Background

Regulateri

0972-1924

The Energy and Resources Institute

rt-2007-34-002

Piecemeal reforms in the Indian coal sector*

Jain

Manisha

¹Malik

Sumit

* The paper has benefited immensely from inputs and review by Mr S K Chand, Senior Fellow, the RSG (Regulatory Studies and Governance) Division

¹Manisha Jain is Research Associate, Area of Energy Reforms, RSG Division

²Sumit Malik is Associate Fellow, Area of Regulatory Policy, RSG Division

92007

34612

Background

Coal is India's predominant source of commercial energy, accounting for over 50% of its overall energy consumption. It is also the most important input for electricity generation, as about 75% of the domestic coal production is consumed by the power sector³. Further, it is estimated that coal will inevitably continue to hold the largest share of energy supply till 2031/32. However, India's coal sector is beset with challenges such as uncertainties about the size of extractable coal reserves, ever increasing demand–supply gap, poor quality of supplies, irrational pricing structure, and lack of consistent dispute resolution mechanism.

³Ministry of Coal website: <http://coal.nic.in>, last accessed on 31 January 2007

Extractable reserves

While the GSI (Geological Survey of India) reported total resources of 255.2 BT (billion tonnes) for the year 2006/07, it needs to be noted that the data reported ‘does not take into account the mined-out reserves’. Moreover, the resources are inclusive of coal seams with a thickness of 0.9 m and occurring up to a depth of 1200 m, while mining in India is restricted to only 300 m and is likely to remain so (MoC 2007a). The reported figure also includes coal that has been sterilized over the past 200 years of mining in India, thereby implying that much of the reported resources would remain out of bounds. Using a thumb-rule, the CMPDIL (Coal Mines Planning and Design Institute Ltd) has now assessed that the total extractable reserves are limited to about 52 BT, which are expected to last only 40–45 years at a 5% growth in consumption. However, the manner in which coal mines are being currently overexploited, the likelihood of reserves getting exhausted much earlier is a distinct possibility. It is, therefore, imperative for India to know exactly how much reliance it can place on coal as an energy source for ensuring security of energy supplies in the long term.

Widening demand–supply gap

Since the late 1970s, while production from underground mines has shown a declining trend, the utilization of surface/open-cast mining, which also causes large-scale land degradation, has risen substantially. Further, increases in coal production have been achieved almost entirely from mining noncoking coal (used for electricity generation), as the production of coking coal (utilized for steel production) has been showing a decline. Coal production in India increased from 289.29 MT (million tonnes) in 1996/97 to 407.01 MT in 2005/06, indicating a CAGR (compounded annual growth rate) of 3.87%. However, this rate is much lower than the required annual average production rate of 4.9% and 5.8% to maintain the GDP (gross domestic production) growth scenarios of 7% and 8% respectively till 2031/32 (Planning Commission 2006). On the other hand, coal consumption increased from 325.0 MT in 1996/97 to 448.73 MT in 2005/06, indicating that the domestic shortfall increased from 27.6 MT to 41.72 MT in the same period.

It is ironic that coal shortages have widened despite the CIL (Coal India Limited) surpassing the production targets set by the Planning Commission. Obviously, the demand projections have not been accurate enough. It may also be highlighted that in five of the last ten years, coal imports have not been able to fulfil the demand–supply gap. This unmet demand not only impacts both the coal-consuming sectors and the economy but also raises concerns on India's long-term energy security. It further encourages illegal mining, black marketing, and theft of coal from the ground stocks of national coal companies. The rising demand–supply gap may primarily be attributed to the inordinate delays in project commissioning due to delays in various approvals and permissions; lack of adequate exploration data; weak financial health of some coal mining subsidiaries; policy constraints that limit private participation in commercial coal mining; lack of long-term planning for the sector; and low productivity and efficiency of mine operations.

Poor quality of supplies

Indian coal is characterized by high ash content, low sulphur and low calorific value. Thermal coal supply to the electricity sector is poorest in quality (grades E to G). Since the nationalization of the coal sector in the 1970s, the quality of coal has been continuously deteriorating due to use of open-cast mining, large sized heavy earth-moving machinery, blast-hole drilling, heavy blasting, and pulverizing the coal strata. The deterioration in quality continues unchecked due to the monopoly structure of the sector and resultant apathy towards quality of supplies. Further, some of the coal seams available in certain coalfields are inter-banded with shale and the mined coal is generally sold without any ‘preparation’ or ‘dressing’. Activities such as simple deshaling, improved mining procedures, and sizing of coal could bring down the average ash content of Indian coal to around 35% from the current level of over 40%, which could be further reduced through full washing.

