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Official Citation: 2019 LHC 4013
Court / Jurisdiction: Lahore High Court
Year of Decision: 2019
Decision Date: 2019-12-13
Parties: Ejaz Textile Mills Limited etc vs Federation of Pakistan etc
This judicial decision was delivered by the Lahore High Court on 2019-12-13. The matter involves proceedings between Ejaz Textile Mills Limited etc and Federation of Pakistan etc, officially reported as 2019 LHC 4013. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
Case cited as 2019LHC4013
Court Name: Lahore High Court Judge(s): Ayesha A. Malik Title: Ejaz Textile Mills Limited etc vs Federation of Pakistan etc Case No.: JUDICIAL DEPARTMENT WP No.49178/2017 Date of Judgment:2019-12-13 Reported As: PLD 2020 Lahore 261, 2019 LHC 4013 Result: Petition allowed
Judgment Ayesha A. Malik J. This common judgment decides upon the issues raised in the instant Petition along with connected Petitions, as detailed in Sche dule "A" appended with the judgment, as all Petitions raises common questions of law and facts. 2. The Petitioners before the Court are all primarily engaged in the textile sector or the CNG sector and are consumers of Re-gasified Liquefied Natural Gas ("RLNG"). As per the prayers in the Petitions, the Petitioners have challenged the vires of SRO 405(1)/2015 dated 7.2.2015 and SRO 971(1)/2015 dated 30.9.2015 along with tariff determinations dated 7.10.2016, 2.6.2017 and 20.6.2017. During the course of arguments, the Petitioners limited their grievance to the procedure followed by OGRA in setting the RLNG price without any hearing. The Petitioners are specifically aggrieved by the tariff determinations made by the Respondent OGRA dated 2.6.2017 and 20.6.2017 which revised the RLNG tariff for the period 1.7.2016 to 31.12.2016 and for the period 1.1.2017 to 31.3.2017 unilaterally , without any hearing. The Petitioners are also aggrieved by the tariff determination dated 7.10.2016 made by the Respondent OGRA in relation to the quantum of cost of service and Unaccounted for Gas ("UFG") permitted to the Respondent SNGPL. The basis of the Petitioners? grievance is that they have been denied the right of hearing in each of the impugned determinations; that cost of service and determination of transmission and distribution losses as well as UFG necessitates due process and a hearing, before OGRA can adjudicate upon the same; that the tariff for the impugned period was decided after a public hearing, however OGRA of its own motion, re-adjusted the tariff and made it applicable retrospectively on the tariff billed to the Petitioners. Facts of the Case 3. On account of shortage of natural gas in the country , the Federal Government made arrangements to import liquid natural gas to be re-gasified as RLNG. The Economic Coordination Com mittee ("ECC") of the Federal Cabinet on 2.7.2013 authorized the Ministry of Petroleum and Natural Resources, Islamabad to import LNG up to
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500 MMCFD on Delivered Ex-Ship (DES) basis from Qatar . On 27.7.2015 the ECC approved the import of LNG which was to be re-gasified by the re-ga sification terminals to be set up at variou s sea ports. The re-gasification process results in RLNG which is to be supplied through the SSGC and SNGPL transmission and distribution networks for industrial consumers who were not getting sufficient supply of the indigenously produced natural gas. At the time it was decided that the RLNG pricing and other matters were to be determined by OGRA under the Petroleum Products (Petroleum Levy) Ordinance, 1961 ("1961 Ordinance") on monthly basis, in line with other petroleum products. To give effect to this decision, appropriate amendments were made in the 1961 Ordinance through SRO 405(1)/2015 dated 7.5.2015 whereby RLNG was included in the First Schedule as a petroleum product and the name of SNGPL and SSGPL were inserted in the Second Schedule as gas utilities. The Federal Government also issued SRO 971(1)/2015 dated 3.9.2015 stating that RLNG price shall be determined by OGRA and notified by the Pakistan State Oil. On 27.7.2015 the Federal Government issued its pricing components and price parameters for RLNG which included cost of service, transmission and distribution losses. OGRA was required to determine both cost of service and transmission and distribution losses with reference to RLNG price. OGRA made a provisional determination on 7.10.2015. PSO, SSGC, SNGPL, all approached OGRA to review its provisional determination to include actual and anticipated costs of importing and supplying RLNG, however , OGRA did not agree to all the claims, but accepted some of the claims in its decision of 18.3.2016. The decision of 18.3.2016 is based on public hearings carried out at Karachi and Lahore. The Petitioners and others participated in these hearings. The said determination was made for the period April 2015 to January 2016 where after OGRA made subsequent determinations, however no public hearing was of fered for any of the subsequent decisions. Arguments of counsel 4. Counsel for the Petitioners argued that the