situations, the
"plus" element in the cost plus basis (namely, the allowable profit
margin, should not be confined to "a reasonable return on the capital"
but should be alloweq to have a much larger content depending on the
circumstances. H
192 SUPREME COURT REPORTS [1990] 'l S.C.R.
The notion that the cost plus basis can be the only criterion for
A
fixation of prices in the case of public enterprises stems basically from
a concept that such enterprises should function either on a no profit-
no Joss basis or on a minimum profit basis. This is not a correct
approach. In the case of vital commodities or services, while private
concerns must be allowed a minimial return on capital invested, public
B undertakings or utilities may even have to run at losses, if need be and
even a minimal return may not be assured. In the case of less vital, but
still basic, commodities, they may be required to cater to IA':eds with a
minimal profit margin for themselves. But given a favourable area of
operation, "commercial profits" need not be either anathema or
forbidden fruit even to public sector enterprises.
c A publication on "Public Enterprises" by the Indian Institute of
Public Administration, produced before us elaborates on the above
aspects. It also gives an interesting analysis of pricing policies adopted
in respect of various commodities. It is unnecessary to touch upon all
the details. It is sufficient, for our present purposes, to say that the
D monograph points out, apropos such pricing policy, that several state
undertakings are already earning profits and the general policy has
been accepted that the maximum economic returns should be secured
from all public enterprises, whether these are operated by the Central
or State Governments directly or through corporation or companies
and that the surplus of public enterprises will have to play an increas-
E ing part in financing economic development under the various
National Plans. It proceeds to say (at p. 173):
"A growing source of governmental revenue in many
countries is the profits of public undertaking. In under
developed countries public enterprises fostered on public
F revenues are expected to play a more positive role in
financing the countries' development than similar enter-
prises do in developed economies. In determining the price
policies of these undertakings considerations of maximising
revenue will not play as important a part as profits do in
private enterprises, but within the limits set by the neces-
G sity to foster economic development, their price policies
are designed to bring in some profits to the countries'
general revenues. Public enterprises in the under-develo-
ped areas are to break ground in projects which are the
core of development. If such projects are to be financed on
an increasing scale, the price policies have to be so
H designed that significant surplllses are left with the projects
0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 193
to be employed either for their own expansion or for
financing the expansion of other projects. In other words, A
there should be an element of profit in the prices of their
products or in the cost of their services to the public."
The Krishna Menon Committee on State undertakings (Novem-
ber 1959), the booklet proceeds to point out, enunciated the following B
pricing policy for public enterprises:
"We have stressed in these pages the importance of incen-
tive and healthy competition and emphasised that concerns
must be able to stand on their own legs for efficient and
proper conduct of business ..... The considerations that
should govern prices appear to be the following. Consum- c
er prices nave to be based upon general market prices and
other factors as well. The decision as to what economy in
cost has to be passed on to the consumer on the one hand
or should benefit the taxpayer on the other and the likeli-
hood of non-availabilities and, therefore, of scarcities in D
the near future has also to be considered. The principle of
'what the traffic can bear' has also to be taken into
account.''
Dr. V.K.R.V. Rao has been quoted again as saying:
E
"As regards profits, it should be pointed out that contrary
to some popular notions on the subject, profits have an
important place in a socialist society, the difference bet-
ween the economic price and the social price would be what
may be called the planned profit and this would largely
correspond to the excise duties and sales tax and other F
indirect taxes that are imposed in a capitalist society. These
planned profits being no more than a way of mobilising
resources and making them available to the community for
purposes both of investment and maintenance expenditure.
Profits also have another important role to play i..; so far as
they relate to the economic price itself. The economic price G
fixed at any particular moment of time is obviously based
on the capital, technique and productivity of the given base
period when this price is fixed; any improvement in pro-
ductivity is bound to lead to a decrease in the cost produc-
tion and in turn this would lead to the emergence of a
surplus within the economic price itself and that would be a H
194 SUPREME COURT REPORTS [1990] 3 S.C.R.
surplus whcb will represent a measure of the nation's
A
increase in productivity this surplus would not be the result
of the policies laid down at national level as in the case of
difference between the economic price and the social price.
