By Naresh Minocha, Our Consulting Editor

THE Centre-State turf tussle over gas pipelines is entering crucial phase with the newly formed Petroleum and Natural Gas Regulatory Board (PNGRB) flexing its licensing and penalty-imposing muscles to the corporates.

Simultaneously, the Centre is once again pleading the Supreme Court to intervene and specifically clarify that the former's exclusive domain on natural gas includes gas pipelines.  

The tussle's echo might well be taken note of by the Commission on Centre State Relations that started seeking public views on all issues relating to the relationship in October 2007. Thus, action on tussle over licensing of pipelines is expected from three vital institutions.

PNGRB had last month issued two set of drafts relating to city gas distribution (CGD) pipelines and other natural gas pipelines (NGP). Each set comprises three draft regulations relating to grant of authorization to existing as well as aspirant pipeline operators, issue of monopoly rights under the garb of "exclusivity" for specified periods and fixation of tariff.

In both cases, PNGRB has asked the companies that are implementing CGD and/or NGP projects without the Centre's approval to apply for authorization under the applicable category.

It has also flaunted its enabling law that empowers it to punish promoters and management of these companies with three-year jail or Rs 25 crore penalty or both. The Board has also powers to impose daily fine of Rs 10 lakh for continuing contravention of the PNGRB Act 2006.

All existing pipeline operators or pipeline project developers are required to furnish information on their operations to the Board within six months beginning 1 October 2007, the day Government notified establishment of the PNGRB.

The Board has cautioned entities that are implementing projects without the Centre's approval to "not to undertake any such new or incremental activity or activities without obtaining authorization."

It is anybody's guess whether the pipeline developers have stopped work on their projects. It also remains to be seen how many of the developers and existing pipeline operators that started operating with States' permission apply for registration.

The crucial issue is whether PNGRB would legitimize the approvals given by the State and thus close the chapter on the Centre-State row or whether it would deny authorization to some entities, thereby adding fuel to the fire.

The tussle has its origin in Gujarat Government enacting Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act 2001(GGRTSD) to facilitate utilization of gas sourced within or outside its territory.

This prompted the Centre to make a Presidential special reference to Supreme Court on Gujarat law. In 2002, the State drafted its natural gas policy.

In March 2004, the Court upheld the Centre's claim that natural gas is a Central subject and is covered by 'Petroleum and Petroleum Products' mentioned in Entry 53 of the Union List under the Constitution. The States have thus no legislative competence to enact laws to oversee the growth of sector.

Later, Gujarat withdrew GGRTSD Act but retained an allied law named The Gujarat Water and Gas Pipelines (Acquisition of Right of User in Land) Act 2000 (GWGP).

In June 2005, Secretary, Union Ministry of Petroleum & Natural Gas (P&NG) wrote to Gujarat Chief Secretary, requesting to him to advice all gas pipeline entities to stall or seek the Centre's approval for their operations

Chief Secretary replied, stating that the State was only acting on Apex Court's directive to reduce air pollution. Prior to the Court's verdict, the State had authorized three companies to set up compressed natural gas (CNG) stations in specified districts. It had also issued no objection certificates (NOCs) to one of these companies and two more companies to set up such projects. The State-promoted Gujarat State Petronet Limited was only marketing gas sold by Central Government-controlled GAIL.

In the subsequent month, PNG Secretary asked Gujarat Chief Secretary to repeal the word 'Gas' in GWGP Act.

The State, however, gained legal uplift in September 2005 Gujarat High Court upheld The Gujarat Water and Gas Pipelines (Acquisition of Right of User in Land) Act 2000 (GWGP).

The High Court concluded that the Apex Court did not decide on State's competence to enact laws on acquisition of property while giving its verdict on gas regulation.

Gujarat thus continues to exercise powers to regulate acquisition of right of user in land to lay pipelines for transporting gas under GWGP Act.

The Act is thus not an encroachment by the State on the Centre's power to legislate on gas sector. GWGP Act is a law for partial acquisition of property, an area where both the Centre and the States have the legislative powers.

In spite of subsequent communication between PNG Ministry and Gujarat Government, the latter has not deleted 'Gas' from GWGP Act nor has cancelled NOCs.

The trail-blazing developmental initiatives of Gujarat Government in the natural gas sector have inspired Uttar Pradesh, Maharashtra, Andhra Pradesh, Haryana and Rajasthan to unveil their similar initiatives. All these States have issued approvals to a few companies for setting up CGD projects in specified districts.

PN&G has appealed to all these States "not to initiate any action regarding grant of NOCs/approvals pertaining to laying of trunk pipelines and city/local natural gas distribution networks."

It is pertinent to note here the fact that the Centre had all along neglected the need for laying down policy and regulatory framework for gas pipelines and merely remained contended with efforts made by GAIL and its associate companies.

It is not surprising to note that only 3 lakh vehicles and too primarily in Delhi and Mumbai operate on compressed natural gas (CNG) and only 5 lakh houses have access to piped natural gas (PNG) in a few cities.

P&NG Ministry belatedly notified the Centre's policy on development of gas pipelines only on 20 December 2006. It followed it with setting up of PNGRB on 1 October 2007.

This is a classical case of the Centre being outsmarted by the State's in its own game of economic reforms.

And the Centre now compounding its mistake by flaunting powers directly or through its appendage PNGRB to issue or cancel approvals to pipeline companies.

We all know that city gas distribution (CGD) projects can not only facilitate wealth generation and new jobs but also improve the air quality in cities.   The Centre learnt this hard way in Delhi under the prod from the Supreme Court.

CGD projects provide CNG to vehicles and PNG to homes. Both CNG and PNG are cheaper than the competing petroleum-derived fuels. With availability of natural gas from domestic reserves as well as from overseas set to increase manifold over the next 5-7 years, there is tremendous scope for CGD projects.

Moreover, the profit margins in the CGD business are lucrative. That helps explain the gold rush among more than 100 companies that have queued up before the regulator to secure approvals to undertake such projects. CGD pipeline and trunk pipelines require thousands of crores of investment.

With such challenging task ahead to provide CNG and PNG to millions of customers across the country, it is high time for the Centre to give up its licence raj mentality.

The Centre should only specify safety and technical norms that should be statutorily enforced right from the stage of project planning. It should also lay down tariff and consumer protection guidelines. It should limit its role to issuing approvals for cross-country and cross-border pipeline projects.

The Union Government ought to delegate the power to the States for pipeline networks within their respective territories. Similarly, it must empower municipalities to decide on city distribution projects.

There is no rationale for bringing back licence raj through the backdoor of independent regulator in this era of liberalization and wealth generation for all.

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