<p>State miner Coal India on 7 August agreed to pay penalties for failing to provide sufficient supplies to new power projects that range from 1.5 to 40 per cent of a shortfall, depending on the level of default.<br /><br />It also agreed to pool the prices of imported coal with domestic supplies but said a final decision on this issue would be taken by the Central Electricity Authority. Such a pricing system would work only if all domestic consumers are willing to accept the resulting higher price, the company said.<br /><br />The Coal India board agreed to pay a 1.5 per cent penalty if its supplies amount to 65 to 80 per cent of the contracted volume and 5 per cent if they reach 60 to 65 per cent, its chairman told reporters after the board meeting.<br /><br />Penalties would rise to 10 per cent for 55 to 60 per cent, 20 per cent for 50 to 55 per cent and a maximum of 40 per cent for supplies of less than 50 per cent of contracted volumes.<br /><br />"We have no objection to pooling of prices if it is acceptable to all stakeholders," Coal India Chairman S Narsing Rao told reporters after a board meeting.<br /><br />The move to fix penalties follows the company's agreement last week to supply a minimum of 80 per cent of the coal needed for new power projects, bowing to a condition set by the government, and paves the way for it to sign a fuel supply pact for 48 projects.<br /><br />Coal India had stipulated that it may use a mix of up to 15 per cent imported coal versus 65 per cent domestic. (<strong>Read</strong><a href="http://businessworld.in/web/guest/storypage?CategoryID=0&articleId=399608&version=1.0&journalArticleId=399609"><strong>: Coal India May Turn Importer</strong></a><strong>)</strong><br /><br />Coal India, the world's largest coal miner, produces nearly 80 per cent of the country's domestic coal supply of about 550 million tonnes but has struggled to increase local supplies for years because of failure to get swift environmental and regulatory approval and inadequate railway infrastructure.<br /><br />The government on April 3 had issued a Presidential directive to the Maharatna PSU to sign fuel supply agreements (FSAs) with the power producers assuring them of at least 80 per cent of the committed coal delivery in face of strong protest from independent directors on the Coal India board.<br /><br />The directive came in the wake of Coal India failing to meet the deadline of March 31, set by the Prime Minister's Office for CIL to enter into FSAs with power producers for minimum assured supply.<br /><br />However, even a Presidential directive was unlikely to relieve domestic coal shortages in the near-term, as was pointed out by ratings agency Fitch on April 4. And in order to meet its cupply obligations, Coal India decided to turn an importer of coal.<br /><br />This, despite the presidential directive, Coal India missed its deadline for signing the fuel supply agreements (FSA) with power companies. The miner had initially set a negligible penalty of 0.01 per cent (on the basic value of the shortfall amount) for itself, against 10 per cent that was originally proposed. The utilities, meanwhile, had asked for 10 to 20 per cent.<br /><br />Why did CIL get to decide its own penalty? (<strong>Read: <a href="http://businessworld.in/web/guest/storypage?CategoryID=0&articleId=403545&version=1.0&journalArticleId=403546">Crime & Punishmen</a>t</strong> ) The government, not CIL, should have decided it. To meet fulfil the 20,000-MW FSA commitment, CIL needs to ramp up production by 70 million tonnes. Failing to supply the entire quantity would hit CIL's revenues by less than Rs 1 crore, say estimates.<br /><br />The government of course needs CIL to supply coal at low rates to power companies. But, who would have been the loser if the coal miner were to pay a much higher penalty? It's the government, which holds 90 per cent stake in CIL.<br /><br /><strong>Specified Penalties</strong><br />"It's not very ominous. Obviously, it's more than they initially wanted, but we should also factor in that they are allowed to import coal to make up shortfall," said Murtuza Arsiwalla, a sector analyst with Kotak Securities.<br /><br />CIL typically puts a 10 per cent penalty clause in its fuel supply pacts with customers.<br /><br />It prices domestic coal 45 to 70 percent below international prices, in part to keep costs low for power companies. Pooling prices would allow the cost of more expensive imports to be distributed to more customers.<br /><br />Coal India plans to import 20 million tonnes in the current fiscal year ending March 2013 and 30 million tonnes in 2013/14, Rao said.<br /><br />Initial imports will be done through state agencies State Trading Corp and MMTC, he said.<br /><br />Ahead of the announcement, shares in Coal India, the country's fourth-largest company by market value at $39 billion, closed 0.3 percent higher in a firm Mumbai market.</p>
