Or to:

Arantxa Fernandez
IPP Panel
Room 295 - Coal Directorate
Department of Trade and Industry
1 Victoria Street
London SW1H 0ET
Fax: 020 7215 2753

 

It would be helpful if those responding could clearly state who they are and, where relevant, whom they represent. Should respondents wish any part (or all) of their comments to be treated in confidence, this should be made clear in any electronic mail or papers. In the absence of such an instruction, submissions will be assumed to be open, and may be shared with others or published by Ministers, or placed in the Libraries of the Houses of Parliament.

2. IMPORT PARITY PRICE PRINCIPLES

1. The Terms of Reference of the IPP Panel require the Panel to set an import parity price (IPP) for each contract signed for sale of UK coal on or after 1 January 2000 in respect of which subsidy is being sought. For each contract the Panel will be asked to assess:

 

What cost, in pence per GJ, the buyer of that UK coal would have had to incur if it had entered fixed price contracts to secure coal of similar quality and on similar terms to those in the UK contract but from a non-UK supplier?

 

2. The Panel will assess the IPP on the basis of prices in hypothetical contracts finalised at the same time as the UK contract which is under consideration was finalised. This will ensure that the IPP determined by the Panel takes account of market conditions prevailing at the time the UK contract was being negotiated. The Panel in establishing the IPP will take account of all relevant factors including Price Adjustments discussed in Section 3 of this document, Shipping and Port issues (Section 4) and Inland Transport Costs (Section 5).

 

3. The international market for coal is characterised by producers or traders selling either Free on Board (FOB) cargoes of suitable size contracted by the purchaser, or on a Carriage, Insurance and Freight (CIF) basis with the seller arranging the ocean sea freight. In either case, coal and shipping costs are usually denominated in US dollars ($). Contracts for overseas coal seldom extend beyond one year, or if of longer duration they normally contain annual price reviews. This will present the Panel with difficult decisions in assessing IPPs for medium and long-term UK contracts that have annual indexation formulae.

 

4. The Panel would welcome advice on the availability and nature of longer-term contracts in the international market for coal. If such contracts are not available, the Panel will have to form a view as to the price that would have applied had they existed. Normally, one would expect the overall price to represent a discount to the current price when prices are high and expected to fall, and a premium to the current price when prices are low. Forward markets have recently started to emerge, which may provide some guidance. If any party can demonstrate that a longer-term international price was available or an international contract containing an indexation formula, at the time when the UK contract was being finalised, then the Panel will take this information into account in determining the relevant IPP. The Panel seeks the views of respondents to this issue.

 

5. A feature of UK coal purchase contracts is optionality, and the level of optional tonnage in a contract can be valuable to a buyer, particularly in a rising market. The Panel would welcome views as to how to value options in UK coal supply contracts compared with international contracts.

 

6. The starting point for establishing the IPP will be the Sterling price of imported coal at an appropriate port or ports delivered on a CIF basis. The Panel has considered ways of establishing this CIF price, and in the absence of a liquid and transparent market for world coal, a recognised, well established and independent index or price indicator appears to be the most logical solution. The lack of transparency in the world market for coal makes the auditing of any price indicator extremely difficult, and the Panel acknowledges that a formal audit trail of any chosen index will be impossible to establish. The Panel has considered the following international coal price indicators.

 

McCloskey Coal Information Services (MCIS) NWE Steam Coal Marker Price

 

7. The MCIS NWE Steam Coal Marker is a long established price indicator, first quoted in January 1991, and produced on a monthly basis until earlier this year when the frequency was changed to weekly postings. For historical comparison and indexation purposes, the monthly price is taken from the first price quoted each month. The monitored price is a spot price delivered CIF to NorthWest European ports, in $/te for 6,000 kcal/kg (25.13 GJ/te) coal, with 1% or below sulphur content, on a Net as Received (NAR) basis. The marker is prepared through regular communication with key market participants. Input for the marker is collected up to 3pm (Central European Time) on the last business day of each week for publication on that day. To maintain balance and consistency and to ensure that no one business sector is dominant in the survey, a wide variety of major buyers, sellers, traders and brokers are contacted each time the index is produced. Prices that are quoted on a FOB basis are converted to CIF using freight rates supplied by the London ship-broking community servicing the relevant routes for delivery within the appropriate time frame. The origin prices are then weighted against the volume of coal imports into NW Europe as reported by the European Commission (the method of weighting is currently under review).