On the contrary, it would represent the result of the moti-
vations and efforts of a larger number of persons engaged
B in productive activity. Hence the importance of arranging
for proper incentive to stimulate the creation of this kind of
surplus. That is the reason why in socialist societies now-a-
days, individual enterprises are permitted to retain a larger
share of such surpluses as they may create by an increase in
productivity, this larger share to be used by them partly for
increasing individual incomes of those engaged in the
c enterprises and partly for giving an opportunity to the
enterprises in question to build up the financial resources
needed to following their own independent investment
policies. Public enterprise must be carried on a profit-
making basis, not only in the sense that public enterprise
D must yield an economic price in the terms described in a
previous section but must also get for the community suffi-
cient resources for financing a part of the investment and
maintenance expenditure of government. Increasingly, the
share of the profits of public enterprises in financing the
investment and maintenance expenditure of government
E must keep on increasing. It is not only the expenditure on
the public sector as such that will indicate the march of the
economy towards its socialist goal. Even more important is
the increasing role that the public sector must play for find-
ing the resources needed for meeting both the maintenance
and investment expenditure of government. This involves a
F price and profit policy in regard to public enterprise which
goes against accepted opinion so far in regard to public
enterprise. The theory 'no profit, no loss' in public
enterprise is particularlv inconsistent with a socialist
economy, and if pursued in a mixed economy it will hamper
the evolution of the mixed economy into a socialist society.
G The sooner, therefore, this theory of 'no profit no loss' in
public enterprise is given up and the policy accepted of
having a price and profit policy for public enterprise such as
will make the State increasingly reliant on its own resources
(as distinguished from taxing the personal incomes of its
citizens), the quicker will be the evolution of a socialist
H society".
0.N.G.C. v. ASSOCIATION [RANGANATIIAN, J.] 195
In another article on "The Public sector in India", quoted in
A
-~ "Issues in Public Enterprise" by Sri K.R. Gupta, Dr. Rao is quoted as
saying (at p. 84):
" ..... the pricing policy should be such as to promote the
growth of national income and the rate of this growth .....
public enterprises must make profits and the larger the B
share of public enterprises in all enterprises, the greater is
~ their need for making profits. P10fits constitute the surplus
-.- available for savings and investment on the one hand and
contribution to national social welfare programme on the
other; and if public enterprises do not make profits the
.-- national surplus available for stepping up the rate of invest-
c
ment and the increase of social welfare will suffer a cor-
responding reduction; .... Hence the need for giving up
the irrational belief that public enterprise should, by defini-
tion, be run on a no-profit basis."
In the light of the foregoing discussion, we are of opinion that it D
would not be right to insist that the ONGC should fix oil prices only on
cost plus basis. Indeed; its policy of pricing should be based on the
several factors peculiar to the industry and its current situation and so
long as such a policy is not irrational or whimsical, the court may not
interfere .
./ E
The question of fixation of a fair and reasonable price for goods
placed on the market has come up for consideration of Parliament and
•-~ Courts in different contl'.xts. Price fixation, it is common ground, is
" generally a legislative function. But Parliament generally provides for
interference only at a stage where in pursuance of social and economic
objectives or to discharge duties under the Directive Principles of F
)- - State Policy, control has to be exercised over the distribution and
consumption of the material resources of the community. Thus while
Parliament has enacted the Essential Commodities Act, it has left it to
the discretion of the Executive to take concrete steps for fixing the
prices of essential commodities as and when necessity arises, by pro-
mulgating Control Orders in exrcise of the powers vested in the Act. G
Various types of foodgrains, sugarcane and drugs have come under the
purview of such control orders and the modalities of fixation of fair
~ prices thereunder have also come up for consideration of the Courts.
