BBA online tuition, B.Com Online tuition, MBA online tuition, MBA projects and assignments solution
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
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.
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.
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.