Irrational pricing structure

Coal prices were fully deregulated with the notification of the CCO(Colliery Control Order) 2000. Although these measures were aimed at allowing coal-producing companies to negotiate prices based on market forces, in reality, the MoC (Ministry of Coal) continues to guide prices. Further, in the absence of well-defined and explicitly laid-down pricing principles, coal prices are determined on a cost-plus basis, with limited clarity on the level of profit margin sought by the national coal companies. Another impact of price deregulation has been the emergence of regional pricing, which implies that the price of the same grade of coal is different for different collieries. Additionally, coal prices are currently fixed on the basis of grades in terms of UHV (useful heat value) instead of GCV (gross calorific value). UHV has a very wide band of heat values under particular grades while GCV-based pricing will signify a precise calorific value of coal. It can be stated that the UHV method does not facilitate variation of coal pricing with quality.

Lack of consistent dispute resolution mechanism

In the Indian coal sector, disputes are largely related to pricing and quality issues and labour disputes. Currently, there is no established mechanism of price determination and dispute resolution between coal consumers and producers. Earlier, the CCO (Coal Controller Organization) used to adjudicate the disputes between a colliery owner and consumer pertaining to declaration of quality and grades of coal. Such a facility also seems to have been removed. Labour and employment disputes are resolved under the provisions of the Industrial Disputes Act 1947. While the mechanism for resolving labour issues is fairly well developed, it can be highly protracted and time-consuming. It is worth noting that the dispute resolution mechanism is not consistent for the coal sector as different issues are taken up with different adjudicating authorities.

Reforms in the sector

With the objective of addressing the issues described above, several initiatives have been taken by the government to speed up the reform process in the sector, especially during the last decade. Reforms in the sector were initiated in 1976 with the amendment of the Coal Mines (Nationalization) Act 1973. This was followed by the deregulation of coal prices and distribution of coal, allowing 100% foreign direct investment in captive coal mining. Efforts are also being made towards allowing commercial mining by the private sector, developing a fair coal distribution policy, and bringing a coal regulator in place. It is important here to analyse the impact of these initiatives on the sector and whether they have been able to achieve the desired objectives.

Private participation in captive mining

The Coal Mines (Nationalization) Act 1973 was first amended in 1976 to allow captive coal mining by private companies already engaged in the production of iron and steel. It was subsequently amended to allow captive mining by companies engaged in generation of power, production of cement, and washing of coal. Since then, the allocation of captive coal blocks is carried out through a screening committee of the MoC, which has members from various concerned ministries and national coal companies. However, the process has not been very transparent. In order to make this process transparent, a proposal to introduce competitive bidding in the allocation process was to be introduced and is still under consideration for the last couple of years. The proposal, however, has lost its priority over time. Most of the captive coal blocks have already been allocated or are in the process of being allocated through the Screening Committee. It appears that by the time such a system of competitive bidding is put into place, there will hardly be any blocks left for allocation.

The entry of the private sector in coal production has been a widely debated option for realizing efficiency gains and for augmenting domestic coal supply. It was proposed to be achieved by mobilizing the necessary additional investment required in the sector to increase production and to introduce competition by increasing the number of players. The process for this was initiated with a proposal of the MoC to amend the Coal Mines (Nationalization) Act 1973 to allow commercial coal mining by private players. After initial impediments, the Coal Mines (Nationalization) Amendment Bill 2000 was introduced in the Rajya Sabha in April 2000. Even though it is widely recognized that passage of this bill is an urgent need to further reforms in the sector, it is still pending due to the lack of a strong political will.

Price deregulation

As mentioned earlier, coal prices were deregulated even though the industry was totally under the control of government-controlled monopolies. Prior to deregulation, coal prices were set by the BICP (Bureau of Industrial Costs and Prices) based on the LRMC (long range marginal costs). At present, the prices are supposedly set by public sector utilities CIL and SCCL (Singareni Collieries Company Limited). Virtually, there has not been any change in the process after deregulation because the MoC has continued to manage and operate the national coal companies.

Another major reform initiative, supposedly to contain hoarding and black-marketing of coal, was the government-approved e-auction of coal by the CIL in 2005/06. Under the system, while 95% of the coal was being made available to the core sector at administered price, non-core consumers were paying double this price for the same quality of coal through e-auctions. Further, even though the primary target for e-auctions was non-core consumers, large core sector players were also bidding, thereby pushing up the prices. The system was modified to e-booking, following the Supreme Court's criticism of ‘discriminatory pricing’ of the e-auction system. The e-booking system almost replicates the erstwhile eauction mechanism.

