Abstract
The ministry of coal is the body responsible for policy formulation with regard to the development and exploitation of coal resources in the Country. It was during 1971 – 73 that the Indian Government began nationalizing India’s coal mines dreading the uncertain future of the coal sector owing to the inability of private players to make necessary investments to meet future demand and use of unscientific/inefficient mining techniques. This led to the Government taking over the management of coking coal mines and coke oven plants which has come at a great cost to abapical firms and in the due course the consumer. The series of Nationalization policies hence gave birth to the monopoly – Coal India Limited Company (‘CIL’). Today CIL contributes to about 84% of the Coal in India. Certain structural policies, and legal framework that came to be introduced provided a non-level playing field to prospective private players in the coal sector. The Monopoly enjoyed by the CIL coupled with inadequate policy in the sector gave rise to a number of structural impediments to competition in the Coal Sector in India.
The coal sector in India is wholly dominated by state-owned public-sector companies limiting Private Participation. This blog analyses the institutional and structural issues and also policy and regulatory issues that contribute towards the concentration of competition in the hands of merely one player in the coal sector. The blog captures the jurisprudential trends and analyses whether these decisions have had an impact on the marketplace or consumer welfare followed by the changes that can be brought about to foster a competitive marketplace in the Coal Sector in India.
Coal Industry in India– The Fall and Rise of the Coal Industry
By the end of the 1940s, India was producing a little over 30 million tonnes of coal. The five years plans in India gave importance to increasing coal productions and several changesinstitutional and legal were introduced to the coal sector. In the next ten years, coal production had reached around 60 million tonnes. However, prior to nationalization, the coal industry faced a slowing growth in demand due to the low price of petroleum products. To overcome this, the Coal Sector in India was nationalized in two phases (coking coal mines in 1971-72 and non-coking coal mines in 1973-74). The broad objectives of Nationalization were to augment capital investment in coal mines and to meet the rising coal demand. However, the goals of the Nationalization policy remain unrealized owing to several challenges namely the existence of monopoly (public sector monopolies), the presence of archaic legislation that governs land acquisition, mining, rehabilitation, and environment management. Due to the absence of competition in the Coal Sector,Coal India Limited ‘CIL’ has enjoyed and continues to enjoy a monopoly in the Coal Sector.
Pending Nationalization, the thenCoking Coal Mines (Emergency Provisions) Act, 1971 which provided a mandate for the Government to take over the management of coking coal mines emphasizes in its preamble that the taking over is in the ‘public interest’. The then Coking Coal Mines (Nationalization) Act, 1972. The Mineral Laws (Amendment) Act, 2020 is the latest act which deals with allocation of coal blocks (which led to the Nationalization of Coking Coal Mines and the Coke Oven Plants other than those with the Tata Iron and Steel Company Limited and Indian iron and Steel Company limited) provides for protection of consumer welfare in thepreamble itself “An Act to provide for……with a view to reorganizing and reconstructing such mines and plants for the purpose of protecting, conserving and promoting scientific development of the resources of the Iron and steel industry to meet the growing requirements of the iron and steel industry and for matters connected therewith or incidental thereto.”
Although the legislation provides for ‘public interest’ and to ‘meet the growing requirements, to a large extent these remain unfulfilled. Amid the second-wave of the pandemic, with businesses moving to work from home- there was a sharp rise in terms of demand in the power sector. Coal is responsible for around 70 percent of the electricity generation in India. While India has been pushing to meet its renewable energy for sustainable power generation, and reducing the role coal plays in the electricity sector. India was not prepared for this unprepared surge in demand. The shortage of coal in India post the pandemic then can be attributed to the sudden surge in demand and inability of its dominant actor in the Coal sector – CIL to meet the same.
The Nationalization Policy was aimed at meeting the burgeoning demand, preventing unscientific mining, and regulating working conditions of labor in the mining areas. However, this only led to a formation of a natural monopoly in the Coal Sector. These enterprises being in the field for more than 30 years and having established their mining operations over a long period of time, place the private players at a disadvantage in terms of cost of production, price, and profit.
As a result of the Monopoly status CIL has all the available geological data in its possession, which further enhances the domain knowledge. Due to its vast experience, it has an established clientele and enjoys a ‘Business Goodwill’.Additionally, CIL enjoys close proximity with the Ministry of Coal that guides CIL’s pricing and distribution decision.