 

8. The coals monitored are all steam coals for power station and general industrial use for delivery within 90 days. Spot prices are defined as one off purchases from single barge cargoes to large cape size vessel cargoes. NorthWest Europe is defined as shipments, of the most economical vessel size, into ARA, France, Belgium, North Sea Germany, Ireland and the UK. The index captures the majority of traded coals, but excludes higher sulphur coals on the basis that these require much lower sulphur material to blend with them to ensure an acceptable power station fuel. All coals are converted to a standard value of 6,000kcal/kg NAR.

 

9. The Panel has certain concerns about the way the information for the MCIS marker is collated and would have been more confident if the information gathered had been independently audited. The MCIS steam coal marker is however widely used and has become respected throughout the coal community.

 

European Union Power Station Contract Index

 

10. The European Union’s (EU) power station contract index reports delivered prices of coal to utilities throughout the Union. The index is produced on a quarterly basis, but the time delay in the reporting of trades and deliveries extends the elapsed time of delivery to the time it is reported to at least six months. Analysis of the movement of the EU index shows reasonable correlation with the MCIS index, but the delayed nature of the information is apparent.

 

Energy Argus International Index

 

11. COAL Daily, a Washington, USA publication launched the International Index in December 1998 to track the price of coal shipments to NorthWest Europe. Sources are asked to give their best price estimates for the spot shipments on a CIF basis to ports of Amsterdam, Rotterdam and Antwerp with 6,000 kcal/kg coal at 1% sulphur for delivery within 90 days. The Index reflects the current price of both direct and "over-the-counter" (OTC) spot coal market transactions, though transactions completed since the previous published index are considered. Input is collected up to 3pm on the last business day prior to publication from contacts with most or all of the major buyers, sellers, traders and brokers. To prevent any chances of "gaming" or attempts to sway the index, the top and bottom 10% of responses are discounted.

 

Tradition Financial Services API#1 and API#2 Indices

 

12. Tradition Financial Services (TFS) is a leading broker of over-the-counter physical and derivative products established in 1985. It has developed hedging and risk management transactions in coal from offices in London, Stamford USA, Frankfurt, Singapore and Sydney. The first TFS API#1 index was launched in February 1998 as a monthly basket index for the Amsterdam/Rotterdam/Antwerp (ARA) coal price.

 

13. The prices used to compile the API#1 index are the FOB barge quotes published by Coal Week International (CWI) and South African Coal Report (SACR) along with the MCIS Steam Coal Marker as published in International Coal Report. The CWI and SACR prices are adjusted to the MCIS basis of 6,000 kcal/kg CIF, NAR and by a flat $2 to adjust barge quotes to a full cargo basis. The three prices are then averaged with no weighting to arrive at the TFS API#1 index.

 

14. The TFS API#2 is a basket index for the ARA coal price found to be more reliable than the TFS API#1 index, and has become a benchmark against which all CIF ARA financial transactions have been marked to the market. It was first produced as a monthly index in December 1998, but from 6 November 2000 has been published weekly and from 17 November issued on a daily basis. The prices used to compile the index are the simple average of the weekly MCIS Steam Coal Marker numbers published in the International Coal Report and Energy Argus’ International Index published in COAL Daily. The basis of API#2 is 6,000 kcal/kg, ARA, CIF, NAR. The TFS API#2 Monthly index is the average of the weekly API#2 numbers for those Fridays falling within that calendar month.

