COMPETITION COMMISSION OF INDIA

Case Nos. 03, 11 & 59 of 2012

Case No. 03 of 2012

In Re:

Maharashtra State Power Generation Company Ltd. Informant

And

1. Mahanadi Coalfields Ltd. Opposite Party No. 1

2. Coal India Ltd. Opposite Party No. 2

WITH

Case No. 11 of 2012

In Re:

Maharashtra State Power Generation Company Ltd. Informant

And

1. Western Coalfields Ltd. Opposite Party No. 1

2. Coal India Ltd. Opposite Party No. 2

Case Nos. 03, 11 & 59 of 2012 Page 1 of 56

 WITH

Case No. 59 of 2012

In Re:

Gujarat State Electricity Corporation Limited Informant

And
1. South Eastern Coalfields Ltd. Opposite Party No. 1

2. Coal India Ltd. Opposite Party No. 2

CORAM

Mr. Devender Kumar Sikri

Chairperson

Mr. S. L. Bunker
Member

Mr. Sudhir Mital

Member

Mr. Augustine Peter

Member

Justice G. P. Mittal
Member

Appearance: Shri Matrugupta Mishra, Shri Nishant Kumar and Shri Saahil
Kaul, Advocates alongwith Shri A. S. Lone, EE (FMC) for
Maharashtra State Power Generation Company Ltd.

Case Nos. 03, 11 & 59 of 2012 Page 2 of 56

 Shri Gaurav Mitra, Advocate with Shri Jayesh V. Bhairavia,
and Ms. Rashmita Roy Chowdhury, Advocates alongwith Ms.
N. S. Rathod, Law Officer and Shri Nilish Parekh, Junior
Engineer for Gujarat State Electricity Corporation Ltd.

Shri Ramji Srinivasan, Senior Advocate with Shri Harman

Singh Sandhu, Shri Yaman Verma, Shri Toshit Shandilya,
Shri Vivek Paul, Shri Tushar and Ms. Gauri Mehta, Advocates
alongwith Officials [Shri L. K. Mishra, G.M. (S & M), Shri
Amit Roy, Senior Manager (S & M) and Shri G. K.
Vashishtha, GM (S & M) for CIL, Shri S. Chandramouli, GM
(S & M) and Shri P. Das, Senior Manager (QC) for MCL, Shri
Sunil Kumar Roy, Senior Manager (S & M) for SECL, Shri
George Mathew, Senior Manager (S & M) and Shri T. H.
Mohan Rao, Manager (S & M/ QC) for WCL, Shri Sunil Rai,
Senior Manager (S & M), SECL and Shri M.G.M. Swamy,
Assistant Manager (Q C), SECL] for CIL and its subsidiaries.

Order under Section 27 of the Competition Act, 2002

1. The Commission in this batch of informations filed by the power utilities

(Maharashtra State Power Generation Company Ltd. and Gujarat State
Electricity Corporation Limited) vide its order dated 09.12.2013 found
CIL and its subsidiaries to operate independently of market forces and
thus enjoying undisputed dominance in the relevant markets of supply of
non-coking coal to the thermal power producers. The Commission also
held the Opposite Parties to be in contravention of the provisions of
Section 4(2)(a)(i) of the Act for imposing unfair/ discriminatory
conditions and indulging in unfair/ discriminatory conduct in the matter
of supply of non-coking coal, as detailed in the said order.

Case Nos. 03, 11 & 59 of 2012 Page 3 of 56

 2. The aforesaid order of the Commission was put in appeal by various
parties before the Hon’ble Competition Appellate Tribunal. Accordingly,
the Hon’ble Competition Appellate Tribunal vide its common order
passed on 17.05.2016 in a batch of appeals arising out of the orders of
the Commission passed on 09.12.2013,15.04.2014 and 16.02.2015 in C.
Nos. 03, 11 & 59 of 2012 (the present batch), C. Nos. 05, 07, 37 & 44 of
2013 and C. No. 08 of 2014 respectively set aside the impugned order
and noted as follows:

“25. In the result, the appeals are allowed. The impugned

orders are set aside and the matters be remitted to the
Commission for deciding the issues arising out of the
informations filed by Maharashtra State Power
Generation Company Limited, Gujarat State Electricity
Corporation Limited, Madhya Pradesh Power Generating
Corporation Limited, West Bengal Power Development
Corporation Limited, Sponge Iron Manufacturers
Association and GHCL Ltd. afresh.

26. We hope and trust that the Commission will make an

endeavour to hear the parties and pass appropriate
orders as early as possible not later than 2 months of the
receipt of this order.

27. It is made clear that neither of the parties shall be

entitled to adduce any additional evidence before the
Commission nor the Coal India Ltd. and its subsidiaries
shall be allowed to withdraw the amendments/
modifications made in the fuel supply agreements or
concessions granted during the pendency of the cases
before the Commission.

Case Nos. 03, 11 & 59 of 2012 Page 4 of 56

3. Accordingly, the Commission heard the parties afresh on various dates and
decided to pass appropriate order in due course.

Brief Facts

Case No. 03 of 2012

4. The information in this case was filed under Section 19(1)(a) of the Competition
Act, 2002 (‘the Act’) by Maharashtra State Power Generation Company Ltd.
(MAHAGENCO) against Mahanadi Coalfields Limited (MCL) and Coal India
Ltd. (CIL) on 16.01.2012 alleging inter alia contravention of the provisions of
Section 4 of the Act.

5. The Informant alleged that MCL instead of signing/ executing coal supply
agreements/ fuel supply agreements as required under the new Coal Distribution
Policy, 2007 (NCDP) executed/ signed MoUs which did not cover all aspects of
supply and issues. Aspects like quality control, grade failure, short supply, joint
sampling etc., had not been detailed/ enumerated in clear terms and conditions.
Further, the Informant received a model Coal Supply Agreement (CSA) proposed
to be executed between it and MCL. It is alleged that the clauses of CSA
demonstrated that the conditions of supply as proposed were onerous and, as such,
negated the purpose of securing firm supply of coal on the basis of a contractual
arrangement in terms of NCDP. The proposed CSA contained clauses which were
burdensome and capable of causing implementation issues imposing additional
cost on MAHAGENCO leading to higher cost of electricity which would be
eventually passed on to consumers. It is also alleged that while the draft CSA was
under negotiation, MCL sent a draft MoU to MAHAGENCO which had to be
executed simultaneously at the time of execution of CSA. The draft MoU
attempted to further dilute the obligations of MCL to supply coal under the
proposed CSA.

Case Nos. 03, 11 & 59 of 2012 Page 5 of 56

 Case No. 11 of 2012

6. The information in this case was also filed by MAHAGENCO against Western
Coalfields Limited (WCL) and CIL on 22.02.2012 alleging inter alia
contravention of the provisions of Section 4 of the Act.

7. The Informant is aggrieved by certain acts of WCL as also terms of Fuel Supply
Agreement (FSA) dated 21.11.2009 executed between MAHAGENCO and WCL.
The same may be summarized as follows: failure on the part of WCL to entertain
objections raised by MAHAGENCO before execution of FSA; failure to
formulate the joint sampling protocol in FSA as also failure to provide joint
sampling at both loading and unloading points; making provisions in FSA
whereby MAHAGENCO is deprived of its right to participate in joint sampling of
coal or the sampling procedure which could lead to supply of lumpy, wet and
sticky coals and also stones/ coal of large size which cannot be used; and failure
on part of WCL to crush and wash coal which is an integral process of dressing
coal before supply.

Case No. 59 of 2012

8. The information in this case was filed under Section 19(1)(a) of the Act by
Gujarat State Electricity Corporation Limited against (GSECL) South Eastern
Coalfields Limited (SECL) and CIL on 13.09.2012 alleging inter alia
contravention of the provisions of Section 4 of the Act.

9. The Informant, which is a power generating utility, is purchasing coal by way of a

coal linkage from SECL of 16.4 Million Metric Tonnes (MMTs). It is averred that
out of total purchase, 14.4 MMTs from SECL is being supplied through Road-
cum-Rail mode from Korba coal-field of SECL and the remaining quantity of 2
MMTs is supplied from Korea-Rewa field of SECL through Rail mode. Ministry
of Coal, Government of India had notified NCDP on 18.10.2007 mandating a

Case Nos. 03, 11 & 59 of 2012 Page 6 of 56

 switch-over from the linkage regime of coal distribution to firm FSAs between
CIL’s subsidiaries and their respective consumers with demand greater than 4200
tonnes per annum (TPA). It has been stated that the Informant entered into an FSA
on 07.07.2009 with SECL.

10. The Informant has detailed various clauses of FSA as also the acts/ omissions of
the Opposite Parties which are stated to emanate from the dominant position of
the Opposite Parties in the relevant market.

11. The Informant has alleged that there was vast difference of Gross Calorific Value
(GCV) of the coal received from Korea-Rewa field than as shown in billing grade
of SECL. It is alleged that the said differences were about grade slippage of about
3 to 5 grades and sometimes more in the quality of coal supplied from Korea-
Rewa field.

12. Further, referring to the various clauses of FSA, the Informant has alleged that as
per condition number 3.11 of FSA, there is a provision in respect of Deemed
Delivery Quantity (DDQ). It is stated that as per this provision, whatever the
quality of the coal supplied, the same has to be accepted by the purchaser and
even if the purchaser refuses to accept the lower quality, the same is treated as
deemed delivery and the purchaser is liable to pay for the coal. SECL is used to
supplying lower quality coal from Korea Rewa field with bills of higher quality
and the purchaser has no remedy except to pay for the higher quality. This is
alleged to be in contravention of the provisions of Section 4(2)(a)(i) read with
Section 4(1) of the Act.

13. It is further alleged that the present sampling procedure is a departure from the
past practices regarding sampling of coal. It is stated that earlier i.e., before 2007,
the samples were analysed both at the loading as well as unloading ends. There
was a process of reconciliation of discrepancies by working out an average/ mean
grade or quality. It is, however, alleged that CIL suo motu amended the said

Case Nos. 03, 11 & 59 of 2012 Page 7 of 56

 process in FSAs. It is alleged that at present the sampling is carried out in terms of
the agreement at the loading end only within the colliery. This process is stated to
be inadequate/ inefficient resulting in severe grade/ band slippage.

14. Grievance is also made of the fact that as per clause 4.7 of FSA, SECL was
required to install Augur Sampling Machines (ASM) within 24 months from
signing of FSA, where the loading was to be through silos. However, SECL failed
to install ASM according to the agreed terms and conditions. It is further averred
that due to non-installation of ASM, the collection of the samples of coal to be
supplied could not be done properly. It has been pointed out that where ASM was
not installed according to terms within specified time, in such circumstances, the
sample collections were to be done at unloading end. It is alleged that in complete
breach of the terms of FSA, neither ASM was installed within the stipulated time
therein nor the joint sample collection was permitted at the unloading end. Such
conduct has been described as abusive by the Informant.

15. The Informant, accordingly, sought appropriate directions to be issued to the coal
companies to crush and wash coal so that Grade/ GCV of coal is consistent with
the terms contracted, supplied and invoiced. Inquiry was also sought in the
matters relating to grading, sampling, testing and analysis of coal.

