Consumers set to pay for illegal coal blocks

These state utilities along with their private-sector partners would have produced 123 million tonnes of captive coal by March 31, 2015, and will have to cough up an estimated R3,600 crore in penalties at the court-prescribed rate of R295 a tonne.

The private partners — Eastern Minerals and Trading Agency in case of Punjab, West Bengal and Karnataka and Adani Enterprises which is in a joint venture with Rajasthan’s state-run RRVUN — are under no obligation to pay up as the mines were allotted to the respective state undertakings. So contrary to popular perception, not just private companies (without JVs with state undertakings), government power utilities and their hapless consumers will have to bear the brunt of the SC’s judgment.

“We are still in the process of consultations (with the state government) on whether the government pays the penalty or the burden comes to us. The situation will be clear in a day or two,” CMD of Punjab State Power KD Chaudhri told FE.

The Punjab, Rajasthan, Karnataka and West Bengal governments hold some of the 42 operational blocks that the SC said will stand cancelled effective March 31, 2015. It allowed the producing blocks to continue to function under the current dispensations till the end of the fiscal to give the government “breathing space to manage the emerging situation”. After this period, Coal India will manage the blocks till the completion of deallocation.

“We expect the power purchase cost for utilities to rise, particularly in West Bengal and Punjab, where it would increase by R0.50-0.80 per unit given that these plants account for a large share of power purchase,” Crisil said in a recent report.

Apart from the visible cost of penalties, utilities will likely encounter several invisible cost due to uncertainty in the way forward for the operational mines.

The process of handing over operational mines to CIL from the incumbent miner is still vague.

“Transfer of mines to CIL is not likely to be a smooth process considering issues of legal documentation, employees and investment made by existing mine-owners for which they would demand compensation,” Edelweiss said in its report.

Currently, Eastern Minerals and Trading Agency — which holds a majority stake of 76% in the joint ventures with West Bengal’s WBPDCL, Punjab’s PSEB and Karnataka’s KSEB — mines coal from blocks allotted to these three states. Furthermore, in the event an auction is conducted and the winning bid is from new companies, private JV partners could even ask for compensation for investment by the existing mine owners.

By Sumit Jha| The Financial Express