Coal India sets 1.5-40 pct penalty for power project pacts

NEW DELHI/MUMBAI Tue Aug 7, 2012 8:40am EDT

NEW DELHI/MUMBAI Aug 7 (Reuters) - State miner Coal India agreed on Tuesday to pay penalties for failing to provide sufficient supplies to new Indian power projects that range from 1.5 to 40 percent of a shortfall, depending on the level of default.

It also agreed to pool the prices of imported coal with domestic supplies but said a final decision on this issue would be taken by the Central Electricity Authority. Such a pricing system would work only if all domestic consumers are willing to accept the resulting higher price, the company said.

"We have no objection to pooling of prices if it is acceptable to all stakeholders," Coal India Chairman S Narsing Rao told reporters after a board meeting.

The move to fix penalties follows the company's agreement last week to supply a minimum of 80 percent of the coal needed for new power projects, bowing to a condition set by the government, and paves the way for it to sign a fuel supply pact for 48 projects.

Coal India had stipulated that it may use a mix of up to 15 percent imported coal versus 65 percent domestic.

Coal India, the world's largest coal miner, produces nearly 80 percent of the country's domestic coal supply of about 550 million tonnes but has struggled to increase local supplies for years because of failure to get swift environmental and regulatory approval and inadequate railway infrastructure.

The miner had earlier sought to pay only 0.01 percent of the shortfall in supply, while utilities asked for 10 to 20 percent.

PENALTIES SPECIFIED

On Tuesday, the Coal India board agreed to pay a 1.5 percent penalty if its supplies amount to 65 to 80 percent of the contracted volume and 5 percent if they reach 60 to 65 percent, its chairman told reporters after the board meeting.

Penalties would rise to 10 percent for 55 to 60 percent, 20 percent for 50 to 55 percent and a maximum of 40 percent for supplies of less than 50 percent of contracted volumes.

"It's not very ominous. Obviously, it's more than they initially wanted, but we should also factor in that they are allowed to import coal to make up shortfall," said Murtuza Arsiwalla, a sector analyst with Kotak Securities.

The miner typically puts a 10 percent penalty clause in its fuel supply pacts with customers.

It prices domestic coal 45 to 70 percent below international prices, in part to keep costs low for power companies. Pooling prices would allow the cost of more expensive imports to be distributed to more customers.

Coal India plans to import 20 million tonnes in the current fiscal year ending March 2013 and 30 million tonnes in 2013/14, Rao said.

Initial imports will be done through state agencies State Trading Corp and MMTC, he said.

Ahead of the announcement, shares in Coal India, the country's fourth-largest company by market value at $39 billion, closed 0.3 percent higher in a firm Mumbai market. (editing by Jane Baird)

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