Directions to the DG

16. The Commission after considering the entire material available on record vide its
order dated 24.01.2012 passed in Case No. 03 of 2012 directed the Director
General (DG) to cause an investigation to be made into the matter and to submit a
report. In Case No. 11 of 2012, a similar order was passed by the Commission on
06.03.2012. Further, it was also ordered that since the Commission has already
directed investigation to be made in Case No. 03 of 2012 on similar facts, the DG
shall club the investigation of this case along with the investigation of Case No.
03 of 2012 and submit a consolidated report in respect of both the cases. Lastly,

Case Nos. 03, 11 & 59 of 2012 Page 8 of 56

 the Commission passed a similar order in Case No. 59 of 2012 on 04.12.2012 and
also directed that this case may be clubbed with earlier cases for joint
investigation.

17. The DG, after receiving the directions from the Commission, investigated the
matter and filed a common investigation report in all these cases on 08.02.2013.

Investigation by the DG

18. The DG noted that the relevant product for the purpose of investigation in the
present case was non-coking coal which is used as primary raw material by power
producers for the generation of electricity. Further, the DG opined that as the
condition for supply of coal in the entire country was uniform and homogenous as
there are no barriers in terms of geographic location for the consumers, it was
concluded that the relevant geographic market is entire India. Thus, the relevant
market in the instant case was determined by the DG as the production and sale of
non-coking coal to the thermal power generators in India.

19. On dominance, it was concluded by the DG that CIL is vested with absolute
monopoly in production and distribution of coking and non-coking coal, as there
was no supply-side substitution, due to entry barriers imposed by the policy
measures of Government of India and the Coal Mines (Nationalization) Act, 1973.
The Opposite Parties were thus found not to have any competitive pressure in the
market as there was no challenge at the horizontal level against the market power
of CIL and its subsidiaries. Accordingly, the DG was of the view that CIL and its
subsidiaries enjoy a dominant position in the relevant market in terms of the
factors mentioned in Section 19(4) of the Act.

20. On analysis of the terms and conditions of FSA, the DG concluded that CIL and
its subsidiaries had violated the provisions of Section 4(2)(a)(i) of the Act by
imposing unfair or discriminatory conditions in the relevant market. The

Case Nos. 03, 11 & 59 of 2012 Page 9 of 56

 following terms and conditions were found by the DG to be unfair or
discriminatory:

a) Sampling procedure for existing PSUs and other power producers are
different, without any reason for such discrimination. The sampling
procedure lacks obligation on the seller to incorporate fair and
transparent procedure to match the Gross Calorific Value (GCV)
pricing mechanism. The sampling and testing procedure in clause 5.7
(4.7 for old power producers) FSA were found to be unfair and
discriminatory.

b) Provisions in clause 5.2 of FSA relating to charging the transportation

and other expenses from the buyers on supply of ungraded coal were
found to be unfair.

c) The Opposite Parties have also been found to impose unfair and
discriminatory conditions regarding putting a cap on compensation for
stones in clause 4.6.3(e) of FSA for new power producers. In this
connection, the DG noted that during the course of investigation the
capping was removed subject to some conditions.

d) The provisions relating to review and termination of the agreement in

clauses 2.5 and 2.6 of FSA were found to be unfair and discriminatory.

e) It was noted by the DG that the provision relating to satisfying the

Condition Precedent in clause 2.8.3 of FSA for new power producers
gave upper hand to the seller for waiving the condition precedent at its
sole discretion. Accordingly, the provisions relating to waiver of
conditions in clause 2.8.3 were found to be unfair by the DG.

Case Nos. 03, 11 & 59 of 2012 Page 10 of 56

 f) Discriminatory provisions for new power producers by removing the
provisions for review of grade in case of consisting grade slippage for
3 months. In this connection, the DG noted that during the pendency of
investigation these provisions have been re-inserted in clause 5.5 of
FSA.

g) Incorporating the conditions in force majeure clause which are not

normally treated as force majeure in clause 17.1 of FSA for new power
producers were found to be unfair and discriminatory. These
conditions were stated to be modified during the pendency of
investigation.

21. The investigation, thus, concluded that the Opposite Parties have violated the
provisions of Section 4(2)(a)(i) of the Act by imposing unfair/ discriminatory
provisions in the relevant market.

Replies/ Objections/ Submissions of the parties

Replies/ objections/ submissions of the Opposite Parties

22. The Opposite Parties challenged the maintainability of the present proceedings on
the ground that the Informants are indulging in forum shopping. It was contended
that the instant case arises out of the terms of a negotiated and signed agreement
between CIL on the one hand and the Informants (and other power utility
companies, as the case may be) on the other. In addition to an arbitration clause
for resolution of disputes, the agreement contains adequate safeguards (including
involvement of the Office of the Coal Controller (CCO) and government coal
testing laboratories) for grievance redressal with respect to specific clauses such
as sampling and grade declaration. In the presence of proper and adequate
remedies available in the contract, it is inappropriate on the part of the Informants

Case Nos. 03, 11 & 59 of 2012 Page 11 of 56

 to approach the Commission for seeking redressal of purported disputes which are
essentially contractual in nature.

23. On merits, it has been submitted that the allegations made in the informations in
relation to the alleged abuse of its alleged dominant position are unfounded. In
relation to the relevant market, the Opposite Parties submitted that the DG’s
conclusion on relevant market being the market for production and supply of non-
coking coal in India is incorrect and the market should be supply of coal globally.
An analysis of the factors mentioned under Section 19(6) of the Act establishes
that the relevant market for the purpose of the present case is global. Further, there
are no regulatory trade barriers or any specific local requirements or national
procurement policies that restrict imports of coal into India in any manner.
Further, the DG, in his report has erroneously concluded that the port and railway
infrastructure for transporting coal from ports to power generation stations is
insufficient to handle large quantities of imported coal in India.

24. In terms of dominance, the Opposite Parties have made detailed submissions to
demonstrate that they cannot operate independently within the meaning of Section
4 of the Act. It has been submitted that CIL’s commercial behaviour is
significantly constrained because it does not have the ability to either choose its
customers or decide the quantity of coal that it can supply. Further, its pricing is
also constrained keeping the larger public interest in mind. It has been servicing
the demand of its customers despite them having not paid hundreds of crores in
outstanding dues. Therefore, considering all these facts, it has been submitted that
the DG’s findings that CIL is dominant is incorrect.

25. It was further submitted by the Opposite Parties that even if the relevant market
were to be confined to supply of thermal/ non-coking coal in India, CIL is not
dominant as it cannot operate independently of competitive forces or its
customers. Rather, its conduct is significantly constrained by directions received
from various stakeholders such as Ministry of Power, Ministry of Coal, Central

Case Nos. 03, 11 & 59 of 2012 Page 12 of 56

 Electricity Authority (CEA), National Thermal Power Corporation Limited
(NTPC) etc., all of whom exert significant influence and are involved in making
decisions that impact various aspects of their business. Therefore, the Opposite
Parties do not operate in a free market and their conduct and operations are
essentially regulated by the concerned Ministries. As CIL cannot be said to
possess any commercial freedom in determining its conduct in market, the
question of exercising dominance in the market does not arise.

26. In relation to the impugned terms of FSAs, it has been submitted that FSAs signed
between CIL and the power generation companies in 2009 were a result of
detailed bilateral negotiations and discussions between CIL, the power utilities,
and other governmental stakeholders. Following the implementation of NCDP,
CIL was required to produce the first drafts of the model FSAs, whereafter
various meetings were held to finalize the model FSAs for existing/ old power
plants, and wherein the power producers, either directly or indirectly through
CEA/MoP, made suggestions and counter-proposals which were accepted by CIL.

27. It was also submitted by the Opposite Parties that while a first draft of each of
FSAs was generated by CIL (with help from CRISIL), there were several rounds
of detailed discussions and deliberations between CIL and various stakeholders,
which were chaired by CEA and attended by power utility companies including
MAHAGENCO and GSECL, before FSAs for existing power plants were
finalized. It has been submitted that issues in relation to FSAs are now being
raised after availing benefits for years under these agreements.

28. In relation to the new power plants (that were to come into existence after
31.03.2009), CIL continued to receive comments, observations and objections
from various stakeholders in relation to various provisions of FSAs. CIL has
responded positively by accepting majority of the comments from various
stakeholders, which clearly indicates that the process of finalization of FSAs was
an ongoing process and CIL has always been open to making amendments to

Case Nos. 03, 11 & 59 of 2012 Page 13 of 56

 FSAs. It was also argued that benefits of FSA negotiated under CEA's auspices
were made equally applicable to all similarly situated power plants/ companies.

29. The Opposite Parties also made detailed submissions to demonstrate that the
clauses were fair and non- discriminatory.

30. Lastly, it was argued that the clauses being challenged by the Informants or found
by the DG to violate the provisions of the Act have never been invoked by CIL
and in any event, stand modified pursuant to the negotiations between the parties.
Therefore, no prejudice has been caused to the Informants or as a matter of fact to
other customers.

31. In light of the above, it has been argued by the Opposite Parties that there is no
merit in the findings of the DG or in the allegations of the Informants which hold
CIL and its subsidiaries to be in violation of the provisions of the Act. The
Opposite Parties have also submitted that the DG failed to appreciate that CIL had
been constantly engaged in working closely with all its stakeholders to modify
and finalize the conditions of FSAs in accordance with their demands, even
against its self-interest at times.

Replies/ objections/ submissions of the Informants

32. MAHAGENCO in its common reply in Case Nos. 3 and 11 of 2012 has broadly
supported the findings of the DG, and prayed to the Commission to reject the
objections filed by the Opposite Parties to the DG Report. Subsequently, written
submissions on similar lines were filed besides filing a written note by way of a
response to the submissions made by the Opposite Parties. Written submissions
and rejoinder were also filed by the Informant in Case No. 59 of 2012.

Case Nos. 03, 11 & 59 of 2012 Page 14 of 56

 Analysis

33. The following points arise for consideration in the present matters:

(i) What is the relevant market in the present case?

(ii) Whether CIL and its subsidiaries are dominant in the said relevant
market?
(iii) Whether the Opposite Parties have contravened the provisions of
Section 4 of the Act?

Point No. (i) : What is the relevant market in the present case?

34. In the present batch, the DG determined the relevant market as production and
sale of non-coking coal to thermal power generators in India.

35. It was, however, submitted on behalf of the Opposite Parties that the DG's
conclusion on relevant market is incorrect. It was contended that the relevant
market for the purpose of the present cases should be supply of coal globally. It
was argued that the DG has wrongly confined the relevant market to the market
for production and supply of non-coking coal for thermal power generation in
India without any analysis of the relevant geographic market. It was further urged
that the DG in the report has erroneously concluded that the port and railway
infrastructure for transporting coal from ports to power generation stations is
insufficient to handle large quantities of imported coal in India. Lastly, it was
submitted that, in case of power plants situated closer to the coast, sometimes it
may be more convenient to procure imported coal than to source it from CIL.

36. The Commission notes that the contention of the Opposite Parties that the relevant
market for the present purposes has to be global and cannot be confined to India,
is misdirected.

