Reverse auctions for coal: The intention good but ambiguities remain

Of the 92 mines to be allotted and auctioned in the first lot, 57 would be given to the power sector, and the remaining would be for industries like steel and cement.

And of the 57 blocks to be allotted and auctioned for the power sector, 23 will be considered for allotment to states and the rest will be put for auction.

 Reverse auctions for coal: The intention good but ambiguities remain

AFP image.

It is respect of these 34 blocks earmarked for the thermal power producers there could be problems emanating out of the draft e-auction of coal rules notified on 18 December 2014.

While everyone else would make a forward bid which means the bids have to be more than the floor price that in any case will not be less than Rs 150 per tonne, power producers would make a reverse bid.

According to the draft rules, for the power companies the reverse bidding norm has been conceived so as to cap the power rates for consumers. In other words, when a coal block reserved for power production is auctioned, the bidders would not be quoting price for coal but what they would be charging for the power sold.

The one quoting the lowest tariff for the power to be produced out of the coal allotted would bag the block. The intention is noble but the issue is would the power producer not get the coal gratis in that event? It appears it would but it would be so much better if this is set out clearly in black and white terms. It must also be made clear what happens in the following situations:

* If the power producer dependant on the coal mine he has bagged draws poor quality coal and or lesser than expected quantity of coal from the captive mine necessitating imports or sourcing from Coal India will he still be bound by the quotation he has quoted to bag the block? Or will there be a suitable escalation allowed in the tariff? If so what are the modalities?

* While coal would be the major cost of production, there would be other elements of cost such as labor, handling and so on. What if these go up significantly necessitating hike in tariff? Would tariff hike be granted in such a case based on the predetermined price escalation clause or would the power producer be condemned to stew in his own juice that could result in a loss?

One wonders whether the draft rules would be against the Supreme Court diktat on the issue. Perhaps the Supreme Court wanted auction as the only mode because guarding the price line for power consumers while being noble is beset with problems such as the ones envisaged above. It remains to be seen what the Apex Court says if and when the draft rules are consecrated as final rules.

Another danger area, the one that could plague both power and other producers, is with reference to technical bids in the run up to the price or tariff bid. The ministry plans a two-stage bidding, where after qualifying in the technical stage, the top 50 per cent of the pre-qualified bidders would participate in the e-auction and submit price offers.

The technical eligibility criteria hinges on the end-usage of coal, amount of the fuel required, distance of end-use plant to the mine and its completion status of the same. This is fine but it must be ensured that the body examining the technical bids is completely neutral and impartial.

It would be advisedly better if an authority like TRAI is set up whose remit would be to oversee all coal auctions including the evaluation of technical bids in the run up to the commercial bid. Ad hoc committees at the local level are bound to be viewed with suspicion whereas a permanent body with members selected on the basis of their knowledge of the subject and integrity is bound to beget greater respect.

Updated Date: Dec 20, 2014 12:08:04 IST