 

WEFA Monthly Spot Coal Price Monitor

 

15. WEFA Energy based in London and Boston USA are a team of consultants and analysts who provide a wide range of economic and market consultancy and research services on coal and other energy industries. The WEFA Monthly Spot Steam Coal Monitor available to their clients, provides indices for South African, Colombian and Australian coal on an FOB basis. It is produced using steam coal prices provided by the European buyers of imported steam coal. They are canvassed for the price they would pay for a spot capesize cargo of coal for delivery within the next three months for coal from the three regions and based on the following qualities: South Africa 6,000 kcal/kg NAR, Colombia 11,600 Btu/lb GAR, Australia 6,000 kcal/kg NAR. Prices are quoted in US$/GJ and are tracked for each country of origin, together with freight rates sourced from London based shipbrokers to produce delivered prices on a Carriage and Freight (C&F)basis

 

16. WEFA also produce an index comprising 60% South African, 30% Colombian, and 10% Australian coals and plan to publish a rolling two-year record of price movements every month. The WEFA monthly indices have been used as a benchmark index for derivative trades and also for physical coal transactions.

 

Standard European Coal Agreement (SECA)

 

17. The SECA contract was launched in late 1999 and in recent months has gained substantially in both credibility and usage. It is a standardised FOB barge ARA contract for 5,000 tonnes with a quality specification of 6,000 kcal/kg NAR which reflects the average steam coal grade used in Europe. It can be fine tuned by agreeing premia and discounts for individual specifications. The contract is for physical delivery with payment due in five days. However, it is also used for financial transactions and total physical and financial trade in the on-line and OTC markets has exceeded 2m tonnes in a single week. There is therefore sufficient liquidity in the market to enable the entrance of financial traders. Whilst there may be some concerns about the applicability of a standard European barge sized contract to UK circumstances, the value is derived from actual market transactions and it is traded in blocks. It is also traded forward for up to a year. Tracking the contract's value may therefore provide valuable information on the NW European market in general.

 

The Panel’s Use of Coal Price Marker Indices

 

18. In considering the available indices and marker prices, the Panel has examined imported prices of coal over periods to look for potential areas of divergence, and the timely presentation of information. The EU Index was considered to lag the market. The TFS marker prices are both averages of the MCIS marker with other indices in an attempt to temper any sudden movement. The SECA index has become widely used in recent months. It is apparent that the MCIS marker and the WEFA C&F, the API#2, and the SECA indices all provide reasonably consistent information on which actual trades by market participants have been based. The Panel will be undertaking further close analysis of the bases of, and the recent trends shown by, all of these indices to determine which, or an average of which, is the most appropriate for its purposes. In the meantime, the Panel invites the views of respondents on these indices. At the end of the consultation period the Panel will decide which basis to use, and will make this known in the final statement describing its approach.

 

19. Having selected one or more indices, the Panel proposes to use as the starting point in deriving a relevant IPP, the average over the three-month period immediately prior to the finalisation the UK contract in respect of which subsidy is being sought. The Panel considers that three months is an appropriate period within which the UK contract would be negotiated, and it would therefore seem reasonable to average the import marker price over a similar period. Whilst the Panel thinks that this is the most appropriate method of assessing the IPP, the Panel will look at any other information that is brought to its attention. The Panel invites comments on the appropriateness of this approach to establishing the starting point for determining an IPP.

Sterling/US Dollar Exchange Rates

 

1. The price of international coal is usually negotiated in US Dollars and the Panel has discussed various methods of handling the Sterling/US Dollar exchange rate risk. The Panel considers that traditionally, UK generators handled exchange rate risk by forward purchase of US Dollars at the time that the contract to purchase imported fuel was finalised. The method of financial risk management was essentially a matter for the treasury department of UK companies who might modify this approach following consideration of forward currency exchange rates. Most UK coal generators are now either subsidiary companies of US based corporations or have substantial assets that are US based and the traditional methods of financial risk management may not be appropriate in the current climate. Because this is a matter for individual companies and can be managed, the Panel does not propose to ascribe a specific value to exchange rate risk.