Case Nos. 03, 11 & 59 of 2012 Page 15 of 56

37. Also though the geographic market definition is a prerequisite to calculating
market share which is the most important criterion/ yardstick in the assessment of
dominance, it is not an end in itself but provides a framework for assessing
competition.

38. In this regard, the Commission also notes that imports do not automatically imply
that the sources of imports or potential sources of imports are to be incorporated
to widen the geographical definition of market beyond national borders. It is not
the absolute level of imports but the elasticity of imports to any change in market
condition that should be referred to for assessing the competitive constraints that
imports pose on domestic manufacturers.

39. In this connection, the Informants, while supporting the determination and
delineation of market by the DG, argued that the plant design/ specifications of
most Indian thermal power plants (which are designed for burning domestic coal
on account of factors intrinsic in the coal like ash content, moisture content etc.) is
such that imported coal can only be used in small proportion, blended with
domestic coal to achieve the requisite calorific value. Further, CIL, by virtue of its
dominant status, is in a position where it only supplies 90% (ninety percent) of the
Annual Contracted Quantity (ACQ) to Indian thermal power plants under FSA,
thereby forcing thermal power plants to acquire the balance 10% (ten percent)
needed to operate its plants from the import market. It was submitted that it is
ironical that CIL is seeking to rely on these import figures, which are necessitated
as a result of its abuse of the dominant position, in order to fallaciously define the
market as including imported coal. It was further contended that the terms of FSA
which govern supply of coal to most Indian thermal power utilities, ensure
dependence of the utilities on CIL to the tune of about 75% (seventy five percent)
of their total coal requirement. Lastly, it was submitted that imported coal is
substantially more expensive on account of import duty, sea freight, exchange
rate, price based on country of origin etc. and inadequate handling capacity of the
ports also makes direct handling of imported coal difficult.

Case Nos. 03, 11 & 59 of 2012 Page 16 of 56

40. The Commission notes that in terms of the provisions contained in Section 2(s) of
the Act, ‘relevant geographic market’ has been defined to mean a market
comprising the area in which the conditions of competition for supply of goods or
provision of services or demand of goods or services are distinctly homogenous
and can be distinguished from the conditions prevailing in the neighbouring areas.
In this regard, it is observed that whereas the Opposite Parties, on the one hand,
have contended that the relevant market has to be global, on the other hand, it has
equally been submitted that circumstances under which coal is produced and
supplied in India is inherently different from coal supply and production
conditions in other jurisdictions. Thus, looking at from any perspective, the
Commission has no hesitation in holding that the plea of the Opposite Parties that
the relevant market may be taken as global, is not only legally untenable, the same
is mutually contradictory and deserves to be rejected. As the condition for supply
of coal in the entire country is uniform and homogenous, hence the relevant
geographic market is entire India and imported coal cannot be considered a
substitute for domestic coal on account of several factors including the peculiar
design and specifications of the boilers used in majority of Indian thermal power
plants and further considering that imported coal is subject to customs duty and
other levies, rendering it more expensive than domestic coal supplied by the
Opposite Parties.

41. So far as the relevant product market is concerned, the DG, after considering the
physical characteristics of non-coking coal and its use in power plants, noted that
there is no substitute available for non-coking coal used by the thermal power
plants in India. Thus, the relevant product market in this case was taken by the DG
as non-coking coal, which is used primarily as a raw material for generation of
electricity by the thermal power plants. No serious challenge was made by the
Opposite Parties on this count.

42. In the result, the Commission is of the opinion that the relevant market in this case
is production and sale of non-coking coal to thermal power generators in India.

Case Nos. 03, 11 & 59 of 2012 Page 17 of 56

 Point No. (ii) Whether CIL and its subsidiaries are dominant in the said relevant
market?

43. Before adverting to the submissions made on behalf of the Opposite Parties
challenging the finding of dominance as noted by the DG, the Commission notes
the admissions made by CIL declaring itself to be the largest coal producing
company not only in India but in the whole world. This is evident from the
following statement of Chairman of CIL made in the Annual Report 2011-12
which was noted by the DG in the main investigation report (at page 55) and the
same is quoted below:

Coal India Limited (CIL) is a Maharatna Public Sector

undertaking under the ministry of Coal, Government of India
with headquarters at Kolkata, West Bengal. CIL is the single
largest coal producing company in the world and the largest
corporate employer with manpower of 3, 71, 546 (as on 1st
April, 2012). CIL operates through 81 mining areas spread
over 8 provincial states of India. Coal India has 467 mines of
which 273 are underground, 164 opencast and 30 mixed
mines.

44. It was submitted by the Opposite Parties that CIL is not dominant in the market as
it cannot operate independently of competitive forces or its customers. Rather, its
conduct is significantly constrained by directions received from various
stakeholders including Ministry of Power, Ministry of Coal, CEA, Planning
Commission, NTPC etc., all of whom exert significant influence and are involved
in making decisions that impact various aspects of CIL's business. It was argued
that CIL does not enjoy any commercial freedom in deciding the customers to
whom it should supply coal and the quantity of coal to be supplied. In this
connection, it was pointed out that Central Government promulgated NCDP in
2007 wherein it was envisaged that the Standing Linkage Committee (Long Term)
[SLC (LT)] was to continue to decide the linkages for supply of coal to core

Case Nos. 03, 11 & 59 of 2012 Page 18 of 56

 sectors. As a result, CIL has no role to play in determining who it shall supply
coal to and in what quantity, as the decisions of the SLC (LT) are binding on CIL.
It was further emphasized that the SLC (LT) comprises of representatives of CEA,
Ministry of Power, Ministry of Railways, NTPC etc., and it is SLC (LT) that
decides the linkage of coal for source of supply and quantum of coal to be
supplied by CIL which is based on the norms set by Ministry of Power/ CEA.
This clearly negates the possibility of any kind of dominance on part of CIL.

45. Reliance was also placed upon the decision of the Hon’ble Supreme Court in
Ashoka Smokeless case wherein it was observed that decisions with respect to
pricing by CIL should be made keeping in mind public interest to sub-serve
common good. Thus, it was argued that CIL is constantly working under the
pricing constraints imposed by the Hon’ble Supreme Court and is constrained
from pricing as per free market conditions.

46. It was further argued that CIL’s position of largest producer of coal is not because
of its commercial behaviour but the same is a result of the operation of law viz. the
Coal Mines Nationalization Act, 1973. CIL’s share of coal supply is gradually
decreasing due to increasing imports of coal and the consumers are looking to
alternative sources to meet their coal requirement, including captive coal blocks in
India and acquisitions abroad. Further, Singareni Collieries Company Limited
(SCCL) also caters to the demand of coal from consumers in India. The mere fact
that CIL has a large share of market for sale of coal in India does not imply
dominance, as consumers are not dependent solely on CIL in meeting their coal
needs. Reference was also made to the countervailing power exercised by various
stakeholders and it was submitted that FSA signed between CIL and the power
generation companies in 2009 was a product of detailed bilateral negotiations and
discussion between CIL, the power utilities and other governmental stakeholders.

47. Based on the above, it was submitted that as CIL does not operate in a free market
and consequently it does not have any commercial freedom in deciding its market

Case Nos. 03, 11 & 59 of 2012 Page 19 of 56

 conduct. A thorough analysis of various factors mentioned under Section 19 (4) of
the Act clearly rules out the possibility of CIL being dominant in the relevant
market.

48. The Informants, however, supported the finding of the DG holding CIL and its
subsidiaries to be in a dominant position in the relevant market and it was
contended that CIL and its subsidiaries are indeed vested with monopolistic
powers on account of the provisions of the Coal Mines (Nationalization) Act,
1973, a position which has been upheld by the Hon’ble Supreme Court in Ashoka
Smokeless case. The mere fact that SCCL - a joint venture between the
Government of Andhra Pradesh and the Government of India - also produces coal
for commercial sale in itself does not negate the fact that CIL and its subsidiaries
constitute a monopoly in the relevant market, in as much as SCCL has a negligible
presence in the relevant market. The market share (with respect to total coal
demand) of CIL in the financial year 2010-11 was 69% (sixty nine percent) as
opposed to merely 8% (eight percent) for SCCL, while the market share of the
two entities in 2011-12 stood at 63% (sixty three percent) and 8% (eight percent)
respectively. Further, it was stated that on account of the fact that the production
capacity of SCCL is miniscule as compared to CIL, only a few power generation
utilities and other consumers have been granted linkages to SCCL under NCDP,
on account of which non-linked power generation utilities can only purchase coal
from SCCL under the e-auction process i.e., at costs which are higher by
approximately 40% (forty percent) than coal obtained under FSAs.

49. It was further submitted that irrespective of the fact that SLC (LT) plays a major
role in the determination of linkages under the NCDP, the terms and conditions of
the supply for coal i.e., those of FSAs are decided unilaterally by CIL. As such,
the dominance of CIL and its subsidiaries in the market is not diminished on
account of the role played by SLC (LT).

Case Nos. 03, 11 & 59 of 2012 Page 20 of 56

50. It was also vehemently argued that power producers in India depend on CIL and
its subsidiaries for approximately 70% (seventy percent) of their coal requirement.
‘Other sources’ mentioned by CIL and its subsidiaries predominantly refer to coal
imports, which are not substitutes for domestic coal on account of various critical
factors, and which are resorted to only to fulfil the gap between the requirement of
thermal power producers and supply by the Opposite Parties. Most of the older
power stations, on account of extant policies, were designed keeping in mind
supplies of coal from indigenous sources, which are predominantly controlled by
the Opposite Parties.

51. It was pointed out that the allocation of captive coal blocks to a few power
generation utilities has not had any impact on the market share or the dominance
of CIL and its subsidiaries. Referring to the issue of acquisition of overseas coal
mines by Indian companies, it was contended that this is also not a factor affecting
the market position and dominance of CIL and its subsidiaries in as much as the
coal obtained from these mines is not a substitute for domestic coal. It was denied
that customers or other stakeholders exert any significant countervailing power or
influence on the Opposite Parties.

52. Further, it was submitted that the very fact that NCDP has mandated that all
supplies of coal are to be regulated through enforceable bilateral FSAs shows that
the said policy envisages a market-based structure based on commercial concerns.
The mere fact that NCDP has ‘imposed’ the task of meeting the entire domestic
demand for coal under FSAs on CIL, and that if need arises, CIL is expected to
resort to the import of coal to fulfil this demand, in no way detracts CIL from
operating independently in the relevant market, in as much as it is not the case of
the Opposite Parties that the supply of coal under NCDP (including imports) is to
be made by the Opposite Parties at sub-market or non-competitive rates. In fact,
imported coal to be supplied by the Opposite Parties under FSAs is to be supplied
at cost plus price (i.e., higher than the market price). In reality, the Opposite
Parties have never exercised their option to supply imported coal as part of the

Case Nos. 03, 11 & 59 of 2012 Page 21 of 56

 ACQ under FSA, which only goes to show that imported coal is not treated as a
substitute to indigenous coal, even by the Opposite Parties themselves. In fact, the
structure of FSAs under NCDP further strengthens the dominance of CIL and its
subsidiaries in the market, virtually making domestic thermal power utilities
dependent on the Opposite Parties for their operations.