RLNG Tariff Determination Framework comprises of the gas supply agreements between the Petitioners and SNGPL and various decisions and notifications issued by the Federal Government, by the ECC and by OGRA. The core feature of this framework is that the tariff determination of RLNG was ring-fenced keeping it separate from the tariff determination of natural gas. Hence it calls for a separate process to settle RLNG prices. The Petitioners are aggrieved by the manner in which RLNG tariff determination is made by OGRA as it is done without hearing the Petitioners with respect to key components of the tariff, which include transmission and distribution losses as well as cost of service. Learned counsel argued that RLNG tariff determination is made by OGRA on the basis of the delegation of authority by the Federal Government in terms of Section 6(2)(r) of the Oil and Gas Regula tory Authority Ordinance, 2002 ("2002 Ordinance"). The Counsel argued that OGRA is bound to hold a public hearing in all matters where its decision is with reference to a regulated activity as per the provisions of Section 9 of the 2002 Ordinance. Learned counsel further argued that the Petitioners challenged the vires of SRO 405(1)/2015 dated 7.2.2015 and SRO 971(1)/2015 dated 30.9.2015 on the ground that OGRA has the power to fix the tariff under the 2002 Ordinance and the process to be followed for RLNG tariff is as per the 2002 Ordinance. However during the course of arguments since the Respondents accept this contention, the Petitioners do not press the vires of the two SROs in this case. 5. Learned counsel argued that the Petitioners essentially press their right of hearing at the time when the tariff is determined in order to ensure that their objections with reference to the prudency of transmission and distribution losses and cost of service are duly considered before granting amounts to the Respondent SNGPL or SSGC. They argued that the RLNG tariff was determined in the impugned determinations, without grant of hearing to the Petitioners. In the process the Respondents radically changed the computation mechanism of various costs allowed to SNGPL/SSGC without giving the Petitioners an opportunity of objecting to the same. By way of example, the Petitioners stated that the Respondents included cost of service in the RLNG tariff determination on 7.10.2016 without any hearing to the Petitioners in terms of Section 9 and made it applicable retrospectively , whereas originally through earlier determinations they were not granted any cost of service despite their requests. OGRA also revised the manner in which UFG was calculated through its determination of 7.10.2016 even though the mechanism for calculating UFG is decided in the agreements with SNGPL and again during the public hearings at Lahore and Karachi. In essence they claim that in the order of 7.10.2016 OGRA reviewed its earlier orders and changed the computation mechanism for UFG allowance and allowed cost of service with retrospective effect. As
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per the counsels? arguments these issues were decided and finalized by OGRA vide its determination of 18.3.2016 and could not have been revised with retrospective effect. They further argued, if at all any amount was to be fixed under these heads, it had to be done prospectively after hearing the Petitioners. Learned Counsel also argued that tariff determination for the period April 2015 to January 2016 was finalized through the tariff determination of 18.3.2016 which is based on a public hearing. This decision of 18.3.2016 was reviewed and changed with retrospective effect on 7.10.2016 without giving the Petitioners an opportunity of hearing, hence the Petitioners have challenged the same. 6. Learned counsel also argued that the impact of the impugned determinations is that it has increased the cost of service allowed to SNGPL over and above 41 cents per MMBTU to 81 cents per MMBTU, hence the cost of service has doubled, without hearing the Petitioners and without giving them an opportunity to object to the increase made. It is the Petitioners? contention that the Respondent OGRA has not considered any of the objections of the Petitioners and consequently gave a huge financial benefit to SNGPL. In the same way, they argued that SNGPL was allowed UFG at 4.5% which increased to 9.2% which is unreasonable and does not meet the standard of reasonableness and prudency . In this regard, learned counsel relies upon OGRA Natural Gas (Regulated Third Party Access) Rules, 2012 ("2012 Rules"), in terms of which UFG is to be determine d. The Counsel contend that following any other methodology is against the terms of their agreement. Learned counsel further argued that RLNG Tariff Determination is a power given to OGRA by the Federal Government in terms of Section 6(2)(r) of the 2002 Ordinance, hence OGRA is required to ensure that it is in compliance with the requirements of the 2002 Ordinance, such that in terms of Section 9 of the 2002 Ordinance, an obligation to hold a public hearing in all matters where the decision relates to a regulated