The election effect on Short term power transaction in India

Introduction:

Amidst the economic downturn, there is some good news for Indian industry as stability is back with a bang with UPA getting near to the majority on its own. The reform is the first agenda for the new government and particularly the infrastructure sector looks bright in its prospect.

As far as power sector is concerned, there has been significant improvement in the growth in actual generation over the last few years. As compared to annual growth rate of about 3.1% at the end of 9th Plan and initial years of 10th Plan, the growth in generation during 2006-07 and 2007-08 was of the order of 7.3% and 6.33% respectively. However, growth rate was meager at 2.71% with 723.556 BUs generated during the year 2008-09 over 704.469 BU during 2007-08

Among the several issues faced by power sector, the short term transaction of power (via bilateral trading, UI mechanism and power exchanges) is much debated nowadays. CERC in its efforts to rationalize the short term price of power came up with new set of guidelines reducing the bandwidth of frequency to make the grid function in a disciplined manner, reducing the UI rate so as to give a proper signal to reduce price in power exchanges, making stringent penalty system for any violations including summoning of chiefs of Discoms.

Despite all these guidelines from CERC which had been effective from April 01, 2009, nothing seems to have changed in the month of April and May 2009. The two months unfolded a drama in Indian democracy as India witnessed general polls for Lok Sabha in five phase elections from April 16 to May 13. The weather was unkind at this crucial time as the heat wave was on several parts of the country and the states were finding it difficult to provide 24x7 power.

The economic recession though quite harsh on Indian manufacturing sector provided little relief to power sector. The state governments had to face all the music as elections were round the corner and states could not afford to load shedding in these turbulent times since power is one of the major issues for the general elections. Under the direct or indirect pressure from the state governments, state discoms had no option but to buy short term power at a higher rates and resort to overdrawl from the grid. Despite several warnings from the CERC, they constantly drew UI power from the grid thus pressurizing the whole system. At times, aggressive trading in power exchanges was also witnessed at unbelievable rates of Rs 15 per unit.

It is said, “everything is fair in love and war”. And so it goes for elections as well. Strict instructions from the top authority not to shed load in the areas where election were scheduled, made the distribution companies go that extra mile by purchasing short term power at a higher cost or to overdraw from the grid at the cost of grid security. So the people who otherwise faced a long duration of load shedding had the last laugh as they got power at will..thanks to the great election tamasha!

The higher purchasing rate coupled with UI payables and penalties there of, will ultimately burden the end customer only.

In India, elections are fought with 3 basic things Pani, bijli and sadak i.e water, electricity and roads. Electricity is one of the prime needs of the electorate, the state government irrespective of any party can not do much but to provide power at any cost. Infraline study highlights the ill effect of making 24x7 power available during the election journey in India.

Short term power transaction in India

Though most of the power generated in India is in the form of long term PPA, distribution utilities very often prefer to take the route of short term buying of power bilateral trading and through UI mechanism to reduce their demand supply mismatch in the crisis. After the introduction of power exchanges, buying power through exchanges also started. However, the volume traded in power exchanges is only a meager 3 to 4 % of the total short term power transacted in the country. According to the market monitoring report for February 2009 by CERC,

1. It was found that of the total electricity generation, 3935.62 MUs (6.89%) transacted through short term i.e. 2148.94 MUs (3.76%) through Bilateral (through traders and direct between distribution companies), followed by 1569.11 MUs (2.75%) through Unscheduled Interchange (UI) and 217.57 MUs (0.38%) through Power Exchanges (IEX and PXIL).

2. Of the total short-term transactions, Bilateral constitute 54.60% (42.63% through traders and 11.97% direct between distribution companies) followed by 39.87% through UI and 5.53% through Power Exchanges.

3. Top 5 states selling electricity are Chattisgarh, Delhi, Gujarat, West Bengal and Punjab and top 5 states purchasing electricity are Rajasthan, Andhra Pradesh, Maharashtra, Karnataka and Tamil Nadu.

Short term power transaction during the election months (April and May 2009)

Elections were held in India in 5 phases from April 16, 2009 to May 13, 2009 with 124 loksabha constituencies in phase I, 141 in phase II, 107 in phase III, 85 in phase IV and 86 in last phase. Details of election schedule in Annexure-I. Analyzing the election dates and phases and the states going to be polled, it can be seen that:

Just before the election commenced, starting from April 1, 2009 the short term price in power exchange touched Rs 10 per unit and the trend picked up from there touching an all time high of Rs 15 per unit and an average Rs 10 per unit.

