BSES Rajdhani and BSES Yamuna violating code of conduct; power situation worsens……..

At the time of Delhi privatization in 2002, two separate companies ( BSES A Rajdhani and BSES Yamuna) were given two separate areas for distribution of power.As per the MOU with Delhi Govt, they were supposed to compete with each other so as to bring efficiency and competitiveness to the system. Even they were registered as two different companies.

But after 7 years of privatization, nothing seems to have been improved in power distribution in Delhi. People are always at logger heads with the discoms (specially with BSES discoms).

Massive load shedding, inflated billing, poor service are some of the major achievements of the private discoms. The customers are getting hugely inflated bills because of improper long term power projection by the discoms and the discoms resorting to high price short term power purchase. These anomalies can be well attributed to failure in administrative system. After several warning from DERC  to have separate CEOs for the two companies, there seems to have no urgency in this matter.

Though it is well known that the parent company of these two discoms is Reliance but then they need to bring in efficiency by competing with one another.

Looking at the functioning of the two discoms, it is found that not only they share a common CEO but even they have a common customer care center. This is a complete violation of EA2003.

The two companies are having a combined base of 25 lakh consumers .It is the consumers who sufferer the most at the hands of the discoms. The poor functioning by the two discoms lead violent protests in some areas in Delhi.

It is high time that distribution companies pay heed to the consumers complaint and change their way of functioning so as to provide relief to the masses.

CERC to cap short term power price: Is it a good idea?

CERC constantly monitors the short term power purchasing price of traders and through exchanges. In its recent notification, it wants to cap the short term power price to be at a maximum level of Rs 11 per unit.

As per CERC, at peak time ( morning 9 to 10 AM and evening 6 to 7 PM) , the traded price of electricity is touching a high of nearly Rs 15 per unit at PXIL and IEX which is not at all desirable.

It finds that the volume cleared at higher price were in the range of 650MWh to 850MWh during August 10 to August 16, 2009.Rather than load shedding, the distribution companies are buying power at a higher rate and also drawing UI power from the grid.

The situation aggravates due to drought like situation in many parts of India , specially northern region. The high temperature in the northern region also drives huge demand for power in urban areas.

The higher price is just a reflection of high demand with supply deficit scenario and is completely unrelated to fuel price as the fuel prices are somehow stable in this period.

The purchase of power at this higher price not only affects the financial health of the distribution companies but also it will directly reflect at the retail tariff paid by the consumers.

Recently there were protests from Mumbai and some parts of Delhi due to unreasonable hike in retail prices for power. People even denied to foot for the power bills and registered cases in grievance redressal forum.

CERC which is custodian to protect consumers’ interest issued draft order to limit the price applying its power under the proviso to clause (a) of sub section (1) of section 62 of electricity act 2003.

It wants to fix the price for 45 days period under trial basis. Though CERC is empowered to cap for a period of 1 year, it chooses 45 days taking traders and exchanges concern.

The commission in its draft says that it is equally conscious of long term interest of investors, future investment plans and mostly reasonable rate of return.

Now the big question is that what is reasonable rate of return? Based on its calculation, CERC finds that the price of power could be at most Rs 10.94 taking naphta as fuel choice for power generation (including fixed charge at 60% availability).

The UI price of power including the additional 40% fine charge, the total price comes out to be Rs 11.03 per unit (includes transmission charge and transmission loss).

Thus, it is of opinion that distribution utilities can buy power at Rs 11 per unit without overdrawing from the grid, jeopardizing the whole transmission grid.

It also takes into consideration of CEA’s load generation balance report while formulating the price cap band. The load generation report forecasts that for 2009-10, the estimated energy shortage in the country would be 8.8% and the peak shortage to be at 18.1%.

Having all permutations and combinations, CERC is planning to have a price band from Rs 0.10 to Rs 11 per unit for 45 days period.

Though it brings cheer to the distribution farms who are buying at such a higher price, the traders are skeptical about this decision. They fear that it will affect the profitability of power selling companies and would be hindrance for proper power market development.

This kind of capping of traded power price gives wrong signal to power developers especially to merchant power developers who bears all the risk to gain in such a deficit scenario.

India is always in trouble as it wants to develop a middle path for power sector and is always critical how to treat power ( service or commodity), unlike in foreign countries where there is a power surplus scenario and customers have a wide choice to decide their power suppliers.

