Power cos can't take fuel risk; full marks to CCI: Montek

Planning Commission deputy chairman Montek Singh Ahluwalia said power producers in the country are facing fuel supply problem but it would be unfair to expect power companies to undertake fuel risks. He said power production will take time to become efficient as the system is reluctant to pay more for electricity. He gave thumbs up to The Central Electricity Regulatory Commission's (CERC) pronouncement on Adani Power.

Speaking on the NTPC-Coal India row over coal supply, the deputy chairman of the Planning Commission said it could be solved using commercial means. He said a large number of exploration projects will get cleared soon and mining will begin on NTPC's Karanpura Thermal Plant.

Reiterating his faith in competition commission of India (CCI), Singh said it is an extremely important initiative at this stage which has made progress in helping various projects stuck due to environmental issues.

Below is the edited transcript of his interview to CNBC-TV18.

Q: Can you give us an update on what you have done with specific regard to the CCI over the last one month and by when you expect some kind of unclogging to happen?

A: At this stage the CCI is an extremely important initiative as a number of projects are stuck for one or rather regulatory clearance or some inter-ministerial differences. For example, how to pull domestic supplies of coal with imported supplies of coal. The CCI has met a couple of times and has made some very important gains.

In the environmental area, large number of issues that were pending and which were required to be cleared up has been taken up and some notifications has been removed.

It is a question of how one goes to get clearances for linear projects like roads and transmission lines that pass through large number of gram sabhas etc. the requirement for clearance for 25 percent expansion of capacity in a coal mine. Many things were unnecessarily clogging the system; the CII has taken decision that will unclog them.      

Projects like National Thermal Power Corporation’s (NTPC) North Karanpura Super Thermal Power Project (NKSTPP) were held up due to inter-ministerial difference. It was later known that the site was situated in an area which has ample coal and there was a constant tussle whether they should move the project or not. The problem has been resolved, the project will continue and coal mining will take place in the entire area excluding the project area. This issue has been resolved.  

In the matter of new exploration licensing policy (NELP) for offshore coal blocks, a very large number of coal blocks were stuck because they have been awarded but subject to detail clearances those clearances were proving to be impossible. Out of eight large projects, half of them have been cleared and we expect a satisfactory outcome for another 31 projects in next two weeks. In other words, a large number of exploration projects which were held up will be cleared.

There is a pending issue of how to bring about pulling of domestic coal with imported coal. I think we have moved quite far in reaching a resolution in that area and we expect the issue to be resolved by the end of this month. The finance ministry has identified large number of projects, which were financed by the bank are also stuck. So, clearance on those will also come before. The CCI is clearly conveying the intention of the government that this has become a major impediment to moving ahead, it is holding up projects, which is backed by bank finances.

It is possible that some of these projects in the past, some of the clearances that they were supposed to get may not have been obtained the way they should have been or there may be some inconsistency with some other requirements but importantly the problem will be resolved. If it is left to the system, each ministry simply acts as a silo. So, if a project does not meet its criteria, it simply says no. This is a classically sensible thing to do when you are looking ahead. It is not sensible to do when one is looking at an entire pipeline of projects on many of which the work has already begun.

We need to strike a balance so that the projects can move ahead, where additional corrective action is necessary or marginal modification is necessary that can be introduced and CCI is required for that. At a political level, it is only possible if you take a holistic view. If you leave it to individual ministries then the system, the bureaucratic system within a ministry only follows its own guidelines; it is not their job to balance it off with other considerations. The CII will hopefully do that. I think within 2-3 weeks, there should be a sufficient accumulation of good results, which will give the impression to the CCI that has done well in whatever it is expected to be done.

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Q: Why has the issue of NTPC and Coal India on fuel supply agreement not resolved despite efforts by many and even the Prime Minister’s Office?

A: I don’t wish to pronounce on individual differences. These are individual companies which have their own board and it is logical for them to take purely company oriented decision. Part of the problem is that the structure of the contracts between these companies is not actually volatile. For example, I am told that when Coal India signs a fuel supply agreement, the legal terms of the fuel supply agreement implies that Coal India is obliged to provide them with coal. But actually it is not obliged to provide them with domestic coal at the stated domestic price. It could provide them with imported coal at the imported price and that would satisfy the terms of the fuel supply agreement.

