The government also said that 46 of these blocks could, however, be exempted from the cancellation exercise given that 40 of them have already begun production (with their end-use plants in place) and the rest are about to commence operations.
While both the court and the government seemed aware of the economic ramifications of an inefficient handling of the imbroglio, the government suggested that the court could ask the companies operating the 40 functional blocks to compensate the government for the CAG-estimated loss to the exchequer of R295 per tonne. They could also be told to enter into fresh power purchase agreements with utilities so that the power produced from these blocks are sold at sub-market prices, factoring in the benefit captive coal, attorney general Mukul Rohatgi told the bench headed by Chief Justice RM Lodha. The government would submit details of operational mines to the court shortly.
The price of e-auction coal (which the power plants with captive coal will have to resort to in case of deallocation), is three times that of captive coal while imported coal at current prices could be five times more expensive.
Out of the 218 captive blocks that the SC deemed illegal, 105 belong to private companies. Of these, industry sources say 42 blocks are operational and they already produce around 53 million tonnes (mt) of coal, less than 10% of the countrys total output of the fuel. As per an estimate, captive blocks allocated so far were expected to produce 100 mt of coal by 2017.
Among the coal blocks currently under production are those belonging to private firms like Jindal Steel and Power (Gare Palma IV/1), its subsidiary Jindal Power (Gare Palma IV/2 & 3), Hindalco Industries (Talabira-I), CESC (Sarshatali), Monnet Ispat and Energy (Gare Palma IV/5), and Sarda Energy (Gare Palma IV/7).
Public sector companies producing coal from allocated mines include SAIL (Tasra), Damodar Valley Corporation (Barjora North) and West Bengal Power Development Corporation ( Barjore).
Posting the matter for further hearing on September 9, the court asked the coal ministry and the three industry associations concerned the Coal Producers Association, Sponge Iron Manufacturers Association and Independent Power Producers Association of India to file affidavits stating their respective stand in light of last weeks judgment.
During the hearing, the SC bench observed that the Union is very clear that auction should take place. They are very clear that all the 218 coal blocks be put under auction... The allocations have been found to be altogether illegal. Therefore, it (the Centre) wants to start from a clean slate.
In a report tabled in Parliament in August 2012, the CAG said the exchequer suffered a loss of Rs 1.86 lakh crore by not going for competitive bidding to allot captive coal blocks. The losses were calculated on the basis that firms allocated the blocks could earn a profit of Rs 295 per tonne.
Rohatgi said there was a need for saving 40 coal blocks from guillotine of cancellation as uncertainty of coal availability would affect the respective power plants, when the country is facing acute shortage of power supply. The government also opposed the apex courts earlier suggestion to set up a committee headed by a retired judges of the Supreme Court to go into the consequences of the courts decision. We dont want any committee. If it has to go, all (coal block allocations) must go, Rohatgi told the bench.
The SC last week observed that all coal block allocations through the screening committee and the government dispensation routes between July 1993 and January 2009 were done in an arbitrary manner and termed them illegal. Addressing a press conference last Saturday, the finance minister Arun Jaitley described the SC decision as a silver lining and said it would lead to a fairer mechanisms for allocation of natural resources, adding that it was the issue cannot be allowed to linger and inflict great collateral damage on the economy.
Indias total coal production was around 566 mt in 2013-14 and of this 452 mt was used to feed thermal power stations while around 150-160 mt was imported. If all the installed thermal stations operate at a plant load factor of 90% (they now operate at less than 70% right now), then the country would need an additional 165 mt of coal and a significant chunk of this was to come from the captive mines.
The AG also told the court that out of 218 allocations, 80 have been cancelled by an inter-ministerial group prior to the judgment. He also said that after 22 years of allocations, only 7% of mines are functional and most of the allotments have been made after 2006.
The court, however, said: They are holding only allotment letters. No effective progress has been made... Let us do our best to remove this darkness.
How the issue is resolved has serious implications for the financial sector also. As per a Credit Suisse report, about 9% of the total financial exposure to the power sector or around $10-12 billion worth of loans could be affected by the situation.
Legal experts feel that the government is bound to go for auctions only as it has become the law of the land since 2010 when the government finally brought in an amendment to Section 10 of the Mines and Minerals (Development and Regulation) Act, 1957.