States where polling was conducted saw a high level of volume of power traded through power exchange with rates picking up and after the elections were over in that particular area, the utilities resorted to load shedding and other areas picked up from there. The trend for UI was also similar in nature with the discoms hugely overdrawing power sidelining the CERC guidelines and jeopardizing the grid. Bilateral trading also saw a huge growth in volume in these months at a rate similar to the power exchanges.

A comparative study of different states with respect to overdrawl of power and power purchased through exchanges and bilateral trading confirmed such trends. A study of major defaulters states like Andhra Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh in April and May 2009 highlighted the gross indiscipline by the state discoms overlooking all the rules, guidelines and warnings of CERC.

Warning by power ministry on over drawl issues:

Ministry of Power issued a stern advisory to Northern States overdrawing power asking them not to overdraw from the Grid when the grid frequency drops below 49.5 Hz.. In its warning note, the ministry said that in case States failed to discipline their utilities, they will have to face the consequences. States / Utilities had been warned that overdrawal of power beyond its availability may have serious and adverse ramifications for the Grid. MoP also advised all State generating utilities including NTPC and NHPC to function at optimum level so as to avoid any adverse situation.

In view of the rising demand due to the summer season coupled with elections, the over-drawal of power by the constituent States threatened the security of the integrated Northern-Eastern-Western grid.


To Be Continued...........

Dedicated Freight Corridor: Logistics Simplified (part – III)

Continued from Volume V, Issue No. 49…

The Dedicated Freight Corridor is proposed to be completed in a time frame of 5 years through a Special Purpose Vehicle (SPV). Since DFC would be complementary and not competitive corridor to Indian Railways as most of the traffic would continue to originate and terminate on Indian Railway’s network it will be under the administrative control of Ministry of Railways.
The dedicated freight corridors will cover 10 states of India with maximum investment and track length in Uttar Pradesh. The table below provides approximate State wise length of track and cost of DFC on both western and eastern routes:

Map of Western Freight Corridor



Western Freight Corridor (Delhi Mumbai Industrial Corridor)
The 1,469-km-long dedicated western freight corridor, linking Jawaharlal Nehru port to Dadri near Delhi, is expected to be completed in 2011 at a cost of Rs 11,446 crore. Fit for double stock container train movement, the corridor will be routed through Vadodara, Ahmedabad, Palanpur and Rewari.
The western corridor will carry container traffic from the western ports to destinations in Delhi, Haryana, Punjab and Uttar Pradesh and the eastern corridor will mostly carry coal and steel cargoes. The movement of trains with computerized control system will considerably reduce cost of operations, which is expected to benefit the industry and thermal power plants. Top
The western corridor is known as the Delhi-Mumbai Industrial Corridor (DMIC). DMIC has been designed to transform it into a Global Manufacturing and Trading Hub. This will be the biggest infrastructural project ever undertaken in the country. The government has also doubled the investment funds for the project from $50 billion to $90 billion (Rs 3,60,000 crore). The mega project will be developed with Japanese assistance and includes the development of an industrial infrastructure between Delhi and Mumbai which would run parallel to the 1,483-km railway freight corridor.
The corridor will be spread over an area of 4,00,000 sq. km and will be fully furnished with world-class roads, port and airport connectivity, power supply and multi-modal transport hubs. It will be 1,483 km long and 300 km wide. As per the rules of the mega infrastructural projects in the country, this industrial corridor would have to be constructed through public-private partnership.
It would significantly improve Indo-Japanese trade and economic relation. On the domestic front the project is expected to bring about a major expansion of infrastructure and industry in the states along the route of the corridor. The industrial corridor will cover six states namely, Uttar Pradesh, Delhi-NCR, Haryana, Rajasthan, Gujarat and Maharashtra. It will also link 10 cities with more than 10 lakh population each which include Faridabad, Surat, Delhi, Greater Mumbai, Meerut, Jaipur, Ahmedabad, Surat, Vadodara, Pune and Nashik.
The corridor project will involve the upgradation of key airports, setting up of food processing parks, ports on the west coast and power plants. The industrial corridor will have three green field ports, six airports and a 4,000-megawatt power plant. The corridor will encompass many special economic zones (SEZs), for which tax sops are given by the government. The Delhi-Mumbai industrial corridor will be constructed along the major transport facilities like highways, passenger train connectivity and rail freight corridors so as to facilitate imports and exports. Top
As per the proposed plan, the development of the industrial corridor will be undertaken in two phases. The first phase will be from 2008-2012 while the second phase will be from 2012-2016. Phase I will include the setting up of one investment region (IR) of about 200 sq. km and one industrial area (IA) of smaller sizes in each of the five states. Although, the corridor would pass through the six states, the national capital, Delhi which is also included in the six states, will not be able to enjoy the benefits of industrial development due to scarcity of land.
The industry department has planned to develop investment regions that will be spread over at least 200 sq. km, and an industrial area of 100 sq. km. The major economic activities will thus take place over these spaces. As of now, the industry department has identified 5 investment regions and 5 industrial regions for phase I of the project.
The table below shows the investment regions and industrial areas.
Investment Regions
Industrial Areas
Dadri-Noida-Ghaziabad
Meerut-Muzaffarnagar
Manesar-Bawal
Faridabad-Palwal
Khushkhera-Bhiwadi-Neemrana
Vadodara-Ankleshwar
Ahmedabad-Dholera
Alewadi/Dighi Port
Igatpuri-Nashik-Sinnar
Jaipur-Dausa