India needs to define and find out what would be the reasonable rate of return to the developers? There is a long queue of companies to enter into power generation segment. This kind of move by CERC may trigger bit of unrest among companies.

Some experts in the field of trading and power exchange believes that by capping the maximum price CERC gives an unwanted ammunition to the power sellers to bid at a higher price and as a result the average power purchase price at the exchanges will rise which would be of more harm than what is prevailing right now. It may possible that more volumes will remain unsold as it will not find any buyers at a higher price.

CERC in the mean time has also given permission to power exchanges to sell the extra power that remain unsold by a mutual negotiable rate between the seller and the purchaser on day ahead basis and it is feared that it may trigger a price rise in the short term power business.

On the other hand, CERC can not wash its hands off the responsibility towards power consumers. Ultimately, it’s the end users who suffer most when distribution utilities buy power at a higher cost.

There is an urgent need to control the spiraling short term power prices so as to safeguard the consumers from this type of situation. India is a country of uncertainty with delayed monsoon, drought like situation, floods, tsunamis and untimely elections etc. Anytime this kind of events crop up, power market behaves abnormally and companies make extra ordinary profits by taking advantage of calamities.

There is a need for self discipline and if it is not possible, there are always other means to make them fall in line. CERC’s controlling of short term power price is a right step taken at the right time.

60% generation target achieved by Ministry of Power for its “100 days program”; nothing to cheer about

Out of 5653MW target commissioning set by the power ministry for its 100 days agenda, only 3378MW commissioned. In a review meeting, analyzing further, it was said that 550MW capacity under firm feasible for commissioning. 1145MW capacity already synchronized on designated fuel and about to commissioning and 415MW capacity is to be followed up for synchronization.

1. Projects under firm feasible for commissioning :

a. Budge Budge U-3, West Bengal (250 MW)

b. Turangullu U-2, Karnataka (300 MW)

2. Synchronized projects but not commissioned:

a. Giral U-2, 125 MW

b. Kota TPP U-7 , 195 MW

c. Kutch Lignite U-4, 75 MW

d. Vijayawada ST-4, U-1, 500 MW

e. Suratgarh TPP-IV, U-6, 250MW

3. Followed up projects for synchronization:

a. Chandrapura U-7, DVC, 250 MW

b. Konaseema ST, 165 MW

RGGVY:

· Target: 5000 villages and 12 lakh BPL families

· Achieved: 4000 village and 13.5 lakh families

R-APDRP:

· Target: Rs 925 crores to be sanctioned for projects

· Achieved:1614 crores sanctioned.

Captive Coal block monitoring: a complete eye wash...

Anyhow the long awaited reply from CCO ( Coal Controller Organization ) finds its destination. I called back Mr Panda, director CCO to enquire about the answer but he had revealed the unimaginable. They do not monitor the associated end use project and if coal production starts early ( he is sure that it wont be) then the coal ministry will take a call how to best use that coal or at best they will transfer the coal to one of the CIL subsidiaries. How rubbish!!! So it is now very clear after one get the coal block , it may not necessarily go for end use project development , rather it would mine coal and sell in the open market and this has been the practice of many and at best they can divert the coal to other end use project because virtually there is no one to monitor.CCO is there but for the namesake only. According to the director CCO, it is very hard to maintain the data and they do not have a proper database to maintain the data. Even coal companies are not providing them the required data and they are yet to get any data for their quarterly review of the projects.But I wonder if CCO do not have the required data then how can they provide the status report for the coal ministry's review on June 22, 2009.Captive coal development remains one of the black hole, after the coal block is allocated to any party, they become the unsaid owner of the block and use the block according to their use. MoC is not very strict on monitoring the coal block development as well as milestone of the associated end use project. All the review meetings and threatening are nothing but a completely eye wash to the public at large.

Living with the virus H1N1

Sitting on the information highway is really very difficult when you are aware of bit by bit happenings around you and there is more in store as media is hyper active in the metros. Media is a necessary evil so as to make people aware about the facts and figures but they create a panic like situation in case of a viral attack or any terrorist attack.