There has also been such fixation of price under the Industries
(Development & Regulation) Act, 1951, vide: Premier Automobiles v .
•
Union, [1972] 2 SCR 726. In all these cases, the primary concern of H
196 SUPREME COURT REPORTS I1990) 3 S.C.R.
Government and Parliament has been that the articles in question
A
should be available to the members of the consumer public at the
minimum prices possible and, in that context, these legislations no
doubt adopt the "cost plus reasonable return on investrllent" test in
the fixation of prices. That, even in respect of such commodities, the
"cost plus" method is not the only reasonable method has been recog-
B nised in judicial decisions. The cases on this topic have been reviewed
and the limitations on judicial review of price fixations fully discussed
recently by a Constitution Bench of this Court in Mis Shri Sitaram
Sugar Company Ltd. & Another v. Union, IT 1990 1 SC 462. It is,
however, not necessary here to enter into a discussion of this and the
earlier cases because those cases were primarily concerned with the
c question whether the price fixation had been made in consonance with
the requirements of the relevant legislation fixing prices of essential
commodities in the interests of the general public and also because
ONGC does not deny that, as a State instrumentality, its price fixation
should be based on relevant material and should be fair and reason-
able. None of these decisions hold that the cost plus method is the only
D relevant method for fixation of prices. On the contrary, there are
indications in some judgments to indicate that not a minimum but a
reasonable profit margin is permissible. Even in relation to a public
utility undertaking like the State Electricity Boards where the duty not
to make undue profits by abusing its monopoly position is clear
(vide: Jagadamba Paper Industries v. Haryana State Electricity Board,
E [1984] 1SCR165, this Court said, in Kera/a State Electricity Board etc.
v. Mis. S.N. Govinda Prabhu & Bros. and Ors. etc, [1986) 4 S.C.C.
1988:
"Now, a State Electricity Board created under the provi-
sions of the Electricity Supply Act is an instrumentality of
F the State subject to the same constitutional and public law
limitations as are applicable to the government including
the principle of law which inhibits arbitrary action by the
government (See Rohtas Industries v. Bihar State Electricity
Board, [ 1984] 3 SCR 59). It is a public utility monopoly
undertaking which may not be driven by pure profit
G motive-not that profit is to be shunned but that service
and not profit should inform its actions. It is not the func-
tion of the Board to so manage its affairs as to earn the
maximum profit; even as a private corporate body may be
inspired to earn huge profits with a view to paying large
dividends to its shareholders. But it does not follow that
H the Board may not and need not earn profits for the
O.N.G.C. v. ASSOCIATION [RANGANATHAN, J.] 197
pm pose of performing its duties and discharging its obliga- A
tions under the statute. It stands to common sense that the
Board must manage its affairs on sound economic princi-
ples. Having ventured into the field of commerce, no
public service undertaking can afford to say it will ignore
business principles which are an essential to public service
undertakings as to commercial ventures. (See Lord a
Scarman in Bromely vo Greater London Council, I 1982] 1
All ER 129). If the Board borrows sums either from the
government or from other sources or by the issue of
debentures and bonds, surely the Board must of necessity
make provision year after year for the payment of interest
on the loans taken by it and for the repayment of the capital
amounts of the loans. If the Board is unable to pay interest
c
in any year for want of suffibent revenue receipts, the
Board must make provision for payment of such arrear of
,>-· interest in succeeding years. The Board is not expected to
run on a bare year-to-year survival basis. It must have its
feet firmly planted on the earth. It must be able to pay the D
interest on the loans takfo by it; it must be able to dis-
charge its debts; it must be able to give efficient and
economic service; it must be able to continue the due
performance of its services by providing for depreciation
etc.; it must provide for the expansion of its services, for no
one can pretend the country is already well supplied with
electricity. Sufficient surplus has to be generated for this
purpose. That we take it is· what the Board would neces-
sarily do if it was an ordinary commercial undertaking
properly and prudently managed on sound commercial
lines. Is the position any different because the Board is a
public utility undertakings or because of the provisions of F
the Electricity Supply Act? We do not think that either the
character of Electricity Board as a Public Utility Undertak-
ing or the provisions of the Electricity Supply Act preclude
the Board from managing its affairs on sound commercial
lines though not with a profit-thirst.