Need for regulation

The need for an independent regulatory oversight in the coal sector has often been emphasized. The Planning Commission's Expert Group on Integrated Energy Policy, headed by Dr Kirit Parikh, has advocated the need for a regulator as an interim measure to undertake various activities, including approval of coal price revisions, monitoring the functioning of e-auctions, and creating the environment for a competitive coal market, amongst others. At present, most of these activities are being undertaken by the government. The case for setting up a regulator has also been made by a number of stakeholders, including the Ministry of Power and many state governments. This is primarily with regard to the unilateral price revisions and problems in the quality of coal supplied.

An expert committee headed by Mr T L Shankar was constituted to carve out a roadmap for the sector. Apart from other issues, the committee analysed in detail the various aspects of governance and regulation in the sector (MoC 2007b). The committee report states that the sector needs a regulatory mechanism to attend to all issues relevant for the development of coal resources, regulation of coal prices, wherever necessary, and ensuring a level playing field between large public sector coal companies and many small coal companies that are and would be exploiting the allotted coal blocks in future. The committee has recommended that various agencies governing and regulating the sector at present need to be delinked and brought together under a single agency of the government, which could be given certain regulatory powers. Contrary to this, the committee also suggests that there is a need for an objective agency, say a regulator, that besides the government, can offer an impartial competent, regulatory, and dispute-resolution mechanism. Its recommendation of setting up an authority with a minimum of three members and five directorates go beyond the stipulated role of a regulator.

Conclusion

Drawing from past experience on impact of reforms in the coal sector, it is very crucial at this stage that the country adopts an integrated phasewise approach to resolve existing issues. It is essential to ensure that the proposed regulator is an independent and transparent authority. While delineating its role and responsibilities, the fate of organizations that are already regulating various parts of the sector in a fragmented manner needs to be clearly identified. Further, pending entry of private operators, the government could consider introducing competition among various subsidiaries of the CIL. The incumbent utilities must also rationalize coal prices, levies, and freight so that they are based on economic principles. Additionally, these utilities need to reduce manpower, as well as improve capacity utilization and productivity. It can be stated that for facilitating all these reforms, the government would have to introduce certain modifications/amendments in existing legislation. However, the most important prerequisites for the success of any reform measure in the sector are creation of a transparent, equitable and hassle-free framework and strong political will.

ReferencePlanning Commission. 2006. Integrated Energy Policy, New Delhi: Planning Commission, Government of IndiaMoC (Ministry of Coal). 2007a. Annual Report 2006/07, New Delhi: MoC, Government of IndiaMoC (Ministry of Coal). 2007b. Draft Report (Part II) of the Expert Committee on Road Map for Coal Sector Reforms, New Delhi: MoC, Government of India