Like in case of swine flu, people are quite aware about the facts ( whom to contact, where to contact, medicines, preventive actions and all) but the news which comes in form of breaking news and the state wise figures of death, like in case of election results are really worrisome. People take stock of all these things and live with the fear of virus.

As of now, no deaths reported in Delhi but the panic the news creates is enormous. I commute daily from Noida to Delhi in a chatter bus and people are scared to travel and their reactions change when some body sneeze or shows cough and cold like symptoms. They keep thinking, is this people affected? May be I am the next victim.

People do live in fear and the obvious example is my close knit group in Noida. We cancelled one of our possible trips to a place nearby because of swine flu and decided to stay at home and enjoy.

The irony is that when something major/minor happens in any metros, it spreads like jungle fire as Media do their bit to make it a tadka news for one and all. The footage showing breaking news like: Cases reported till now in India: XXXX…Deaths reported: Pune: XXX, Mumbai:XXXX, Ahmedabad: XXXX..and so on and the time machine constantly showing some figures upward really make life miserable to one and all living in the metro. People far off living in villages do not have to worry about it as for them there are other things to worry about.

They have other problems like drought situation, water shortage, spiraling prices of vegetables to cope up with. The spread of news is far more than the spread of the virus itself and directly and indirectly it affects the economy. It is good news for some (medicine manufacturers, mask distributors, chemists, doctors) while very bad news for others like ( malls, cinema theaters, tourism, transportation as people refrain themselves going to any crowded areas).

In India, we have more deaths in cases like malaria, dengu, diarohea and some unknown diseases. Villages disappear in no time and there is no fuss about it, no concerns nothings. But if the matter is a global phenomenon and most likely to attack the haves rather then have nots, as the travelers are the sole carriers of this flu , the govt shows some sincerity to solve the matter.

I do not know how dangerous the swine flu virus is. Of about 2 million cases world wide, the fatal rate is less than 1%, it clearly shows there is nothing to panic. Proper medication can help reduce the effect of disease.

The big question is : what should be the role of the citizens, society and the government in this kind of situation. Media should be instructed to make people aware about the complexity of the problems and the steps to be taken to tackle the issue and not to create panic by overstating the problems. Govt should take fast actions so as to arrange the necessary medicines, doctors, facilities, proper monitoring of the situation, speedy development of vaccines and allowing the private hospitals to join the war and no one should take extra mileage out of this situation. People must come forward to take voluntary actions and pledge not to make this epidemic a profitable charity.

This is time not to worry but to focus and live as usual without fear. Take necessary steps to make the body and mind active and let the nature take its own way to tackle the problem.

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>>>>>>>>>>

Dedicated Freight Corridor: Logistics Simplified ( Part - II) ..

Continued from Volume V, Issue No. 48…
Recommendations of the task force

The task force in its report recommended various models in existence for the dedicated freight corridor:
1. Vertically integrated structure: This model is followed in countries like China, Russia, Brazil, Mexico etc where railway systems are run either by state owned companies or privately owned regional companies. The integrated railways are run by the private sector on the basis of concessions or franchises.
2. The second structure in which the dominant user is integrated with infrastructure while incremental users have access for which they pay access charges. This model is followed in US wherein one vertically integrated freight railways uses the infrastructure of another entity. In Japan, the Japan Rail Freight Corporation runs as Govt undertaking on infrastructure owned by a private regional undertakings.
3. The third model in which the infrastructure is separated from the users but remains accessible to all under an access regime. The EU has adopted this model since 1991.This model ensures management independence of railway undertakings with no discrimination while sharing the infrastructure.
Map of proposed Dedicated Freight Corridor




The Railway Ministry initiative

Ministry of Railways have planned to construct a new Dedicated Freight Corridor (DFC) covering about 2762 route km (Eastern Corridor -1232 Km and Western Corridor -1469 Km) on two corridors, Eastern Corridor from Ludhiana to Sone Nagar and Western Corridor from Jawahar Lal Nehru Port Mumbai to Tughlakabad/Dadri along with interlinking of two corridors at Khurja. Upgradation of transportation technology, increase in productivity and reduction in unit transportation cost are the focus areas for the project. Based on the feasibility study conducted by RITES for Eastern and Western Corridors and their financial viability, the construction of dedicated freight corridors were approved “in principle” by CCEA in its meeting held on February 2, 2006 with the directions for expeditious finalization of modalities regarding resources and the Special Purpose Vehicle for implementation of the project.The total length of the dedicated freight corridor is 11,500 km and is expected to involve an investment of Rs 1,00,000 crore. While the western corridor will have a length of 1,469 km and seven feeder routes, the eastern corridor will have a track length of 1,232 km and 17 feeder routes. Both the western and eastern corridors will be connected between Dadri and Khurja to facilitate transfer from one corridor to the other.