53. It has been further argued that only the linkages under NCDP are determined by
SLC (LT) of Government of India, while CIL has a free hand in determining the
terms and conditions of FSAs keeping in mind its commercial interests. The
objects clause of the Memorandum of Association of CIL encapsulates the role of
CIL and provides that it must act ‘as an entrepreneur on behalf of the State in
respect of the coal industry and plan and organize production of coal as also its
beneficiation and the manufacture of other by-products of coal in accordance with
the targets fixed in the Five Year Plans and the economic policy and objectives
laid down by the Government from time to time’. As such, it was sought to be
suggested that CIL is driven by commercial interests in the supply of coal to the
thermal power producing utilities under FSAs, which finds reflection in the terms
of the said FSAs drafted by CIL.

54. It was further submitted that the chronology of events leading to the issuance of
the Presidential Directive dated 04.04.2012 reveals that the same was occasioned
on account of the failure of the Board of Directors of CIL to implement the
communication of Ministry of Coal with regard to revision of the trigger levels of
supply (for disincentive) in FSAs, which at that time stood at an unjustifiably low
figure of 50% (fifty percent). While issuing the said directive in relation to the
trigger levels, Ministry of Coal communicated to CIL that it was free to
incorporate suitable conditions in FSAs to protect its commercial interest. The
said directive was issued only in relation to the clauses pertaining to the trigger
levels, and the clauses relating to sampling/ testing remained arbitrary and un-
modified.

Case Nos. 03, 11 & 59 of 2012 Page 22 of 56

55. Further, it was argued that the inability to choose its own customers is no ground
to hold that an enterprise is not dominant or that it cannot abuse its position of
dominance in regard to its customers irrespective of the fact whether such
consumers are freely chosen or mandatorily stipulated by government/ regulator.
On pricing of coal, it was argued that substantially the entire market for coal in
India is dominated and controlled by CIL and its subsidiaries, and as such, the
argument that the price of coal in India is ‘lower than market driven prices’ is
fallacious. The same is true of the contention that the prices of coal in India is
lower than the prices of imported coal, which is a given, considering that imported
coal is subject to duty and additional costs of sea freight, exchange rate
considerations etc. In any event, it was submitted that imported coal cannot be
included in the definition of the relevant market in this case on account of the fact
that it is not a substitute for indigenous coal.

56. Having considered the contentions of both the Informants and the Opposite Parties
on the issue of dominance, the Commission notes that following the enactment of
the Nationalization Acts, the coal industry was reorganized into two major public
sector companies viz. CIL which owns and manages all the old Government-
owned mines of NCDC and the nationalized private mines and SCCL which was
in existence under the ownership and management of Andhra Pradesh State
Government at the time of the nationalization. CIL is a holding company and has
various wholly owned subsidiaries. Although CIL and its subsidiaries are
companies registered under the Companies Act, 1956 with their respective Board
of Directors, all policy decisions are taken by CIL Board and the coal subsidiaries
implement the decisions taken by CIL. Further, in view of the provisions of the
Coal Mines (Nationalization) Act, 1973, production and distribution of coal is in
the hands of Central Government and, as such, CIL and its subsidiary companies
have been vested with monopolistic power for production and distribution of coal
in India. In view of the statutory and policy scheme, the coal companies have
acquired a dominant position in relation to production and supply of coal. The
dominant position of CIL is acquired as a result of the policy of Government of

Case Nos. 03, 11 & 59 of 2012 Page 23 of 56

 India by creating a public sector undertaking in the name of CIL and vesting the
ownership of the private mines in it. The Hon'ble Supreme Court of India also in
Ashoka Smokeless case observed that coal companies are monopolies within the
meaning of the provisions of the Nationalization Act and they would be deemed to
be monopolies within the provisions of clause (6) of Article 19 of the Constitution
of India.

57. The mere fact that SCCL - a joint venture between the Government of Andhra
Pradesh and the Government of India - also produces coal for commercial sale in
itself does not detract the fact that CIL and its subsidiaries enjoy dominant
position in the relevant market in as much as SCCL has a negligible presence in
the relevant market. As submitted by the Informants, the market share (with
respect to total coal demand) of CIL in the financial year 2010-11 was 69% (sixty
nine percent) as opposed to merely 8% (eight percent) of SCCL, while the market
share of the two entities in 2011-12 stood at 63% (sixty three percent) and 8%
(eight percent) respectively. The DG has noted that the market share of CIL and
its subsidiaries in the relevant market is about 70%.

58. As noted earlier, imported coal is not a substitute which is used in small measure
to blend with domestic coal so as to achieve the appropriate calorific value.
Further, imported coal is more expensive than domestic coal on account of import
duty, sea freight, exchange rate and price based on country of origin etc.

59. Further, the plea of CIL that it is not able to act independently as the decisions
relating to supply of coal are taken on the basis of recommendations of SLC (LT)
and it cannot refuse to negotiate or influence the supply of coal, is misconceived.
The Commission notes that NCDP was formulated to regulate distribution of coal
in India in view of the limited resources and dependency of various sectors on
coal as a primary source of fuel. Thus, even though NCDP lays down the policy
for the supply and pricing for regulated industries like Power, Fertilizers,
Railways and Defence, it does not determine the terms and conditions for supply

Case Nos. 03, 11 & 59 of 2012 Page 24 of 56

 and CIL is at liberty to decide the quantity of coal, prices and terms in view of its
commercial interest within the parameters provided in NCDP.

60. After bestowing thoughtful consideration on the matter, the Commission notes
that CIL through its subsidiaries enjoys economic strength and the advantages of
monopoly vested by law. Even in relation to pricing of coal, no material was
placed to show that the prices are not determined by the Board of CIL. Prices of
coal for unregulated sector are market driven and kept at 30% higher than the
regulated sector. Further, coal sold through e-auction also yields greater prices.
NCDP lays down a limit of 10% for e-auction but the Opposite Parties have been
able to allocate higher quantity for e-auction in the commercial interest of the
companies. Moreover, in its commercial operations, there is sufficient
independence conferred upon CIL which is also exemplified by the fact that it has
been given the status of a Maharatna.

61. The Commission further notes that merely being a PSU and mention of social
objectives in the memorandum cannot negate the market power exercised by CIL
in view of the commercial freedom enjoyed by it.

62. It would be apposite to note that after the introduction of NCDP and
implementation thereof, the net profit of the Opposite Parties have grown
exponentially. In 2008-09, the profits were about Rs.2,000 crores whereas in
2011-12 it has increased to about Rs.14,800 crores.

63. In view of the above discussion, the Commission is of the considered opinion that
CIL through its subsidiaries operates independently of market forces and enjoys
dominance in the relevant market.

Case Nos. 03, 11 & 59 of 2012 Page 25 of 56

 Point No. 3 (iii) Whether the Opposite Parties have contravened the provisions
of Section 4 of the Act?

64. To appreciate the alleged abusive conduct of CIL and its subsidiaries, it would be
appropriate to make a reference to NCDP which necessitated signing of FSAs
giving rise to the issues arising therefrom and thereunder which have been
projected by the Informants in the present batch of informations.

65. The Government approved NCDP in 2007 which sought to facilitate supply of
assured quantities of coal to various categories of consumers in a regime of
enforceable obligations on the part of both the suppliers and consumers of coal.
The new policy took into consideration the regulatory regimes in which various
sectors of the economy were functioning for classification of consumers and
prioritization of coal supplies in terms of quantities. This policy also envisaged an
enlarged role for State Governments in the supply of coal to a large number of
small and medium industries. Under this policy, e-auction sale of coal was re-
introduced with certain modified features to encourage emergence of proper coal
market in the country. The policy was evolved based on extensive discussions
held by the Committee headed by Secretary (Coal) with all the stakeholders.

66. Under NCDP, the existing classification of coal consumers into core and non-core
sectors was dispensed with. Since power and fertilizer sectors are operating in a
price regulatory regime, coal, to the extent of 100% of the normative requirement
of the units in these two sectors, was to be supplied by the coal companies as at
present but only under FSAs. In view of the importance of the defence sector and
railways, their total requirement will continue to be met. For all other consumers
with coal requirement of more than 4200 tons per annum, 75% of their normative
requirement of coal would be provided under FSAs. Supply of coking coal to steel
plants would be based on FSAs as is done at present. In respect of small and
medium sector consumers, the existing cap of 500 tons of coal per year will be
increased to 4200 tons per year. It was further provided that since CIL and its

Case Nos. 03, 11 & 59 of 2012 Page 26 of 56

 subsidiaries cannot deal with a large number of such small and medium sector
consumers, State Governments will be required to take up the responsibility of
identifying such consumers and arranging supply of coal to them through their
designated agencies. To begin with, a quantity of 8 million tons of coal per year
will be made available to meet the requirements of the small and medium sector
consumers. State Governments will enter into FSAs with public sector coal
companies for sourcing coal for distribution through their designated agencies
which could include National Cooperative Consumers Federation, National Small
Industries Corporation, any State Government agency and established industrial
bodies.

67. An innovative feature of the new policy was the concept of Letter of Assurance
(LOA) to be granted by the coal companies to the project developers as against
the present system of granting coal linkages. Such LOAs will be converted into
FSAs after specific milestones are achieved by the project developers in a period
of two years in case of power plants and one year in case of other consumers.
Consumers granted LOA are required to furnish a Bank Guarantee equivalent to
5% of their annual requirement of coal which will be forfeited if the suggested
milestones are not achieved within the stipulated period. Bank Guarantee system
was introduced to encourage only genuine consumers and to prevent pre-emption
of coal linkages without developing the end-use projects in time as has been
happening currently. LOAs in case of power (including power utilities,
Independent Power Producers (IPPs) and captive power plants), steel (including
sponge and pig iron) and cement sectors are to be granted by the SLC (LT)
functioning in the Ministry of Coal. For all other consumers, LOA will be issued
by CIL. Under the new policy, CIL will be at liberty to import coal to meet their
supply commitments to various consumers and in such case necessary price
adjustments will be made by the coal companies.

68. Various provisions of NCDP were to be operationalized as per the following time
schedules:

Case Nos. 03, 11 & 59 of 2012 Page 27 of 56

 a) All the existing linked consumers shall enter into FSAs with respective
coal companies within a period of 6 months failing which coal supplies
can be discontinued.
b) State Governments shall put in place necessary institutional
mechanisms for supply of coal to small and medium sector consumers
as envisaged in the new policy within a period of 6 months.
c) Provisions of the new policy applicable to the new consumers will be
given immediate effect to.
d) E-auction sale of coal to be introduced within one month and until such
time the present scheme of sale of coal under e-booking will continue
to operate.