G:
xxx xxx xxx
7. A plain reading of Section 59 (as amended in 1978)
plainly indicates that it is the mandate of Parliament that
the Board should adjust its tariffs so that after meeting the
various expenses properly required to be met a surplus is H
198 SUPREME COURT REPORTS [1990] 3 S.C.R.
left. The onginal negative approach of functioning so as
A
not to suffer a loss is replaced by the positive approach of
requiring a surplus to be created.
xxx xxx xxx
B Under the above provision, the Board is under a
statutory obligation to carry on its operations and adjust its
tariffs in such a way to ensure that the total revenues
earned in any year of account shall, after meeting all
expenses chargeable to revenue leave such surplus as the
State Government may, from time to time, specify. The
tariff fixation has, therefore, to be so made as to raise
c sufficient revenue which will not merely avoid any net loss
being incurred during the financial year but will ensure a
profit being earned, the r&te of minimum profit to be
earned being such as may be specified by the State
Government.
D
xxx xxx xxx
8. Shri Potti, learned counsel for the consumers placed
great reliance on the observations of this Court in Kera/a
State Electricity Board v. Indian Aluminium Co., [1976] 1
E SCR 552; Bihar State Electricity Board v. Workmen, [1976]
2 SCR 42 and P. Nalla Thampy Thera v. Union of India to
contend that the Electricity Board was barred from con-
ducting its operations on commercial lines so as to earn a
profit.
F xxx xxx xxx
We do not think that any of these observations is in conflict
with what we have said. Pure profit motive, unjustifiable
according to us even in the case of a private trading con-
cern, can never be the sole guiding factor in the case of a
G public enterprise. If profit is made not for profit's sake but
for the purpose of fulfilling, better and more extensively,
the obligation of the services expected of it, it cannot be
said that the public enterprise acted beyond its authority.
The observations in the first case which were referred to us
merely emphasised the fact that the Electricity Board is not
H an ordinary trading corporation and that as a public utility
0.N.G.C. v. ASSOCIATION (RANGANATIIAN, J.] 199
undertaking its emphasis should be on service and not pro-
A
~·· fit. In the second case, for example, the Court said that it is
not expected to make any profit and proceeded to explain
why it is not expected to make a profit by saying that ii is
expected· to extend the supply of electricity to unserved
areas without reference to. considerations of loss. It is of
interest that in the second case, dealing with the question B
whether interest cannot be taken into account in working
out profits, the Court observed, (SCC p. 235, para 5):
'The facile assumption by the Tribunal that ihe
interest should not be taken into account in working out
the profits is not borne out by the provisions of the statute'.
c
In the third case, the court appeared to take the view that
the railway rate and fares should cover operational
expenses, interest on investment, depreciation and pay-
ment of public obligations. It was stated more than once
that the total operational cost would include the interest on D
the capital outlay out of the national exchequer. While the
,, court expressed the view that there was no justification to
run a public utility monopoly service undertaking merely as
a commercial venture with a view to make profits, the court
did not rule out but refrained from expressing any opinion
on the question whether a public utility monopoly service E
undertaking should ever be geared to earn profits to
support the general revenue of the State.