The investment regions and industrial areas have been identified for specific purposes. The investment regions, Dadri-Noida-Ghaziabad are identified for general manufacturing, Manesar-Bawal for auto components, Khushkhera-Bhiwadi-Neemrana for general manufacturing, Pitampura-Dhar-Mhow, Bharuch-Dahej for petroleum and chemicals and Igatpuri-Nashik-Sinnar for general manufacturing. While the industrial areas that have been short-listed for purposes include Meerut-Muzaffarnagar for engineering, Faridabad-Palwal for manufacturing, Jaipur-Dausa for marble/leather/textiles, and Neemuch-Nayagaon, Vadodara-Ankleshwar and Alewadi/Dighi in Maharashtra..

to be continued..............

Ad Valorem royalty structure for Coal In India: To Be or Not To Be...

THE CONCEPT OF ROYALTY
Royalty is a share in production, free of the costs of production. This is a sharing arrangement created by a lease contract between the owner of mineral deposits (the lessor) and one who is given the right to go onto the lands of the lessor and explore for and develop these minerals (the lessee). In return for allowing the lessee to develop the minerals, the lessor is given a share of any minerals produced.

Royalty may also be looked at as the price paid to the lessor for the mineral extracted or consumed by the lessee. Thus, price of mineral is of two kinds:
• Price paid by the lessee to the lessor, and
• Price charged by the seller (lessee) to the consumers
The basis for arriving at the two prices is different. The price paid by the lessee to the lessor for extraction and use of the mineral is royalty. While determining the pit head price of coal, royalty and other levies are not included in the cost of production of coal. Even the transport cost, handling charges, demurrages and other expenses incurred after the dispatch of coal from the pit head are excluded from the estimation of cost for arriving at the pit head or basic price of coal. Thus, after fixing the pit head price, royalty is collected by the operator from the coal consuming entities. Royalty and other levies are taken into consideration while arriving at the final consumer price charged by the seller.

The royalty is not a tax levied by the government. Tax is a levy imposed on the entire citizens. 'Royalty' is a payment made by the lessee to the lessor based on an agreement. Royalty is also not a rent. Rent is charged for letting the premises to be used. The land does not get depleted. Royalty is charged for letting the lessee to consume the wealth belonging to the lessor. The wealth gets depleted over time.

Royalty is also not a 'profit sharing arrangement between the lessor and the lessee. Whether the lessee has profit or loss - royalty has to be paid to the lessor. It is also not a profit sharing because while calculating royalty, the cost is not passed on to the lessor.
Mineral royalty is payable on market price or on market value (determined at the pit head). The price or value is determined at the time mineral is physically severed from the ground and used or marketed. In almost all countries, the issue of 'royalty' is riddled with hurdles and complexity. There are always some sort of disputes between the lessor and the lessee over how the royalties are calculated and paid. The issues, which generally crop up, are:
• The basis of calculating royalty payment or the method of determining the value of the produced mineral (i.e., should royalty be based on the proceeds of sale of the mineral, or on the intrinsic value of the product etc.);
• The point of valuation of the product (i.e., at the dispatch point, at the pit head, etc.); and
• The quality or condition of the product (i.e., in raw state at the mouth of the well (pit head) or if not marketable at the pit, after placed in a marketable condition).

