Enron end-game?

Print edition : September 29, 2001

With the Dabhol Power Company and the Maharshtra State Electricity Board sticking to their positions and the State government instituting a judicial inquiry into the power project, the controversy only appears to be deepening.

EVERY few weeks there are indications that the gridlock over the Enron-sponsored Dabhol power project will be sorted out. But it is beginning to appear that a solution to the ongoing crisis may still be a long way away. If anything, the crisis appears to be deepening. After months of wrangling over non-payment of dues, neither the Dabhol Power Company (DPC) nor the Maharashtra State Electricity Board (MSEB) is willing to back down. The DPC continues to slap bills and notices on the MSEB, which is using every trick in the trade to stall international arbitration.

The Dabhol Power Company's $3-billion power plant at Guhagar, which has stopped power generation.-

Both believe their respective case is water-tight. While Enron has indicated its willingness to sell its stake in the DPC, it has clearly stated that it will not quit without a fair settlement. Renegotiations were unsuccessful and have wound up. With the Maharashtra government announcing a judicial probe into the controversial power project, the dispute, which has been going round in circles, may now head in the direction of closure.

On September 19, the Maharashtra cabinet announced the setting up of a judicial commission under the Commission of Inquiry Act to probe the multi-billion dollar Dabhol deal. Consent letters issued by state authorities and the Power Purchase Agreement (PPA) signed between the U.S. power company and the MSEB will now come under fresh scrutiny. Announcing the terms of reference, Chief Minister Vilasrao Deshmukh said: "The committee will check whether the licences, letters of consent and other clearances given by various authorities were in line with the Electricity (Supply) Act, 1948." In addition, under the terms of reference, "the committee will probe the circumstances that led to the renegotiation of the Enron deal; the stand taken by individuals responsible for renegotiating the deal; and whether the decision on the second phase of the project was in the interest of the State." Deshmukh said the probe panel would examine the deal in its totality and present its recommendations to the State government in six months.

The move to constitute a judicial commission was first suggested by the Madhav Godbole Committee, which was formed to review the 2,184 MW, $3 billion Dabhol power project. As the dispute between the MSEB and the DPC began to intensify, the Left parties and other allies of the ruling Democratic Front (D.F.) demanded a judicial probe into the deal. They even threatened to pull out of the coalition if Deshmukh did not comply.

However, the two largest constituents of the D.F. government - the Congress (I) and Sharad Pawar's National Congress Party (NCP) - were opposed to a judicial probe. According to them, it was uncalled for when renegotiations were on. Besides, they said, the Supreme Court, the Bombay High Court and the Maharashtra Electricity Regulatory Commission (MERC) were in the process of solving various aspects of the crisis. But when the Peasants and Workers Party (PWP), along with the Janata Dal (Secular), threatened to walk out, Deshmukh, not wanting to precipitate a political crisis, announced the investigation.

The DPC, in a statement, denounced the government's move. The statement said: "The DPC believes the judicial probe will serve no purpose other than to further delay the resolution of outstanding issues related to the Dabhol project. Such a commission of inquiry is inappropriate and will add unnecessary delay to an ultimate resolution. In addition, many of the issues to be considered by the commission are currently the subject of existing disputes between the DPC and MSEB/GoM/GoI, which are being fully addressed through various dispute resolution proceedings."

Furthermore, DPC spokesperson Jimmy Mogal told Frontline that the Dabhol project and its PPA had been scrutinised 25 times. "Every time we have proved that the PPA is legitimate," said Mogal. "What more are they going to gain from one more inquiry? And this will further prolong the dispute." The company also said it was improper for the government to bring its executive powers to bear against the DPC while they were seeking to resolve ongoing commercial disputes through previously agreed dispute resolution procedures.

Pradyumna Kaul, an activist with the Enron Virodhi Andolan, however, said the judicial probe would accelerate the termination process. "Within a week they will come to the bargaining table." Kaul said those who demanded the probe did not expect such clear terms of reference. He claimed that the probe would expose the lack of governance by the Maharashtra government at the time of signing the deal with Enron.

Although the Enron deal has been publicly debated several times, much of the agreement remains shrouded in mystery. When the multinational came to India a decade ago, what it offered was the largest foreign investment project in the country. Sharad Pawar, Chief Minister of Maharashtra at the time, was instrumental in pushing through the 740 MW first phase. However, when the Shiv Sena-BJP combine came to power in 1993, it first cancelled the first phase but then did a dramatic volte-face. It not only invited Enron back but rewarded it with an even bigger 1,444-MW second phase. In the brouhaha that followed this decision, Enron admitted to spending $20 million on "education and project development in India". The question is, who was "educated" by the multinational?

On September 10, four months after the first preliminary termination notice (PTN) was served, the DPC served two fresh PTNs on the MSEB - one for non-payment of the fixed monthly dues for April, May and June as per the PPA and the other for "abrogation of the PPA". "This step, which continues the process of terminating the PPA, was necessary to protect the interests of Dabhol's sponsors and other stake-holders," said the DPC. The MSEB maintains that it is under no obligation to make fixed payments because the electricity board rescinded the PPA on May 23 this year.

The DPC says its "preferred approach will be a prompt and amicable resolution of the Dabhol dispute based on a complete recovery of foreign sponsor costs." The DPC is allowed to issue preliminary notices for every default and any breach, according to MSEB Chairman Vinay Bansal. "This is just to keep us under pressure. The MSEB will not pay for the power that it has not used and definitely not at DPC rates," he told Frontline. "Besides, unless the Rs. 706-crore rebate that the DPC owes the MSEB is settled, we will not lift power from them."

