OIL AND NATURAL GAS COMMISSION AND ANR. v. ASSOCIATION OF NATURAL GAS CONSUMING INDUST- RIES OF GUJARAT AND 9 ORS., ETC. ETC.

urging that advantages that accrue to the coal-bearing 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 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 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 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 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 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 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 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 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, 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 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 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 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 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 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 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 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 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 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 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 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 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 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, 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 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 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 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 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 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.

"Now, a State Electricity Board created under the provi- sions of the Electricity Supply Act is an instrumentality of 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 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 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

7Copy pinpoint7. 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

8Copy pinpoint8. 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 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 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 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 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 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 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 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. "'" 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 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 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.