COAL Regulator - A Major Reform; Positive for Power Sector - India Ratings

Chennai, July 9, 2013 India Ratings & Research (Ind-Ra) says the government of India’s (GoI) recent decision to constitute an independent regulatory authority for the coal sector is a vital step for its much-needed overhaul. It can potentially bring considerable relief to industries which depend on coal as a critical input, most notably the beleaguered power sector.
Notwithstanding the reportedly large coal reserves in India, the sector is characterised by acute shortages, poor quality, inefficient mining practices and distorted pricing mechanisms. These factors have had a crippling effect on power generation, a vital component of scaling up the country’s undernourished infrastructure sector. Many of these issues have been ascribed to the virtual monopoly enjoyed by the state-owned Coal India Limited.
It is yet unclear if price setting would also be included within the ambit of the proposed regulator. However, the proposed regulator is likely to determine the principles on the basis of which producers can price coal. Ind-Ra also expects it to establish yardsticks to determine quality or grades of coal supplies, ensure adherence to supply contracts, adjudicate on disputes between suppliers and consumers and oversee the progress of mining rights/licenses granted to private companies. Allocation of fresh coal mines will, however, continue to be the prerogative of the GoI.
Although GoI’s recent announcement has brought in considerable optimism, Ind-Ra believes the mere constitution of a regulator in itself cannot act as a panacea for all the problems facing the sector. The mandate given to the regulator and the resources provided to it for effective discharge of its duties in an independent and transparent manner, free from political interference, would be vital to realise GoI’s objectives. Concurrently, other reform measures such as restructuring Coal India and significantly expanding private sector’s participation in coal mining would also need immediate attention.
The regulator is proposed to be set up through an executive fiat, demonstrating GoI’s urgency to address the problems plaguing the coal and power sectors. This is another milestone in the GoI’s reforms agenda that it has been pursuing fairly systematically in the last 12 months or so to fix many of the ills plaguing the stressed infrastructure sector. Parliament would need to pass a legislation constituting the authority and thereby ratifying the Government action – a bill to this effect is likely to be introduced in the ensuing session. Earlier this year, a Group of Ministers had approved this proposal and recommended a revised draft bill for consideration of the Cabinet.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)