COAL PRICING IN INDIA
Government of India deregulated the prices of Non-Coking Coal of grades A, B & C, Coking coal and Semi/Weakly coking coal on March 22, 1996. Prior to this government was fixing the coal prices at will looking into the cost factor and inflationary pressure on the country. Subsequently, on February 12, 1997, Government of India deregulated the prices of non-coking coal of grade D, Hard Coke and Soft Coke and also allowed Coal India Ltd. to fix coal prices for grades E, F & G till January 2000 once in every six months by updating cost indices as per escalation formula contained in the 1987 report of the Bureau ofIndustrial Cost & Prices. With effect from January 01, 2000, CIL was free to fix the prices of such grades
of coal in relation to the market prices. Pursuant of the above, CIL fixed the prices of deregulated coal
from time to time and last such revision has been made on December 12, 2007. Grade wise Basic Price
of coal at the Pit-head excluding statutory levies for Run-of-mine (ROM) Non-Long-Flame Coal ,Long
flame Coal, Coking Coal, Semi Coking Coal& Weakly Coking Coal ,direct feed Coal, Assam Coal
for various subsidiaries of CIL (as in 2007) are given in Figure 1:



Figure 1: Coal price w.e.f December 2007

It is widely believed that an increase in the rates of royalty leads to substantial increase in the landed price of coal. It is worth mentioning here that there are two prices of coal. One Pit head price or basic price and the second the final landed price. Pit head Value of coal is the value of coal at pit head (of the collieries). It is computed on the basis of basic price - thus it does not involve any cost of sizing, transportation from pit head, loading, Cess, Royalty, Sales tax, Stowing Excise Duty etc. This is followed for all non-captive coal companies viz., CIL subsidiaries, SCCL, BSMDCL and JKML.

The landed price is basic price plus all levies, royalty, transport cost and other costs. In fact, the price of coal depends not only on royalty but also on various other factors, which affect the final price of coal more strongly. This makes coal companies less competitive and also puts lot of burden on the coal consuming industries.

The impact of increase in price either due to revision of pit head (Basic) price of coal or due to increase in the landed price of coal should have similar economic impact on the performance of the coal consuming industries. This should also affect the demand for coal in the similar manner. However, it is not clear, why the same view is not taken when the landed price of coal increases due to increase in the basic coal price (pit head price) or due to increase in the railway freight charges or other levies imposed both by the Centre and the States. The coal producing states rightly feel that the coal prices are frequently increased to benefit the companies and the Central Government. Centre also earns through coal freight.

Most of the coal companies are Central Government undertakings. The Centre gets dividend from these public sector undertakings. Any increase in profit of these companies is directly beneficial to the Central Government. It is argued by non centralists that if the government is interested in lowering the price of coal, Centre can adjust the coal freight and or fix lower pit head prices of coal, while allowing the States to get more through royalty.

While the price of coal has been revised almost every year (some time more than once in a year) and the revision was also quite steep. The Ministry of Coal felt "in India, unit value of coal in terms of per kilo calorie of useful heat value has been increasing more rapidly than being exhibited by simple unit value comparison over the years.

ROYALTY ISSUES IN INDIA

The Mines and Mineral Development Sector is under the concurrent control of the Central and the State governments. Entry 54 in the Union List and entries 23 and 50 in the State List have stipulated that both Central and State governments are competent to regulate mines and mineral development in the public interest.

The MMDR act 1957 empowers the central government to govern and fix the royalty rates in India. Royalty revenues go directly to the state’s account. In India, there are three players to the royalty structure:
• The central government
• The state government
• The coal mine lease holder
The central government fixes the royalty rate, mode and the frequency of revision of royalty rates. The state government collects and appropriates the royalty revenue and the mine lease holder who pays the royalty as fixed by the government.
Based on the recommendations of the Sarkaria Commission, in the Standing Committee of Inter State Council, a consensus was reached that the Central Government should endeavor to revise the royalty rates every three years, with a programme to progressively shift towards an ad-valorem regime. The 11th and the 12th Finance Commissions had also recommended for timely revision of royalty rates.
Low royalty rates and their infrequent revision has become an important irritant in the realm of Centre- State financial relations. While the Centre is under no compulsion to periodically revise royalty rates, the States on the other, plea for an upward revision of the rates on the ground that they lose heavily if rates are not commensurate with the revision in the administered prices of Coal and Lignite.

To be continued>>>>>>>>>>