About the SPV

A special purpose vehicle named Dedicated Freight Corridor Corporation of India Limited (DFC-CIL) has been formed. The SPV is registered as a company under the Companies Act 1956 and managed by a Board of Directors (BoD), which would include the Managing Director, four full time functional Directors. Chairman, Railway Board will be the ex-officio Chairman of the BoD. The first-time Managing Director and four full-time Directors will be appointed for a tenure of five years subject to an overall age limit of 65 years. One of the Government nominees to the Board of Directors will be from Ministry of Railways and the other from the Planning Commission. The independent Directors would be selected carefully from such fields as may be relevant for the SPV (academics, law, finance, human resource etc.) to bring fresh expertise and insights to the BoD.
The SPV will have a paid-up capital of Rs. 50 crores and authorized capital of Rs. 4000 crores, which can be increased subsequently as per future requirements. Initially the SPV will be constituted with 100% equity by Ministry of Railways. The equity in the SPV will be offered to PSUs/Government institutions in case they evince interest in future subject to retention of majority stake by Ministry of Railways.
The debt equity ratio will, however, not exceed 2:1.The funding offered by Government of Japan under Special Terms of Economic Partnership (STEP) being coordinated by JICA/JBIC should be utilized for the project. SPV would be fully empowered to take decisions in respect of project estimates, award of contracts, resource mobilization and hiring of staff.
The SPV will plan, construct, own and maintain the dedicated freight corridor under a Design, Build, Construct and Maintain and Transfer Concession to be given by Ministry of Railways for a period of thirty years after the start of commercial operations of the full corridor.
The concession may be extended further by mutual agreement. It will be responsible for movement of trains on its system. The SPV will not own or lease any rolling stock nor will it do any freight business directly with the clients. Actual train operation including provision of motive power would continue to be vested in the Indian Railways. The relationship between the Ministry of Railways and the SPV should be codified in a concession agreement.
Salient Features of the Project

The main features of the project are as follows:
• Both Eastern & Western Corridors will be made suitable for running of heavier trains of 25 tonne axle load. Maximum moving dimensions on the routes will be more liberal and comparable to world standards in order to permit heavier and longer trains.
• While Eastern Corridor will be electrified, the Western Corridor will operate on diesel traction in order to permit Double Stack Container operation.
• Bridges and fixed structure, which have long life, would be laid on this route for 30 tonne axle load. The loops provided on the route (DFC) should have length to accommodate double trains (1500 meter).
• Logistics Parks are proposed to be developed along the Dedicated Freight Corridor.
• The Eastern Corridor as approved by the Indian Railways network will also be developed to carry heavier traffic of coal and steel.
• The total length of feeder routes for Eastern Corridor will be about 3000 kilometers.
• The Western Corridor will start from Jawaharlal Nehru Port, New Mumbai and will be routed via Vadodara, Ahmedabad, Palanpur and Rewari to Tuglakabad and Dadri.
• The feeder routes of the Western Corridor connecting Ports of Gujarat will be upgraded. A feeder route from Rewari to Ludhiana via Hissar will also be developed to serve the States of Punjab and Haryana. This corridor will carry mostly container traffic.
• Both Eastern and Western Corridors will be connected between Dadri and Khurja.
• This 1469 kilometers long Corridor, fit for double stack container operation is estimated to cost Rs. 11,446 crores. Feeder routes on the existing Indian Railways network will also be developed for moving double stack container trains
• Total length of feeder routes for Western Corridor will be about 1500 kilometers.
(to be continued..)

Dedicated Freight Corridor: logistics simplified..

