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Monday, 30 July 2012 00:00
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PMO needs to find ways to assuage CIL’s board

With Coal India Limited’s Board going to meet tomorrow to decide on whether CIL will agree to signing fuel supply agreements with power plants set up since 2009 (and those in the pipeline till 2014), the big question is whether it will once again be a flop show. The last time the PMO asked CIL to sign FSAs for 50,000 MW of power plants and to include a guarantee clause with penalties in case CIL was not able to meet at least 80% of the coal demand of these plants, CIL’s independent directors turned this down and eventually, the entire board, refused to ratify the proposal. CIL then came up with a watered down proposal, to sign FSAs with very weak penalty clauses and offering to supply just 65% of the coal needs of the power plants. Since this wouldn’t provide enough comfort for banks lending to these projects, the power ministry asked the PMO to intercede again. In an ideal situation, the government should have thrown open the coal sector to commercial miners, but it hasn’t been able to summon up the necessary courage to denationalise the sector.

In order to provide comfort to CIL’s board, especially with The Children’s Investment Fund breathing down its neck, the PMO needs to assuage the fears CIL’s board has. Top on the list is the losses CIL will suffer it is not able to produce enough coal (which it cannot) and has to import coal to meet its commitments. Under normal circumstances, CIL would import the coal and charge the buyer the difference. But given the vastly higher imported coal prices, this makes power produced unviable vis-à-vis the plants that get CIL’s domestic coal. The PMO is in favour of a pooled price where buyers of local coal share some part of the higher costs of imported coal, but the problem with this is that if the older buyers (state government-owned utilities as well as NTPC) object to paying a higher price, CIL could get in trouble. What it needs is the power ministry, and perhaps the Central Electricity Regulatory Commission (CERC) to pass an order authorising this and, most important, making the tariff adjustments automatic – CIL could otherwise end up paying higher prices for the imported coal but not get its money back on time. And given that CIL’s slow production growth means the need for imports is going to keep rising, the PSU is understandably reluctant to get into the business of imports which is not its core competence – more so given the limited capacity of ports to handle the traffic and of the Railways to transport this coal to buyers. Perhaps the PMO needs to figure out which agency – MMTC perhaps – will take on this obligation. Until these two conditions are met, it’s unlikely we’ll arrive at a permanent solution. 

 

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