New Delhi: The government’s auditor is studying a decision of the government to allow the diversion of surplus coal by Reliance Power Ltd from the captive coal mines associated with the Sasan ultra-mega power project to another project of the company.

“The report is at a draft stage and comments have been asked from the power ministry. We will have an exit conference with the stakeholders to review the audit findings. Expect the audit report to be ready early next year," said a senior official at the Comptroller and Auditor General of India (CAG) who is aware of the development, but didn’t want to be identified.

An official at the power ministry confirmed that it had received queries from the auditor.

“CAG has sent us an audit query and observation on Sasan. They (CAG) have raised a lot of questions. The main issue is about allowing the diversion of coal. We will be formulating our responses shortly," said a top power ministry official who, too, did not want to be identified.

The auditor’s review of the decision of the ministerial group could further affect the credibility of the government—already at a low following a series of controversies regarding government contracts and policies.

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In response to an email seeking comments that was sent on Friday, Daljeet Singh, group vice-president (corporate communication) at the Reliance Group, sought time till “Tuesday afternoon" citing the “sensitive" nature of the matter. The group hadn’t responded to the queries till late Tuesday evening.

The decision to allow Reliance to use surplus coal meant for Sasan for another of its projects was taken in August 2008 by an empowered group of ministers (eGoM) comprising then finance minister P. Chidambaram, law and justice minister H.R. Bhardwaj, science minister Kapil Sibal, deputy chairman of the Planning Commission Montek Singh Ahluwalia and power minister Sushil Kumar Shinde. Decisions taken by such ministerial groups do not need to be ratified by the cabinet.

The scope of the audit is to review whether this is in keeping with the contract Reliance signed when it bid for and won the rights for the Sasan power project from the government. “The contract agreement seems to have been violated by diversion of coal," said the CAG official.

Original norms for projects such as Sasan (the so-called ultra-mega power projects) said that coal meant for them couldn’t be used by their developers for their other projects. Apart from developing the 4,000 megawatts (MW) power plant at Sasan in Madhya Pradesh, Reliance Power is also developing the 4,000MW plant at Chitrangi, also in the state. The firm has agreed to sell power generated at Sasan at 1.19 a unit, while it plans to sell the power generated at Chitrangi at 2.45 a unit.

The power ministry had nothing to do with this, said a second power ministry official.

“It was an eGoM’s decision, hence a policy matter. This ministry did not take the decision. This is the bottom line of our response. Also, the matter is being contested in the Supreme Court," added this person who, too, did not want to be identified.

Tata Power Co. Ltd, one of the losing bidders for the Sasan project, challenged the decision and has appealed to the Supreme Court after the Delhi high court upheld the government’s decision. The company’s argument, in several statements issued at the time, was that the ministerial group’s decision, coming as it did after the conclusion of the bidding process, “disturbed the fairness, transparency and the level-playing field". During the proceedings in the Delhi court, a government counsel told the court that Tata Power did not disclose that Sasan Power Ltd (the firm set up for the project) had sent a letter to all bidders in November 2006 stating that “incremental" coal from the three coal blocks for the project could be transferred or sold with “the sanction?of the Union government".

“The matter is sub judice and we would not like to comment. The Supreme Court has admitted the case and the matter will be heard expeditiously in February 2012," said a spokesperson for Tata Power in an email.

To be sure, after deciding to allow the use of surplus coal meant for the Sasan project for another project of the developer, the ministerial group sought to make this the new norm applicable to all ultra-mega power projects and all developers of these. It asked the coal ministry to issue necessary instructions to the effect, but this is yet to happen.

Initially, the Sasan project was awarded to a consortium headed by Lanco Infratech Ltd. However, this group was subsequently disqualified for violating bidding norms and the project awarded to Reliance Power in August 2007, on the condition that it matched Lanco’s bid.

Reliance Power has been the most successful company in terms of contracts to develop ultra-mega power projects. Of the four awarded till date, it has been the successful bidder for coal pithead projects at Sasan, and Tilaiya in Jharkhand, and the imported coal-based project at Krishnapatnam in Andhra Pradesh. The imported coal-based project at Mundra in Gujarat was won by Tata Power.

An expert said that while the matter would likely be decided by the Supreme Court, it does make sense for information regarding the use of coal to be made available to all bidders before they make their bids.

“On the one hand, it makes sense to allow usage of surplus coal from such coal blocks in view of the burgeoning gap between demand and supply for domestic coal, and on the other, such terms of allocation need to be made prudently prior to financial bid submission so that information symmetry is maintained and competition is on a neutral ground," said Dipesh Dipu, director of consulting, energy and resources, and mining at Deloitte Touche Tohmatsu India Pvt. Ltd.

The government wants to set up 16 ultra-mega power projects to meet the needs of one of the world’s fastest growing major economies. India has a power generation capacity of 180,000MW and expects to add another 62,374MW by 2012.

Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May 2010 front-page story in Mint that it disputed. HT Media is contesting the case.