This article of mine is published in Observer Research Foundation Vol V Issue 48 13 -19 May 09

http://www.observerindia.com/cms/sites/orfonline/modules/newsbrief/NewsBriefDetail.html?cmaid=16274&mmacmaid=16276&volumeno=V&issueno=48

Introduction:

The Indian railway constitutes a critical component of India’s transport network. Generally it carries passengers and freight. It is cost effective and environment friendly. The Indian railways have 1.4 million employees and 64,000 kilometre-long network. Some inherent problems like capacity constraints and constraints in the freight segment have led to a significant shift from railways to road transport. However, the railways are poised for rapid growth in capacity expansion in recent future.

The high density eastern and western corridors are already saturated in terms of line capacity utilization. The economic growth of India has put a huge pressure on the network and increased congestion in these routes.

As freight is a major source of revenue to railways, there is a necessity of drawing a roadmap for the construction and operation of the dedicated freight corridors. The committee on infrastructure in its report proposed for a corporate entity which would provide the rail infrastructure, but would not engage in freight business, thus providing non discriminatory access on payment of haulage charges by train operators. The committee is of the view that it would help large scale private investment and competition in freight operations.
So, freight is the area where the Railways need to concentrate upon from the point of view of revenue. Around 55 per cent of the freight traffic is accounted for by coal, iron ore and steel. Since the revenue per-tonne-km is almost the same for most commodities, except iron ore and steel, this means the Railways need to look for new categories of freight (those being freighted by road) if they want additional revenues. This is where the role of Public-Private Partnership (PPP) comes in.

Role of private sector in railway transportation:

The government in its effort to efficiently manage the railways system has been proposing public private partnership (PPP) model. The PPP model aims at creating a system wherein the expertise of both the sectors can be exploited. The Railways need to involve the private sector in marketing for freight services, and to complete the last-mile in the supply chain.
As proposed by experts, hub-and-spoke model may be a good option wherein the Railways will carry the goods on the hubs, that is, from one station to the other; while the private sector transships the goods from the hub to the spoke, which is from the railway station to the customers’ godown/outlet. If the Railways use this model and offer attractive rates to transporters, it will incentivise them to divert goods from pure-road to road-cum-rail.

The Railways must increase their effort to enhance container train traffic. There are currently 13 private players, apart from the Railways’ subsidiary Container Corporation of India, who are running their own freight trains and who pay a track fee to the Railways. The Railways can explore the possibility of increasing track capacity for running more freight trains and taking more load per train through better design of wagons, softer and less investment-intensive methods like better signalling, de-bottlenecking, and, where feasible, by rearranging the priority for uneconomic passenger trains.
Experts are of the opinion that a long term strategy should be drawn so as to involve the private sector in creation of dedicated freight corridor, which, of course, is capital intensive. Traffic carried by Indian Railways has exhibited buoyant growth averaging 9% per annum in case of freight and 8% in case of passengers over the last five years. Ministry of Railways (MoR) has set itself an ambitious target of carrying 1100 million tones of freight and 8.4 billion originating passengers by the end of Eleventh Five Year Plan i.e 2011-12. It also plans to reposition its rail transport services competitively to expand its presence into non-traditional segments by offering innovative transport solutions, high quality of services in terms of safe and reliable delivery and transit times as also by adding other value –added logistics services.

The DFC Concept: Weighing the pros and cons:

Notwithstanding the importance of the Indian Railways in transportation network, it is marred with inefficiency and capacity constraints. IR runs sub-urban and other passengers at below cost, transport essential commodities at a loss, run branch lines that are not remunerative and is expected to provide increasing employment opportunities to the population. There should be different parameters to distinguish commercial and social activities. Dedicated Freight Corridor (DFC) presents a good opportunity to establish an independent organization and run this as commercial venture.

In recent times, railways have been losing their competitiveness to roads. Though it has a relative advantage in natural resources and intermediary good markets with large volume of movements, it certainly lacks agility in operation.

Through DFC, it will be possible to undertake periodic performance reviews and problem solving sessions with major clients to improve the service. According to Rakesh Mohan Committee Report, the Indian Railways was rated below roadways on almost all parameters like reliability, availability, price, time, connectivity, suitability, damages, information sharing, adaptability etc. All these factors signal that an independent organization is better equipped with to handle DFC than Railways.
With the abolition of import licensing and the gradual reduction in custom duties, Indian manufacturers have to compete with foreign manufacturers not only in foreign market but also in the domestic market. To remain competitive, the Indian industry has to keep its inventories down and produce just in time concept and all this can only be possible with a backing of highly efficient logistic chain. The dedicated freight corridor will address this problem in an efficient manner with a low cost approach. The need to have a separate organization which is not burdened with the task of balancing the conflicting objectives, would be in a much better position to follow a market savvy approach.