The aforementioned benefits enjoyed by CIL create certain barriers to private players which are as follows:
“(i) Inadequate data and lack of accessible data on extractable coal reserves
(ii) Prohibition on private sector participation in Coal exploration
(iii) Allotment of coal blocks, surface rights, and mining clearances
(iv) Changing Environmental Policies”
The benefits enjoyed by CIL naturally give rise to barriers to entry. In terms of Competition Law Barriers to entry as defined by Joe S Bain is as follows: “the advantages of established sellers in an industry over potential entrant sellers, these advantages being reflected in the extent to which established sellers can persistently raise their prices above a competitive level without attracting new firms to enter the industry”. This is perhaps a definition most appropriate to describe the barriers of entry in the Indian Coal Sector. The effect that any barrier to entry in a marketplace has on competition is that it leads to higher prices and lower levels of innovation.
Alternatively, looking at thedefinition of barrier to entry given by George Stigler–
A barrier to entry is “a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.” However, the current scenario of the coal industry makes it evident that even if the new entrant is willing to pay the cost to penetrate into the market, the existing policy impediments still result in a lack of level playing field. For example, the provisions for acquisition of a coal-bearing land, under the Coal Bearing Areas (Acquisition and Development) Act, 1957 allows for possession of virgin coal-bearing land by the Central Government for a centrally controlled public sector company only, and naturally, the PSEs do not have to obtain coal-mining leases for land acquired under the Act. However, there is no scope for private players to acquire land under this Act. The monopoly enjoyed by CIL has given a number of incumbency benefits to it. In addition, the lack of independent regulation, absence of transparency in price/tariff determination acts as deterrents to competition and greater private sector participation. The existence of a public monopoly structure obviously raises concerns on a non-level playing field for private operators as the government continues to have critical control over pricing, marketing, and distribution.
CIL and the CCI- Judicial Developments
CIL and its subsidiaries were held to be dominant by the CCI in case ofShri Jyoti Swaroop Arora Informant v. Tulip Infratech Ltd and Others. InWest Bengal Power Development Corporation Limited v. Coal India Limited and Others, a complaint was filed against the e-spot auction scheme by CIL, whose terms and conditions included buyers not being able to reject the delivered coal even on account of non-suitability, CIL had the right to modify the terms and conditions at any point and there was no provision for joint and third-party stamping facility. CCI had found that there was no case made out against CIL as – “The terms and conditions must be viewed in the larger context of the market and not the individual opinion of a buyer, there was no inherently discriminatory provision in the scheme by CIL. Since, coal is an energy resource, there are numerous buyers- including the steel industry or the aluminium industry etc., The contentions by complainant were not substantiated on the ground that if there were any such indications breaching S.4 of the Competition act there had to be some material evidence adduced by the claimants.”
The Fuel Sharing Agreement’s another important facet of sale of coal was brought under the notice of CCI inBijay Poddar case in which the CCI took a different stance. They found the FSA agreements by CIL to be abuse of dominant position in the market. CCI had observed that “any default of contractual obligations has commercial ramifications for the parties involved, needed to have corresponding liability on the defaulter and noted the finding of the DG that, the Appellant and its subsidiaries had defaulted on 701 occasions during the last three financial years.” The commission noted that Bidders were consumers too and their interests needed protection. Notably that the 701 instances of default would adversely affect the consumers the same needed to be taken in cognizance.
The FSA agreements primarily absolved any liability on part of CIL in case of default in terms of quality. When an e-auction scheme exists, and even small bidders can participate this uniquely strips protection from the consumers or bidders. The CCI observed as follows: “The e-Auction is admittedly for consumers who are not able to source coal through available institutional mechanisms. The Institutional mechanism is for relatively large consumers, some of whom enter into FSAs. The appellant admitted that, FSA was a bilateral binding agreement where the appellant was required to pay a penalty in accordance with the penalty clauses for failure to supply coal and therefore measures were taken to supply desired quantity as per FSA commitments…..Omission of a provision for compensation in the event of failure to supply in the Spot e-Auction, where even relatively small consumers can bid, while stipulating forfeiture of EMD in the event of failure to lift coal, is certainly unfair” This was inherently unfair as recognized by the CCI. CIL issued a document on 06.05.2017 titled ‘Scheme Document for Auction of Coal Linkages of Coking Coal in the Other Sub Sectors’ with the purpose to provide interested parties with information that may be useful to them in making their bids pursuant to this Scheme. Further, CIL had also issued a copy of the Model Fuel Supply Agreement-Non-Regulated Sector. Post 2018, the existing FSAs would expire, and anyone who wanted to bid successfully would have to approach the same through the newly introduced e-auction scheme. The Model FSA dealt with pricing of coal, renewal terms security deposits in spite of 100% advance payments, terms governing compensation etc.