69. In the aforesaid backdrop of NCDP, a summary of the events leading to

finalization of FSAs and subsequent modifications may be noted to understand the
drafting of FSA and modification process:

a) In October 2007, the GoI announced NCDP. CIL nominated CRISIL

for drafting FSA for different classes of power producers.

b) In April 2008, CIL finalized FSA for existing PSU power producers.
The trigger level for penalty was proposed at 60% whereas the trigger
level for incentive was kept at 90% of ACQ. The term of agreement
was kept for a period of 5 years.

c) In June 2008, Model FSA for new power utilities (those who had not
started power generation but LOAs were issued to them up to March
2009) with trigger level of penalty at 50 % was finalized.

d) In April 2009, in view of the objections raised by various power

producers, a meeting took place between NTPC and CIL with CEA.
CIL agreed to modify some of the clauses of FSA for existing power

Case Nos. 03, 11 & 59 of 2012 Page 28 of 56

 utilities. The CMDs of CIL and NTPC issued a jointly signed
document.

e) In June 2009, the model FSA for existing private power producers was
issued with some modifications. The trigger level for penalty was
raised to 90%, at par with the performance incentive and the term was
increased to 20 years.

f) However, no corresponding changes were made in the model FSA for

new power utilities. The trigger level for penalty was kept at 50%
level.

g) In 2010-11, when the time of supply of coal and signing FSA for new
power utilities came as they started their production, they objected to
some of the terms and conditions of the model FSA, especially the low
trigger level for penalty at 50%.

h) Since no agreement on FSA was reached, CIL proposed to supply coal

to new IPPs through MoU as a temporary arrangement. The stand-off
on the terms and conditions of FSA for new utilities continued in 2010-
11.

i) In January 2012, CIL modified its prices for new grades of coal (G-1 to
G-17) in accordance with the notification regarding switching the
grading system of coal from UHV to GCV issued by GoI.

j) In February 2012, the Ministry of Coal issued direction to CIL for

modification in FSA for new IPPs and to increase the trigger level to
80% from 50%.

Case Nos. 03, 11 & 59 of 2012 Page 29 of 56

 k) In March 2012, CIL deliberated the modification as per the directions
of MoC, but unable to take any decision.

l) MAHAGENCO filed information before the Commission in January/

February, 2012 against CIL and its subsidiaries alleging the abuse of
dominant position by them.

m) In April 2012, Ministry of Coal conveyed a Presidential Directive to

raise the trigger level for penalty to 80%. CIL Board while approving
the revised FSA models with 80% trigger and 20 years tenure, decided,
a disincentive of 0.01% for non-fulfillment of 80% trigger level of
ACQ, with a 3 years moratorium from the date of signing of FSA.

n) The power producers did not agree with the penalty of 0.01% for
supply below the trigger level. They also opposed other changes made
in April 2012 in other clauses of FSA viz., force majeure, condition
precedent for seller, etc.

o) In September 2012, CIL further modified FSA to increase the amount

of penalty from 0.01% with certain conditions. Some of other clauses
were also modified.

p) In December 2012, CIL Board further modified some of the terms and
conditions objected by the buyers.

70. It was observed by the DG that FSA was prepared by CIL for different categories
of buyers without discussing with them. However, it was noted that whereas for
the existing power producers some modifications were made by way of mutual
agreement in 2009, no such negotiations were done in the case of new power
producers.

Case Nos. 03, 11 & 59 of 2012 Page 30 of 56

71. The Opposite Parties, however, contended that FSAs signed between CIL and the
power generation companies in 2009 were a product of detailed bilateral
discussions and negotiations between CIL, the power utilities and other
governmental stakeholders. It was pointed out that on 08.04.2009, a meeting was
convened by Chairman of CEA to discuss various clauses of FSA which was
attended by CIL, NTPC, and also various State power utilities, including
MAHAGENCO and GSECL. Various changes were made to the draft FSAs in
this meeting including the increase in trigger level and an increase in the duration
of FSAs. A large majority of the changes requested by the power utility
companies to the terms of FSA relating to sample collection, tenure, weighment of
coal, compensation for oversized stones, compensation for excess moisture etc.,
were accepted by CIL, as is evidenced from the statement jointly signed by NTPC
and CIL on 27.04.2009.

72. The Informants in Case Nos. 03 and 11 of 2012 have challenged the aforesaid by
arguing that the Opposite Parties have wrongly projected the role of CEA in
negotiations to draft FSA in as much as the mandate of CEA is from a different
perspective. It was denied that CEA has any mandate in the exercise of
negotiating the terms and conditions of FSAs. Similarly, it was argued that the
role of NTPC has to be segregated in the negotiations for the reason that NTPC
had parallel negotiations with CIL. It was submitted that NTPC did not have the
mandate to deal with the Opposite Parties on behalf of the power utilities. In any
event, the case of NTPC was sought to be distinguished from the other power
utilities on the ground that NTPC has mostly pit-head plants and therefore, is in a
position to exercise control over quality of supply. Even then, it was argued that
NTPC had complaints qua grade slippage leading to serious disputes with CIL
and its subsidiaries. The Informant in Case No. 59 of 2012 also alleged that
buyers and other stakeholders were not consulted while making the modifications/
amendments to FSAs.

Case Nos. 03, 11 & 59 of 2012 Page 31 of 56

73. On a careful consideration of the rival submissions, chronology of events
culminating into FSAs and on perusal of statements of power producing
companies as recorded by the DG, it appears that FSAs, envisaged under the new
NCDP to bring binding commercial obligations of the parties, were drafted by
CIL on its own and without any meaningful consultation with other stakeholders.
In this connection, the statement of Shri Manisankar Mukherjee, General Manager
(S & M) of CIL as recorded by the DG during the course of investigation may be
noted:

Q.7 The answer given by you shows that the terms and conditions in the
FSA for new power plants were not a result of joint negotiation with the
power producers. Even the changes made in April 2012 and September
2012 were not a result of negotiation process. Why the coal supply
agreement should not be prepared jointly in consultation with the power
producers?

Ans. FSA models are initially developed by CIL keeping into

consideration its production constraints and other commercial issues.
The model FSAs have been revised through a process of negotiation when
power sector raised reservations on any specific provisions through
which the 2009 model with 90% trigger level was evolved for the existing
power stations. Since the upcoming power stations have started coming
into commissioning stage in 2011 onwards, their issues have been
represented by Ministry of Power, CEA based on which and direction of
Ministry of Coal and issuance of Presidential directions, models have
been revised and considered by CIL Board in April 2012 and again in
September 2012 following which 33 power stations have so far signed
FSA in the new models.

Q.8 Whether any discussion with the representatives of power producers

has taken place before making the amendments in the model FSA in April
2012 and September 2012. If yes, please give details of all such meetings
with the power producers.

Case Nos. 03, 11 & 59 of 2012 Page 32 of 56

 Ans. Meetings on the issues of new FSA and coal supply sector per se
have taken place at various platforms particularly at the ministry level.
Most recent discussion in this regard in June 2012 among Ministry of
Power, Ministry of Coal and CIL following which the FSA model was
revised in September 2012.

Q.9: Whether any meeting has been convened by CIL on its own with the
stakeholders including the power producers for discussing the terms and
conditions of FSA in 2011-12 or during the current financial year.

Ans. I have to check the records and revert back.

74. Thus, it can be seen that the process of negotiations essentially involved Ministry
of Power and CEA who had no mandate or perspective or authorization to enter
into any bilateral engagement on behalf of the power utilities. Shri Mukherjee of
CIL virtually conceded that the meetings convened by CIL did not involve the
stakeholders including the power producers for discussing the terms and
conditions of FSA.

75. In the aforesaid backdrop of CIL drafting/ finalising FSAs unilaterally without
any meaningful consultation with the entire spectrum of stakeholders, the
impugned terms and conditions of FSA besides the conduct of CIL and its
subsidiaries may be examined.

Grading of Coal

76. During the course of investigation, the buyers/ power producers raised various
issues pertaining to the process of declaration and verification of grades of coal.
Such issues may be summarized as follows: (a) the declared grade/ GCV of coal
by the seller remains unverified since the Coal Controllers do not check it on
regular basis. As quality of coal changes with the process of digging/ mining,
GCV has to be ascertained regularly (b) in the absence of proper grading and

Case Nos. 03, 11 & 59 of 2012 Page 33 of 56

 sampling procedure, the coal companies are taking advantage by charging higher
prices (c) there is no obligation on coal companies to supply the quality of coal as
provided in FSA (d) there is no mechanism to address the grievances of
consumers regarding slippage of grade of coal (e) the base price of coal is
determined based on the declared grade and in case of quality slippage, the
purchaser only gets credit of part of the total cost incurred (since while allowing
credit, only difference of base prices is paid whereas no credit of the taxes and
duties paid due to higher grade declaration is given) and (f) lastly, it was
suggested by consumers that declaration of grade of mine/ seams should be done
with participation of a neutral body.

77. It is, no doubt true that credibility of declared grade is always a contentious issue
between the purchasers (power producers) and the coal companies, however, in
view of a suitable and independent mechanism provided by the Office of Coal
Controller (CCO) to redress such grievances, no interference is warranted by the
Commission in the present proceeding on this count. In this connection, the
statement made by Shri R.L.P. Gupta, General Manager (Quality Control), SECL
before the DG during the course of investigation may be noticed:

‘…[t]he CCO, a government organization, is vetting the proposed annual

declared grade and annual grades are declared only then. It is
mandatory to grade this annual grade declared on or before March 31st
every year, which is applicable for the subsequent financial year.

Further, the CCO is continuously monitoring independently coal being

supplied from various sources to various consumers. There is a provision
in the CCO's guidelines that, in case of any grievance against the grade
declaration or quality, consumers can formally lodge a complaint with
the CCO for redressal. In such event, the CCO verifies the grievance
verified in the presence of both the consumer and the coal company. It is
further stated that CCO draws a coal sample independently, in the

Case Nos. 03, 11 & 59 of 2012 Page 34 of 56

 presence of both the parties, to ascertain the genuineness of the
complaint. Since 2010, I have not noticed any such type of complaint.’

78. In this connection, it would be appropriate to note the relevant clauses of FSAs
(clause 2.4, for the existing and new power producers):

For existing power producers

Clause 2.4 of FSA – Notwithstanding the provisions of Clause 2.2 above,

in the event of any change in the Grade structure of Coal declared by the
Govt. of India or by any other authority empowered by the Government,
such changed Grade structure shall be binding and complied with by
both the Parties and shall come into effect as per such declaration.
For new power producers

Clause 2.4 of FSA - Notwithstanding the provisions of Clause 2.2 above,

in the event of any change in the Grade structure of Coal, such changed
Grade structure shall be binding and complied with by both the Parties.
The Seller shall within Fifteen (15) days of introduction of such change
provide a written notice to the Purchaser calling for a joint review of
such provisions of this agreement on which such change in the Grade
structure has a bearing, and upon such joint review, this Agreement shall
be duly amended in writing to bring it in full conformity with such
change.

79. It can be observed that while in earlier FSA, the change could only be made by
GoI, in the new FSA, no reference to GoI has been made. Thus, the changes
brought in FSA for new power producers do not appear to be unfair or
discriminatory. In the latest FSA, there is a mechanism for joint review by both
the parties. In this regard, the Commission observes that under the Colliery
Control Order, 2000 (now Colliery Control Rule, 2004), the functions of the CCO
include inter alia laying down procedure and standard for sampling of coal,
inspection of collieries so as to ensure the correctness of the class, grade or size of

Case Nos. 03, 11 & 59 of 2012 Page 35 of 56

 coal, issuing directives for the purpose of declaration and maintenance of grades
of a seam mined in a colliery and acting as the appellate authority in case of
dispute between parties arising out of declaration of grade and size of coal. In the
light of availability of such statutory mechanism to redress the issues arising out
of declaration of grading of coal, the mechanism can be described as neither
unfair nor discriminatory.