We are of the view that the failure of the government to
specify the surplus which may be generated by the Board
cannot prevent the Board from generating a surplus after F
meeting the expenses required to be met. Perhaps, the
quantum of surplus may not exceed what a prudent public
service undertaking may be expected to generate without
sacrificing the interests it is expected to serve and without
being obsessed by the pure profit motive of the private
enterpreneur. The Board may not allow its character as a G
public utility undertaking to be changed into that of a profit
motivated private trading or manufacturing house. Neither
the tariffs nor the resulting surplus may reach such heights
as to lead to the inevitable conclusion that the Bard has
shed its public utility character. When that happens the
court may strike down the revision of tariffs as plainly H
200 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
arbitrary. But not until then. Not merely because a surplus
A
has been generated, a surplus which can by no means be
~
said to be extravagant. The court will then refrain from
touching the tariffs. After all, as has been said by this Court
often enough "price fixation" is neither the forte nor the
function of the court."
B
We are not called upon here, in the view we take, to decide
whether the cost plus basis or the thermal equivalence basis is more ...,
appropriate. All that we wish to say is that, having regard to the basis --./
on which the claims of the respondents have proceeded thus far, our
task is a very limited one. We cannot say, for reasons set out below,
that the ONGC has acted arbitrarily in fixing the prices on the thermal
c equivalence basis; the fact that it has not done it on cost plus basis does .~
not vitiate the price fixation. The only question we have to address
ourselves to is as to whether the O.N.G.C. has fixed a price based on
relevant materials and on some known principle. At the outset, one ~
must notice that the price is not directly and specifically related to or
D based on any unreasonable margin of profit. There is nothing to indi-
cate that the ONGC was prompted, in fixing its prices, on the one and
only consideration of deriving maximum profits for itself. On the other
hand, it appears to have been guided by the needs of the situation and
the nature of the distribution system that is in operation. As we said
earlier, the manufacture, distribution and consumption of gas has yet
E not attained the status of an essential commodity till recently. It is still
at a stage where the goods are being distributed under private con- "
tracts. Whether this is any longer justified and whether there should
not be a greater amount of control over the modes of, as well as price
for such, distribution is a larger question with which we are not now
concerned. At present, we are in the penumbra! region where the
-.,: --
F commodity is free to be distributed at the manufacturer's choice, but
yet where such manufacturer being a State instrumentality, has to
conform to Articles 14 and 19 of the Constitution. _J
At this stage of development of the industry, we think a much
wider latitude is permissible in the fixation of prices than the imposi-
G tion of a "no profit, no loss" basis or a "cost plus" basis on the
producer. In fixing the prices, it is ligitimate for the O.N.G.C. to take
into account the fact that its supplies are restricted only to a few
industries that have entered into contracts with it. Like industries, ).._
producing the same or similar commodities, are carrying on business
with other sources of energy such as coal or furnace oil and the supply
H of gas is intended to supplement that source of energy. The supply of
0.N.G.C. v. ASSOCIATION (RANGANATIIAN, J.] 201
gas to a few chosen industries at a much lower rate than what the
companies may have to pay for an alternative fuel may indeed lead to A
cries of discrimination as the 0.N.G.C. is scarcely in a position to
supply gas to all industries and replace furnace oil as a source of
energy altogether. Also, it must be kept in mind that exploration of oil
is capital-intensive and money-consuming and the ONGC would be
well justified in supplying gas to voluntary contractors at a price which B
several parties are willing to accept and which will enable the ONGC
to build up a surplus to meet its manifold requirements. The surpluses,
it should be remembered, are not to fatten the coffers of a private
individual but only to strengthen the backbone of the public enter-
prise. To fix its prices on the basis of alternative fuel cannot, therefore,
be described, in the present situation, as irrational or arbitrary. Our
attention has been drawn to a passage from Joan Mitchell on "Price c
Determination and Price Policy" where, dealing with the basis of forn-
tion of gas price by negotiation between the British Gas Commission
and companies producing North Sea gas, it is pointed out hat the price
is set by the nearest alternative fuel, usually fuel oil. This was also the
basis, it will be remembered, on which initially the GSEB and GSFC D
had agreed to receive supplies from the ONGC. Thus this is a basis of
fixation of price that is recognised in this field. Fixation of price on this
basis is, therefore, a logical and appropriate one in the circumstanees.
