Fuel supply pact caught in coal distribution net

It was meant to be the new coal distribution policy to ensure off takes of the requisition of coal made by consumers. But the fuel supply agreement (FSA) of Coal India Ltd (CIL) is caught in a myriad of problems with only 54 applicants getting the letter of assurance (LoA) out of the 1,193 potential consumers.

Scepticism on the trigger level and uncertainties with the state appointed agencies to lift coal had meant that of the 1,193 linked consumers of CIL, only 988 have till now signed the FSA. According to the new coal distribution policy, CIL sends notices to the applicants who are required to furnish bank guarantees to receive the letter of assurance (LoA) from CIL. The FSA is expected to be executed within three months of achieving the LoA milestones.

However, according to sources only 472 applicants (142.988 million tonne) have been sent notices by CIL and its subsidiaries and only 324 applicants (80.42 million tonne) had deposited the bank guarantees for the commitment guarantee with CIL and its subsidiaries.

Sources added that in most cases, the bank guarantee has been found to be defective on account of either not being payable in local bank, not in the proper format, not having validity, having extra conditions etc. It now means only 54 applicants have been issued the LoA from the original number of 1,193 linked consumers, thereby raising doubts if the FSA can be implemented any time soon.

The company had earlier put June 30 as the deadline for the FSA.

Discussion between power utilities and subsidiary companies of CIL are on to achieve implementation of FSA by September 30, 2008.

Most problems have arisen out of the trigger level. Trigger level is a certain percentage of contract volume that both the suppliers and consumers are bound to supply and lift, which otherwise will attract a penalty for the one who defaults.

While for the existing consumers the trigger level is 50% of the contract volume, for the new consumers the trigger level is 60% of the contract volume.

Besides the problems with the trigger level, there are uncertainties with the state appointed agencies who are supposed to lift coal for the non-linked small and medium industries, consuming less than 4,200 tonne a year.

There are a number of states that have not responded to the FSA (see chart). Around 8 million tonne of coal has been earmarked for distribution to state nominated agencies and the state agencies are entitled to a charge of 5% extra towards service charges.