 

2. The Panel must however fix the time of the currency exchange in an appropriate manner to derive the IPP. The Panel therefore proposes to use the forward Sterling/US Dollar exchange rate for the midpoint of the duration of the coal contract in respect of which subsidy is being sought. To allow for the period over which the UK contract is negotiated, the average of this daily forward rate as published in the Financial Times over the three month period prior to the finalisation of the UK contract, will be taken to fix the exchange rate. The Panel invites comments on the appropriateness of this approach.

• Calorific value
• Ash, moisture, sulphur, chlorine and heavy metal content
• Ash characteristics
• Consistency
• Payment terms
• Differential loss of heat content
• Delivery terms and penalties

1. The Panel believes that some of these factors can be quantified, others are more difficult, and some can only be assessed from a qualitative point of view.

 

Calorific Value

 

2. The most important parameter in valuing a coal is its calorific value. To take account of this factor, coals will normally be valued on a p/GJ NAR basis rather than a £/tonne basis. Power stations are capable of burning coals within a reasonable range of calorific value. In the case of power station contracts, the Panel does not propose to make any secondary adjustments to an international price where the heat content of the UK coals fall within a range of 22.5 to 27.5 GJ/te. If any UK coals are considered that have calorific values outside this range or have other unusual characteristics, as is possible for example in South Wales, the Panel will consider them on a case by case basis, taking account of any information that the receiving customer is willing to provide. With coals for specialised industrial use, the Panel will need to examine each case individually and modify its approach where appropriate.

 

Ash

 

3. The ash content of a coal is primarily taken into account in the calorific value of the coal. The higher the mineral matter content, the lower is the calorific value. However, it has to be acknowledged that UK coals tend to be of a higher ash content than international coals. Typical deepmined UK ash contents are around 15% compared to a typical 10% on the world market. Power stations and some other customers do incur additional costs in the handling of ash through the their systems. The value or cost of the furnace bottom ash and pulverised fuel ash is very much customer specific depending on the arrangements for ash disposal and opportunities for sale of ash. In assessing a contract for an IPP, the Panel would be pleased to receive advice on this point from the customer receiving the UK coal. In the absence of specific advice, the Panel does not propose to make an adjustment to the international price to take account of different ash levels unless the ash content of the UK coal is particularly high or low.

 

Moisture

 

4. The moisture content of a coal is primarily taken into account in the calorific value of the coal since calorific values will be taken on a net, not gross, basis. The Panel is not aware of price adjustment provisions for moisture content in UK coal supply contracts over recent years, and does not propose to make such an adjustment to international prices.

 

Sulphur

 

5. The sulphur contents of UK coals vary significantly. Sulphur levels in English coals can be over 1.5% compared to a typical maximum of 1% for international coals purchased by UK customers, although generators have used some higher sulphur international coals. In some circumstances higher sulphur levels may be helpful to power station operation, especially precipitator performance. However, the main importance of the sulphur content of a coal lies in its impact on plant and company SO₂ emissions. This is very plant specific and is dependent upon whether the plant has flue gas desulphurisation (FGD) equipment or other sulphur dioxide abatement technology installed.

 

6. As a general principle, the Panel believes that higher sulphur coals have a lower value. In purchasing a high sulphur coal, a customer may be constraining his flexibility to operate, or may limit his options by having to purchase a much lower sulphur international coal within his overall portfolio. In addition, for power stations with FGD, the higher the sulphur the higher the limestone supply, works power and gypsum production. The Panel will consider evidence in the public domain on the additional costs of running FGD equipment at higher sulphur levels, including evidence presented to the Environment Agency. The Panel would particularly welcome evidence from generators on this issue.

 

7. The Panel does not believe that it is possible to make a universally applicable monetary adjustment on grounds of sulphur to equate an international coal to a UK coal. However, the Panel recognises the increasing importance of the sulphur content of coal and will assess on a case by case basis whether there is a material incremental cost in burning higher sulphur UK coal compared with lower sulphur imported coal. In examining individual contracts, the Panel will be pleased to receive advice on this point from the customer receiving the coal.

