CIL caught in a cobweb

Seldom in recent times has the public sector Coal India Ltd. (CIL) been caught in a predicament as it finds itself now. The Maharatna company, which marked its footprints in the equity markets with aplomb in November 2010, is now virtually entangled in knots over myriad issues, including some major policy matters such as changeover to the GCV (gross calorific value) system of pricing, and the imbroglio over the fuel supply pacts.

It has faced unprecedented actions such as having to roll back prices and being forced to hammering out fuel supply agreements (FSAs) under government directive. And now, there is a possibility that it may have to rework some of the clauses in the FSAs which its main customer labels as biased. In the meantime comes yet another directive, this time to supply fuel to power companies on basis of the earlier memorandum of understanding route as FSAs remain largely deadlocked.

At a time when increasing production and sorting out logistic problems should have been one of its prime tasks, the CIL top-brass, led by its less than month-old chairman, is busy smoothening ruffled feathers of its prime customers such as NTPC over issues such as gross calorific value (GCV) and certain clauses in the FSA which NTPC is uncomfortable about.

The initial discomfort over an absurdly low penalty for non-supplies (at 0.1 per cent leviable after three years) has now given way to plain dismay about the way the draft FSA has sought to protect the coal behemoth from virtually every conceivable factor that may disrupt production, ranging from non-availability of regulatory clearances to equipment failures.

The Central Government had said that CIL would sign fuel supply agreements with power plants identified by the Central Electricity Authority /Union Power Ministry which have entered into long-term power purchase agreements with distribution companies. These power plants should have been commissioned or would get commissioned till March 31, 2015.

However, despite successive meetings (some of them stretching for seven hours), the board was unable to arrive at a consensus. In an unprecedented move, the Coal Ministry issued a Presidential Directive on April 4, seeking implementation of the fuel supply pacts. After another marathon board meeting, the independent directors, who were raising a voice of dissent on the issue of making CIL enter into binding commitments when its production plans were at the mercy of several factors not always in its control, eventually came around. The draft FSA was put up on CIL's website on April 20.

Progress since then has been tardy to say the least and against the 50-odd FSAs that should have been signed, only 13 have so far been sealed.

Coal sector experts felt that by framing the pact in that manner, the Maharatna PSU had actually frittered away an opportunity of turning in its favour a tough situation, and it could have scripted a draft that was more acceptable and kept the government on its side to get the clearances necessary to raise the production for meeting the output obligations.

It was also felt that it made sense to sign FSA for a particular project after identifying the likely coal sources and also setting in as clauses, the hurdles that lay before the project. The penalty level and the force majeure clause have to be specific to each FSA and the pact should be signed with the approval of the CIL subsidiaries.

The chairman of NTPC, the company which buys 311 million tonnes of the 400-odd million tonnes that CIL produces annually, raised the GCV issue as forcefully as he dwelt on the FSA.

In line with the best international coal trading practices, CIL had switched over to the GCV classification of non-coking coal, in place of useful heat value (UHV)-based grading and pricing system in January this year.

However, haphazard inputs from the CIL subsidiaries have believed to have led to a situation where prices of some categories of coal increased abnormally. This had to be rolled back following the minister's intervention. But, more importantly, lack of infrastructure necessitated by the GCV system is creating problems.

In the case of FSA, the NTPC chief voiced his concerns about the force majeure clause and indications are that, at an appropriate time, the CIL board may have to review those clauses which, user sectors believe, indemnifies the coal major, without leaving the user sectors with any safeguard.

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Printable version | Jan 22, 2022 2:07:52 AM |

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