80. However, on the issue of remedy for grade slippage, the Commission notes that
clause 4.7 of FSA for existing power producers provided that if the grade
analyzed pursuant to clause 4.7 shows variation from the declared grade
consistently over a period of three months, the purchaser shall request the Seller
for re-declaration of grade, which shall be duly considered by the Seller.
However, the investigation revealed that in the model FSA for new power
producers this provision of re-declaration was removed by CIL. Such, differential
regime, on the face of it, is discriminatory and as such, is in contravention of the
provisions of Section 4(2)(a)(i) of the Act. The Commission, however, notes the
submission made on behalf of CIL that during the course of investigations, this
anomaly was removed.

Sampling

81. The nub of the dispute between power producers and coal companies in the
present batch of informations centres around the sampling procedure. It was
submitted on behalf of power producers that prior to the present FSA, sampling
was done at both the ends i.e. at loading and unloading points by an independent
party. CIL, however, while drafting model FSA made changes in the sampling
procedures.

82. No doubt, when the price of coal is based on the grade/ quality of coal, the buyer
has the right to get the grade for which he is paying the price. Hence, the

Case Nos. 03, 11 & 59 of 2012 Page 36 of 56

 importance of terms and conditions relating to sampling and consequent
assessment of grade and quality of coal hardly needs any reiteration.

83. The DG found such terms and conditions to be unfair and discriminatory being in
violation of Section 4(2)(a)(i) of the Act.

84. The Opposite Parties, however, strongly justified the requirement to conduct joint
sampling at the loading end only, which is stated to be carried out by CIL in a fair
and transparent manner. It was submitted that in accordance with the provisions of
the Sale of Goods Act, 1930, the title in goods passes on to the purchaser at the
point of delivery of the goods and, therefore, the seller is not liable for any loss or
damage to the goods during transit. Reliance was placed upon the decisions of the
Hon'ble Supreme Court of India in several cases, particularly in Marwar Tent
Factory v. Union of India, (1990) 1 SCC 71, where it was observed that the seller
is absolved of its responsibilities for the goods once they are loaded on to the
trains. As per the terms of FSA, the title to the coal passes at the point of sale,
which in this case is the loading point of coal onto the transportation (which is
chosen by and the sole responsibility of the customer). Accordingly, it was argued
that CIL cannot be held responsible after the coal is loaded on wagons, as the title
has passed.

85. The Informants however vehemently submitted that sampling on the loading end
is a process that is neither fair nor transparent in view of the dominant position of
CIL and its subsidiaries. It was further contended that though the argument that
the sampling ought to take place at the loading end in as much as the title of the
goods passes over to the consumer at the time the coal is loaded into the rakes
appears to be logical, it is incorrect to say that sampling should only be done at the
loading end and not at the unloading end as ‘CIL and its subsidiaries cannot be
held liable for the grade slippage, pilferage or adulteration of coal that takes
place when coal is being transported’.

Case Nos. 03, 11 & 59 of 2012 Page 37 of 56

86. It was submitted that while a reasonable amount of pilferage in quantity might
occur in transit, it is absurd to suggest that that the declared grade of an entire
wagon or train consignment of coal can change during the course of
transportation, or that coal by virtue of transit converts into coal of a different
grade. In other words, it was submitted that the grade of coal or its GCV cannot
change, no matter what distance it is transported for.

87. Similarly, it was contended that the argument of CIL that joint sampling ought to
be done at the loading end alone because here both the representatives of the
seller and buyer are present is also illogical in as much as the Opposite Parties can
very well depute its representatives to the unloading end for the process of joint-
sampling, just as the purchasers are expected to do so at the loading end. It was
further argued that the fact that the results of the testing on samples taken by some
purchasers (of their own initiative) at the unloading end has been grossly different
from the results of samples taken and tested at the loading end cannot be
attributable to specious explanation that the ‘customers themselves are not doing
their job properly by failing to control the process of transportation’. It was also
submitted that the process of manual sampling and testing at the loading end is
fraught with several practical and logistical problems on account of the dominant
market position of CIL and its subsidiaries and the attitude displayed by their
employees.

88. On testing, it was submitted on behalf of the Informants that contrary to the claims
made in the objections, the Opposite Parties neither have adequate technology, nor
sufficiently trained staff to carry out the testing in the prescribed manner in their
own in-house laboratories. It was submitted that the procedure of testing is most
opaque. The provisions with respect to the presence of representatives of both
parties are not followed strictly. Further, the established standards and protocols
of testing are not followed and there is no mechanism to ascertain whether the
results returned by the said laboratories actually pertain to the samples claimed to
have been tested. Further, while the Opposite Parties have provided figures for the

Case Nos. 03, 11 & 59 of 2012 Page 38 of 56

 various testing equipment purchased and expected to be purchased by them, they
have failed to state how many of these equipment are in a proper calibrated and
working condition. The lack of adequate technology was compounded by the
staunch refusal of the Opposite Parties to bring about fair terms for sampling and
testing in FSAs like sampling and testing at unloading port through an accredited
independent third party agency.

89. It was further asserted on behalf of the Informants that the claim of the Opposite
Parties that if despite joint sampling, customers are not satisfied with the results,
they are themselves to be blamed, is another example of the specious reasoning
put forth by the Opposite Parties to justify their indefensible insistence on
retaining sampling only at the loading end. It was submitted that the process of
‘joint’ manual sampling and testing as is currently being followed by the Opposite
Parties, is farcical, and of nominal value only, and even the prescribed procedures
in this regard were not being followed.

90. Lastly, it was contended that the allegation that that power producers are raising
issues related to quality ‘as they do not wish to pay for the correct price of coal
under the GCV pricing’, was baseless. It was submitted that consumers do not
mind paying as long as the contracted grade/ quality of coal is supplied by the
Opposite Parties. Further, the argument that the Opposite Parties are not receiving
quality complaints with regard to coal sold through the e-auction mode cannot in
any manner be construed to be an indication that the complaints with respect of
coal supplied under FSAs are false, as alleged.

91. On perusal of the records, it appears that prior to the current FSAs, the sampling
was done at both ends i.e., loading and unloading points by an independent party.
CIL while drafting the model FSA made changes in the sampling procedure
without consulting the power producers.

Case Nos. 03, 11 & 59 of 2012 Page 39 of 56

92. The Commission notes that CIL sought to justify the new sampling mechanism
due to the problems with the previous method of third party sampling raised by
the power companies besides arguing that the new system is fair as both parties
are involved in the sampling process. It was also argued that joint sampling at the
loading end was the method of sampling agreed upon with the power companies,
NTPC and CEA in 2009.

93. The Commission, however, notes that the justifications provided by CIL to adopt
the new mechanism are not founded on any basis whatsoever. Neither the DG
found any material which substantiates CIL’s claim that the power producers were
not happy with third party sampling nor any such material was brought to the
attention of the Commission. Further, the claim of CIL that the power producers
during the meeting held in April 2009 proposed for joint sampling at loading end
only was also found to be false in light of the minutes of the meeting and the chain
of events which clearly showed that in the model FSA circulated by CIL in June
2008, there was only provision for manual sampling at loading end in the joint
presence of both the parties. The power producers objected to this clause and
when the meeting under the chairmanship of CEA was held, NTPC suggested the
inclusion of provisions for mechanical sampling at loading end and where the
AMS are not functional with silo loading, the sampling to be done at unloading
end. The correspondence exchanged in this regard between the Informant
(GSECL) and CIL in this regard was also found to evidence that joint sampling
only at the loading end was resisted by the Informant.

94. A reference may also be made to the sampling procedure adopted by the only
other player in the relevant market i.e., SCCL to ascertain the industry practices in
this regard. The DG noted that while FSA of SCCL provides for sampling at the
loading end only, there is provision for analysis by both the parties at their
respective labs and for this purpose three sets of sample (one each for seller, buyer
and referee) are prepared.

Case Nos. 03, 11 & 59 of 2012 Page 40 of 56

95. Needless to add that when the price of coal is based on the grade/ quality, the
buyer has right to get the grade for which he is paying the price. In the aforesaid
backdrop and industry practice, the Commission notes that as per clause 4.7. (i) of
FSA, samples of coal are to be collected jointly. Further, as per clause 4.7.5, all
tools required for collection of joint samples, its preparation and all laboratory
facilities for the purpose of joint analysis of samples are to be provided by the
seller. The Schedule further provides that samples drawn at loading ends shall be
analyzed in designated laboratories at loading ends in the presence of seller and
purchaser. Thus, it is clear that the purchaser has practically no say in the
sampling process and becomes a mere spectator as all facilities and infrastructure
for the joint sampling are under the effective control of the seller.

96. In the result, the Commission holds that the terms and conditions relating to
sampling process are unfair and in contravention of the provisions of Section
4(2)(a) (i) of the Act.

97. The Commission has also examined the relevant clauses i.e., 5.7.1 and 5.7.2
which are applicable to the new power producers as well as existing power
producers. The Commission has also examined the relevant clause i.e., 4.7 which
is applicable to the PSUs. It is, thus, apparent that there are different provisions in
FSAs for sample collection for different categories of buyers. For existing PSU
power producers, there is provision for automatic mechanical sampling for coal
supplied through silos, whereas for existing private producer and new private
power producers, it was manual till 2012 when the words ‘or any suitable
mechanical arrangement’ were inserted in the agreements. The Commission is of
the opinion that the provisions for sampling of coal are ex facie discriminatory
between PSU and private producers and thus, in contravention of the provisions of
Section 4(2)(a)(i) of the Act.. The changes effected in 2012 to insert the words ‘or
any suitable mechanical arrangement’ – which are abstract and ambiguous besides
having the potential to cause conflict of interest - in respect of FSAs governing

Case Nos. 03, 11 & 59 of 2012 Page 41 of 56

 private producers are also not sufficient to bring any parity of treatment between
these two sets of producers.

Supply of ungraded coal

98. Coming to the issue of supply of ungraded coal, the Commission notes that
surprisingly the FSA does not impose a strict liability upon the Seller to supply
only the agreed grades. Instead, it only mentions about making adequate
arrangements to assess the quality and monitoring loading of ungraded coal.
Reference may be made to Clause 5.2 (clause 4.2 of the old power producers’
FSA) of FSA which provides that ‘the Seller shall make adequate arrangements
to assess the quality and monitor the same to endeavour that ungraded coal (GCV
of less than 2200 Kcal/ Kg for non-coking coal) is not loaded into the Purchaser's
containers. If the Seller sends any quantity of such coal, the Purchaser shall limit
the payment of cost of Coal to Re.1/- (Rupee one only) per tonne. Royalty, cess,
sales tax etc., shall, however, be paid as per the Declared Grade. Railway freight
shall be borne by the Purchaser.’

99. CIL argued that the responsibility to bear the freight charges for ungraded coal is
that of the buyer. Further, it was argued that customers were not prejudiced as
grade slippages are adequately compensated for under FSA. Further justifying the
fairness of the term, it was submitted that the mechanism provided for a nominal
amount of Rs. 1/- tonne in case of supply of any ungraded coal. This amount was
charged as the sale price and other associated taxes are levied, which are payable
by it to Central Government or the relevant State authorities. It was the
justification of CIL that the Government does not stop charging levies even if
ungraded coal was mined; therefore, it was only fair that the same was passed on
to the customer. It was submitted that, in any event, CIL has not supplied
ungraded coal and therefore this concern was largely academic.

