John Baker, chief executive of National Power, rejected the plan in a letter to Mr Heseltine, leaked with other confidential documents to the president of the National Union of Mineworkers.
According to the documents, Mr Heseltine proposed that National Power should stockpile an extra 15 million tons of coal over five years. Mr Baker was willing to take the stocks, but insisted that it should be at the expense of the taxpayer or the coal industry.
'You indicated for the first time that you expected the shareholders to carry the burden. It is now clear to us that in responding so positively to your requests to find more space to put British coal, we were unwittingly being invited to dig our own grave somewhat deeper.'
Mr Baker said he was willing to take and pay for 40 million tons as a supplementary deal, for burning over the next five years; to give British Coal 'an inside track' for further tonnages on a short-term basis if there was room in the market; and a readiness to stock the extra 15 million tons 'provided were are kept whole from the financial consequences'.
The letter underlines the dilemma facing Mr Heseltine in carrying out the U-turn in policy forced on the Government by a Tory rebellion and national protests at the threat to close 31 pits.
The White Paper setting out the pits rescue plan was due to be endorsed by the Cabinet next week.
A spokeswoman for the DTI last night said they could not comment. 'It is a matter for National Power,' she said. No-one was available from National Power.
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