R Jagannathan
> Feb 13, 2012
> The ink has barely dried on the Supreme Court order in the 2G case, but the
> UPA government is well on its way to tinkering with the auction principle on
> scarce natural resources.
> A few days ago, the government specifically exempted power companies from
> having to participate in auctions for coal blocks under the Auction by
> Competitive Bidding for Coal Mines Rules 2012 notified by the coal ministry.
> Power companies will only pay the reserve price fixed by the state
> government for such projects, reports Business Standard.
> The logic for exempting power companies – and not anybody else – from
> auctions is this: since power companies already bid for power supply on the
> basis of tariffs, it would become unviable for them to bid for coal blocks,
> too, since margins depend on the price of coal. If they have to bid at
> auctions, the project may fall apart.
> The argument does not quite wash.
> First, there is no guarantee that the reserve prices fixed for coal blocks
> will automatically make any power tariff bid viable. Unless, the reserve
> prices are fixed so low that any power tariff will be viable. In which case,
> legitimate questions can be raised on whether the coal block was sold below
> the right price.
> Secondly, trying to subsume two bids into one is not sensible: it can only
> lead to more scams. Reason: let’s assume a power player bids low tariffs for
> a project. To make money from the project, he will have to get the coal at
> rock-bottom prices. Since there will be two prices for coal in the market –
> the open market price and the one incurred by the power company in digging
> the coal out of its block – it is obvious that selling coal in the market
> would be more profitable than using the coal to produce cheap power.
> As things stand, due the high cost of imported coal, power companies are
> seeking the right to use coal from allotted blocks in other power plants.
> In fact, the Comptroller and Auditor General was probing precisely such a
> diversion by Reliance Power, which got the Sasan ultra mega power project
> with a coal block attached. It is said to be using the coal for another
> project.
> No prizes for guessing whether this kind of diversion – if true – can happen
> without an official wink and a nod. The Tatas are already protesting this,
> and have said that if they knew coal could be diverted, they could have bid
> lower tariffs, too.
> The real problem with keeping coal blocks out of the auction process is,
> however, something more fundamental. It distorts energy pricing. And also
> leads to inefficient use of a hydrocarbon resource.
> When cancelling the 122 telecom licences issued by Andimuthu Raja, the
> Supreme Court held that in allotting scarce national resources, the auction
> route was the best. The verdict, delivered by Justices AK Ganguly and GS
> Singhvi, said: “We have no doubt that if the method of auction had been
> adopted for grant of licence, which could be the only rational, transparent
> method for distribution of national wealth, the nation would have been
> enriched by many thousand crores.”
> If this is the case, it is quite possible that any allotment of coal blocks
> without an auction could face court scrutiny.
> However, the more important illogic relates to economics.
> When a depleting resource is allocated not on the basis of market-based
> pricing, but arbitrarily, it is bound to lead to the underpricing of energy.
> If both coal and power are going to be underpriced, it will lead to waste
> and misuse – as is the case with oil subsidies, where the rich buy diesel
> cars due to the heavy subsidy on diesel vis-à-vis petrol.
> Price distortions lead to corruption and crookery. Just as the subsidisation
> of kerosene leads to its adulteration in diesel and petrol, one can safely
> assume that if coal blocks are not auctioned, it will create space for
> skullduggery.
> One may ask: what if the auction process leads to very high bids where power
> becomes too expensive?
> A simple way to avoid this problem would be to invite dual bids – where the
> bidder for a power project bids both for the coal, and a power tariff based
> on the coal bid. The experts will surely have a way of working things out.
> Failure to do that is like an invitation to possible corruption.
> The 2G scam, after all, was the result of selling spectrum at fixed prices.
> Does the UPA want another scam in coal now?