We should once again like to emphasise that different considera-
. ./ tions may perhaps have to prevail if the treatment of ONGC as a E
public utili~y is taken to its logical conclusion ~ut that is not the basis
on which the present writ petitions can be decid)!d. Even at present the
ONGC is supplying to public sector undertaJ(ings at a much lower
price. That has not been challenged by those· organisations and the
differentiation has also been upheld, in principle, by the High Court,
rightly in our opinion. Fortunately, with the discovery of more and F
'
.~
more oil wells in various parts of the country the economy of the
country is booming and gas supply may also become more plentifully
available in course of time. The time will perhaps soon come for the
evolution of proper schemes of distribution and price control. We are
now concerned, however, with the price fixation regarding supply to a
few parties who considered it all right to enter into contractual ·agree- G
ments for supply of gas to them on the basis of the price fixed by the
. ONGC. So far as the scheme of supply is concerned; the respondents
also stand by the existing contract scheme as they want the supply to
continue. It is certainly not their prayer that the existing supply of gas,
such as it is, should be considered a public utility amttationed to meet
the needs of all industries and consumers in Bombay or Vadodara or H
202 SUPREME COURT REPORTS [1990] 3 S.C.R.
elsewhere. Nor is there any complaint today from any industry not
A receiving gas supply that they are being discriminated against and that ~
the supply to selective industries should stop. There is, therefore, no
justification to strike down the scheme of supply on the basis of con-
tracts. The only objection that survives, therefore, is that the price for
the supply should be reasonable and fair. It should be based on princi-
B pie, not caprice. We have pointed out that, though the ONGC has
stepped up the prices considerably, it has claimed to have done so on a
principle and the correctness of this has not been challenged. The _.,'
claim of the respondents only is that prices should not be fixed on that
basis but should, instead, be fixed on the basis of "cost plus". For
reasons indicated earlier, we do not think that the respondents are
justified in challenging this basis of fixation. The basis on which the
c ONGC has fixed the prices is a known basis and, as pointed out by us,
also a basis permissible at this stage of the industry where a certain
amount of freedom is permitted to the organisation in supplying the ·~
gas produced by it. The situation really is one where the .choice is
between makll;tg the limted supply of gas available to a few chosen
D individuals at rock-bottom prices so that they can make huge profits
and making the price higher but competitive so that it subserves the
common good and does not benefit only a chosen few. The ONGC has
rightly chosen the second alternative. We would, therefore, hold that
the respondents can insist on a supply only if they agree to pay the
prices fixed by the ONGC. They are also not entitled to demand
E supply as of right, without contracts. But, as they have in fact had the '
benefit of the supplies under interim orders of the Court, this question
does not survive and all that we can declare is that the prices
demanded by the ONGC are not unreasonable or capricious and are ~
binding on the respondents. "'"
F Having dealt with the pricipal issue, we may now refer to certain
subsidiary matters touched upon in the course of arguments: J,,
(i) A point was made about the ONGC's right to insist on a
minimum offtake guarantee to the extent of 90%. lbis has been
upheld by the High Court and there is no appeal (the cross-
G appeals having been dismissed as time barred) by the respon- " •
dents. There can, however, be no doubt that the High Court was
right in its conclusion on this issue. If any authority regarding the
rationale of such a claus is needed, it is to be found in the deci-
,...
sion of this Court in Amalgamated Electricity Co. Ltd. v. Jalgaon
Borough Municipality, [1976] 1SCR636.
H
O.N.G.C. ·v. ASSOCIATION [RANGANATIIAN, J.] 203
(ii) A statement was filed before us to show that if the prices had A
). . been determined on the basis of the thermal equivalence of coal,
they would have been much smaller. This statement has been
filed before us for the first time and its correctness would need
verification. It is, however, unnecessary to go into this question.
