OIL AND NATURAL GAS COMMISSION AND ANR. v. ASSOCIATION OF NATURAL GAS CONSUMING INDUSTRIES OF GUJARAT AND ORS., ETC. ETC

Citation: [1990] 3 S.C.R. 157

Court: Supreme Court of India

Bench: S. RANGANATHAN, N.D. OJHA, J.S. VERMA

Case summary

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.

Judgment text

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 . 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 and vital materials like oil, petroleum and its products it was set up as body corporate. It is now a statutory corporation constituted by and JI>-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 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 present purposes may be set out here. Chapter III which deals with the powers and functions of the Commission consists of Sections 14 and 15. S. 14 reads thus: "14. Functions ofthe Commission- (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.

(2) In pamcular and without prejudice to the generality of the foregoing provision, the Commission may take such steps as it thinks fit- (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 refinery 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. 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. " 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 property, 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 exercised 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 and reports. Sections 16 and 17 deal with the capital of the Commission 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 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 which have been framed the Oil and Natural Gas Commission Rules, 1960. The only rule relevant for our present purposes is rule 25, dealing with contracts. It reads as follows: "25. Contracts: (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. (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 any contract on its behalf shall not be personally liable for any assurance or contract made on its behalf and any liability 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 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 and 1961 respectively. In most of the oil fields situated in Gujarat, gas 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 commodities which are generally known as 'natural gas' and we shall refer 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 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 Rs. 106. 66 per unit, rounded off to Rs. 80 and Rs. 100 per unit respectively.

The ONGC began to supply gas from Cambay region ofDhruvan 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 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 equivalence. 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 thermal equivalence with an alternative fuel or feedstock emanating from the processing of crude oil. There was no reference to the cost of 1 production of gas as such. -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 the Trombay fertiliser factory and power house at Bombay were substantially lower than the prices that the ONGC charged them. Eventually, 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. 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 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 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, depreciation 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 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 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 ifgas 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 for this supply. The charging of ten rupees less per unit supplied to the Fertiliser Corporation was justified on the ground that such differentiation was consistent with general practice where a petroleum feed stock is used for chemical industry. Among the industries that thus 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 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: Period Price ofsupply 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 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 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 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 supply 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 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 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 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 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 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 oftime the price of gas was stepped up by the ONGC in the following manner: Period Amount 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 We are told that the sudden jump in prices w. e. f. 1. 1. 1982 was consequent 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 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 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 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 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 by this Court and that this Court had to direct, by its orders dated 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 liabilities on account of the difference in the price of (all) the gas supplied to 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 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 petitioners 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, 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 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 concerned in these appeals with the period beyond 30. 1. 1987 when the jurisdiction to fix prices came to be vested in the Central Government. 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 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 petitioners at the interim prices fixed by the court subject to adjustment on fixation of prices determined in accordance with the directions 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 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 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 to be determined by following any one of the modalities suggested 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 prices; -- (iv) The clause regarding minimum guarantee was valid and enforceable. However, in view of its finding that the ONGC is a public utility "~ 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 concluding 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 ex-f~ unreasonable and to that extent their demand for -(' 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: _. ,.. ' .

(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; (ii) They may invoke the arbitration of some eminent economist in consultation with the petitioners; or -- · were ordinary commercial contracts entered into by private treaty bet· 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 agreeing upon a price for such supply.

Assuming that the ONGC is >- 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 contract 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 indefinitely 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 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 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, I 73 L. Ed. 390; Los Angeles Gas & Electric Corporation v. Railroad ;. _ 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 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 greater 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 ownership and control of material resources of the community are so 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 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- .. Edition, Vol. 64) on the subject of public utilities. Some of these passages may be usefully quoted. At page 549, it discusses the definition 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 "public utility" is a business or service which is engaged in regularly supplying the public with some commodity or service of public consequence, such as electricity, gas, water, transportation, or telephone or telegraph service. Publicly owned utilities are those owned by public 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 determining whether a specific organization or business is a public 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 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 distinguished 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 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 conditions, or the importance of the business to the public.

