CCI digs dirt on CIL, probes PSU for raising prices without raising output

Debjoy Sengupta, ET Bureau Jan 1, 2013, 08.45AM IST

KOLKATA: The Competition Commission of India, or CCI, has launched a probe into state monopoly Coal India Ltd's, or CIL, move to raise prices to increase profits without making substantial investments to develop infrastructure and raise production.

The competition watchdog's action follows a complaint filed by consumers against the company's opaque pricing policy, which helped it increase net profit by 36% in 2011-12 despite a meagre 1% increase in output.

Coal India justifies the price rise citing higher wage bill, and blames delays in green clearances for its near-stagnant output.

The Competition Commission has probed several sectors recently, including real estate and cement. Coal India itself gained from one of the commission's orders earlier this year imposing a penalty of 60 crore on 10 private explosives manufacturers after the company complained of a cartel.

Last week, CCI wrote to Coal India seeking information on the sharp increase in profits despite paltry rise in output and asked the company how production and supply targets were fixed. It also asked how infrastructure investments were planned and why Coal India missed production targets in the past couple of years. "CCI has asked for various details from us, including the rationale behind price rises and how various targets are fixed. We are in the process of submitting the answers," a senior company official said.

Several consumers have complained against the pricing system of Coal India while a minority shareholder, The Children's Investment Group, has protested that the company is charging its consumers below-market rates. Analysts said the solution lies in decontrolling the sector.

"Instead of looking at ways to control prices, it is time the government should try and deregulate the coal sector and introduce a policy framework to increase competition so that prices are market driven," said Arvind Mahajan, partner & head, energy and natural resources, at KPMG. "The issue of price increase and ascertaining its reasons - be it to maximise profits or cover cost increases - turn out to be complex at times."

Coal buyers angered by price hike

"Thus, regulators should be more focused on finding out whether the policy framework is encouraging enough to promote competition instead of focusing on stopping a company from raising prices," he said.

Coal India's consumers were angry after the company raised prices by about 15% in February 2011. In January 2012, it migrated to a new system of pricing mechanism that raised prices substantially for certain grades of coal, which were partially rolled back later.

During 2011-12, the company posted a 36% rise in profit after tax to Rs 14,788 crore from Rs 10,867 crore in the previous fiscal because of a steep price hike in February 2011. Production, on the other hand, rose just 1% to 435.84 million tonnes while supplies to consumers during the period grew a meagre 2% to 433.08 million tonnes.

According to a CIL official, delay in environment clearances and a new set of environment rules for a few mines were responsible for it missing production targets during 2011-12. The new environment rules have been gradually lifted, but delay in environment clearances has affected new projects.

Data provided by the company shows that some 179 forestry proposals are awaiting clearances. Of these, 130 are awaiting stage-1 clearance and 49 stage-II forestry clearances. Â 

Under stage-I clearance, the forest department lays down a host of conditions and asks for certain deposits for using land for mining. Stage-I is like in-principle approval. If these conditions are fulfilled and the money is deposited, it receives stage-II clearance.

Following this, it goes to the state government for transfer of land to Coal India.

"CIL increased its prices to cover a rise in wages a couple years ago when a new wage agreement was reached with the unions. Wages increased more than 20% and we had to cover it," a senior CIL official said.

Nevertheless, the logic behind price rise being put forward by CIL is that while some power companies sell electricity by burning imported coal, which is at least 30-40% costlier than domestic coal, their cost of power is more than those that generate power from coal supplied by CIL. A rise in CIL's price rise will in a way help them bring some kind of parity between prices of power produced from these two kinds of power plants and help them sell the power.

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