The buying companies do not view it in similar way. In these issues under normal circumstances, there would have different commercial ways of resolving the problem.  

Part of the problem is that, NTPC views Coal India also as an extension of government. So they hope that they can get a better interpretation by taking the matter to inter-ministerial resolution. All this will change in future because we ought to be absolutely clear what the obligations of a company are. I think if that is absolutely clear then one wouldn’t have these problems.

The problem is that, many a times Coal India gives some sort of a linkage assurance and the legal validity of that linkage assurance is very low. It does not have legal obligation to deliver coal at particular price. But that is always been interpreted that way. So I think we are seeing a transition to a more transparent, legally enforceable, contract based system and that’s what we should have.

Q: CERC ruling on Adani Power created a lot of optimism in the power sector for a lot of companies who have been struggling with unviable projects but a quick challenge has come in from the Haryana State Electricity Board. Do you see quick resolution on these issues of compensation or long drawn out, protracted, legal battles which don’t address this problems that many of the private power players are facing today?

A: It is difficult for me to predict. I welcome the fact that CERC which is a statutory body has entered into an area and made a pronouncement. As a general principle, it is not correct to encourage power producers to take fuel supply risks. They should neither make a lot of money on fuel supply risk turning out one way, nor losing a lot of money on fuel supply risk turning out the other way. The problem is that they have entered into contracts where if the price moves one way, they benefit and if the price moves the other way, they lose.

One learns overtime. I am glad on CERC’s decision. It would encourage any participant that once used to rely on some statutory pronouncement, it might encourage them to take the right stand. One can’t rule out company’s or organisation’s feeling that they are on strong, legal grounds to get a better deal and going to court it. It is impossible to rule that out.

But I think we need to work to solve the problem. One solution is that they can carry on their case in court but they should get on with producing the power and getting the coal and resolving this later rather than simply not producing the power.

Linked to this is a great reluctance on the part of the system to pay more for electricity. If the economic cost of electricity has gone up because imported coal is expensive, Coal India is giving up a large number of coal mines in Maharashtra because with the current price of coal, they cannot afford to pay the land cost. All these indicate that energy prices will go up. Energy prices can only go up if the final use of energy which is electricity is able to cover reasonable cost. I think this issue is not well understood.

Most state electricity boards are happy to reject power at a high price because they don’t want to raise the price to the consumer and solve the problem by introducing power cuts. This means that the state distribution company has not raised the power tariff but they are not delivering power round the clock. The consumer is therefore forced to go for even more expensive power. Diesel power costs Rs 15-16 per unit.

There are many distribution companies that will refuse to pay Rs 8 to buy power in bulk because they are not able to charge that to the consumer so because of this there is a shortage so there are power cuts and the consumer is paying much more in the substitute source of supply. This fact needs to be understood by the people, press, regulator, the distribution companies and the politicians.

One should look four-five years ahead. One or two things will determine the cost of electricity. First, the efficiency with which one operates the system and that requires a whole lot of electricity reforms in the distribution area including investment. Second, the cost of primary energy - imported coal, even domestic coal at the margin. I think these costs are going to be high and not low.

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Q: By when we will start to see some results? The recent core sector numbers have been quite awful but that is backward-looking data. If you are indeed successful in clearing some large projects through the CCI and the feedback that you are getting from agencies like National Highways Authority of India (NHAI) which did not do much in 2012 in terms of awarding projects by when will it start showing up in the infrastructure numbers which we track on a regular basis?

A: True, infrastructure performance was a big problem in 2012. The performance of NHAI was below expectations. In the case of power there is both good and bad news. Positively, there is a lot of success on the generation side. We are adding lot of generation capacity. Fuel supply side has the problem. Coal India has not been able to raise production, hopefully it can do so, but that will take a little bit of time. The solution to that is in the short run more coal imports.

We need to find a way where power generators will buy imported coal and pay the price. They want a certain amount of pooling and certain amount of sharing. These things can be worked out. There is no doubt that we cannot produce much more power if we cannot absorb imported coal in the next 12 months. We need to find a solution and if necessary, ram it down the producers’ throats. That can only be done by the CCI.