activity must be complied with. 7. On behalf of Respondent OGRA, it was argued that OGRA is in compliance with the law and the guidelines provided by the Federal Government. Learned counsel explained that in order to deal with the shortfall of locally produced natural gas, the ECC of the Federal Cabinet authorized the Ministry of Petroleum and Natural Resources to negotiate with Qatar Gas for the impo rt of LNG on Delivered Ex-Ship basis. The ECC approved the import of LNG on 2.7.2013 on DES basis to be re-gasified as RLNG. Thereafter the Federal Government put into place a framework on the basis of which the price of RLNG is to be determined. In princi ple, it was agreed that the price determination framework will be similar to the tariff determination of petroleum products under the 1961 Ordinance and the Rules. Consequently SRO 405(1 )/2015 dated 7.5.2015 was issued and thereafter SRO 971(1)/2015 dated 3.9.2015 was issued to include RLNG in the 1961 Ordinance. In this framework OGRA acts as the delegatee of the Federal Government and even though authorized to determine RLNG prices as per the 1961 Ordinance it is bound by the guidelines provided by the Federal Government under Section 21 of the 2002 Ordinance. The price determination of RLNG is carried out on a monthly and provisional basis and ultimately a final determination is made by OGRA based on actual costs which is then notified by PSO. During the initial phase, one of the key considerations was that there was no infrastructure for the import and distribution of RLNG, hence SNGPL would use its existing infrastructure on the understanding that ultimately this will be separated and RLNG shall and have its own infrastructure. This has been factored into the price determinations made by OGRA for which it held two public hearings in which the Petitioners participated. 8. Learned counsel further argued that RLNG prices are determined on provisional basis at the start of the pricing period and have to be actualized when the actual pricing data becomes available to OGRA. In this regard, the Federal Government has issued the pricin g components for RLNG on 27.7.2015 on the basis of which the price for RLNG is actualized. She explained that in terms of the letter issued on 27.7.2015 a public hearing is not required for all components as some of the components are provided for by the Federal Government whereas OGRA has to determine cost of services and transmission and distribution losses. A public heari ng is given with reference to the cost of services and the transmission and distribution losses and was provided to the Petitioners who are before the Court. So far as the financial year 2015-16 and 2016-17 are concerned, the Petitioners were heard. Learned counsel clarified that throughout this process, the Petitioners were aware that the tariff determination was provisional and subject to actualization at the end of the pricing period. She further explained that once a public hearing is granted and all objections are noted, it is not necessary that at the time of actualization of the pricing
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components that the Petitioners are heard. She further stated that the 1961 Ordinance does not require a public hearing at every stage and any objections that the Petitioners had towards the UFG or cost of services could have been raised with OGRA in the first instan ce. Learned counsel also stated that the entire dispute stems from the notion that the Petitioners are entitled to a hearing at every stage on monthly basis when the tariff is determined. This is not how the tariff determination is modeled and it is also practically impossi ble. The Counsel placed several RLNG determinations on record to show that the Petitioners have not objected to the computation or methodology subsequent to the impugned determinations. Hence, she argued that no case is made out before this Court. 9. On behalf of Respondent SNGPL, it was argued that RLNG was ring-fenced, meaning that all costs incurred by the gas utility company in supplying RLNG would not be included in the revenue requirements of the company for indigenously produced natural gas. The ring-fencing requirement was given to ensure that the extra cost of importing LNG and process to re-gasify and make RLNG would be borne by the consumer for whose benefit this entire exercise was carried out. The Petitioners entered into cost supply agreemen ts with the Respondent SNGPL and they agreed to bear the costs of import of RLNG notwithstanding the fact that it may be receiving indigenously produced natural gas in lieu of RLNG. The Petitioners also agreed to pay tariff for RLNG as determined by OGRA and notified by the PSO which includes the cost of services in which it was agreed that distribution and transmission losses would be paid by the Petitioners. Furthermore they agreed that OGRA will make provisional determination on a monthly basis which would be subject to a final determination and that if there is any balance in payment between the provisional tariff and the final tariff, based on the actual costs that would be paid