While the terms "public service corporation" and "quasipublic corporation" are used to describe public utility corporations, and the tenn Hpublic service commission'' to describe the body regulating such utilities, some courts distinguish between a public sector corporation and a public utility on the basis that the latter is required to serve the public generally, whereas the former may be required to serve members only. - . · quences follow. One is a general duty to serve which is descnDed m American Jurisprudence thus: "16. General duty to serve The primary duty of a public utility is to serve on reasonable 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, the public utility is under a legal obligation to render adequate and reasonably efficient service impartially, without 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 utility. 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 company, nor does the fact that the person applying for gas is aheady supplied with gas by another company.

The fact 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 ·-- -· 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 interest on the loans takfo by it; it must be able to discharge 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 necessarily 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 public utility undertakings or because of the provisions of the Electricity Supply Act? We do not think that either the character of Electricity Board as a Public Utility Undertaking 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 left. The onginal negative approach of functioning so as not to suffer a loss is replaced by the positive approach of requiring a surplus to be created.

xxx xxx xxx 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 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. 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 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 conducting its operations on commercial lines so as to earn a profit. 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 concern, can never be the sole guiding factor in the case of a 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 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 profit.

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 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'. 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 payment of public obligations. It was stated more than once that the total operational cost would include the interest on 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 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 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 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 arbitrary. But not until then. Not merely because a surplus 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. " 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 . ~ 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 based on any unreasonable margin of profit. There is nothing to indicate 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 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 commodity is free to be distributed at the manufacturer's choice, but yet where such manufacturer being a State instrumentality, has to _J conform to Articles 14 and 19 of the Constitution. At this stage of development of the industry, we think 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 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 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 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 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 enterprise. 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 Determination and Price Policy" where, dealing with the basis of forntion 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 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 public utili~y is taken to its logical conclusion ~ut that is not thebasis 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 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·agreements 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 elsewhere. Nor is there any complaint today from any industry not 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 contracts. The only objection that survives, therefore, is that the price for the supply should be reasonable and fair. It should be based on principie, 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 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 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 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.

"'" 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 crossappeals 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 decision of this Court in Amalgamated Electricity Co. Ltd. v. Jalgaon Borough Municipality, [1976] 1SCR636. O. N. G. C. ·v. ASSOCIATION [RANGANATIIAN, J. ] 203 (ii) A statement was filed before us to show that if the prices had 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 Vadodara 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 furnance oil which, by an large, was the source of energy tapped by .. the local industries. There being no irrationality in adopting this basis, it is n6t open to us to say that the basis of thermal equivalence 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 to the disparities in prices between supply to public sector undertakings 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 differentiation, 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 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 stands on no different footing from Electricity Boards or Fertiliser 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.

(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 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. (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 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 group of petitions was far from being satisfactory and, Gtherefore, 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 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 was whether the ONGC could discard this and adopt the thermal 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 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 hearing of the writ petitions but the exercises would not be futile. Havng reached the conclusion that the cost plus was the only 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 directions in para 36, left the matter at large for it asks the ONGC to . / . get the price fixed "according to the reasonable and rational 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 consultalion with the present. respondents or with prospective customers.

In such cases of price fixation, as in the case of price fixations by Government (see Cynamide case, (1987] 2 SCC 720), ,J. 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 obligalions in tlus regard. We should also like to add that, now that the 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 contained 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.

Sen who appeared for the ONGC very fairly stated before us 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 suggested to the respondents, keeping the price fixed by the order dated 30. 3. 1987 in mind, a figure which we thought was reasonable but the respondents were not agreeable to the course suggested. 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 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 stopped taking supply of gas, are in arrears to the tune of about Rs. 12 lakhs. We need hardly say that the ONGC will be at liberty to take immediate steps to recover the charges due from the respondents 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 the Government issued subsequently fixing the price at Rs. 1,400 ', plus. We do not know the circumstances or the statutory authority 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 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.