Chlorine

 

1. The chlorine content of UK coals varies considerably. Most deepmined coals have higher chlorine contents than opencast coals, which are close to international chlorine levels. Most UK power stations have been designed and maintained to be able to take the higher chlorine content of a blend of high and lower chlorine UK coals. Historically UK generators set chlorine limits on a plant by plant and company wide basis. The plant by plant limits ensured chlorine would be below levels that would cause enforced outage from corrosion and tube leaks. The company wide limits ensured that sufficient flexibility existed in managing a portfolio of coals to a number of stations. With the plant divestments in recent years the company wide limits are less relevant.

 

2. Contracts between UK suppliers and electricity generators have historically included downward price adjustments for chlorine contents above certain base levels, but have not in general included upward adjustments for chlorine contents below this base. The costs to generators of plant outages outweigh the level of historic chlorine adjustment provisions. The Panel is of the view that generators will buy a portfolio of coals that will not cause major operating problems. It is not proposed that any adjustment will be applied to take account of chlorine levels in UK coals unless these are particularly high, say above 0.5%.

 

Heavy Metals

 

3. The Environment Agency is progressively tightening limits on the heavy metal content of fuels for generation, and generating companies have to take account of heavy metal contents in their procurement decisions. However, this is not a pricing issue. A coal is either acceptable or not. The Panel does not propose to make any price adjustments in respect of heavy metal contents.

Ash Characteristics

 

1. The propensity of individual coals to cause slagging or fouling is very difficult to quantify or value. Typically individual power stations or other customers would look to test burn individual coals before making major contract commitments. A coal therefore is either acceptable or not to an individual customer. There is no basis for applying any price adjustment for coals with a propensity to slagging or fouling.

 

Consistency

 

2. International coals, due to their reduced mining variability and blending at the port of loading, tend to be of a high consistency. UK coals are generally more variable and the difference in quality between individual train deliveries can be greater. However, provided that deliveries are within a reasonable band, this should not impose additional costs on the generator. Unless purchasers come forward with evidence on this point, the Panel will not include any consistency adjustment in the conversion of international prices to UK terms.

 

 

Payment Terms

 

3. There is a significant difference in payment terms between international and UK coals. International coals (unless bought through a UK trader) are generally sold on a FOB basis and payment is due up to 2 weeks after the vessel is loaded. In some cases, this can result in payment even before the coal reaches the UK, let alone before it is delivered to the customer. Typically imported coals may be held in stock at the ports for anything up to 60 days. The time between payment and delivery of an international coal to a UK customer can therefore be significant. UK coals are typically invoiced after delivery to the power station with payment made in the middle of the month following delivery. The difference between these payment terms will have some impact on customers' working capital, albeit in most cases small. The Panel will look at the payment terms in any contract put before it and assess the difference between these and typical international contract terms at LIBOR plus 1%. In general, the magnitude of this difference will probably not be material, and the Panel would not normally expect to make any adjustment to the IPP in respect of payment terms.

 

Differential Loss of Heat Content

 

4. For international coals the determination of quantity and quality is usually undertaken at the load port. Quantity and quality are also measured at the receiving power station. It is not unusual for there to be a shortfall in heat delivered to the final customer of over 1%. The actual level of shortfall will depend upon the period of stockholding and the amount of double handling. The more that these take place, the higher the heat shortfall will be. For UK coals, the quantity and quality is usually determined at the power station or colliery/loading point. It is not known whether customers take account of differential loss of heat content in comparing UK and international prices, and the Panel will be pleased to receive advice on this point.

Delivery and Penalty Terms

 

1. The Panel recognises that the rate of delivery and penalty clauses in smaller UK contracts may be such that there is no realistic import equivalent. The Panel will consider each such case on its merits.

Other Adjustments

 

1. Some other factors have been raised that could impact upon the value of an IPP, in particular:

• UK coals have traditionally attracted a premium over international prices in the UK market. Should any premium be attached to UK coals?

• Will the UK subsidy scheme have any impact on the world market price of coal?

