In a landmark development, the government has exempted power sector companies from going through the auction route for the allocation of coal blocks for captive use. The move comes even as the Supreme Court last week cancelled 122 telecom licences for not following auction as the method for allocation of second-generation (2G) spectrum, another scarce natural resource, used in mobile telephony.
However, for users other than power sector companies, the competitive bidding method would replace the current practice of allocating blocks for notified captive use on the basis of recommendations of an inter-ministerial committee. The new system is expected to induce “transparency and objectivity” in the overall coal block allocation process. In the first phase, 54 blocks would be offered to both power and non-power users, under the new dispensation.
Under the new system, while coal blocks would be allocated to companies in sectors other than power through an auctioning method, where bids would be invited over a floor price, power sector companies seeking blocks would be selected on the basis of electricity tariff for the power plant connected to the block. Power companies will, however, have to pay the “reserve price” fixed by the central government, according to the ‘Auction by Competitive Bidding of Coal Mines Rules, 2012’, notified by the coal ministry. All proceeds from the process would go to the coffers of the state governments concerned.
The power ministry had recently argued that projects would become uneconomical if a developer had to go through two rounds of bidding – one for deciding the tariff for sale of electricity and the other for the allocation of coal blocks – under the coal block auctioning regime. The ministry had sought an exemption for projects bid out on tariff-based criteria.
The coal ministry denies the move could create controversy. “The new rules have been firmed up only according to the existing provisions of the law. Even in the UMPP route, a power project is bid out without an auction for the captive coal block,” a senior official from the coal ministry said. He also clarified that under the new coal block auctioning rules, a mine would be shown upfront to a power company to enable the developer to quote a tariff for supply of power accordingly to save margin.
The coal ministry had prepared draft guidelines with four models for selection of successful bidders during the multi-step auction process. The four models are – upfront payment, production-linked payment, upfront payment with 20 per cent preference for development status of end-use plant and production-linked payment with 20 per cent preference. “We are yet to decide which of the four models will be finalised,” the official said.
The private power industry, while satisfied with the exemption, sought more clarity. “The special treatment for power companies would go a long way in preserving margins. But, it would be a difficult move to implement in view of the latest Supreme Court directive in favour of auctioning. The move could lead to chaos,” a senior industry representative said on the condition of anonymity. Experts say the government could avoid controversy, even while exempting the power sector from bidding, by following a transparent and equitable process for allocation. “As long as the government ensures that blocks are given to those who have projects in advanced stages of completion or are willing to give firm commitment, no controversy should arise,” said Amrit Pandurangi, senior director at accounting and consultancy firm Deloitte Touche Tohmatsu Ltd.
In August last year, Parliament passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2010, which paved the way for the introduction of auction of coal blocks through competitive bidding to private companies for captive use.
