Is it desirable / feasible to have a common regulator for coal and power?

The debate on coal regulator has been divisive and coal producers and consumers have had opposing opinions. However, the discussion needs to focus on the issues from the perspectives of market structure for pricing; and coal mining investment environment for greater participation in the sector.

The current market structure for coal has been skewed – 94% of production comes form government owned companies, private sector participation is limited to captive mining, distribution of coal is done through rationing, there is shortage in supply and with time the shortage is likely to become severe – all of which has resulted into distortions. Market forces have not been allowed to determine the prices. The current practice of Coal India Limited notifying coal prices on useful heat value (UHV) based grades adds yet another dimension to the uniqueness of coal market in India. Ideally, market forces of demand and supply should be allowed to operate independently resulting in market determined dynamic equilibrium prices. For that to happen in India, the coal sector will have to be opened for larger participation from private and public sector companies. Legal restrictions on independent mining companies to own, develop and operate coal mines should be removed. Till such developments create vibrant market forces, there does exist a need for coal regulator. For price regulation, creation of coal regulatory mechanism may be essential in the transition phase of the market till the market forces take shape. However, such regulatory mechanism may be essential only for regulated consumer businesses like power generation. The newly formulated coal distribution policy too supports the idea of CIL charging import-parity prices to un-regulated consumers. However, the policy falls short on regulating coal prices for power generation and allows continuation of CIL notified prices, which many power generation consumers tend to see as inefficient and opaque. The recent price hike by CIL may provide further strength to their vigorous demand for coal regulator, even though CIL may justify the hike in light of rising input costs.

Current debate in the industry, however, also includes topics of the roles and responsibilities of the coal regulator. This discussion becomes significant from the coal mining investments environment perspective. Coal mining in India is even otherwise a highly regulated business, with scores of statutes applicable to the sector ranging from the Coal Bearing Land Act, the Mines and Minerals (Development & Regulation) Act, Mines Act, environment-related statutes, labour laws, explosives storage and consumption related laws to land acquisition related laws and policies. Several of these statutes have regulatory mechanisms and compliance requirements that coal mines have to adhere to. Creation of coal regulator with overlapping responsibilities can only be detrimental to projects development. This may also result in project delays and hence, risk profile for investments in the sector may worsen further.

There exists a case for regulation of coal block allocation process, which needs to be made more objective and transparent. The coal regulator may also take on industry regulatory responsibilities that the Ministry of Coal may want to dispense with to an independent agency. Creation of coal regulator with independent authority and with a mandate to make allocation and further processes objective and transparent will help the sector attract investments.

Considering these arguments, it may appear sound to conclude that creation of coal price regulatory mechanism is the need of the hour. With this comes the question of creating a unified coal and electricity regulatory mechanism, since the electricity regulation has been already institutionalized, and also because of about two-thirds of coal produced in India being used for power generation. From the perspectives of efficiency and effectiveness, it may be advisable to have a common regulator who may have jurisdiction over conflicting interests, and managing them under one regulator may prevent myopic decision-making. While this may seem a pragmatic approach, the amendments in several legislations in both electricity and coal sectors may make creation of this unified regulatory mechanism difficult. This may also result in overloading such a regulator with the responsibility of administration of coal blocks allocation and several other related administrative work that Ministry of Coal currently discharges.

(This article was published in the Power Line magazine)