100. Further, with regard to the allegation of MAHAGENCO on rakes of ungraded

coal received between 2009 and 2012, CIL submitted that no such issue was ever

Case Nos. 03, 11 & 59 of 2012 Page 42 of 56

 raised before it. It was pointed out that a detailed analysis of the coal rakes would
reveal that in relation to a vast majority of the rakes which were alleged to have
ungraded coal, the sampling results of these rakes were jointly signed by
MAHAGENCO's representatives and were within grade. On other occasions, it
was contended that since MAHAGENCO voluntarily chose not to participate in
the joint sampling process, there was absolutely no basis whatsoever in its claims
about supply of ungraded coal.

101. Having perused FSA, it is noted that the term does not mandate the seller to
provide the agreed grade and neither any strict liability is imposed in case of
failure to do so. It only mentions about making adequate arrangements to assess
the quality and for providing monitoring mechanism to prevent loading of
ungraded coal. Further, there is no provision for compensation if the ungraded
coal is loaded and transported. In case it is loaded, whether the buyers require or
not, they have no choice but to pay all the expenses on transportation, royalty and
taxes etc.

102. The Opposite Parties could not justify as to why the buyers were given no choice
but to pay for the expenses of ungraded coal, which was supplied in breach of the
agreed quality of coal under FSA. The finding of the DG in this regard is
unassailable and the Opposite Parties could not controvert the same. Suffice to
notice from the record of the DG that any goods which is not in conformity with
the sale agreement, should not be sent to the buyer, irrespective of the fact that the
goods supplied to the buyer may have less or more value than the good contracted
for. Charging any amount from the buyer on the ground that it has some value
cannot be accepted as fair if the buyers are not willingly to accept the same. The
ungraded coal may have some value and CIL may be able to sell such ungraded
coal in the open market to the willing buyer, but imposing a condition that if such
goods are transported by default, the cost has to be borne by the buyer does not
seem to be fair in any circumstances.

Case Nos. 03, 11 & 59 of 2012 Page 43 of 56

103. It may be noted that CIL’s conduct to force the buyer to pay for the cost of
ungraded coal because CIL failed to make adequate arrangement to avoid such
transportation goes on to show how the seller has upper hand on the buyers. The
Commission fails to appreciate as to why a customer would be forced to pay for
those goods which it does not require at all and was not part of the contract for
which purpose it was executed. Further, it is not out of place to mention that such
a provision also results in inefficient use of the limited resources of Railways. The
ultimate sufferer is the end user of power on whom the increased cost is passed
on. Thus, the terms and conditions in FSA regarding supply of quality coal should
be guided by the strict adherence to the desired quality and the measures relating
to grading, sampling and testing of the coal need to be incorporated in the
agreement to the satisfaction of both the parties.

104. It may also be noted that FSA is only meant for supply of graded coal. However,
the buyer is required to pay the expenses incurred by seller in production and
transportation of goods which are not meant to be supplied as per FSA. In fact, for
new power producers, even the GCV of the coal to be supplied is mentioned. Yet,
it was further found by the DG that the quantity of such ungraded coal is deemed
to be a supply of quantity coal for calculating the ACQ. The power producers
stated before the DG that the ACQ is fixed on the basis of PLF @ 85% at the
grade of coal meant for the boilers. However, if they receive coal of low GCV or
ungraded coal, the power generation would require additional quantity of coal to
produce the desired quantity of power. In other words, if 1 Kg. coal of 5000 GCV
is required to generate 1 watt, 2 Kg. coal of 2500 GCV shall be required for same
amount of power generation. Thus, it can be seen that if the coal of low grade is
supplied, the quantity of coal required and resultantly purchased by the power
producer increases.

105. The Commission further observes that the payment for transportation for the
unwanted goods i.e. ungraded coal by buyers does not even seem to be industry
practice. It is observed from the report that even the other player in the market i.e.

Case Nos. 03, 11 & 59 of 2012 Page 44 of 56

 SCCL reimburses the freight to the buyer in case of supply of ungraded coal
whereas the Opposite Parties do not allow even the reimbursement of
transportation cost of ungraded coal.

106. The Commission notes that the clauses relating to DDQ in FSAs gave leverage to
CIL to evade and avoid its liability for short supply. It is paramount that an FSA
should ensure timely delivery of contracted quantity of coal conforming to the
agreed grade. Any supply of coal from alternative sources casts not only financial
uncertainty but also uncertainty in terms of calorific value of coal so received. The
problem gets further compounded if DDQ is read together with the clauses
pertaining to ACQ, ungraded coal and oversized stones.

107. In the result, the Commission is of the considered opinion that the provisions
relating to sample collection and supply of ungraded coal in FSA are unfair and in
contravention of the provisions of Section 4(2)(a)(i) of the Act.

Oversized coal/ stones and compensation

108. It was alleged by power producers that, notwithstanding that the top size of coal
should not be more than +250 mm size as per terms of FSA, big lumps were
supplied by the Opposite Parties to the linked power stations causing delays in
unloading of coal rakes due to which demurrage charges were attracted. It was
averred that most of the loading sites of coal companies either do not have coal
crushers installed or the crushers remain out of order for long times. Additionally,
extra cost was incurred by power producers for arranging manual labour for
breaking of big lumps at its unloading site.

109. CIL, however, contended that the cap on compensation for stones at 0.75% of the
total quantity was not only fair but also proportionate. It was submitted that this
cap was applicable to the new power plants, for they were sourcing coal from
other sources apart from CIL i.e. captive mines etc. Therefore, stones separation

Case Nos. 03, 11 & 59 of 2012 Page 45 of 56

 was done at the time of unloading and since CIL has no control over such supplies
or what quantity of stones are received from such supplies or of knowing what
quantity of the stones found were actually from its supplies, a limited cap of
0.75% was inserted.

110. It is pertinent to note that during a meeting held in April 2009 existing power
producers had requested that the compensation of stones be based on actual
quantity and no restriction needs to be put in FSA. It appears that CIL agreed to
this proposal and removed the capping of 0.75% for compensation in the case of
existing power producer but did not amend the capping in FSA for new power
producers.

111. It would be appropriate to quote the relevant clause of FSA in this regard:

Clause 4.6.3

The Purchaser shall inform the Seller all incidents of receipt/ presence of
stones in any specific consignment(s) by rail, immediately on its detection
at the Delivery Point and/ or Unloading Point. The Seller shall,
immediately take all reasonable steps to prevent such ingress at his end.
The stones segregated by the Purchaser at the Power Station end shall be
assessed jointly by the representative of the Seller and the Purchaser at
the Power Station end for adjustments pursuant to Clause 9. 1.

Compensation for oversized stones shall be payable by the Seller to the

Purchaser month-wise, Power Station wise, in terms of weighted average
Base Price of the analyzed Grade of Coal for the equivalent quantity of
stones verified/ removed, as above provided that the quantity of stones
admissible for compensation shall be restricted to 0.75% of the total
quantity of Coal supplied progressively in a year by the Seller to the
concerned Power Station by rail after accounting for the weight
reduction towards destination end, weighment in terms of Clauses 5.2
and moisture compensation in terms of Clause 9.2.

Case Nos. 03, 11 & 59 of 2012 Page 46 of 56

112. The Commission observes that for any agreement to have a semblance of fairness,
it must necessarily provide for payment of compensation which is based on
mutual negotiations. Further, the clause must operate in a non-discriminatory
manner which is not the case here. It is also observed that CIL agreed to the
proposal of NTPC and removed the 0.75% capping in April 2009 but provisions
for new power producers were kept unchanged. The question that would arise is
whether the new power producers were different from the old ones and, if yes, to
what extent and in what manner. If not, what could be the possible reason for CIL
to keep the same clause intact for the new power producers and remove the same
for the old power producers. Such a conduct is plainly discriminatory besides
being unfair. Even the explanation provided by CIL for imposing such conditions
for different class of consumers in the same market, are found to be not based on
any intelligible differentia. The anxiety of CIL that the new power producers are
sourcing coal from other sources and hence mixing of supplies, is also not well
founded and such an apprehension cannot be a basis for discrimination. Moreover,
it appears from the DG report that CIL Board has proposed to remove the cap with
some conditions. This shows that CIL itself has realized the discrimination in the
process.

113. In the result, the Commission holds that the Opposite Parties have imposed unfair
and discriminatory terms and conditions regarding compensation of stones in
contravention of the provisions of Section 4(2)(a)(i) of the Act.

114. The Informants, in addition to challenging the clauses of FSAs as discussed

above, have also challenged the conduct of the Opposite Parties flowing
therefrom. In this regard, the Commission is of considered opinion that the
impugned conduct of the Opposite Parties essentially arise and emanate out of the
abusive terms and conditions in FSAs relating to quality assurance as highlighted
earlier in this order which are the trigger of all the grievances made by the power
producers in these proceedings. Since such terms have already been found to be in

Case Nos. 03, 11 & 59 of 2012 Page 47 of 56

 contravention of the provisions of the Act and further in view of the proposed
remedy ordering inter alia modification of FSAs, the Commission does not deem
it necessary and expedient to examine the specific conduct flowing from such
abusive terms in any greater detail which has been elaborated in the report of the
DG.

Other clauses of FSAs

115. During the course of investigation, the Informants and other power producers
raised concern about some other clauses of FSAs, which, according to them, were
one sided and unfair. In this regard, it was noted by the DG that some of the
clauses had already been modified by CIL during the pendency of proceedings.
However, an analysis of terms and conditions of FSAs which were alleged to be
unfair and discriminatory by all the power producers was undertaken by the DG.

Review of FSA

116. Grievance was made on behalf of the new power producers that the clauses in
FSA regarding review of FSA for them are unfair and discriminatory. To
appreciate the issue, it would be apposite to quote the relevant clauses:

Clause 2.5 of FSA for PSUs and old private Power Producers

In the event, the parties are unable to arrive at a mutually agreed

position with respect to the subject matter review in terms of Clause 2.3
within a period of three (3) months from expiry of each five (5) year term,
the parties shall refer the Matter to the Govt. of India and until a decision
from the Government of India is received, the Agreement shall continue
to be in force. The decision of the Govt. of India on the subject matter
shall be final and binding on both the Parties.

117. The provision for new private producers is as follows:

Case Nos. 03, 11 & 59 of 2012 Page 48 of 56

 If the review in terms of Clauses 2.3 does not result in a mutually agreed
position with respect to the subject matter of review, this agreement shall
nevertheless continue to be in force. However, if despite further efforts
the parties are unable to arrive at a mutually agreed position with
respect to the subject matter of Review, within a period of nine (9)
months from the date of notice in term of Clause 2.3, the aggrieved Party
shall have the right to terminate the Agreement subject to a further notice
of three (3) months given in writing to the other Party."

