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Companies are not exactly victims of CIL inefficiency

ALL the policies and contractual documents since the introduction of the New Coal Distribution Policy (NCDP, 2007) clearly state that imports can be used to meet the commitments made in the coal linkage, says the PEG report. Therefore, it is not true to say that coal imports were unanticipated and it was expected that all coal would have been supplied from domestic sources.

It should have been evident from the minutes of the SLC (LT) meetings, CIL’s annual coal production targets and achievements, and CIL’s red herring prospectus (2010), all of which are publicly available, that domestic coal production would not be able to keep up with the coal demanded through linkages for the power sector.

So, power generators with linkages cannot legally or morally claim to be ignorant of the need for imports to meet their linkage commitments. Despite this, many power producers who participated in competitive tariff-based bidding bid aggressively low tariffs to win bids. Of the eight Case-I domestic coal-based power procurement bids during 2006 to 2010 won by power generators with linkages, only half the winners quoted any escalable fuel charge at all, though the bidding norms allowed quoting for such a component. This, despite the fact that between 2000 and 2006, Japanese steam coal import prices had increased by 10.5% annually, and a similar trend was also observed for other coal prices.

The total fuel related charges—sum of escalable and non-escalable fuel charges estimated for 2010-11— quoted by the winning bids – translates into Rs 604 to Rs 1,977/ton, with five of the eight bids being close to, or less than, Rs 1,313.4/ton—this was the average cost of domestic coal supplied to the sector in 2010-11.

In dollar terms, the winning bids represented coal costs in the range of $13 to $44/tonne, with five bids representing costs below $40. The FOB price of comparable Indonesian eco-coal, used by many Indian power generators, in 2010 was about $48/tonne.

The quoted fuel transport related charges (escalable and non-escalable) were also highly inadequate to meet the costs of international freight, customs etc.

This suggests that most winning bidders effectively assumed that coal linkages would be met through domestic sources despite all contracts and documents clearly stating otherwise.

Thus, power generators, particularly those who won competitive bids for power supply, bid aggressively without either understanding the risks involved, or with the intention of approaching regulators to reopen legally signed power-purchase contracts after winning the bid, though the power purchase agreements for competitively won bids has no provision for passing through increased fuel costs, says the report.

So, it is perhaps fair to say that power generators are as responsible for the coal shortage rather than just being victims of it, the report points out.

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