The Competition Commission of India recently accused Coal India of using its monopoly in commercial coal production to arm-twist consumers. The panel’s initial report is based on complaints lodged by two Western India-based power sector consumers.
There are two main allegations against CIL: One, that it forced consumers to enter one-sided fuel supply agreements and, two, it supplied coal of a poorer quality than promised while making consumers to pay for higher grades.
While CIL is yet to respond, the findings could trigger a debate on coal policy as well as the efficiency and work ethics of CIL’s mining subsidiaries.
One-sided FSA
The fuel supply agreement (FSA) issue goes back to the controversial National Coal Distribution Policy (2007), announced after a failed attempt to denationalise commercial coal production (Bill pending since 2000).
CIL objected to this policy on the ground that a corporate run on profit motive cannot be responsible for supplies to the entire country — that too, in the face of large-scale redistribution of its reserves to captive miners, limiting the company’s ability to step up domestic production after the current Plan period (2012-17).
To add to the problem, the standing linkage committee went on distributing linkages till 2010-11.
According to CIL, the company’s repeated warnings of a looming production shortfall were overruled and Coal India was forced to issue letters of assurance (LoA), to be converted to FSAs.
To protect its interests CIL first dilly-dallied on signing the FSAs after March 2009. Later, faced with a Presidential Directive, the CIL Board agreed to sign new sets of FSAs but on stiffer terms.
The Board, guided primarily by independent directors, felt the shareholders’ interests should be protected in the face of production shortfalls vis-à-vis the NCDP and the Railways’ reluctance to enter a broader agreement (as was proposed in NCDP) to ensure supplies.
Interestingly, while the CCI accuses CIL of arm-twisting consumers by virtue of the latter’s monopoly, UK-based institutional shareholder TCI accused the coal major of sacrificing shareholders’ interests by keeping domestic coal prices artificially low.
In a lawsuit filed against the company in the Calcutta High Court, TCI claimed that CIL lost a Rs 2,15,000-crore profit opportunity — since the IPO in end 2010 — by not taking advantage of the global spike in energy prices. CIL, however, stuck to its point that protecting national interests is of priority to the company.
That argument may now come handy in countering the competition watchdog’s views that the company operates “independent of market forces.”
Quality concerns
But the company may not have much of a defence on quality issues. There is little doubt that the switch to calorific value-based pricing, at the recommendation of the Coal Ministry, made CIL more accountable than ever on the quality front.
The new benchmark expanded the CIL product basket from 8 to 17 items. Since the heat-value bandwidth in each grade was narrowed down, even a slight deviation in quality would prove costly for the consumer.
Company insiders admit that low mechanisation in the opencast mines, desperation to keep production growing and, last but not the least, poor work ethics often lead to quality shortfalls. Mines in the Dhanbad-Ranigunj belt are considered the biggest defaulters on quality.
To avoid future disputes on grade slippage, CIL recently planned to introduce third-party sampling by reputed agencies.
“The decision was taken a month ago and the tendering process is on. Appointments are likely to take another three or four months,” a CIL official told Business Line .