Unscrambling coal scam

It took the Supreme Court to cancel the telecom licences given out by A Raja, but even while saying the CAG’s coal scam estimates are incorrect, the government appears to be taking some pre-emptive steps before the CAG’s final report. Since it came to light that power producers who had been allotted captive coal mines were making huge profits—everyone talks of Jindal Power, but this is not the only one—the power ministry has issued a letter demanding that this be stopped. As FE reported on Tuesday, the power ministry has said that since the spirit behind allotting the captive blocks was that power supplies would be made available at the earliest and at low rates, all power producers who had been given captive blocks will henceforth have to sell this coal only through competitive bids. The power ministry’s letter, presumably, will be followed up by the coal ministry reiterating the same—since the blocks have been issued by the coal ministry, the power ministry’s note in itself means little.

To complement this, after issuing around 100 show-cause notices to various firms who have been given captive coal blocks but have not been able to develop them, the coal ministry has ‘de-allocated’ 24 coal blocks. Though the blocks have been cancelled after the CAG began its investigations, the official line is that the blocks have been cancelled for not developing the mine, and not because of the ‘scam’—in quite the same manner, when the Trai had recommended cancellation of 69 2G licences, these were not on grounds that the licences had been given away at throwaway prices, but on grounds the licensees had not fulfilled their rollout obligations.

While asking power companies to sell electricity based on competitive bids instead of, say, selling in the merchant power market sounds like the government is finding ways to take back the windfall gains, this is mere optics. For most power plants, the capacity charge is around R1 per unit while, if the coal is from a captive block, the fuel charge will be around 50 paise per unit, taking the total cost to around R1.5 a unit. If, however, a power plant does not have captive coal blocks and has to either buy in Coal India’s e-auction or import it, the fuel costs can go up to as much as R2 a unit, taking the overall cost to R3 per unit. So, even if there is a competitive bid, the power plant with captive coal can still bid, say, R2.80 per unit, win the bid and make a killing. The only genuine solution is to go back to the old two-part tariff where power plants bid on their capacity charge and where the fuel costs are based on only the actuals (in this case, 50 paise per unit). Anything less than scrapping the existing system and going back to the old two-part tariff is merely optics.