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Half-hearted on coal

Only a statutory regulator can depoliticise allocation of natural resources.

Considering that India’s coal and natural gas reserves are limited, their markets are riddled with imperfections. (Reuters) Considering that India’s coal and natural gas
reserves are limited, their markets are riddled with imperfections. (Reuters)

Rule-based regulation becomes necessary when there are natural monopolies, or when markets fail to deliver efficient pricing for consumers, or when there are externalities like threats to the environment. Considering that India’s coal and natural gas
reserves are limited, their markets are riddled with imperfections and that their extraction and end-uses involve threats to the environment, their extraction, end-use and pricing need to be regulated.

More than 90 per cent of domestic coal production is in the hands of Coal India Limited and Singareni Collieries Company Limited, both PSUs. During 2012-13, imports were 138 million metric tonnes (MMT). Considering that there are limitations on how much coal can be imported, the two PSUs will have a monopolistic control over coal supplies for years to come.

Coal pricing was administered by the government under Collieries Control Order (CCO), 1945, till that order was amended in 2000 and the PSUs were given the freedom to fix prices on a normative basis. This brought no change in the PSUs’ monopoly over coal pricing. Nor did it resolve the consumers’ concerns about the quality of coal supplied. Persistent pressure from  power utilities and recent public outrage at the coal allocation controversy prompted the ministry of coal to belatedly introduce the Coal Regulatory Authority of India (CRAI) Bill in the Lok Sabha, in December 2013. The coal regulator received the cabinet’s nod late last month.

The CRAI bill is a half-hearted measure, as it would not empower the regulator to determine the grade-wise price of coal or enable it to enforce that contracts for captive coal blocks be auctioned — two crucial areas of major concern for consumers. The CRAI’s role, on the other hand, would be limited to coal conservation, enforcement of mine development plans, coal sampling and testing, suggesting principles of pricing, norms of operational efficiency and resolution of disputes between producers and consumers. In the allotment or de-allotment of captive coal blocks, the CRAI would merely advise, not enforce. Its composition and the method of selecting its members are similar to the provisions in the case of other regulatory authorities, leaving scope for the government to use the CRAI as a parking place for retiring civil servants, thereby eroding its autonomy.

Not quite confident of piloting the bill through the usual legislative process, the government has now set up a toothless regulator through an executive order. This implies a total dilution of the concept of independent statutory regulation — a long overdue reform — and would simply create yet another layer of red tapism and infructuous public expenditure arising from it!
We need independent, umbrella regulation for pricing not only electricity but also the two fuels, coal and natural gas, as well as nuclear power, with a single authority to hear appeals against its orders. The following cases illustrate the need for this.

As of now, a statutory regulator determines electricity tariffs on a normative basis, through an elaborate process of public consultation. Consumers can contest the tariffs before an appellate authority. However, whether the fuel used is coal or natural gas, the regulator takes the fuel price as given, without questioning its reasonableness from the electricity consumers’ point of view.

Since coal prices are left to PSU monopolies, despite an ostensibly normative approach, there is neither any transparency nor a foolproof guarantee that consumers’ interests are fully protected. In the case of captive coal block developers, during the earlier regime of first-come-first-served allotment, windfall profits went to the developers and no advantage fully accrued to the consumers of electricity, cement or steel, the products that consumed coal.

In the case of one captive coal developer who was to utilise the coal for an ultra mega power plant, the political executive constituted a group of ministers (GoM) that permitted the developer to divert significant quantities of surplus coal (which ought to have been sold to CIL at the administered price) to another power station, infringing the concept of “captive mining” and also violating the tender ethics for electricity sold from the second power station. This provided windfall profits to the company concerned, without the corresponding benefit going to the ultimate consumers of electricity. This attracted an adverse observation from the country’s highest auditor, the CAG. Had the pricing decisions been left to a statutory regulator, the process would have been transparent, the corresponding benefits would have accrued to the electricity consumers and the controversy avoided.

In the case of natural gas too, the concerned regulator is not empowered to determine the gas price; instead, it is left to the gas producer to “discover” an “arms length” price under the relevant production sharing contract (PSC), subject to approval by the government. Though the PSC provides for referring gas pricing to a regulator if necessary, the political executive has deliberately arrogated this authority to itself by setting up a GoM.

In one case, the GoM ignored a lower, competitively bid price offered by the producer to a gas-consuming power utility and adopted a higher price obtained from a contrived bidding process in which the bidders had no incentive to bid low, as whatever price they quoted would be a pass-through price for the electricity regulator. This resulted in the gas producer earning huge windfall profits and the taxpayer subsidising electricity consumers. The present controversy surrounding the pricing of gas from the Krishna-Godavari basin has arisen mainly as a result of the government thus introducing a political element in the pricing methodology. If price fixation had been left to a statutory regulator, the controversy could have been avoided and the benefits to the consumers optimised.

During its decade of rule, the least that the UPA government could have done was to depoliticise regulation and provide a single statutory regulator for coal, natural gas and electricity to benefit the consumers. But it was an opportunity missed.

The writer is a former Union power secretary.

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