Can't sign FSA on trigger level of more than 65%: CIL

Country's largest coal producer Coal India has introduced a one-time offer that allows power utilities to lift the fuel directly from mines.

S Narsing Rao, chairman and managing director of Coal India told CNBC-TV18 that this move will result in mutual benefit to both power companies and Coal India. "Instead of depending on imported coal power companies can supplement from this coal. We also realize our revenue instead of allowing the ground stock to be lying over there," he elaborated. The scheme is available for independent power producers drawing coal under fuel supply agreements (FSAs) as well. The Prime Minister's Office will meet Coal Ministry officials and Rao on June 22 to discuss three-year moratorium on fuel supply agreements and the level of penalty to be charged on shortfall of supply. CIL is facing a shortage of about 40-45 million tonne to meet its production plan target of 470 million tonne for this year. "This is leading to a delay in signing of FSAs and we have asked the government to consider this," he highlighted. In order to meet the shortfall CIL might have to import 30 million tonne coal, however the company will not cross subsidise this imported coal. With the current production plan CIL would not be in an position to sign the fuel agreement on more than 65% trigger level, Rao said. "The issue is to meet the 80% trigger through indigenous production whereas our current production plan meets maximum up to 65%. I can assure you surely we will find a middle ground soon. Below is the edited transcript of Rao’s interview with CNBC-TV18. Also watch the accompanying video. Q: Could you start off by explaining the decision of Coal India to go with this 1 time offer allowing power utility companies to lift coal right from the mines. What kind of benefit will it provide to Coal India in terms of cutting down your evacuation problems etc? A: Traditionally, we have been transporting coal for the power sector. We bring coal from mines to the loading point and load it into the railways and it goes.
Unfortunately, because of certain evacuation constraints year on year we have been accumulating the ground stock. We ended last fiscal with about 70 million tonne. In the last two months we could liquidate about 7 million tonne. Now that the power companies are facing shortage of coal, what we have decided is in addition to what we are already loading as a routine, in addition we wanted to offer them this opportunity of giving more coal if required even more than the contracted quantity. They could make local arrangement for transporting coal from that pithead to a railway siding where railways also have agreed to liberally provide railway sliding, so that they can augment the coal from our ground stock. This has two advantages – one huge benefit to the power companies because instead of depending on imported coal they can supplement from this coal. For us also, once we liquidate the damage that has been caused to the coal, we can also realize our revenue instead of allowing the ground stock to be lying over there. Q: Apparently the 22nd June you have got a meeting with the PMO. What will be discussed in that meeting and if the PMO steps up on the urgent need to sign the Fuel Supply Agreements (FSAs), does Coal India have a blue print going into that meeting of what kind of concessions it might make particularly on the penalty clause for which the signing of many of these FSAs have been held up? A: FSAs have been held up from signing, but about 17-18 of them have already signed, but the fact is we have a shortage of coal. Our best production plan this year which is 470 million tonne to be provided as off take in the entire country, we have a shortage of about 40-45 million tonne given the kind of demand that is there on account of our FSAs. So that is what we have requested the government of India to consider this aspect before signing the FSAs. _PAGEBREAK_ Q: The next thing which will come up is how the deficit will be made up and whether you’ll need to import coal and what would be the pricing and the sharing of that additional cost burden? I am sure the PMO will bring that up in the meeting. What is your suggestion and on that tricky issue how do you see resolution because I am sure that in this meeting the PMO will seek a final resolution? A: Ultimately for the current year I agree with you that there is no way but to import that coal equivalent of this demand. 40-45 million tonne of domestic is equivalent to about 30 million tonne of the imported coal. Now we need to work out the modalities; whether we import or whether we request on our behalf MMTC, STC someone to do that. But ultimately it is for the government. But as far as Coal India is concerned we will not be cross subsidizing that imported coal price. Q: Who will bear that additional cost because I guess that’s where the problem lies. Will it be the power companies that will have to pay up? If you do it will cause additional pressure on your margins. A: The consumers have to bear that additional cost. Against 347-350 million tonnes of domestic coal if you are required to import this 30 million equivalent that’s about 10% of the coal and the additional price for that they have to bear it. Q: You met with the coal minister as well who pointed out that at this point there were no price increases being considered but ex of that Coal India would still be profitable. What exactly is happening on the price situation in terms of how soon you can move and what kind of quantum you can increase prices by? A: The minister yesterday mentioned we are not immediately considering any proposal for increase of price except some correcting. Some prices corrections were seen in western coal fields and eastern coal fields. It resulted in some reduction of price that was obtaining as on 31st December. To hat extent we will be making a correction for about 50-55 million tonne equivalent of the production. _PAGEBREAK_ Q: This price increase has become a thorny issue with your investor TCI. They seem to be asking for an immediate revision upto international market price for Coal India. How do you skirt your way around that problem? A: I think I will not publicly respond at this stage. Yes, we got a notice yesterday. We will respond to them appropriately soon. Q: Do you think you can assure given the state of environmental clearances today the PMO that you will do more than 500 million tonne and by FY14 the need for imports may not be that high then? A: We have charted out a plan of action for all the five years in this current 12th five year plan. This year starting with 464 million tonne and finally for 2016-2017 we proposed a target of 650 million tons. There are some issue constraints relating to land acquisition, iron ore, environmental clearance and forest clearance but there are also constraints in railway infrastructure for evacuation. We are focusing on that, we are also requesting government of India, Coal Ministry, Railway and even the PMO to intervene there and sort out these things and we are positive about it. We should be able to achieve these targets. Q: Has any deadline been set either in conversation with the coal ministry or otherwise in terms of how soon these FSAs will get tied up because as you said a couple of them have happened but many key companies like NTPC have refused to sign that agreement? A: NTPC has not signed. Many of the state utilities have not signed except Rajasthan. we are supplying coal to them even though they have not signed the FSAs there is a MOU arrangement. Even last year without any FSA regime we have supplied 36 million tonne. Even for the first two months of this year we have supplied substantially to these people. But, they have some reservations about some clauses and the penalty indicated. We have our problem of meeting that 80%. We have to find a middle ground where we can resolve this issue. Q: Will a middle ground be found because the Prime Minister himself seems extremely keen that we break this logjam, move ahead on the FSAs. If the PMO is able to assure you that the imported cost will be borne by the power producers, will you relent on the penalty clauses so that this log jam is broken, FSAs can be signed at the end of this meeting next week? A: This issue is not about imported coal. Imported coal provision is anyway there in our FSA. The issue is to meet the 80% trigger through indigenous production. Our current production plan meets maximum up to 65%. So, that is where the problem is between 65% and 80%. I can assure you surely we will find a middle ground soon. Q: What is that middle ground because suddenly by the waving of a wand we cannot move from 65 to 80%? What is that middle ground? A: As far as the 65-80% is concerned, I can assure you there is no question because our most optimistic scenario is 65% this year, next year around 60%, following year 65%. But at end of this 12th five year plan we will reach 80%. But for coal it takes 3-4 years to bring a new mine into production. I am afraid that more than 65% is not possible this year and next year. Q: Just one clarification for a specific company. We believe that Coal India has decided not to supply to Lanco’s Amarkantak II facility. Why exactly is that? A: The instructions we have are rightly so from the Coal Ministry. The power companies which have signed their FSAs with discoms alone are eligible for this FSA system at the notified price. Power plants which have not signed PPAs with discoms are not entitled. As far as Lanco Amarkantak is concerned, I think you are referring to specific case from this South Eastern coal fields. We requested them to confirm if they have signed the PPA with discoms. So, the intention of the government is very clear that the relatively cheaper price of this coal should get passed on to the final consumer.