The acceptability of this argument may depend, inter alia on how
far the coal basis is relevant for the industries located in Vado- B
dara where the principal alternate fuel is fuel oil. It is possible that
'>-- this is one alternative that may be available and it was open to
'y· the petitioners to have had discuss and mediations with the
ONGC for alteration of the prices on that footing. The ONGC
has fixed prices on the basis of the thermal equivalence of fur-
nance oil which, by an large, was the source of energy tapped by
..- the local industries. There being no irrationality in adopting this
c
basis, it is n6t open to us to say that the basis of thermal equi-
valence of coal should be adopted rather than that of furnanci>
~ oil, particularly in the absence of fuller material and discussion.
(iii) A point was made that the ONGC is charging different :0
prices to different industries. The answer of the ONGC is that,
save in the case of certain public sector enterprises, their prices
are fixed on the basis of the prices prevalent on the thermal
equivalence of fuel oil basis as on the date the relevant contract is
entered into. This has not been shown to be wrong. The only
/ discrimination urged at the stage of the High Court was in regard E
to the disparities in prices between supply to public sector under-
takings and private industries. Though the award, towards the
- ..,.
end, suggested that there should be no such differentiation, it is
now well settled that a favourable treatment of public sector
organisations, particularly ones dealing in essential commodities
or services, would not be discriminatory. Also, this differentia- F
tion, as already pointed out, has been upheld by the High Court,
,.. we think rightly. No tangible material has been brought to our
notice which would support the plea of unfair discrimination.
(iv) A point has been made that the ONGC had entered into a
contract for a ten year period with the Amul dairy for supply of G
gas at Rs. 741 per unit which demonstrates the unreasonableness
of the prices charged to the respondents. We do not a_gree. We
>. have already pointed out that the ONGC is supylying gas, to
,. certain public sector undertakings at much lower rates and that
this differentiation has been upheld. Though the Amul Dairy is a
cooperative society it deals with a basic need of society and H
204 SUPREME COURT REPORTS [1990] 3 S.C.R.
stands on no different footing from Electricity Boards or Ferti-
A
liser Corporations or Municipal Corporations. The instance of ~
the Amul Dairy cannot, therefore, be treated as an index of the
unreasonableness of the price charged from the respondents,
particularly when the basis of fixation has been explained and is
an intelligible and rational one.
B
(v) Reference has been made to the price of gas in Assam
and U.S.A. So far as the former is concerned, the High Court
has, rightly in our view, discarded the comparison. So far as the
latter is concerned, the point made by the ONGC was that Dr.
Rao had fixed the price of gas in India in 1967 at 15% below the
then U.S. price and that on the same basis the price of Rs.2000
c per unit today could not be said to be unreasonable as prices in
U.S.A. have also shot up about thirty fold in the meantime. We
find no effective reply to this argument. The High Court has just.
brushed it aside by reiterating that the well-head prices alone
would be the reasonable basis for fixation of price.
D
(vi) The High Court in its judgment has observed:
"If the ONGC were acting fairly and reasonably, there was
nothing to prevent them from placing all their cards on the
table of the court. They did not put the price structure that
E possibly be worked out on the lines similar or akin to those
suggested by Dr. V.K.R.V. Rao in his award. Nor did they
put forward any other reasonable criteria for price fixation.
All throughout they harped on the thermal equivalence and
furnace oil equivalance and the prices in U.S.A. and the
prices of crude, but did not allow the Court to have the
bare glimpse of what could possibly be the well-head price
of gas, by making allowances for amortisation and all other
conceivable factors, having their sway in the ultimate price
fixation. This also is indicative of the unreasonableness on
their part and we would say that Mr. Singhvi was justified
in complaining that the return filed by the ONGC in this
G- group of petitions was far from being satisfactory and,
therefore, was liable to be brandished as no real return at
all."
