The ongoing battle between Coal India Ltd (CIL) and NTPC Ltd can be compared to a heavyweight boxing match between brothers, where neither wants to back down despite their familial bond, while upping the ante with new tactics in each subsequent round.
Here’s how the problem began: due to the acute shortage of coal that has affected power companies, the Prime Minister's Office (PMO) issued a diktat to CIL in February asking the miner to meet full supply commitments made to power companies under Letters of Assurance (LoAs). Since some of the company's board members refused to comply, the PMO diktat was followed by a Presidential reference in April. The Presidential decree, however, allowed CIL to relax the penalty. The company, then, agreed on meeting 80 per cent of the contracted quantity but inserted a low penalty level of 0.01 per cent in the newly- designed FSA. After power companies raised a hue and cry, the matter again went to PMO.
Finally, after a series of meetings at the PMO, there were renewed hopes that the country’s coal supply problems for the power sector were now effectively resolved. Despite being saddled with terms considered unfavourable, power companies went so far as to sign as many as 27 fuel supply agreements (FSA) with the monopoly coal producer.
So, why then is the biggest power producer now crying foul, forcing the government to relook at the FSA terms that were drafted by CIL?
Earlier, CIL effectively told power companies that if it were to supply 80 per cent of the power companies’ fuel requirements, it would unilaterally reduce the penalty clause to 0.01 per cent of the value of the shortfall—a negligible amount at best. Its rationale was that it has to shoulder tremendous risk by being forced to adhere to the imposed 80 per cent supply threshold and so the company’s already-worsening bottom line shouldn’t have to suffer from a failure to meet a governmental order.
Then, in the June 22 meeting at the PMO’s office, CIL-contrary to what you would imagine from a company being ordered to mitigate the fuel crisis-proposed an even lower level of supply commitment than the originally-mandated 80 per cent of annual contracted quantity (ACQ). CIL wanted a four-year window before moving on to the 80 per cent mark in the fifth year of the agreement. In return, the company would commit to a far greater level of penalty than 0.01 per cent of the value of short supply it had put in the FSA that was drafted after the first round of meetings.
Consequently, CIL now decided that it was worth taking the risk of having to pay a staggering 10-40 per cent of the value of the shortfall in any given year, as long as the supply levels were decreased to 65 per cent for the first four years.
Strangely, the ministry of power was not represented in the June 22 meeting though CIL was directed to go back to its board and take a final call.
Have power companies welcomed this new shift in penalty for commitment trade-off? The changes, however, have not yet been implemented. NTPC chairman and managing director Arup Roy Choudhury says that the FSAs are still in discussion at various levels. “NTPC shall abide by the decision of PMO and the Ministry of Power in the matter,” he said. Choudhury had earlier vocally opposed the low level of penalty and force majeure clauses put in by CIL in the FSA.
However, if the proposed change in the FSA clause that promises 65 per cent of the contracted quantity for the first three years from CIL, 72 per cent for the fourth year and 80 per cent for the fifth year is implemented, many in the industry believe that it would be even less reassuring for power companies than the earlier version.
A senior executive of a private power company that has already signed the FSA says that it is one thing to be a giant—indeed, the biggest power producer in the country-like NTPC. “If NTPC protests, it will be heard. Even if NTPC refuses to sign the FSA, CIL will willy-nilly supply coal to them. In the case of private companies like ours, this does not work out,” he says. Private companies have signed FSAs because they do not have any alternative for procuring domestic coal for plants from which they have already committed power supply to state utilities.
|WHY IS NTPC MIFFED BY THE COAL SUPPLY ACTt?
|1) Trigger level & penalty
- CIL has committed supplying at least 80 per cent of the Annual Contracted Quantity (ACQ), called Trigger Level, against 90 per cent at present
- This trigger can be revised annually by CIL at its sole discretion
- Also, penalty for shortfall has been brought down to 0.01 per cent, a 4,000 times reduction as compared to the existing 40 per cent
- This penalty, too, will come into effect only after three years
|2) One-sided nature of FSAs
- CIL can terminate agreement in case a change in distribution system is not acceptable to the buyer
- No provision for inter-project transfer of coal
- Cap on compensation for stones introduce while no such cap exists in current FSA
|3) Force majeure
- Even ordinary business difficulties included as “force-majeure”
|4) Supply for expansion problem
- NTPC says two different FSAs for the same station, one for the existing plant and the other for the expansion project, will create operational problems. CIL says not much difference between existing plant and its expansion
- CIL should supply at power station, not at the port, says NTPC. Delivery at port is a concern as the power regulator has capped handling and transit losses to 0.8 per cent
- No specifications defined for imported coal to be supplied by CIL
- CIL should intimate at least one year in advance and not three months
|NOTE: In a meeting in PMO last month, CIL proposed bringing down trigger level to 65 per cent for the first three years of supply and increasing it to 72 per cent in the fourth year and finally to 80 per cent in the fifth year. The company also reportedly agreed to restore penalty level in line with the existing provision. A final view on the matter will be taken by CIL board when it meets on 10 July
Yet, NTPC isn’t in an entirely enviable position. The company needs more fuel soon. It has commissioned 4300 Mw capacity between April 2009 and December 2011 for which FSAs have to be signed. "We have already conveyed to CIL that FSAs will be signed for full quantity of coal mentioned in the Letters of Assurance (LOAs) for a period of 20 years with trigger level of 80 per cent for levy of disincentives and 90 per cent of levy of incentive," says Choudhury. Incidentally, these trigger levels were set by the PMO after Prime Minister Manmohan Singh met private sector power producers in a meeting where NTPC was not represented. These supply commitments are to be met even if CIL is unable to produce coal itself. In effect, the coal producer will have to be importer for power plants too.
NTPC lists several reasons for being dissatisfied with CIL's stance. One, its entire capacity addition is brownfielded—which means, it is happening through expansion at the existing sites. This, NTPC says, will create a situation where there will be two different FSAs for the same station—one for the existing plant and the other for the expansion project—creating operational problems for the company. CIL denies that this should be a problem in the first place. NTPC also wants coal at the 80 per cent of ACQ limit.
Of course, it will take a lot more than CIL's maneuverings to truly perturb NTPC. It has an installed capacity of 39,174 mw capacity and will pass on any additional cost incurred due to more expensive imported coal to consumers since the tariff regime for these power plants allow a pass-through of fuel cost. “Ultimately the consumers will suffer, either through reduced availability of power as PLF goes down or high tariffs as we pass on costs,” says a NTPC executive.
CIL, for its part, also doesn't seem to be breaking into a sweat despite the radical increase in its penalty numbers. Could this be because it has chalked out a plan to ramp up its production by 40 per cent in five years to produce 615 million tonne annually, and therefore doesn't even have to consider using imported coal?
The troubled power sector is no stranger to such disputes. A little over five years ago, when power companies faltered on capacity addition there was a slanging match between NTPC and Bharat Heavy Electricals Ltd on the issue of supply of equipment.
What appears to be happening now is another instance of two government-owned corporate biggies feuding rather than exploring a symbiotic relationship between the two closely-linked sectors.