<p><table-wrap id="tab001" position="anchor"><table><thead><tr><th>State</th><th align="center">Regulation</th><th align="center">Control period</th><th align="center">First year of control period</th><th align="center">Generation/transmission/distribution/retail supply</th><th align="center">Contents of MYT filing</th><th align="center">Controllable factors</th><th align="center">Uncontrollable factors</th><th align="center">Targets and trajectory for controllable factors</th><th align="center">Sharing of gains and losses</th><th align="center">Incentives/penalties</th></tr></thead><tbody><tr><td colspan="11"><hr /></td></tr><tr><td valign="top">Andhra Pradesh</td><td valign="top">√</td><td valign="top">First control period = 3 years and subsequent control period = 5 years</td><td valign="top">2006/07</td><td valign="top">Separate MYT framework regulation for (a) wheeling and retail sale of electricity and (b) transmission</td><td valign="top">Components of ARR separately mentioned for distribution business, retail supply business, and transmission business</td><td valign="top">1) Operation and maintenance expenses 2) Return on capital employed 3) Depreciation 4) Non-tariff income</td><td valign="top">1) Taxes on income 2) Cost of power purchase</td><td valign="top">Targets are to be set by the Commission or O&M costs, financing costs and distribution losses; trajectory for specific variables ‘may’ be set in case performance can be improved through incentives/disincentives</td><td valign="top">No specific mechanism specified; only aggregate gains or losses for the control period as a whole will be considered by he Commission</td><td valign="top">Incentive/penalty in case of transmission losses has been indicated</td></tr><tr><td valign="top">Assam</td><td valign="top">√</td><td valign="top">Generation = first control period, 5 years from 1 April 2006; Transmission =first control period, 3 years from 1 April 2006; Distribution =first control period, 3 years from 1 April 2006</td><td valign="top">2006/07</td><td valign="top">Single MYT framework regulation for G,T&D with separate components of ARR specified for generation, transmission, bulk supply and distribution</td><td valign="top">Components of ARR separately mentioned for generation (thermal and hydro), transmission, bulk supply and distribution business</td><td valign="top">Not specifically mentioned</td><td valign="top">Not specifically mentioned</td><td valign="top">A loss reduction trajectory is required to be submitted by he licensee for each year of the control period; if the divergence in losses is more than 10% of the initial assumption of losses, commission will make suitable adjustments based on a review study undertaken by a third party distribution licensee shall be allowed to retain 50% of gains arising out of higher loss reduction than target and 50% shall be passed on to consumers</td><td valign="top">Gains = 50% of additional profit earned from all sources to be retained by licensee/generating company, 25% to be credited to the contingency reserve of licensee/generating company, 25% to be passed on to consumers; such gains are to be shared at the end of the control period; in case of distribution losses, distribution licensee shall be allowed to retain 50% of gains arising out of higher loss reduc than target and 50% shall be passed on to consumers</td><td valign="top">Incentive specified in case transmission licensee achieves weighted annual availability beyond the target availability as per the specified formula; incentive to be payable by distribution licensee and open access customers in the ration of their average contracted transmission capacity for the year</td></tr><tr><td valign="top">Delhi</td><td valign="top">√ (draft)</td><td valign="top">First control period = 4 years and subsequent control period = 5 years</td><td valign="top">2007/08</td><td valign="top">Separate MYT framework regulations for generation, transmission and wheeling, and retail supply</td><td valign="top">Components of ARR separately mentioned for generation tariff, transmission tariff, wheeling tariff, and retail supply tariff</td><td valign="top">1) Availability of transmission system 2) Transmission loss 3)O&M expense 4) Financing cost 5) Depreciation 6) Quality of supply</td><td valign="top">Not specifically mentioned</td><td valign="top">Performance targets are to be set for availability of transmission system, transmission loss, O&M expense, financing cost, depreciation and quality of supply</td><td valign="top">Wheeling and retail supply: Aggregate profits after annual adjustments will be shared annually as, 1/3 of the gain to be shared with consumer, 1/3 of gain to be credited to tariff control reserve and 1/3 to be retained by licensee; transmission: profit sharing formula is to be applied on aggregate profits and losses on account losses on account of individual controllable factors are not to be included, no cap is imposed on profits</td><td valign="top">Incentive specified in the event of implementation of intrastate ABT@25paise/kWh for ex-bus scheduled energy</td></tr><tr><td valign="top">Jharkhand</td><td valign="top">√ (draft)</td><td valign="top">First control period = 3 years and subsequent control period = 5 years</td><td valign="top">Not specified</td><td valign="top">Single MYT framework regulation for G,T&D with separate components of ARR specified for generation, transmission, distribution and retail sale</td><td valign="top">Components of ARR separately mentioned for generation, distribution business, retail supply business, and transmission business</td><td valign="top">1) Capital expenditure variations 2) AT&C losses including bad debts 3)R&M expenses 4)A&G expenses 5) Employee cost 6)Interest charges 7) Return on equity</td><td valign="top">Force majeure events, changes in law, inflation rate, taxes, and statutory levies</td><td valign="top">Trajectory will be specified by the Commission from time to time which may cover one or more control periods for specific