We think this criticism is not justified. The stand of the ONGC
was that it had fixed the prices on the thermal equivalence basis
.H and this has not been controverted or found against. It was the
O.N.G.C. v. ASSOCIATION (RANGANATIIAN, J.] 205
respondents' case that the cost plus price would work out much
A
~ cheaper and the onus was on them to prove it. We fail to see how
the blame for not allowing the court to have a glimpse of what
could possibly be the well-head price of gas can be put at the
doors of the ONGC. However, this aspect is irrelevant as the
case throughout has proceeded on the assumption that the cost
plus basis would yield lower figures and the question debated B
was whether the ONGC could discard this and adopt the thermal
J
equivalence basis.
(vii) Turning now to para 36 of the judgment of the High Court,
we may observe that these directions do not survive in view of
the conclusion we have reached that the prices demanded by
ONGC are based on proper and relevant criteria. However, we
c
may observe that directions (i) and (ii) in this paragraph virtually
~-
throw open the entire issue for fresh discussion. It may have
been helpful if such a direction had been given before the hear-
ing of the writ petitions but the exercises would not be futile.
Havng reached the conclusion that the cost plus was the only D
proper basis of fixat;on of price, the High Court should perhaps
have directed the ONGC to charge prices on that basis and given
a reasonable time to work out the said price and implement the
direction. Instead, the High Court appears to have, by its direc-
tions in para 36, left the matter at large for it asks the ONGC to
./ . get the price fixed "according to the reasonable and rational E
norms". We do not also see any justification for providing that
the price fixation should be done in consultation with, or after
giving an opportunity to the respondents. It is for the ONGC to
~-· fix the prices and there can be no requirement of a prior consul-
talion with the present. respondents or with prospective custo-
mers. In such cases of price fixation, as in the case of price F
,J. fixations by Government (see Cynamide case, (1987] 2 SCC 720),
the only remedy of aggrieved consumers can perhaps be to have
some sort of post-decisional reconsideration by the ONGC after
hearing the view points of those affected. But this question does
!10t arise now in the view we have taken to the ONGC's obliga-
lions in tlus regard. We should also like to add that, now that the G
prices have been fixed by the Government since 30.1.1987 and
gas has already been supplied to the respondents till then on the
basis of interim prices, the implementation of the directions con-
tained in this paragraph would be a prolonged and unmeaningful
exercise and it would have been much better to fix some ad hoc
·price, for this period, after hearing both parties. In fact, Sri B. H
206 SUPREME COURT REPORTS [1990] 3 S.C.R.
Sen who appeared for the ONGC very fairly stated before us
A
that, so far as this period was concerned, the ONGC was pre- ~
pared to leave it to this Court to fix the price of supply at any
figure that the Court might consider reasonable. We also sug-
gested to the respondents, keeping the price fixed by the order
dated 30.3.1987 in mind, a figure which we thought was reason-
B able but the respondents were not agreeable to the course sug-
gested. They put forward certain alternative proposals which
were not acceptable to the ONGC. In these circumstances, we ~
have been constrained to hear the appeals on merits.
(viii) On behalf of the ONGC, it has been pointed out that a sum
of Rs.14.35 crores is outstanding for the period from December
c 1982 to August 1989 from eighteen concerns, even on the basis of
the interim prices at which the ONGC has been supplying them
gas under the orders of this Court, primarily due to shortfalls in~
the guaranteed off-take and that four concerns, who have stop-
ped taking supply of gas, are in arrears to the tune of about Rs.12
D lakhs. We need hardly say that the ONGC will be at liberty to
take immediate steps to recover the charges due from the respon-
dents in the light of this judgment.
(ix) We wish to add that we are not called upon to, and do not,
express any opinion regarding the notification dated 30.1.87 of
E the Government issued subsequently fixing the price at Rs.1,400 ',
plus. We do not know the circumstances or the statutory autho-
rity or the basis on which the said price fixation was made and
that is totally outside the purview of these appeals.
This concludes a discussion of all tqe points urged before us. For
F the reasons detailed above, we allow these appeals and uphold the
prices charged by the ONGC for supply of gas to the various respon- .i._
dents. We, however, make no order regarding costs.
R.S.S. Appeals allowed.
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