Volume IX, Issue 34 11 February 2013

ENERGY7/12
ENERGY
Price Pooling: Politics without Romance?
Lydia Powell, Observer Research Foundation
The Cabinet Committee on Economic Affairs, the gang of few which gets to make important economic policy
decisions of the country, has given in-principle approval for pooling the price of imported and domestic coal.
Like most decisions, this critical step which essentially equalises the unequal will create a few winners and many
losers.
Imported coal based power producers are the clear winners. Despite being experienced commercial entities,
they secured generation projects through bids with unbelievably low fixed tariffs which failed to take into
account the sovereign risk associated with the price of imported coal. When sovereign risk hit them last year
they clamoured for renegotiating contracts that were technically closed. The in-principle approval of price
pooling will open the back door for them to renegotiate these supposedly non-negotiable contracts. In all
probability, tariff is likely to be increased and passed on conveniently to the consumer. The argument that
stranded generation projects must be completed to meet shortages will provide a convenient cover. Some
sections of the economic press have already pronounced that over 70 GW of stranded capacity will be revived
on account of price pooling. The uninformed public will see it as a good thing. Naturally no consumer wants
power cuts.
The losers are the domestic coal producers, projects based on domestic coal, utilities that do not have a stake in
imported coal projects, consumers who pay for electricity and in a broader sense the national exchequer. As
price pooling effectively incentivises the import of coal at the expense of domestic coal production, domestic
production which is already under tremendous pressure will deteriorate further. States and state utilities which
have no stake in imported coal based projects will be forced to subsidise imported coal based projects which
will add to the discontent and uncertainty in the sector. The burden on the consumer will increase as it is the
consumer who will ultimately pay the price for price pooling. Finally terms of trade for the Indian exchequer
will worsen as it will push the precarious balance of payments situation to the brink.
The question that is troubling is that the Government seems to be taking the opposite view with regard to
natural gas which is effectively no different from coal from an economic perspective. Both are primary sources
of energy from which electricity can be generated. Though domestic natural gas and coal production meets
Volume IX, Issue 34 11 February 2013

most of the demand today it is likely that imports will meet an increasing share of demand in the future. The
domestic price of natural gas is lower than that of imported natural gas, a situation which is no different that of
coal.
The government is now very close to linking the domestic price of natural gas to international prices on the
basis of the recommendations of the Rangarajan Committee. The Committee has suggested that the trailing 12
month average of volume-weighted net back price at well head of gas producers and volume weighted price of
US Henry Hub, UKs NBP and Japans JCC linked price. The logic behind this is that the low domestic price
destroys economic incentives for domestic gas production and the linking of domestic prices to international
prices is the only solution. Linking of domestic price with international prices will increase incentives for
domestic production of natural gas. But in the case of coal, the policy is let us shop for imports till we drop!
The step-motherly treatment of domestic coal is surprising given that coal is the primary driver of the Indian
energy system. Apart from that coal reserves in India are the third largest in the world accounting for over 7
percent of global reserves. On the other hand, natural gas accounts for a substantially smaller share in Indias
energy system in India and India accounts for less than 0.7 percent of global reserves.
One is tempted to ask if the difference in treatment has less to do with the significance of the role and extent of
reserves of the respective fuels and more to do with the extent of lobbying for rent seeking that each fuel
sector can summon. Gordon Tullock, who pioneered work on lobbying for rent-seeking said that the influence
of lobbyists came from their ability to become an essential part of the policymaking process by flooding
understaffed, under-experienced and overworked Government offices with enough information and expertise to
help shape their thinking. This is essentially what seems to be shaping policy making in India with respect to
natural gas. Tullocks partner in research, James Buchanan, the Nobel Laureate who passed away last month
coined the term politics without romance which essentially said that politicians and bureaucrats are rational
actors who strive to do what is in their best interest just as market actors do. The message for Coal India Limited
and the so called captive producers of domestic coal is this: policy making is not about national interest; it is
about self interest pull up your socks and get on with the lobbying it is not expensive!