1. There is little doubt that, over recent years, power generators have been prepared to pay a premium for coal supplies from the UK. The premium covered issues such as security of supply, short supply lines and ease of communication, flexibility of deliveries, known quality parameters, longer-term security considerations as well as the national and local public relations value of supporting UK production. However, the level of premium has never been quantified, and it has been wrapped up in the conclusions of coal contract negotiations. Recent developments in the generation market, with the divestment of coal fired plants and the construction of new ports, suggest that any UK premium going forward, if any, would be small and the Panel does not propose to make any specific adjustment for this factor.

 

Impact On World Market Prices

 

2. In 1999 world seaborne trade of steam coal amounted to 302 Mt. UK imports of steam coal totalled 12 Mt in 1999, i.e. only 4% of the international market. Whilst the total tonnage of coal that is likely to seek support under the UK subsidy scheme is not known at present, and will vary from year to year, the Panel is of the opinion that the impact of the subsidy arrangements on world market prices will be small. The impact of state aids elsewhere in Europe, in Germany, France and Spain, is far more likely to be having an impact on world market prices than the arrangements in the UK. The Panel will not take this factor into account in assessing an IPP.

 

Conclusions

 

3. It is apparent from the above analysis that there are several factors which add or detract from the value of an international coal compared with a UK coal of equivalent calorific value.

 

4. Generally speaking, the lower ash, sulphur and chlorine levels, and consistency of international coals enhance their value, therefore it might be appropriate to adjust international prices downwards to equate with UK coals in calculating an IPP. On the other hand, different payment terms, differential loss of heat content, and some of the factors underlying the historic "UK premium" such as short supply lines, easier communications, flexibility of deliveries, and known qualities enhance the value of UK coals. Many of these factors are specific to the customer concerned and his plant, many are unquantifiable, and it would not be possible to calculate a set of universally applicable adjustments.

 

5. With the exception of reflecting the impact of higher UK sulphur and chlorine levels in specific cases, and possibly an adjustment for differential loss of heat content, the Panel does not propose as a general rule to make adjustments to the international price in calculating an IPP. However, the Panel will examine each contract individually to see whether there are any other particular features of the coal or the contract which merit specific consideration, and will be pleased to receive views from the UK supplier and his customer.

The Panel believes that it is appropriate to adopt the second of these approaches.

Comments are invited on the most appropriate approach to the allocation of available port capacity between hypothetical import contracts.

 

1. To determine an IPP for each contract considered by the Panel it will be necessary to have information or to make estimates of delivery costs between the production unit and the point of consumption, and the delivery costs of imported coal between ports and the consumer.

 

2. Contracts for the sale of UK power station coal have usually been priced at the pithead or opencast rail loading point, with buyers meeting the cost of transporting the coal. Because the subsidy is to be given to coal producers, and not to coal buyers or to rail transporters, there can be no compulsion under the scheme for coal buyers or railway companies to reveal details of transport costs. If buyers and/or rail companies choose to make such details available through statements approved by their auditors, these costs can be verified and taken into account as with other coal production costs. In the absence of this information, the Panel will have to take a view on transport costs between the point of production and the point of use.

 

3. In general the majority of coal will be conveyed from pit to power station or from import terminal to power station by rail. To determine rail haulage rates, the Panel will enter discussions with rail freight operators who have specialist rail trucks for conveying coal to UK power stations. English Welsh and Scottish Railways (EWS) have been established in this market for several years, and Freightliner Heavyhaul are about to enter the market. The Panel's principal interests in this regard are the differential transport rates between conveying UK and imported coals to the customer. The Panel intends to establish a confidential database of such rail transport costs for its own use in order to determine an IPP for each contract under consideration

 

4. For short journeys from pits to power stations road delivery may be competitive, and the Panel will be guided by information contained in the contracts being considered. Usually road delivered coal would be contracted at a delivered price and the Producer will be required to provide an audited statement of road haulage costs as part of the application for subsidy. Where a contract states a delivered price for coal, the Panel would expect the transport element of the price to be transparent. For road delivered contracts where coal is purchased at a mine or loading point, the road distances, and appropriate road vehicle carriage rates obtained from the Road Haulage Association might be applied. The costs of delivery by canal barge to Ferrybridge Power Station will also be considered where appropriate.

