Monday, June 21, 2021

# 9 GM04 Case Questions: What steps have been taken by government to overhaul coal sector? How effective coal regulator would be to avoid monopoly situation in coal industry in case pricing is kept out of its remit? How is price decided in coal industry where there is situation of near monopoly? (Explain with suitable diagram). GM04 Managerial economics assignment solution AIMA PGDM

 

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Section B Case Study

Govt. Moves to overhaul coal sector

The government on Wednesday moved a step closer to restructure the coal sector with a proposal that could potentially benefit the power companies that have been strained by the scarcity and poor quality of coal supplied to them.

 

A group of Ministers (GoM) signed off on a plan to set up a coal regulator and to create a “pass-through” mechanism that would see higher costs from imported coal being passed on as increased tariffs.

 

The proposal is now expected to be presented to the Union cabinet for its approval on 7 June 2013.  “We have been able to achieve traction and closure, pretty much, with regard to the coal regulator Bill, in terms of the formulation of different clauses and finality of its structure,” said minister of state for power Jyotiraditya Scindia. “Similarly, with regard to the pass-through mechanism for increasing supply of coal from external sources to the power sector, we have achieved closure on that mechanism structure as well.”

 

The proposed coal regulator will be primarily entrusted with the task of monitoring testing, quality, supply and grading of coal, but will not regulate pricing. It will, however, have an attached appellate body that will adjudicate on disputes between coal suppliers and buyers, including some pricing issues.

 

Finance minister P. Chidambaram said that pricing of coal would be kept out of the ambit of the coal regulator, and that it would be empowered to resolve disputes, including those arising out of fuel supply agreements with power and other downstream producers.

 

“There is an agreement that pricing must be left to the producer of coal, but the regulator will have powers to adjudicate on disputes relating to price, quality, supplies. All disputes will be adjudicated with the regulator and then there will be an appellate authority,” PTI had cited Chidambaram as saying.

 

Scindia said the proposed appellate body would have some control over pricing.

 

“We certainly have given a certain amount of authority to the coal regulator in certain very specified cases,” he said in response to a question if regulation of pricing was within its ambit. Besides pricing, the new body will be entrusted with the regulation of testing, quality, supply and grading of coal, Scindia said.

 

“It (the proposed regulator) takes into account the interest of all stakeholders within the industry, the suppliers of coal as well as the buyers of coal,” he said. “It balances and protects the interest of all stakeholders and, at the same time, gives a very judicious balance to the regulatory authority to be able to supervise the supply and demand of coal in the country.”

 

Both the proposals—one on the regulator and the appellate body and the other on the price pass-through mechanism—are likely to be taken up by the cabinet on 7 June, a top coal ministry official said.

 

Analysts and senior coal industry executives are, however, not convinced about the effectiveness of a coal regulator, especially if pricing is kept out of its remit. For one, state-owned Coal India Ltd (CIL) is a near-monopoly producer of the fuel. “It will be a nightmare, even if it is given full pricing powers. What will you regulate? It is not just a case of CIL being a monopoly player. The cost of production of varying grades of coal from different mines is different, so imagine how many permutations and combinations there will be to regulate,” said a senior CIL official who did not want to be identified.

 

Chintan J. Mehta, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd, said that without the authority to regulate pricing, the new body will be ineffective. “Although CIL has a monopoly over pricing, a regulator, if it had the power, could have raised an objection, thereby compelling the company into changing prices. That cannot happen now,” he said.

 

“Having said that, various non-pricing processes will be streamlined and become transparent, as the regulator will be an independent non-political entity,” Mehta added.

 

On 22 April, the cabinet had rejected a proposal to pool coal prices, which is the averaging out of cheaper domestic coal with costlier imports as a means of helping those who have to depend on supplies from overseas. Instead, it had asked a ministerial panel to set up a mechanism to pass on the incremental costs due to costlier imported coal to power producers.

 

CIL, the world’s largest miner of coal, supplies 85% of the domestic coal demand. It has been unable to meet growing demand, especially from the power sector, and hence has been resorting to imports to meet supply obligations.

 

While a pass-through price structure will increase electricity tariffs for consumers, it could potentially help restore investor interest in the power sector.

Source: Article form Live Mint published: Tue, Nov 27,2012

 

9.         Case Questions:

 

i.          What steps have been taken by government to overhaul coal sector? 

Steps taken by government to overhaul sector include setting up a coal regulator and to create a “pass-through” mechanism that would see higher costs from imported coal being passed on as increased tariffs.

