It is extremely rare for Indian public sector companies to face off. But in January this year, Coal India Limited (CIL) and NTPC have massively squared off on the price of coal, India’s largest source of energy.

At stake is cost escalation for NTPC that could shave off up to R8,000 crore from its annual topline, while for CIL the stakes are even more. For the economy, the dispute is over the cost of energy, topped with the issue of the health of India’s third and seventh-largest listed companies by market cap.

The dispute is over a new gradation of coal that CIL has introduced from this January. The company has shifted the measuring rod to judge coal quality from the useful heat value (UHV) based pricing to a new gross calorific value (GCV) based pricing.

Since coal is the key input for the power sector?about 65% of the Indian electricity comes from thermal source, ie coal?this means a rise of this magnitude will create a cascading effect.

Production cost will go up between 60 paise and R1.20 per unit, says NTPC chairman Arup Roychowdhury. He told FE, ?The new pricing system will increase power costs and it will directly impact consumers.? NTPC?s current power production is between R2.50 and R2.80 per unit at present. This would roughly go up by 60-70 paise per unit, NTPC?s spokesperson said. Which way the issue is resolved is important for all private and public sector companies, especially in the power sector, which do not have capitve mines. India wants to add 1,00,000 mw in the 12th Five-Year Plan and issues like these are big spanners in the works.

The problem for companies like NTPC is that the change was abrupt. The country?s largest power producer uses the lowest category coal in UHV terms? E and F grades. But it has little idea if the new system will allow it the same grade or it will have to source coal at higher prices (the higher the grade of coal, the lower is the ash content).

But for CIL, the options were limited too. The company, which has a monopoly over the sale of coal in the country, is in any case going to run into protests whenever it raises prices. The GCV formula, too, raises the price, but also brings it closer to international norms.

Realising the significance of the developments, the owners of the two companies, power and the coal ministries, have waded into the dispute. The problem is exacerbated as CIL has had no regular chief for more than a year and NC Jha, its seniormost director, was holding additional charge till now.

According to former CIL chairman and managing director Sashi Kumar, the new scheme of pricing would add an estimated R9,000 crore to its topline next fiscal, but without achieving any growth in production. He said although GCV was the scientific basis of pricing coal,

the way CIL has done it was ?absolutely improper?.

Other companies like CESC, too, have reported that its power production cost would go up by a rupee per unit.

According to a West Bengal Power Development Corporation Ltd official, the biggest difficulty was in choosing the right GCV which would suit operations the best. So far, coal under UHV, was divided into seven grades ( A to F) and the GCV has categorised it into 17 sub-bands, which by no means are comparable with the earlier grades. The sub-bands have not been created holding each grade. Each sub-band with a bandwidth of 300 kilo calorie per kg (kcal/kg) has been determined on the basis of the calorific value a coal seam has, which is the standard practice worldwide.

On UHV basis, A grade of coal, considered to be the best quality was available at R4,100 per tonne at the pit head. Now the best quality coal has been determined to have a calorific value of above 7,000 kcal/ kg and its price under GCV has been fixed at R5,194 per tonne, 27% higher than the earlier price. Further down, the highest quality of coal has been determined to have a GCV between 6,400 and 7,000 kcal/kg and this has been divided into two more sub-bands: from 7,000 kcal/kg to 6,700 kcal/kg and from 6,700 kcal/kg to 6,400kcal/kg. The price for each sub-band has been fixed at R4,971 per tonne and R4,728 per tonne (at the pit head in Eastern Coalfields Ltd?s mines) up by 21% and 15%, respectively.

Under the UHV pricing, the entire range of GCV?from above 7,000kcal/kg to 6,400 kcal/kg?was available at one price?R4,100 per tonne at the pit head. But now there are three different prices of the earlier grade. Moreover, the above mentioned sub-bands are not essentially coming under A grade. In some mines, the earlier determined B and even C grades of coal are found to have GCV of say 6,400 or 6, 800 kcal/kg.

So B grade of coal, which was priced at R3,990 per tonne at the pit head in ECL, has been now priced at R4,728 per tonne.

NTPC, which is CIL?s largest buyer, is expected to pick up 160 million tonnes in 2011-12. It has a number of fuel supply agreements across CIL subsidiaries. But it lifts the most from South Eastern Coalfields Ltd, Central Coalfields Ltd and Northern Coalfields Ltd. The company generally feeds its boilers with the cheapest coal (E grade in UHV terms) and purchases it at an average of R730 per tonne. Now taking SECL as an example, the CIL subsidiary has determined the GCV of the same coal at 4,900-5,200 kcal/kg and has priced it at R1,890 per tonne, an increase by 159%. The company spends about R20,000 crore per annum on coal, a number that could go up by R7,700 crore per annum.

Analysing subsidiary-wise GCV prices, it is revealed that while the minimum coal price increase for regulated sectors (power, defence and fertiliser) has been by 4%, the maximum increase has been by 219%. Coal prices across the board have gone up by an average 60.71%, the highest-ever in the history of CIL, though chairman NC Jha, while announcing the shift, said, ?The entire exercise would be revenue neutral.?

The whole system of GCV based coal pricing, Kumar says, is dependent on determination of calorific value through Bomb Calorimeters. ?But as far as my knowledge goes, CIL doesn?t have enough number of it,? Kumar said. He said coal sample collection was the most important aspect of quality and internationally it was practiced through Automatic Sampler or Augur Sampler. He wondered how CIL was doing without those. He felt CIL should have discounted for ash and moisture in its GCV-based pricing, which aims at bringing Indian coal to import parity prices, but it has not done so, though Indian coal is high in ash and moisture compared to the coal of South Africa and Indonesia.

Partha Bhattacharyya, CIL?s immediate past chairman and managing director, said the procedure which CIL adopted in setting the GCV based pricing was not very clear. But he did not want to make any further comment on it.

However, the coal ministry has asked CIL to scale down coal prices and CIL, according to officials, has worked out a formula to bring down prices by an average 10% for the regulated sectors and 13% for the non-regulated sectors. But the average increase across the board is 60.71%, and so the cut is too little to give any real comfort to its consumers.

Planning Commission principal adviser Pronab Sen thought it an opportune moment to bring Indian coal to import parity prices since demand was more than supplies, but at the same time he expects inflation to come down by March with non-food inflation cooling down. He is of the view that non-food inflation should be measured by the cost of industrial production and not by wholesale price index. But if power prices go up, as a fallout of coal price increase, there is no reason to think that inflation would be tamed.