The project is capital intensive in nature and requires certain benchmark standards to run on commercial principles. The investment requirement as ascertained by the task force was Rs 22,500 crores. The task force suggested the assistance from the Japanese government through JICA (Japanese International Co operation Agency). The SPV can also help in raising loans from the market and the idea of running the track on a commercial basis could very well inspire confidence among investors.

Some of the stakeholders identified for this purpose are the port operators including port trusts, shipping and shipping related companies, coal, iron ore and steel companies such as CCL and SAIL and NMDC and power generation companies like NTPC.

Dedicated corridor for freight or passengers?

The existing infrastructure imposed significant technical constraints limiting the payload carrying capacity of freight trains. Axle Load permitted on the tracks is 20.3- 22.9 tonnes against 25 to 37.5 tonnes per axle carried by major freight carrying systems. The length of loops provided in yards and in stations is 686 metres, limiting the length of trains to 58 BOX ‘N’ wagons. Against this, heavy haul freight systems internationally carry more than 100 wagons, with the Australian system carrying over 300 wagons per train. The moving dimensions, which is the space envelope in which the locomotives, coaches or wagons have to be designed is restricted on the Indian railways.

The envelope in other countries is larger allowing use of wagons with higher cross-sectional area permitting increased payload in the same wagon. Payload to tare ratio i.e. the payload compared to empty weight of wagon is in the range of 4-7 internationally against 2.5 prevailing in India. The envelope cannot be increased as structures on the track like stations, platforms, roofs, bridges, tunnels, road over-bridges etc. have been constructed with clearances according to the current space envelope. The Railways may not be able to cope with the growth in container traffic of around 15% annually without double stack movement. Double stack container movement would not be possible due to the physical limitation imposed by the restrictive space envelope. Increasing clearances will mean large-scale investment in raising bridges, increasing width in platform areas, increasing height in platform areas, increasing height of electrical OHE, tunnel sizes etc.

One train in Australia clears the same payload as would require 6-7 trains in India. Thus the sectional capacity gets vitiated on the Indian Railways due to extra trains being run. Making the existing tracks fit for high axle load, increasing loop length and clearing physical impediments on existing structures would not only be very difficult but extremely costly, and a big challenge in built-up urban/semi-urban areas. A dedicated freight corridor free from the technical limitations enumerated above and fit for high axle load, longer trains and larger clearances can be constructed afresh with little extra investment compared to normal track construction.

A high-speed passenger corridor needs a higher level of technology to provide the necessary safeguards towards safety, and other systems including coaches, locos and signaling etc. The high-speed train system between Mumbai and Ahmedabad that was proposed in the past was estimated to cost around Rupees 70 crores per km. For the Delhi-Mumbai and Delhi-Howrah passenger corridors, a total distance of 2800 kms, the project cost would be around Rs 100,000 crores even at 50% of the earlier estimate. Against this the corresponding freight corridors are estimated to cost Rs 22500 crores. Given the magnitude of funds required for the passenger corridors, the project cannot be given priority over the freight corridors.

The dedicated freight corridor has to be preferred over high speed passenger corridor for the following reasons:
• The investment requirement to build passenger corridor is five times that required for freight corridor
• Simultaneously significantly heavy investments would be required to augment capacity on existing networks to cater to the freight business.
• Even after these investments physical limitations imposed by the restrictive space envelope would remain
Investment for the dedicated high-speed passenger corridors would have relatively lower returns on capital, which the country can ill-afford.


to be continued…

DDG: Is this the answer to peak power deficit in India?

DDG (Decentralized Distributed Generation) may be based on conventional and non conventional source of energy, may be a stand alone system or grid connected, Site specific (Rural or Urban).

India is facing acute power shortage and it is predicted by CEA that the situation may worsen in 2009-10 when peak deficit of some states may touch around 30%.This keeps the alarming bell ringing and India need to address these concerns as soon as possible.