by the Petitioners. Further that OGRA in fact carried out this entire process and has been in compliance with the law yet the Petitioners have challenged this process notwithstanding the fact that they have contractually agreed to it. Learned counsel stated that it has already been decided by this Court vide judgme nt dated 8.2.2017 passed in WP No.1821/2017 titled Mayfair Limited etc v. Federation of Pakistan etc. that there is a contractual agreement between the parties which governs the terms and conditions on which RLNG will be supplied to the consumers and the terms of the agreement specifically provide what amounts are to be paid. Under the circumstances, learned counsel argued that the Petitioners are not entitled to any relief from this Court. SNGPL has been supplying RLNG to the Petitioners and has been accumulating all data of actual costs incurred in relation thereto. These costs are put before OGRA who then makes its determination. The entire mechanism has been transparent after following due process and the Petitioners have no cause to claim that they have been denied public hearing when the record shows otherwise. Opinion of the Court the legal framework: 10. The 1961 Ordinance provides for the levy and collection of petroleum levy on petroleum products and matters connected therewith. SRO 405(1)/2015 dated 7.5.2015 amended the First and Second Schedule of the 1961 Ordinance to bring RLNG within the scope of petroleum products so that RLNG is treated as a petroleum product and to treat SNGPL and SSGCL as utility companies under the 1961 Ordinance. Further SRO 971(1)/2015 dated 3.9.2015 brought RLNG within the sphere of the categories of petroleum products for which the Federal Government fixes prices and may delega te its function to OGRA. The Petitioners do not dispute this position and no longer raise challenge to the SROs. The 2002 Ordinance established OGRA and in terms of Section 6 of the 2002 Ordinance set out the powers and functions of OGRA. RLNG price determination has been delegated to OGRA consequent to Section 6(2)(r) of the 2002 Ordinance which provides that OGRA shall administer or establish prices for those categories of petroleum for which the Federal Government estab lishes prices and may delegate the function to the Authority . Hence under the said Ordinance OGRA is a delegatee of the Federal Government. Section 13 provides for the review , rescind or change of the Authority's decision who can rehear and change a decision in the event of changed circumstances or the discovery of new evidence which was not available at the earlier stage and will materially after the decision. Section 21 grants the Federal Government the power to issue policy guidelines to OGRA on matters of policy not inconsistent with the provisions of the 2002 Ordinance or rules made thereunder and OGRA must comply with them. These directives are therefore binding on OGRA. Section 9 provides for the right of hearing in regulated activity , where the decision of the Authority may directly and adversely
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affect the right of a person. As per the contentions raised before the Court all parties agree that OGRA sets RLNG prices as a delegatee of the Federal Government after making its determination as per the formula provided in the directives. 11. The issue raised by the Petitioners is with respect to their right of hearing when OGRA makes its determination for cost of services and transmission and distribution losses in the supply of RLNG because this decision directly and adversely affects their rights. They argue that OGRA is obligated to hear them before making a determination on these components as per Section 9 of the 2002 Ordinance. Specifically they raise the issue that RLNG tariff determination after March 2016 has been made without a public hearing and quantums decided at the public hearings were subsequently enhanced through subsequent determinations retrospectively without any hearing. In this context, it is important to note that OGRA is obligated to follow all policy directives issued by the Federal Government. The Federal Government issued the pricing components under policy directive dated 27.7.2015 for RLNG and both parties agree that the role of OGRA is limited to determinations at serial No.1(v) and (vii) of the directive dated 27.7.2015. As per the directive the price components are as follows: No.DGO(AC)-5(235)/15-LNG Government of Pakistan Ministry of Petroleum & Natural Resources, (Policy Wing) Directorate General of Gas, 21-E, Huma Plaza, Blue Area Islamabad, the 27th July , 2015 01. The Chairman, Oil & Gas Regulatory Authority , Islamabad 02. The Managing Director , Pakistan State Oil Company Ltd. Karachi. 