parameters</td><td valign="top">Gains = 1/3 to be passed as rebate in tariffs, 1/3 to be retained in special reserve, balance amount to be utilized at the discretion of the utility; Losses = 1/3 to be passed on as an additional charge in tariff and balance to be absorbed by the utility</td><td valign="top">Not specified</td></tr><tr><td valign="top">Kerala</td><td valign="top">√</td><td valign="top">First control period = 3 years and subsequent control period =5 years</td><td valign="top">2007/08</td><td valign="top">MYT framework regulation specified for distribution and retail sale of electricity</td><td valign="top">Components of ARR separately mentioned for distribution business, and retail supply business</td><td valign="top">1) O&M expenses 2) Return on equity 3) Depreciation 4) Non-tariff income</td><td valign="top">1) Power purchase costs 2) Expenses on account of inflation 3)Taxes on income</td><td valign="top">Not specified</td><td valign="top">No specific mechanism specified</td><td valign="top">Not specified</td></tr><tr><td valign="top">Madhya Pradesh</td><td /><td valign="top">First control period -3 years</td><td valign="top">2006/07</td><td valign="top">Separate MYT framework regulation for (a) generation, (b) transmission, (c) wheeling and retail sale of electricity</td><td valign="top">Components of ARR separately mentioned for generation (thermal and hydro), transmission, wheeling and retail supply business</td><td valign="top">Not specifically mentioned</td><td valign="top">Not specifically mentioned</td><td valign="top">Target norms set for thermal generating stations - availability, PLF, gross station heat rate, secondary fuel oil consumption, auxiliary consumption; fixed at 97% for first 2 years of control period and 97.5% for the last year, O&M expense targets specified for transmission and distribution (to be split between wheeling and retail sale activity) business, distribution loss targets</td><td valign="top">Gains = transmission licensee shall be allowed to retain 50% of additional gains and 50% shall be passed on to consumers; Distribution licensee allowed to retain 50% of profit and no specific mention of treatment of remaining 50%</td><td valign="top">Target PLF values eligible for incentive specified for each year of first control period; incentive specified in case transmission licensee achieves weighted target availability as per a specified formula; incentive to be payable by distribution licensee and open access customers in the atio of their average contracted transmission capacity for the year; Rebate to consumers for maintaining appropriate power factor, achieving higher load factor or for annual availability beyond the implementation of energy conservation measures and seasonal surcharge/time of use surcharge, power factor/load factor surcharge and reactive energy charges to be specified by the Commission</td></tr><tr><td valign="top">Maharashtra</td><td valign="top">√</td><td valign="top">First control period = 3 years and subsequent control period = 5 years</td><td valign="top">2006/07</td><td valign="top">Single MYT framework regulation for generation, transmission, wheeling and sale of electricity</td><td valign="top">Components of ARR not separately mentioned for G,T&D</td><td valign="top">1) Capital expenditure variations 2) AT&C losses, including bad debts 3) Number of of power consumers, variations in working capital requirements and labour productivity</td><td valign="top">Force majeure events, changes in law, inflation rate, taxes and statutory levies, cost of power purchase</td><td valign="top">The Commission ‘may’ specify a trajectory for determination of tariff of a generating station balance</td><td valign="top">Gains = 1/3 to be passed as rebate in tariffs, 1/3 to be retained in special reserve, amount to be utilized at the discretion of the utility; Losses = 1/3 to be passed on as an additional charge in tariff and balance to be absorbed by the utility</td><td valign="top">Not specified</td></tr><tr><td valign="top">West Bengal</td><td valign="top">√ (draft)</td><td valign="top">First control period = 1 year; Second control period = 3 years; Subsequent control periods = 5 years</td><td valign="top">2007/08</td><td valign="top">Single MYT framework regulation for generation, transmission, wheeling and sale of electricity</td><td valign="top">Components of ARR not separately mentioned or G,T&D</td><td valign="top">1) Repair and maintenance expenses 2) Administration and general expenses 3) Return on equity 4) Depreciation 5) Non-tariff income</td><td valign="top">1) Fuel cost, 2) Power Purchase cost 3) Employee cost, 4)Interest rate and finance charges, 5) Energy sales volume 6) Rate of interest on working capital</td><td valign="top">Trajectory will be specified by the Commission during the control period for specific parameters-heat rate, PLF, auxiliary consumption, oil consumption rate,T&D losses</td><td valign="top">No specific mechanism of sharing gains/losses; any variation arising out of controllable factors is to be borne by the licensee/generating company</td><td valign="top">From time to time the Commission is to specify the set of performance target on different parameters for incentive; such norms are to be applicable from the second control period</td></tr></tbody><tfoot><tr><td colspan="11"><hr /></td></tr><tr><td colspan="11">ARR - annual revenue requirement; MYT - multi-year tariff; GT&D - generation, transmission, and distribution; T&D - transmission and distribution; PLF - plant load factor;</td></tr><tr><td colspan="11">MYT - multi-year tariff; SERC - state electricity regulatory commission; R&M - repair and maintenance; A&G - administrative and general</td></tr><tr><td colspan="11">√ - issued</td></tr><tr><td colspan="11">Source Garg A, Gaba V, and Bajaj J L. 2007. Regulation in Practice: impact of tariff orders on the Indian electricity sector. New Delhi: TERI</td></tr></tfoot></table></table-wrap></p></sec></app></app-group></back></article></article></body></html>