The crisis over the non-payment of dues to the Enron-promoted Dabhol Power Company by the Maharashtra State Electricity Board deepens as the company serves notices of arbitration to the Central and State governments.
THE battle over the Enron-promoted Dabhol Power Company (DPC) has reached what could prove to be its final phase. Just before a Maharashtra government-appointed committee recommended wide-ranging financial restructuring of the controversial $3 billion power project, the DPC served notices of arbitration on the Government of India and the Maharashtra government. The notices demanded the payment of dues by the Maharashtra State Electricity Board (MSEB) and claimed the existence of a political force majeure which made it impossible for the multinational to fulfil its contractual obligations. With important coalition partners in Maharashtra's ruling Democratic Front (D.F.) alliance demanding that the project be scrapped, a showdown seems inevitable.
On April 4, the DPC served notices of conciliation and arbitration to the Central government over the MSEB's refusal to pay its Rs.102 crore-bill for December 2000. The MSEB's dues to the DPC are guaranteed by the Maharashtra government and counter-guaranteed by the Central government. The company gave the Centre a 60-day deadline to give a reply and appoint a conciliator. The DPC appointed former Chief Justice of New South Wales Lawrence Street as its conciliator. On April 16, the Central government announced that Law Commission Chairman Justice B.P. Jeevan Reddy would be its conciliator. Together the conciliators will appoint a third member, and this three-person panel will begin the conciliation process. If the panel fails to resolve the issue, the two parties would have to initiate international arbitration. On April 16 and 17, the DPC served notices of arbitration on the Maharashtra government and the MSEB. It demanded the payment of Rs.225.26 crores, the total of the DPC's December 2000 and January 2001 bills.
The DPC's offensive was in part the result of a Rs.401-crore penalty imposed by the MSEB under a 'mistake ratio' clause. According to the MSEB, the DPC failed to supply power within a stipulated three-hour period on January 28. As the Power Purchase Agreement (PPA) provides for a penalty of two weeks' receivables, the MSEB decided to make good this clause and slap a fine for failure to ensure power availability. Since the cash-strapped MSEB could not make its fixed monthly payments to the DPC, it asked the power company to set off the penalty against the amount that the MSEB owed it. The DPC refused to accept this, and insisted that the Central government pay the pending amount. However, the Union Law Ministry has upheld the stand taken by the State government and the MSEB, stating that the State is well within its rights to ask for an adjustment against payments. An MSEB official told Frontline that the utility company had a right under the PPA to check the DPC's functioning once in every four months. "When we realised they were not performing as guaranteed, we decided that we had the right to ask for a rebate," the official said. He pointed out that the MSEB had paid the bill for February, amounting to Rs.114 crores.
FOR the MSEB, these legal issues are questions of life and death. Ever since the signing of the PPA, Maharashtra has been paying the DPC Rs.95 crores every month. This is because the MSEB is bound to pay for 90 per cent of the 740 MW of power produced by Phase I of the DPC, irrespective of whether the State uses the electricity or not. Even at the risk of bleeding itself, the MSEB was trying to make the payments. However, following massive losses suffered this year, the MSEB categorically told the DPC that it could no longer meet its exorbitant charges. The MSEB is in serious financial distress and does not have the resources to pay. Until the DPC entered the picture, the MSEB was known as one of the most profitable and efficient utility companies in the country. Alarmingly, Phase II of the 2,100 MW project is scheduled to be commissioned later this year. This means that the MSEB will have to fork out Rs.500 crores a month as stand-by charges to the DPC, irrespective of how much it buys.
Since the MSEB's monthly collections are about Rs.900 crores, it will end up paying more than 50 per cent of its revenues to just one power supplier. When the DPC deal was struck, it was agreed that the tariff would be inversely proportional to the quantum of power used. As the MSEB uses only 5 per cent of the power it buys from the DPC, it pays approximately Rs.7 per unit. This is exorbitant compared to the Rs.2 it pays the National Thermal Power Corporation (NTPC). Moreover, the tariff structure was pegged to the dollar. The falling rate of the rupee against the dollar and the increase in the price of naphtha pushed the DPC's bill to Rs.700 crores a month. Once the second phase gets going, and if the State is still bound by the PPA, it will have to pay more than Rs.8,000 crores a year to the DPC. That, most experts believe, is the kind of cash the MSEB cannot raise, even if it were to improve collections dramatically and state subsidies to rural users were to be slashed.
However, DPC officials seem determined not to give in. It is not coincidental that the DPC issued a notice of 'political force majeure' to the MSEB on April 9, on the eve of the release of the Madhav Godbole Committee report. A DPC press statement said that the notice "indicates that the concerted, deliberate and politically motivated actions of GoM, GoI and MSEB have or potentially will have a material and adverse effect on DPC's ability to perform obligations under the PPA." By invoking the 'political force majeure' clause, the DPC conveyed the message that it was unable to discharge its commitment of selling power owing to factors beyond its control. Issuing a 'political force majeure' notice is an extreme move and if it can be substantiated that the situation warranted the issue of the notice, the financial ramifications will be severe. It is also the first step towards a possible termination of the project. If it leads to a termination, the Centre's liability will be $300 million under the counter-guarantee agreement. However, for the case to be proved a conciliation process will first have to begin.