Ever since Enron and the MSEB signed the PPA, the deal has been entangled in controversies, political and otherwise. Apart from raising doubts about the entire agreement, the DPC and the MSEB have been locked in a protracted legal battle over the non-payment of dues. Under the PPA the MSEB had to pay the DPC Rs.95 crores every month, irrespective of whether it used its electricity or not. These payments, which began from May 1999 when the plant was commissioned, depleted the MSEB's coffers rapidly. The MSEB defaulted on its payments in October and November 2000, and by early 2001 the once-profitable State utility was on the verge of bankruptcy.

Following the non-payment of dues the DPC invoked its counter-guarantee clause with the Central government. Matters came to a head when the MSEB asked the DPC for a Rs.401-crore rebate for not providing power on three occasions within a stipulated period. It suggested that the amount be set off against the amount owed to the DPC. The DPC said the two issues were not related and insisted that the MSEB honour the Rs.213.60-crore outstanding. From April to September, the rebate due to the MSEB had increased to Rs.706 crores.

The DPC then issued a notice of political force majeure on the Centre in April. It claimed that the government's interference and non-cooperation was hindering the company's performance in India. It followed this up with notices of arbitration and conciliation. Ironically, the notices were served on the eve of the presentation of the Madhav Godbole Committee Report. Finally, on May 19 the DPC served its first PTN. In response, the MSEB cancelled the PPA, stopped purchasing power and took its case to the MERC. The DPC says it does not recognise the MERC, as this quasi-judicial body was formed after the PPA was signed. They have challenged the MSEB in the Bombay High Court on the MERC's jurisdiction. The judgment is expected in a few weeks.

The DPC would have to keep charging the MSEB and slapping it with notices to show that it did not intend to give in so easily, said an industry consultant. This will, hopefully, accelerate the termination process. Besides, the amount owed to the DPC could be claimed if the MSEB loses the case at the time of arbitration. This will be over and above the Rs.25,000 crores the MSEB might have to give in damages should it lose its case. Arbitration, however, is currently not even in the picture. Although the PPA specifies that international arbitration should be used in case of differences, arbitration is on hold since both the DPC and the MSEB are fighting cases in court.

Before serving the PTNs, the DPC had invoked the State government guarantee for the April dues, which amounted to Rs.136 crores. A day after issuing the PTN, the DPC invoked the Central government's counter-guarantee for the amount. The MSEB made the April payment, but "under protest". The DPC refused to accept the payment because of that and, instead, asked the Centre to uphold its sovereign guarantee and pay the May (Rs.143 crores) and June (Rs.102 crores) bills. When the DPC invoked the Centre's counter-guarantee for the first time, the Centre bailed out the MSEB. It later instructed the DPC and the State government to sort out their differences, clearly implying that it wanted to have as little as possible to do with the dispute. It is unclear whether the Centre will honour its counter-guarantee to the DPC again.

According to DPC spokesperson Mogal, it is becoming increasingly difficult for the company to stay afloat. The DPC's only source of income is the MSEB. With the MSEB stopping monthly payments and not lifting power, the DPC cannot pay its lenders, contractors or staff. When it attempted to invoke a Rs.136-crore letter of credit drawn on Canara Bank this month, the court refused permission. Mogal says the plant has been shut down. Out of the 15,000 employees once employed, only 500 remain.

The DPC was to start the second phase of the project in June this year. It cancelled the commissioning after the MSEB said it would not buy power from the DPC. Mogal says Enron's international lenders have also decided to cut their losses and quit the project. Yet, while Enron has announced its willingness to sell its stake in the DPC, there have been few takers. "Nobody wants to touch us now that we are part of a judicial inquiry," says Mogal.

"The DPC need not weep so loudly," says an anti-Enron activist. It raised its money in India. The people of Maharashtra have had to pay for the MSEB's mammoth bills owing to its fixed-payment obligation to Dabhol. "Enron will only be dented slightly. It is really the Indian lenders who are going to collapse."

Clearly, Enron wants out. Even the Madhav Godbole Committee wound up, stating that it does not believe it should continue since Enron is not interested in staying. Besides, until the inquiries and cases are complete, it would be pointless renegotiating. In its final report, which was submitted to the State government on August 31, the committee recommended changes in the tariff structure - which has been the crux of the DPC problem.

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 used only 5 per cent of the power it bought from the DPC, it paid approximately Rs.7 a unit. This was exorbitant, compared to the Rs.2 it paid the National Thermal Power Corporation. Moreover, the tariff was pegged to the dollar. The falling rupee rate and the increase in the price of naphtha pushed the price up even further.

The Godbole Committee suggested that all partners in the DPC, including Enron, Bechtel and the MSEB, write off 50 to 75 per cent of their equity stake. "Currently, the entire equity held by the partners in Phase-I amounts to $435 million, while that in Phase-II amounts to $452 million. We have suggested that the restructuring of project costs will bring down tariffs to Rs.2.40 a unit, which is the ideal price."

But Enron wants a zero-loss exit. It says that the cut in equity is unrealistic for the DPC's offshore sponsors. With no takers for the project apart from the Government of India, the only option for it now seems to be to wait until the judicial probe is over and the court cases are settled. Meanwhile, the Indian lenders, the Maharashtra government and the Government of India are in no better position. Should Enron quit, and in all likelihood it eventually will, who is to take over and operate the massive power plant? More importantly, at what and whose cost?

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