 

5. Similar principles and methodology will be applied in the case of industrial contracts being considered by the Panel. Where the contract is on a delivered price basis, the coal company applying for subsidy will be required to identify the transport cost.

 

6. In addition to establishing inland transportation costs, the Panel will also consider rail capacity constraints over various routes. The Panel will consult EWS, Freightliner and Railtrack with a view to identifying the constraints on rail transport between import terminals and power stations. The availability and constraints on rail loading infrastructure will also be taken into consideration. Where rail capacity limitations are identified on particular flows, the Panel will identify and consider alternative sub-optimal import routes as a basis for estimating the IPP.

6. CONCLUSIONS

1. The Panel believes that overwhelmingly the most significant factors in the determination of an IPP are:

• The estimation of a dollar price of imported coal in a hypothetical contract that the purchaser would have purchased had he not signed a contract for UK coal
• The selection of the port or ports through which such hypothetical imports would have been shipped, and the resultant costs
• The estimation of transport costs between the ports and points of consumption, and (where this not explicit) between the UK production or loading points and the points of consumption.

The Panel's approach to these issues has been outlined in this paper.

1. Against these three factors, most of the other questions discussed in this paper are likely to be of second-order importance. Nevertheless the Panel will examine each contract in detail, to assess whether it is appropriate to make adjustments for reasons of coal quality or because of the specific contractual terms in the UK contract.

 

2. The Panel will welcome comments from interested parties on all the matters raised, and views on whether there are any other factors not discussed in this paper which should be taken into account. The address and deadline for comments is given in Section 1.

 

3. During the consultation period the Panel will be further examining and analysing all the available information relevant to the determination of Import Parity Prices. The Panel's final views, taking into account responses received to this consultation, will be made known as soon as possible.

A Pricing Panel will be established to set import parity price (IPP) for each contract signed for sale of UK coal to UK consumers on or after 1 January 2000 for which subsidy is sought. For each contract the Panel will be asked to assess:

The IPP would be assessed on the basis of prices in hypothetical contracts finalised at the same time as the UK contract in question. This is to ensure that the IPP takes account of market conditions prevailing at the time the UK contract was being negotiated.

The Panel will be an independent body, made up of a mix of experts, at least some of

whom will have direct experience of the industry. The Panel’s procedures will be open and transparent in so far as that is consistent with respecting the commercial

confidentiality of parties not applying for aid under the scheme. The Panel will be free to seek representations from interested parties in relation to any aspect of their work. Any IPP recommendation from the Panel to the Secretary of State will be made public.

In reaching its assessment, the Panel will take account of all factors it considers relevant. The panel will be asked, in coming to their decision, to take into account:

1. Quality of the coal

Coal of equivalent quality must be of equal value in use to the purchaser in terms

of:

· Calorific value
· Content of ash, moisture, sulphur, chlorine, heavy metals
· Ash characteristics (fusion, slagging)
· Consistency

and other components of importance to the equipment design.

2. Supply terms

Equivalent contract terms on volumes of coal per unit time (supply rate) and
overall contract duration, including options.

(c.) Transport costs

The cost of delivering the coal to the UK, including port handling charges, and
from UK ports to the location where the contracted UK coal is expected to be
consumed;

3. Infrastructure limitations

Where transport infrastructure would be insufficient for the full set of contracts
under consideration a higher price must be estimated to take account of the costs
which would be incurred in expanding capacity or using alternative transport
routes.

4. Risks

These include the cost of hedging exchange rate risks given that non-UK
producers are likely to have sought prices denominated in a foreign currency; and
costs that the overseas supplier might have had to incur in order to ensure a
comparable degree of security of supply.

5. Other

Any other contractual matter which might reasonably be expected to have a
measurable impact on the price of coal.

 

The Panel will be free to use any relevant information, including price indices, in coming to their recommendation on an IPP.