With this new development the CCI took a different approach inIndustries and Commerce Association v. Coal India Limited and Others, The informant argued that coal was an essential as well as scarce commodity, where the price of the final end product could not be prompted. E-auction of the same by a dominant enterprise (it had been well established that CIL has a position of dominance in the coal sector) would lead to monopolization and unfair prices. This is a direct contravention of the provisions of Section 4 of the Competition act. The CCI observed that “While formulating policies, MoC is not engaged in any of the activities specified in Section 2(h) of the Act which defines ‘enterprise’. Formulation of policies does not fall in the realm of commercial or economic activity as envisaged under the definition of the term ‘enterprise’ as given thereunder…The challenge by the Informant to model FSA is also highly premature. The auctions for grant of linkages are yet to be conducted. Thus, the CCI observed that, at this stage, any examination of the terms of Model FSA would be a speculative exercise until the FSAs are executed by the successful bidders in the e-auction and the final terms are concretized”. The commission conclusively held that the change in policy of Ministry of Coal, through establishing e-auctions and introducing model FSAs, were not violative of Section 4, the contentions by the Informants were premature and not concretized.
Impact on Consumers
Competition acts as a vehicle not only to promote dynamic markets and economic growth but also to promote the well-being of the consumers. The principal effect of the competition is that goods and services are being provided to consumers at competitive prices. This is followed by the effect that Competition has on the efficiency and productivity of a market, often markets that are highly competitive are more productive. According to the report by International Energy Agency – ‘India Energy Outlook 2021’, Coal accounts for 70% of India’s electricity generation is dependent on coal. There has been an increase in demand for coal, coupled with post-pandemic economic recovery pushing India towards a possible energy crisis due to coal shortage. The domestic company CIL hasn’t been able to keep up with the market forces, there aren’t other prominent market players as the sector is monopolized by nationalization and pushed to a dominant position. The imports are uneconomical at this point as even International prices have been soaring.
India is the third largest coal importer, with a rising demand in the same. The domestic suppliers- CIL accounts for 80% of the India’s coal is pushed to ramp up production. It has been observed that when import prices increase substantially, incentive for domestic producers and manufacturers reduces. The lack of efficiency of CIL in providing quality supply has been evident in the above CCI decisions especially in the Bijay Poddar case, wherein there were 701 instances where CIL had defaulted and failed to deliver as per the expectations and terms, with many power plants suffering directly the consequences of the same without any alternatives due to its dominant position.
The industrial consumers are directly facing a crisis as CIL has a dominant position and any issue with supply directly leads to loss of revenue and halting operations. For the residential consumer, who indirectly faces the brunt of the same- the effect is a trickle down of soaring coal prices, due to an uncompetitive monopolistic market that simply doesn’t meet the demand.
There is a possibility for rise in electricity prices, which would lead to an inflationary trend. The industries like steel, aluminum etc., that use coal to generate heat, would primarily bear the brunt of increase in prices as electricity for farmers and many households is subsidized in India. The extra burden of these prices in select industries then again falls on consumers.
Conclusion
The Dominant position enjoyed by CIL and the reasons for limited private participation as enumerated above have a direct impact on the production of coal. The evident impediment to competition and greater private sector participation is the existence of the public monopoly – CIL and the control that the Government exercises over pricing, marketing and distribution.
Competition drives innovations and also allows nascent firms to enter into markets dominated by already existing firms and makes innovation a crucial aspect for the existing players. Competition fosters innovation and growth. One of the benefits of having a competitive marketplace is that it helps foster restructuring in sectors that have lost competitiveness. For this benefit to be reaped it is essential that the Government should not have an interventionist approach towards regulating the market which may lead to distortion of the economy.
The existing market structure in the Indian Coal sector has given rise to an ecosystem that lacks innovation or growth and ultimately has an effect on the consumers. A huge reform is required to be introduced to ensure that the consumer does not bear the brunt of the anti-competitive structure in the coal sector in India. There is a pressing need for policy regulations that will allow for private sector participation in the coal sector. There have been proposed amendments to the Coal Bearing Areas Act (Acquisition and Development), 1967 that provide a level playing field by introducing provisions which aim at giving more control to the private players. It is important that the legislations be introduced in order to remove the discriminatory provisions against private players and provide for a level playing field which would lead to effective competition and meet the growing demand of coal in the Indian energy sector.
About the Author
Ms. Nandini S. Patil is an Associate at Keystone Partners, Advocates & Solicitors, Bangalore.
Chahana Charles is a 4th Year Law Student at the Gujarat National Law University, and an Associate Editor at IJPIEL.
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Gaurang Mandavkar
Associate Editor: Chahana Charles
Junior Editor: Harshita Tyagi
Preferred Method of Citation
Nandini S. Patil and Chahana Charles “Critical Analysis of the Anti-Competitive Structure in the Indian Coal Sector” (8 December 2021)
<https://ijpiel.com/index.php/2021/12/08/critical-analysis-of-the-anti-competitive-structure-in-the-indian-coal-sector/>
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