THE explanation for Enron's stubborn stance lies in the Godbole Report. Tabled in the Maharashtra Assembly on April 10, the report is perhaps the first on-record official admission that a failure of governance led to the current crisis. The report argues that the Shiv Sena-Bharatiya Janata Party coalition that signed the deal did so despite being aware that the PPA was skewed in Enron's favour, and that it would have serious consequences for the MSEB. "The committee," it notes, "is concerned that there are numerous infirmities in the process of approvals granted in the project, which bring into question the propriety of the decisions." Charges of bribery and corruption in the DPC deal, which was first negotiated by the Congress(I) government led by Sharad Pawar, helped the Shiv Sena and the BJP come to power in 1995. However, shortly after coming to power, the alliance renegotiated the project on terms even more iniquitous than the earlier ones. The commitment to Phase II was a key element of this new agreement.
The report says that the most critical requirement now is a complete overhaul of the financial structure of the DPC. The committee recommends that if this is agreed upon, the maturity period of the DPC's debt could be increased, preferably to 15 years with an initial moratorium of five years. Moreover, an indicative interest rate for such debt could be 12 per cent in rupee terms (in dollar terms it would be around 6 per cent). If this is not applicable to foreign loans, the foreign debt should be converted to a rupee debt and restructured accordingly. The Godbole Report suggests that 75 per cent of the equity could be converted into preference capital at the rate of 10 per cent with the same redemption period as the debt. The cumulative result of this exercise is to reduce the first year capacity charge at 30 per cent Plant Load Factor (PLF). This means that the capacity charge comes down from Rs.3.19 to Rs.2.18. Coupled with the fuel charges of Rs.1.94, this gives a barely acceptable tariff level of Rs.4.12 a unit at 30 per cent of the plant's capacity.
Significantly, the Godbole Report has also proposed that both phases of the project be renegotiated. Bringing down capital costs and the cost of power is crucial at this stage, says the report. It suggests converting the tariff into two parts. This suggestion assumes significance because the method of structuring of the tariff remains shrouded in mystery. The report says that as the tariff is an extremely contentious issue with the DPC, "it is essential to remove this opacity". The tariff must be benchmarked to the lowest cost of supply of power from gas-based projects elsewhere, the report says. In its final comments, the report suggests that the PPA be re-examined and compared with other Independent Power Producer agreements in accordance with a least-cost plan. Meeting a long-standing demand of several critics, it also recommends that all dollar denominations be removed in the fixed-charge component. This would mean that the falling value of the rupee would not have a major impact on the MSEB's dues to the DPC.
It is important to note that the Godbole Committee's proposals are neither radical nor drastic. Critics of the project believe that it has not gone far enough to address the major problems in the PPA. Pradyumna Kaul, an activist of the Enron Virodhi Andolan and a long-standing opponent of the project, said that there were some fundamental errors in the Godbole Report, particularly with regard to financial restructuring. Kaul argues that even if the Committee's proposals on capital restructuring are implemented, the writing down of capacity charge and the PLF still forces the MSEB to pay between Rs.3,000 crores and Rs.4,000 crores each year. The cost for this huge payment would inevitably mean that the price of power in the State would have to be increased drastically. Kaul referred to the MSEB proposals, now pending before the Maharashtra Electricity Regulatory Commission (MERC), to increase power tariffs by 38 per cent. "To pay Enron's bills, the MSEB has to raise its prices sharply. It is clearly an unwarranted burden on the consumer," Kaul said.
THE notices issued by the DPC are seen as being part of an effort to ensure that even the modest restructuring proposed by the Godbole Report are not implemented. DPC officials said that the PPA, which states that the MSEB should continue to pay in accordance with relevant sections, throughout the duration "of any event or circumstances of force majeure". This means that the MSEB would have to pay the DPC even if the company is unable to provide any power. In a letter to the Union Power Secretary, dated April 7, the DPC stated that the dispute had snowballed when the MSEB refused to pay the bill for November. As the MSEB was not meeting its payment commitment, the DPC said that lenders for the second phase had stopped making their disbursements. This means that if the second phase is not commissioned on schedule, the company will have to pay damages to the MSEB. A DPC spokesperson told Frontline that the company had to take these steps because there was "no sign of any payments". "What face will we show our lenders and contractors?" he asked.
However, Kaul believes that the truth lies elsewhere. The MSEB's failure to pay its dues, he argues, was probably the outcome of the realisation that neither it nor the Maharashtra government would be able to afford the second phase. "The arbitration notices constitute just some sparring between the two of them before an inevitable showdown," Kaul said.
THERE are signs, however, that the multinational is trying to cut its losses. Worldwide, Enron has shifted its core business from generating power to supplying products like gas. Several of the team members, responsible for the establishment of the DPC have moved out of Enron, and the company has been suggesting for several months that it would be willing to sell its stake in the project - at the right price.
The Enron board was meeting on April 23 to discuss among other things the DPC issue. Speculation is rife that lenders for the Indian company have pulled out. Some believe that Enron's real strategy now is to get out of the project after collecting the best possible price. That, many believe, would be an easy option for the company. The Peasants and Workers Party, the Janata Dal, the Communist Party of India and the Communist Party of India (Marxist), all constituents of the D.F., have made it clear that the Godbole Report needs to be followed up with further investigation of possible criminal actions. In spite of the flaws in the report, there is little doubt that it has made clear that corruption had a lot to do with the DPC's birth.
A detailed investigation alone can bring down the curtain on India's most controversial power project. Whether it will take place depends on how much pressure the Left allies of the D.F. will be able to mount on the Congress(I) and the Nationalist Congress Party, who have more than enough reasons to avoid any meaningful inquiry into the DPC's birth.
