Tackling the coal conundrum

Written by Santosh Tiwari | Updated: Feb 18 2014, 09:39am hrs
In the din over Telangana, all other issues have taken a back-seat in the ongoing session of Parliament, which is also the last session of the 15th Lok Sabha. So it is not surprising that the Standing Committee report on coal pricing and issues relating to coal royalty, presented to both the houses on February 6, has not been talked about much.

While the report clearly indicates that the coal mess is set to continue as the urgency to deal with it has not yielded any result, it has also outlined possible solutions which need to be studied and discussed further for action.

Not that everything that the panel has suggested can be implemented, but in the backdrop of a sectoral governance structure without any regulator and a monopoly (Coal India Ltd) player, the shackles have to be broken gradually, instead of expecting a big-bang changethe ultimate change, though, is restructuring the coal sector by introducing more players, as recommended by the Competition Commission of India recently.

That may take time, but as a step forward to the whole process, the government should start working seriously on the parliamentary panel's recommendations for streamlining the coal-pricing mechanism and the payment of royalty to the coal-producing states.

While it has pushed for the establishment of a coal regulator for taking decisions on coal pricing and other areasthe Cabinet cleared the Bill for this in June last year but it is yet to be brought in Parliamentthe whole process can be started by constituting an independent regulatory committee. In any case, in the diluted Coal Regulatory Authority Bill, the regulator has been reined in by restricting its power to merely suggesting price methodologies. This would mean that the ultimate power would still remain with the government.

What the Standing Committee has now suggested is the speedy creation of a full-fledged regulator, or at least the central government constituting a Coal Pricing Regulatory Committee consisting of representatives of coal companies, the Centre, each coal-producing state, coal purchasers, power generation companies and an expert to head the committee.

The original idea of the Planning Commission was the creation of an independent coal regulatory authority with powers to comprehensively handle coal resource development, regulation of extraction, end-use as well as pricing and safety issues.

The new government at the Centre would obviously want to take a fresh look at the powers of the proposed coal regulator but in the meantime what the government can do is initiate the process for setting up the independent coal pricing regulatory committee. A transparent and workable pricing mechanism can play a significant role in breaking the vicious cycle which is keeping Coal India's hegemony going.

It goes like this. Due to the lower coal production, there is shortage of coal in the countrythe coal demand in FY13 was estimated at 772.84 million tonnes as against a domestic production of 574 million tonnes, leaving a gap of 198.44 million tonnes. Monopoly Coal India is failing to meet the domestic demand, so the gap is being filled by importing coal. So, the price and production both are being handled by Coal India and the government is not in a position to do much and let consuming industries, especially power, suffer.

Though the ultimate solution is to bring in as many private players in the coal mining sector as possible to get to realistic and market-determined pricing, the government, simultaneously, must ensure that steps are being taken to break Coal India's hegemony in coal pricing.

The other contentious issue in the sector is that of royalty payments, fixed by the centre, and paid to the producing states. These states are demanding a transparent royalty fixation regime for quite some time. The rates were last revised with effect from May 10, 2012, and are currently being calculated as a combination of specific and ad valorem rates devised by the Economic Advisory panel of the Prime Minister. But according to the Standing Committee, the formula is ambiguous and complicated.

This has been a bone of contention between the Centre and the coal-producing states, like Orissa and West Bengalthe latter also collects cess, so it has been kept under a different royalty payment structure. The states have been blaming the Centre for low royalty collections due to its policies. While the prices of coal have been revised nearly 7 times since deregulation in 2001 but the rates of royalty have not been revised.

The Central government has now decided to revise it every three years but the producing states' demand is to make it commensurate with the coal price increase. So the standing committee has suggested consideration of the demand for an upward revision, establishment of a transparent royalty calculation regime and has recommended that, in case the royalty cannot be revised for some reasons, the Centre should compensate the states through an equivalent matching grant.

The argument against higher payment of royalty is that it will impact coal prices, which then will have to be borne by the consumers as Coal India cannot meet the demand. But the short point here is there has to be a clear and acceptable mechanism for calculating royalty which should be devised through extensive stakeholders' consultations.