The proposed coal regulator will be primarily entrusted with the task of monitoring testing, quality, supply and grading of coal, but will not regulate pricing. It will, however, have an attached appellate body that will adjudicate on disputes between coal suppliers and buyers, including some pricing issues.

Pricing of coal would be kept out of the ambit of the coal regulator, and it would be empowered to resolve disputes, including those arising out of fuel supply agreements with power and other downstream producers.

There is an agreement that pricing must be left to the producer of coal, but the regulator will have powers to adjudicate on disputes relating to price, quality, supplies. All disputes will be adjudicated with the regulator and then there will be an appellate authority.

The proposed regulator takes into account the interest of all stakeholders within the industry, the suppliers of coal as well as the buyers of coal. It balances and protects the interest of all stakeholders and, at the same time, gives a very judicious balance to the regulatory authority to be able to supervise the supply and demand of coal in the country.

ii. How effective coal regulator would beto avoid monopoly situation in coal industry in case pricing is kept out of its remit? 

Without the authority to regulate pricing, the new body will be ineffective to avoid monopoly situation in coal industry in case pricing is kept out of its remit. Although CIL has a monopoly over pricing, a regulator, if it had the power, could have raised an objection, thereby compelling the company into changing prices.

Various non-pricing processes will be streamlined and become transparent, as the regulator will be an independent non-political entity.

The cost of production of varying grades of coal from different mines is different, so there will be problem of regulating multiple pricing for coal and will be tedious and time consuming in the event of keeping pricing out of ambit of coal regulator.

The major issues in coal sector relates to monopoly situation that exists in the industry and CIL produces 85 % of coal produced domestically in India.

CIL has a monopoly in the pricing strategies of coal which is required to be regulated by an independent body and it has been authorized power to work upon pricing mechanism in the industry.

Setting up a coal regulator without regulating price in the industry and authorizing regulator to keep an eye on it will be worthless.

iii. How is price decided in coal industry where there is situation of near monopoly?  (Explain with suitable diagram). 

Coal industry is predominantly considered as a monopoly industry. Since nationalization, coal gradation and coal pricing have been controlled by the Union Ministry of Coal (MOC) and/or Coal India Ltd (CIL).

Coal Pricing Till 31 December 2011

Till 31 December 2011, non-coking coal grades used to be dependent on Useful Heat Value (UHV) expressed in kcal/kg as shown in Table 1.

UHV took into account the heat trapped in ash (A) produced by burning the coal and the heat lost in removing the moisture (M) while burning the coal. Equal importance was assigned to the heat loss arising out of ash and moisture contents.

For coal with high moisture content:

UHV = 8900 – 138 (A + M) (1)

For coal with low moisture and low volatile matter (VM) content:

UHV = 8900 – 138 (A + M) – 150 (19 – VM) (2)

The value of 8,900 kcal/kg adopted as the upper limit in Equations 1 and 2 represented the maximum heat value of Indian coal determined on pure coal basis.

Coal Pricing Till January 1, 2012

For over a decade and a half, UHV linked grade-based wide band pricing system was considered outdated. It was also felt that principally this system contributed to domestic coal being priced at 50–65 per cent cheaper than the international price till 1 January 2012.

Since then, a new grade-based pricing system has been put into effect. The new grades are dependent on heat value of coal, commonly represented by Gross Calorific Value (GCV), measured and expressed in kcal/kg. Grades are uniformly spaced at an interval of 300 kcal/kg as given in Table 2.

The new pricing was aimed at making the pricing system more scientific and rational while encouraging quality assurance. Possibly, all these three attributes brought the Indian coal prices on par with international coal prices.

Under the new system, any coal with a GCV of less than 2,201 kcal/kg is considered as ungraded coal and cannot be sold per se. Non-coking coal known in international nomenclature as thermal coal because of its intrinsic heat value is, however, priced in a rather elaborate manner in all major coal producing countries. The same has been briefly discussed hereafter.

 

Note: - At 5% moisture level.

 ** => indicates mine–head prices, excluding various duties and other charges;

(#) => Through a subsequent notification price for the GCV exceeding 7,000 kcal/kg, has been notified to increase by `150/– per tonne over and above the price applicable for GCV band exceeding 6,700 but not exceeding 7,000 kcal/kg, for increase in GCV by every 100 kcal/kg or part thereof.

Prices of all other grades were downwardly revised.



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