Talking about the need of urban areas where Industrialization is growing at fast pace, the hunger for power keep growing at an alarming rate and the need for 24 x 7 power supply is a must to sustain the growth momentum. In the need of the hour, it is the rural segment which is affected badly, as if load shedding is to be made; the first area to go without power is jhuggi jhopdi areas in urban and the rural areas. The reasons are plenty, we can not afford for power cuts in urban areas as economic activity stops without power and the loss to overall growth of the country is very huge.

Now, the big question is that whether the DDG could make for the peaking shortage of urban areas. What would be the cost factor and where is the fuel resource for such type of systems. Can this type of system economically, financially and commercially viable. If the answer is yes, then what is stopping the private entrepreneurs to tap the area? Is there any policy which supports this type of activity? Is there any hurdles regarding the regulatory mechanism. If not then, why such systems are not coming up in a large numbers in India.

As it is now evident that everyone seems to be consensus to the point “Generate where required”. By this, lot of problems could be solved at one go. There will be virtually no technical losses in the system as the power is not to be transported to a large distance by wires. There will be less carbon foot print as the power will be generated by less polluting fuel such as gas and renewable sources. Grid connectivity will not be a problem as the power generated will be used locally and at time of need it can be supplied to the grid so s to help the grid functioning better.

So many advantages, so what is stopping us going forward? The huge cost factor and the private developers are demanding grants and subsidies from the government. Do they find the customers who are willing to take the power .If customers are willing to pay for the power, then these systems must be encouraged but who will guarantee the long term fuel supply .As these DDGs are planned to operate at gas based fuel and we are very much aware about the gas supply scenario of India, Due to want of the gas, many gas based power plants are running at a PLF of only 30 to 40%. The KG basin gas is a hope for the future prospectus but the problem is that the fertilizer lobby is so strong that they have the first right to use the gas and then comes large gas based power plants of CPSUs and the IPPs and then if any gas is available, the govt might think of allocating the remaining gas for DDG type of schemes.

So, the fuel is the main problem as of now. We may hope the situation to improve when the national power grid takes shape in India but that is also a distant dream right now.

Moreover we must remember that more than 1 lakh villages in India are still to be electrified and the policy makers are rightly pointed out for a possible solution with implementation of DDG systems as a stand alone system in rural areas where it is very difficult to lay the grid lines. Under the scheme of RGGVY and MNRE, several financing options are available to make the system viable. On the other hand, the private players are demanding same incentives to develop the model in urban areas as they are not willing to go to the rural areas and develop the same as they very well know that those areas are not commercially exploitable.


Some argue instead of focusing rural areas Govt may come up with some policies so as to mitigate the demand of urban areas first as this could help them save substantial power and power supply will be reliable and sustainable and peak deficit may be addressed in case of urban areas. The idea is good but then why urban areas .As we know that people in urban areas can pay more and they should be paying according to their use. The recent phenomenon at the power exchange suggests that the peak rate is hovering around at Rs 15 per unit. I think this could better trigger to the point that if they go with DDG with less space requirement, less water requirement and overall price of power will be less as it is also used for heating and cooling effect. The malls , office spaces and other loads if they can afford such type of power, they must be encouraged to go for DDG systems and DLF utility has already implemented the same in some of their buildings and they plan to implement it for their upcoming housing areas as well as market establishments.


Some experts argue in favour of having the DDG system only for rural areas where the requirement is small and the fuel resource is abundantly available locally. The technology must be developed so as to make the system reliable and financially viable.

In a recent round table conference organized by Infraline Energy, Mr Shahi , former secretary to MoP has suggested PPP model for DDG generation scheme. He has advocated for viability gap funding for the project where as the Govt would be ready to pay for a particular tariff which will be a pass on to the consumers and for the gap cost the generators must compete against each other to get the required benefit from the government.

Or can we think of a franchise kind of structure where in some players are selected by the government to establish the plant on a BOOT ( Build, own, operate and transfer scheme) basis.

Though Wartsila is strongly advocating of DDG system in urban areas there are very few takers to their argument but then the scope is very vast and if they can find the right customers who are willing to take that extra foot forward, it’s a better solution to go in for this type of systems as we very well know that India need power and it does not matter from where and how the power comes from like in 20-20 cricket, it does not matter the kind of risk or the shot selection of the players, what matters the most are the valuable boundaries.

What say!!!!!!!!!!!!!!