118. The following clauses are also relevant for appreciating the issue under
consideration:

The Clause 2.6 of FSA is as under:

In the event of any material change in the Coal Distribution system of the
Seller due to a Government directive/ notification, at any time after the
execution of this Agreement, the seller shall within seven (7) days of
introduction of such change provides a written notice to the Purchasers
calling for a joint review. If the Parties are unable to arrive at a mutually
agreed position with respect to the subject matter of review, within a
period of thirty (30) days from the date of notice, the parties shall refer
the matter to the Govt. of India for a decision.

Clause 2.6 for new private producers:

In the event of any material change in the Coal Distribution system of the
Seller due to a Government directive/ notification, at any time after the
execution of this Agreement, the seller shall within fifteen (15) days of
introduction of such change provides a written notice to the Purchasers
calling for a joint review. If the Parties are unable to arrive at a mutually
agreed position with respect to the subject matter of review, within a
period of thirty (30) days from the date of notice, the seller shall have the

Case Nos. 03, 11 & 59 of 2012 Page 49 of 56

 right to terminate the Agreement subject to a further notice of Thirty (30)
days given in writing to the Other Party.

119. The private producers alleged that the seller has been allowed to be a judge of his
own cause as per the clause which provides the seller with authority to unilaterally
terminate the agreement. That power to terminate on its own is unfair and unjust
and the same should be opined by an independent committee of members from
CEA, MoP, MoC in the case of any review of FSA or any disagreement/ dispute
on review, as suggested by the private producers.

120. The Commission notes that the empowering clause reserving the right to
unilaterally terminate the agreement without any scope of review by any
independent agency can hardly be described as fair in the extant regulatory
framework operating in the coal sector. Due to the statutory monopoly enjoyed by
CIL and its subsidiaries, the buyers are heavily dependent upon the coal
companies and insertion of such clause gives CIL through its subsidiaries an
overpowering advantage in the relevant market, which is patently unfair. The
formal equality in the clause giving the aggrieved party a right to terminate the
agreement is also effectively of no consequence in view of the tremendous
dependence of the buyer upon the dominant supplier of coal.

121. The DG noticed from the minutes of the meeting dated 27.04.2009 between CIL
and NTPC that earlier provision for PSUs was similar to the present provision for
new private producers. Due to the objections raised by NTPC, the provision for
reference to Government of India was incorporated. Meanwhile, CIL did not make
such changes/ modifications for the new private players.

122. From the conspectus of events as narrated above, the Commission is of the
considered opinion that CIL is resorting to unfair and discriminatory conduct by
inserting clauses in FSAs with PSU power producers vis-à-vis new private
producers. The clause for review of FSA is disadvantageous to new power

Case Nos. 03, 11 & 59 of 2012 Page 50 of 56

 producers in comparison to the clause for review of FSA in respect of PSU power
producers in the way that the former gives a unilateral right to terminate the
agreement to the Seller.

123. In view of the above, the Commission holds that the Opposite Parties have
imposed unfair and discriminatory terms and conditions in contravention of the
provisions of the Section 4(2)(a) (i) of the Act.

124. During the course of investigation, the DG was apprised that Board of CIL
considered this aspect in its meeting and approved amendment of clauses 2.5 and
2.6 to make similar provisions for all the buyers. The Commission notes this
aspect.

Force majeure

125. It was alleged by the Informants that the force majeure clause for new power
producers contained different conditions in comparison to the old power
producers. It was submitted by the power producers that following additional
terms and conditions have been inserted, which cannot fall under force majeure.
The relevant clauses in FSA for new power producers may be noticed:

Clause 17.1(i) – Global shortage of Imported Coal or delays caused by

supplier or no response to enquiries for supply of coal or logistics
constraints in transportation of Imported Coal;

Clause 17.1(j)

(i) Break-down of equipments and machineries.

(ii) Failure of contractors to deploy equipments and machineries.
(iii) Non-supply/ delayed supply of equipments or spare parts by vendors
(iv) Shortage/ cut in power supply

Case Nos. 03, 11 & 59 of 2012 Page 51 of 56

 (v) Non-supply/ short supply of explosives by vendors
(vi) Obstruction in transportation of coal from pithead to sidings by
agitations/ mob violence/ riot.

126. From a plain reading of the above clause, it is observed that the provision of force
majeure clause in the present case, is couched in an extensively wide language,
leading to the inference that the same have been put by the suppliers (the
dominant party) to the agreement. This clause seems to dilute the suppliers’
commitment for supply of coal. The fear of power producers that since this clause
envisages various circumstances/ events/ acts which gives room to the suppliers to
delay or not to perform their part of commitment on time cannot be said to be
unfounded. Accordingly, the same is held to be in contravention of the provisions
of the Section 4(2)(a) (i) of the Act.

127. It may, however, be noted that CIL appraised the Office of the DG that it has
modified the force majeure clause by removing such conditions after considering
the objections of consumers.

Prices

128. On the issue of excessive pricing, no such evidence could be found during the
course of investigation by the DG that revealed any unfair or discriminatory
pricing charged by the Opposite Parties in supply of coal in the relevant market.
Also, the Informants have not been able to produce any document to substantiate
on this allegation. Therefore, considering the fact that there is no material on
record to prove that CIL has charged excessive price on the Informants for the
supply of coal, the allegation stands negated.

Case Nos. 03, 11 & 59 of 2012 Page 52 of 56

 Terms and conditions relating to quantity and trigger levels

129. The DG examined the aspects relating to trigger levels for performance
incentives, conduct relating to quantity and source supply, issues relating to
diversion of coal for e-auction, restriction of production etc., and some other
clauses of FSA, however, no contravention was found by the DG on these scores.
The Informants have also not been able to produce any document to substantiate
on this allegation.

Conclusion

130. In view of the above discussion, the Commission is of the considered opinion that
CIL did not evolve/ draft/ finalize the terms and conditions of FSAs through a
mutual bilateral process and the same were imposed upon the buyers through a
unilateral conduct. Further, the Commission holds the Opposite Parties to be in
contravention of the provisions of Section 4(2)(a)(i) of the Act for imposing
unfair/ discriminatory conditions in the matter of supply of non-coking coal to
power producers, as noted above.

131. Accordingly, the Opposite Parties are directed to cease and desist from indulging
in the conduct that has been found to be in contravention of the provisions of the
Act. Further, it is ordered that the fuel supply agreements shall be modified in
light of the observations and findings recorded in the present order. For effecting
these modifications in the agreements, CIL shall consult all the stakeholders
including the Informants herein. CIL is also directed to ensure uniformity between
old and new power producers as well as between private and PSU power
producers. Specifically, CIL is directed to incorporate suitable modifications in
the fuel supply agreements to provide for a fair and equitable sampling and testing
procedure. CIL may also consider the feasibility of sampling at the unloading-end
in consultation with power producers besides adopting international best practices.

Case Nos. 03, 11 & 59 of 2012 Page 53 of 56

132. So far as imposition of monetary penalty is concerned, the Commission notes that
even though CIL enjoys operational commercial freedom, its conduct is
constrained by directions received from various stakeholders including Ministry
of Power, Ministry of Coal, CEA etc., all of whom exert influence and are
involved in making decisions that impact various aspects of CIL's business.
Moreover, pricing of coal is determined by CIL keeping in mind the larger public
interest and its social obligations. However, notwithstanding the overarching
policy and regulatory environment within which CIL has to operate, it has
sufficient flexibility and functional independence in carrying out its commercial
and contractual affairs and such factors do not detract from CIL and its
subsidiaries operating independently of market forces and enjoying undisputed
dominance in the relevant market. At the same time, these aspects cannot be
altogether ignored by the Commission while quantifying the penalty.

133. Also, the Commission notes the changes effected by CIL during the course of the
investigation and pendency of proceedings before the Commission in FSAs on
certain aspects, as noted in the order. In fact, it appears that even during the
pendency of appeal before the Hon’ble Competition Appellate Tribunal, CIL has
taken steps to improve the process of sampling of coal. Prior to October 2013,
FSAs for new and existing power plants provided for joint sampling and analysis
at the loading end. Pursuant to modifications in the sampling procedure made in
October 2013 i.e. before the passing of the order by the Commission, CIL
appointed independent third parties through an open tendering procedure with a
view to bring more transparency in the sampling process. Under this system, the
samples were collected and analysed by an independent third party at the loading
end, instead of joint sampling by seller and purchaser. In 2015, further
modifications were made by CIL whereby both CIL and consumers appointed
separate third parties for sampling and analysis. Both the third parties conducted
the sampling (collection and analysis) jointly at the loading end. Final laboratory
sample was to be divided into three parts: the first part was taken by the power
company for analysis at their end; the second part was taken by the respective

Case Nos. 03, 11 & 59 of 2012 Page 54 of 56

 subsidiary of CIL for analysis; and the third part, which may be used as
‘Reference Sample’ in case of dispute and would be analysed at a mutually agreed
NABL Accredited Laboratory, was jointly sealed and kept in the joint custody at
the loading end. The results of the analysis of the referee sample were binding on
both parties.

134. It has been further pointed out by CIL that following these changes, as a result of
continued demand from the power sector, a meeting was held on 28.10.2015
under the chairmanship of the Hon’ble Minister for Power, Coal and New and
Renewable Energy, which was attended by representatives of Ministry of Coal
(MoC), Ministry of Power (MoP), the Association of Power Producers (APP),
CIL, and the National Thermal Power Corporation (NTPC) in relation to third
party sampling protocol for coal dispatched by CIL’s subsidiaries to power
producers. Based on the decision in the meeting, the MoC, issued guidelines
regarding the revised sampling process. The revised process communicated by the
MoC envisages sampling to be carried out by CIMFR (Central Institute for
Mining and Fuel Research) at the loading end only. It was also decided in that
meeting that for future modification and inter alia to facilitate operationalization
of the guidelines dated 26 November, 2015, a committee was to be constituted,
which would interact at regular intervals. However, it is mentioned that at this
stage the Hon’ble Competition Appellate Tribunal through its order dated
17.05.2016 set aside the Commission’s order and directed for fresh consideration
by the Commission.

135. Thus, it cannot be gainsaid that constant steps are taken by CIL to improve the
sampling procedure and the Commission hopes and trusts that this process will
reach to its logical conclusion to the satisfaction of all the stakeholders.

136. On a holistic consideration of the matter, the Commission decides to impose

penalty on CIL by taking into consideration its consolidated accounts at the rate of

Case Nos. 03, 11 & 59 of 2012 Page 55 of 56

 1 % of the average turnover of the last three years. The total amount of penalty is
worked out as follows:
(in crore)
S. No. Name Turnover Turnover Turnover for Average turnover @ 1% of
for 2009-10 for 2010-11 2011-12 for three years average
turnover

1. CIL 52,252.09 55,101.42 69,952.33 59,101.94 591.01

137. The directions contained in para 131 above, must be complied within a period of
60 days from the date of receipt of this order. The Commission further directs CIL
to deposit the penalty amount within 60 days of receipt of this order.

138. The Secretary is directed to inform the parties accordingly.

Sd/-
(Devender Kumar Sikri)
Chairperson

Sd/-
(S. L. Bunker)
Member

Sd/-
(Sudhir Mital)
Member

Sd/-
(Augustine Peter)
Member

Sd/-
(Justice G. P. Mittal)
Member
New Delhi
Date: 24/03/2017

Case Nos. 03, 11 & 59 of 2012 Page 56 of 56