Last month, the Competition Commission of India (CCI) imposed upon the Coal India Limited (CIL) and its subsidiaries a combined penalty of Rs 17,730 million for abusing their position in the market to supply non-cooking coal to thermal power generation companies.

The complaint against the CIL was filed by two thermal power generation companies — the Maharashtra State Power Generation Company Limited and the Gujarat State Electricity Corporation Limited. The two alleged that, inter alia, the CIL was supplying coal on onerous terms, supplying low-quality coal at high prices, forcing them to accept the low quality coal and not providing a fair dispute redressal mechanism.

Significantly, the CIL is the first public sector undertaking (PSU) to be penalized by the CCI. The decision is the first instance where the regulator has dealt with the concept of ‘competitive neutrality’ under the Indian Competition Law. As per the OECD, the “competitive neutrality [is a] regulatory framework (i) within which public and private enterprises face the same set of rules and (ii) where no contact with the state brings competitive advantage to any market participant”. It creates a level playing field among all players, whether these are private enterprises, PSUs or government departments engaged in non sovereign commercial activity.

Under the scheme of the Competition Act, there is no distinction between PSUs and private enterprises, both domestic and foreign, and the provisions of the Competition Act, relating to anticompetitive agreements (section 3), abuse of dominance (section 4) and combinations (section 5) are equally applicable to all PSUs. The CIL decision further underlines the equity of all enterprises under the Indian Competition Law regime.

It is important to note that under section 4 of the Competition Act, a dominant enterprise is one which enjoys a position of strength and can operate independent of the competitive forces operating in the relevant market. The market power of such an enterprise allows it to behave to an appreciable extent independently of its competitors and customers.

The CIL contended that its business operations are significantly constrained by directions received from various departments/ministries of the government, including the Ministry of Power and Coal, the Planning Commission of India and the Central Electricity Authority (CEA) and therefore it cannot be considered as a dominant enterprise acting independently of its competitors and customers.

The CIL submitted that under the terms of the government’s New Coal Distribution Policy 2007 (NCDP), it does not have anycommercial freedom to either choose its customers (pursuant to the NCDP, linkages for supply of coal is decided by the Standing Linkage Committee (Long Term) (SLC)) or the quantity of coal to be supplied to such customers. Further, the CIL has contended that as per the guidelines of the Supreme Court of India in Ashoka Smokeless Case, it has to price the coal keeping the larger public interest in mind and is constrained from pricing at free market conditions.

Rejecting the submissions of the CIL, the Commission held that pursuant to the Coal Mines (Nationalization) Act, 1973, CIL and its subsidiaries were vested with monopolistic power for production and distribution of coal in India. Thus, they have no competitive pressure in the relevant market. The Commission noted that for enterprises which have been created as a monopoly under a statute, there was no need for a separate analysis to determine the dominance of such enterprises in the relevant market.

The Commission disagreed with CIL that it does not have any market power in the relevant market since it is unable to choose its customers. It held that though linkages for supply of coal are decided by the SLC, the terms and conditions of the supply of such coal, (i.e., those of the FSAs) are decided unilaterally by the CIL. The fact that the government has imposed upon the CIL the task of meeting the entire domestic demand of coal for the regulated sectors, it should not restrict the CIL from operating independently in the relevant market, the Commission ruled.

It also disagreed with the CIL that it has no commercial freedom in deciding the prices of the coal supplied, and held that the NCDP only sets the broader guidelines within which the prices of coal are unilaterally decided by the CIL’s board of directors.

The NCDP requires the CIL to supply coal to the regulated sectors (e.g., power, defense, railways) at a lower rate than the unregulated sectors. Nevertheless, the CIL’s FSAs have provisions to significantly increase the prices of coal which is supplied to the regulated sectors on the fulfillment of certain supply commitments. The Commission reviewed extracts from the minutes of meetings of CIL’s Board to infer its absolute authority and flexibility to take decisions regarding pricing, quantity and terms of the FSAs without any interference from the government.

The Commission noted that the argument of CIL that it operates in a regulated market and consequently has no commercial freedom in deciding its market conduct cannot be accepted since that would mean that all regulated sectors be exempted from the abuse of dominance provisions under the Competition Act. The standard that the Commission shall apply while analyzing the alleged dominance of an enterprise (i.e., the ability to operate independently) is to examine if the said enterprise enjoys sufficient flexibility and functional independence in carrying out its commercial and contractual affairs.

Here lies the crux of the concept of ‘competitive neutrality’ of the decision, i.e., irrespective of the nature of ownership of an enterprise, or the overarching policy and regulatory environment in which it operates, the Commission shall focus on the actual commercial behaviour of the enterprise.

The Commission found the CIL and its subsidiaries to be dominant in the relevant market and to have abused such dominance by imposing unfair and discriminatory conditions of supplying coal to the said power companies. The Commission held that the FSAs were unilaterally drafted by the CIL without any meaningful consultation with the power generation utilities or any other stakeholders. The submissions of the CIL, that such FSAs are finalized after extensive consultations with the Ministry of Power and the CEA, were rejected since such governmental agencies have no mandate or perspective to enter into any bilateral engagement on behalf of the power companies.

The Commission found that certain clauses of the FSAs, including those relating to the sample and testing procedure of coal, capping of compensation relating to supply of poor quality of coal and review and termination provisions, to be unfair and discriminatory in nature. The Commission, besides imposing monetary penalty at three per cent of CIL’s average turnover, directed CIL to: (a) cease and desist from indulging in such discriminatory and unfair conduct and (b) modify the FSAs after consulting all stakeholders

The decision of the Commission has now been challenged by the CIL before the Competition Appellate Tribunal.