03. The Managing Director , Sui Northern Gas Pipelines Ltd, Lahore 04. The Managing Director , Sui Southern Gas Company Ltd. Karachi Subject: SALE PRICE OF RLNG Dear Sir(s) I am directed to inform that Economic Coordination Committee (ECC) of the Cabinet in its meeting held on 06.06.2015 while considering a summary submitted by this Ministry on the above subject vide Case No.ECC- 87/11/2015 dated 06.06.2015 approved the following proposals: (I) Pricing Components for RLNG: i. LNG DES Price including any take or pay volumes, losses on account of Net Sale Proceeds and relevant adjustments due to exchange rate. In case of FOB cargoes, the price should include FOB price plus freight charges. ii. PSO's other imports related actual costs. iii. PSO's Margin upto 4 percent of LNG DES Price, subject to review after three months. iv. Terminal Charges under LNG Service Agreement (LSA). v. SSGCL/SNGPL cost of service (to be determined by OGRA). vi. SSGCL/SNGPL administrative margin upto $ 0.05/MMBTU (to be paid in rupees) for each company (to be treated as non-operating income), subject to review after three months. vii. Transmission losses at 0.5% and distribution losses, if any (to be determined by OGRA). (II) The RLNG Price will be determined by OGRA and notified by PSO on simila r lines to that for petroleum products pricing including Exchange Rate adjustments. However; RLNG price will be determined on the basis of price of LNG cargoes scheduled to arrive in Pakistan during the relevant month (as against the preceding month's practice in fuels) so that price should reflect the close to actual cost of LNG. (III) Moreover PSO has been allowed to incorporate any differential between actual versus provisional prices in subsequent pricing period upon availability of all actual costs. This will remove any ambiguity in the pricing mechanism and ensure that the actual and auditable prices are charged to customers. (IV) Gas infrastructure Development Cess will not be applicable on RLNG. 2. It was also approved by the ECC that a Committee Comprising Secretary Finance Division (Convener), Secretary Ministry of Water & Power , Secretary Ministry of Petroleum & Natural Resources and Secretary Law,
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Justice & Human Rights to review the pricing mechanism after three months and submit report to ECC for consideration. 3. You are kindly requested to take further necessary action in the implementation of above ECC decision under intimation to this Ministry at the earliest please. Yours truly , Abdul Rashid Jakhio, Director (T ech) Tele: 9204812 The Federal Government issued another policy directive on 27.6.2016 with reference to price determination of RLNG which is reproduced hereunder: Government of Pakistan Ministry of Petroleum & Natural Resources, (Policy Wing) Directorate General of Gas, First Floor , Petroleum House, Ataturk Avenue G-5/2 Islamabad, the 27th June, 2016 01. The Chairman, Oil & Gas Regulatory Authority , Islamabad 02. The Managing Director , Pakistan State Oil Company Ltd. Karachi. 03. The Managing Director , Sui Northern Gas Pipelines Ltd, Lahore 04. The Managing Director , Sui Southern Gas Company Ltd.Karachi Subject: DETERMINA TION OF SALE PRICE OF RLNG Dear Sir(s) I am directed to inform that Economic Coordination Committee (ECC) of the Cabinet in its meeting held on 14.6.2016 considered the summary submitted by this Ministry on the above subject vide Case No.ECC-72/12/2016 dated 14.06.2016 and approved the recommendations of the Committee, constituted by ECC vide case No.ECC- 87/11/2015 dated 06.06.2015, for conveying to OGRA as policy guidelines under Section 21 of the OGRA Ordinance, 2002 as under: i. LNG DES price to be taken as per Contract. ii. Port charges will also be taken at actual including amount reimbursed to supplier as per relevant agreement. There was a consensus that all relevant cost may be allowed to POA to sustain its operations along with a reasonable profit margin. iii. PSO was advised to take up the matter with Sindh Government for non-applicability of Sindh infrastructure Cess in line with other Petroleum Products'. The Ministry of Petroleum and Natural Resources was also advised to facilitate PSO accordingly . It was also agreed that pending the ultimate settlement of this issue, the said Cess will also be included in RLNG price. iv. PSO margin will be determined at 2.50%. v. All charges under LSA including but not limited to capacity charges and utilization charges as well as Retainage are to be included at actual. SSGC/PSO will share all relevant details with OGRA. vi. SSGC's Margin for LSA Management to be determined @ $ 0.025/MMBTU to be treated as non-operating income. vii. Transmission Loss to be determined and charged at actual subject to a maximum of 0.5% (to be shared by gas companies based on length of Transmission Line involved). viii. Distribution Loss to be determined and charged at actual. The said loss for the customers located on high pressure transmission lines as well as those customers who are willing to lay their dedicated line from SMS/TBS at their own cost shall also be determined and charged at actual. However , for other customers on distribution lines, an actual average UFG for the last financial year will taken in determination. 2. You are kindly requested to take further necessary action in the implementation of above ECC decision under intimation to this Ministry . Yours truly , Abdul…
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