Rajan's two-tier coal pricing idea gets Plan panel support

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Raghuram Rajan had suggested power plants which had signed fuel supply agreements before 2009 should get 90% of their annual input from Coal India. Raghuram Rajan had suggested power plants which had signed fuel supply agreements before 2009 should get 90% of their annual input from Coal India.
SummaryAsks PMO to introduce mechanism within current FSA regime.

The Raghuram Rajan plan for a dual pricing of coal has found support in the Planning Commission.

The Commission has asked the Prime Minister’s Office to introduce two-tier pricing of the fuel that could be operated within the framework of the current fuel supply agreements (FSA) India’s public sector Coal India (CIL) is now signing up with thermal power companies.

The note prepared by Gajendra Haldea, adviser to the Commission’s deputy chairman Montek Singh Ahluwalia notes this will mean CIL will run a notified price regime for 80 per cent of the coal it mines. But it will set an import parity (IP) price for imported coal and the remaining 20 per cent of domestic coal.

As the finance ministry’s chief economic adviser, RBI Governor Raghuram Rajan had suggested that power plants which had signed fuel supply agreements before 2009 should get 90 per cent of their annual input from CIL.

However, in the Commission’s proposal, Haldea has proposed no cut-off year, but has endorsed Rajan’s contention that the import parity price should be allowed to be pass through to make it revenue neutral for CIL.

As a sweetener for the power companies, he suggests CIL could offer a proportionate discount on the notified price. “The net impact on the producers would be negligible, as the additional burden cast by the IP price will be offset by the discount to be provided by CIL,” Haldea has argued.

According to him, this would cut down transport of coal on rails as it will keep coast-based power plants incentivised to use more imported coal. At present since the price of domestic coal is comparatively low, power producers insist on getting it.

So, coastal power plants too prefer domestic coal, which means plants inland have to import a large amount which is a drain on resources. The principle of pass through prices has been cleared by the Union Cabinet in June as the cost plus mechanism.

At current projections, India needs to import about 150 million tonnes of coal to meet its total requirement of 525 million tonnes in FY14. The Haldea plan is meant to make this import translate into lesser rise in cost for the economy.

To allay apprehensions among the power producers, Haldea assures that there is no need for securing formal concurrence of the coal-bearing states as his proposal would not violate the existing FSAs.

But stakeholder consultations should be ensured after ‘in-principle’ approval to the dual pricing proposal.

The proposal would require Cabinet approval before being operationalised, he adds. The proposal also envisages diverting 1.25 per cent or 5 MT coal from e-auction for sale at IP price. “CIL would be free to divert additional quantities from e-auction for supply at IP price and the PSU may retain the revenues generated from this exercise,” it says.

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