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Coal India penalized for misusing monopoly

Charges include supplying low-quality coal, preferring other state-owned companies over private buyers

India’s competition watchdog has fined Coal India Ltd (CIL) and three of its subsidiaries a combined Rs.1,773 crore for misusing their position as monopoly suppliers of coal to fix prices and supply poor-quality coal, and do so on conditions that favoured them over the buyers.
The specific charges against Coal India, the first state-run company to be fined by the Competition Commission of India (CCI), were: supplying low-quality coal at high prices; retaining the right to unilaterally terminate contracts with buyers; not providing a fair dispute redressal mechanism; and preferring other state-owned companies over private buyers of coal.
The antitrust regulator also fined Coal India units Mahanadi Coalfields Ltd, Western Coalfields Ltd and South Eastern Coalfields Ltd.
Coal India said it will comment after seeing the order. “Once we go through the order, the management will decide on the further course of action,” a senior company official said on condition of anonymity.
The company has the right to appeal against the order with the Competition Appellate Tribunal.
The case against Coal India, the world’s largest coal miner, was registered by the Maharashtra State Power Generation Co. Ltd and Gujarat State Electricity Corp. Ltd, the spokesperson said.
“It is the first time the CCI has penalized a public sector company. Through its order, the CCI has rejected the contention that just because a company is a government entity it does not have commercial interests,” said M.M. Sharma, a New Delhi-based competition law expert with Vaish Associates. “It shows that the CCI is finally focusing on the aspect of competitive neutrality.”
The 101-page order was put up on the CCI website on Tuesday evening. The penalty has been calculated at 3% of Coal India’s average revenue in 2009-10, 2010-11 and 2011-12, which was Rs.52,252.09 crore, Rs.55,101.42 crore and Rs.69,952.33 crore respectively.
“CCI held that CIL through its subsidiaries operates independently of market forces and enjoys undisputed dominance in the relevant market of production and supply of non-coking coal in India,” the competition watchdog said.
Coal India and its units were also found to have breached provisions of the Competition Act by imposing unfair or discriminatory conditions in fuel supply agreements (FSAs) with power producers for supply of non-coking coal, the order said.
The commission ordered Coal India and its units to “cease and desist” from such practices and modify clauses in the FSAs that relate to sampling and testing procedure and charging buyers transportation and other expenses for supply of ungraded coal, among others.
“Further, for effecting these modifications in the agreements, CIL was ordered to consult all the stakeholders. CIL was also directed to ensure parity between old and new power producers as well as between private and PSU (public sector unit) power producers, as far as practicable,” CCI said.
This is not the only case against Coal India that the regulator is investigating. In 2012, there were at least five complaints against the company in three cases, in which CCI had conducted investigations. No decision has been taken on these by the commission. In July 2012, CCI had ordered a probe against three CIL units—Eastern Coalfields Ltd, Bharat Coking Coal Ltd and Mahanadi Coalfields.
A CCI spokesperson said the outcome of the other cases will not be affected by Tuesday’s order.
Dipesh Dipu, an energy analyst and a partner at Jenissi Management Consultants, said that since Coal India operates in a regulated sector, and is state-controlled, the company can’t be blamed for its pricing mechanism. “Coal India marks its prices on a cost-plus basis. The only other alternative is market-based pricing which would make coal costlier,” he said.
In its order the commission regulator has said that it “is not oblivious of the regulated environment in which CIL operates”.
“The Commission opined that notwithstanding the overarching policy and regulatory environment, CIL has sufficient flexibility and functional independence in carrying out its commercial and contractual affairs. Such factors, however, were not found to detract from CIL and its subsidiaries operating independently of market forces and enjoying undisputed dominance in the relevant market,” the order said.
Dipu said that the order could have a two-pronged impact.
“It could mean that CIL’s subsidiaries would be individually listed on the stock exchanges. This would help make the operations of their boards transparent,” he said.
“The order could also mean that the government may be forced to amend the coal nationalization Act,” Dipu said. The Coal Mines (Nationalisation) Act, 1973, which governs the mining and trade of coal in the country, had nationalized all the private collieries in the country.
A senior CCI official however disputed this and said that the coal nationalization act was “only a policy decision by the government” and that “signing of the FSAs had nothing to do with it.” The official didn’t want to be named.
The company presently has seven coal-producing subsidiaries. These include: Bharat Coking Coal, Central Coalfields Ltd, Eastern Coalfields Ltd, Mahanadi Coalfields, Northern Coalfields Ltd, South Eastern Coalfields and Western Coalfields Ltd. It also has an international venture, Coal India Africana Limitada, which is not producing coal as yet. The Central Mine Planning and Design Institute Ltd at Ranchi in Jharkhand also comes under the company.
On 13 November the company had said that it had signed fuel-supply pacts for power generation to the tune of 70,400 mega watts (MW), out of the 78,000MW it is mandated to. The company also said its profit after tax for the fiscal second quarter ended 30 September fell marginally to Rs.3,052 crore from Rs.3,067 crore in the corresponding period last year. Revenue for the quarter increased to Rs.15,411 crore from Rs.14,572 crore.
On Tuesday, the company’s stock price fell 1.7% toRs.285.45, while the BSE’s benchmark Sensex shed 0.33% to 21,255.26 points. The CCI order was passed after the close of trading.

Source: www.livemint.com