A disastrous deal

On all that was wrong with the Dabhol deal from the beginning - and the way out now.

CASSANDRAS are perceived as prophets of doom who should not be taken seriously. This is what the Trojans thought too when they wheeled the large wooden horse that the Greeks had left behind inside the walls of Troy, paying no heed to the warnings of Cass andra. It is ironical that anybody foretelling disasters is still dismissed as a Cassandra.

Nothing else can explain the case of Dabhol. Perhaps very few contracts that a government has entered into have been exposed as thoroughly as Enron's Dabhol project. All the terms of the contract that is currently leaving the Maharashtra State Electricit y Board (MSEB) bankrupt were known well in advance. Economic and Political Weekly and Frontline, and also some mainstream newspapers, had carried detailed articles on the disastrous nature of the Dabhol contract. In spite of this, first Sha rad Pawar, as the Chief Minister of Maharashtra, and N.K.P Salve, as Union Minister for Power, pushed through the first stage of Dabhol. After the Shiv Sena-Bharatiya Janata Party combine came to power in Maharashtra, it first cancelled the first phase a nd then rewarded Enron with an even bigger second phase of the project.

If the political establishment failed the country, the judiciary did no better. There was a series of violations of law in the matter of the Dabhol contract. Unfortunately, both the Bombay High Court and the Supreme Court failed to act. The Supreme Court 's virtual dismissal of the petitions filed by the Centre of Indian Trade Unions (CITU) and Abhay Mehta represents a case of lost opportunity for the courts to protect the people. Whether it is Narmada or Dabhol, the courts have given verdicts which, eve n if viewed charitably, do not add to their judicial lustre.

In the Enron saga, one of the salient features was the failure of leading officials - either technocrats in the MSEB or administrative officers within the government - to stand up to their political superiors. A whistle-blower early on would have certain ly helped the movement against Enron. While many officials refused to be a party to the Enron decision, none of them finally stood up and was willing to be counted. The Central Electricity Authority (CEA), unhappy with the Dabhol contract, gave it only t echnical clearance and side-stepped the issue of the cost of power. Under the Electricity Supply Act, the CEA is required to provide techno-economic clearance and not just technical clearance. Since the major reason for the opposition to Dabhol was its h igh cost, this may have helped the CEA in keeping the individual consciences of its members clear but certainly did not help the people of Maharashtra.

The Enron case is turning rapidly into a disaster that will sink not only the MSEB but also the Maharashtra government. At the time the Enron deal was originally agreed upon, Enron and its defenders claimed a tariff of Rs.2.40 a unit. This certainly did not seem as frightening as the current figure, Rs.7.20-7.80, given by Maharashtra Power Minister Padamsinh Patil. Contrast the cost of Enron's power of over Rs.7 a unit with the average cost of Rs.2 for power generated by the MSEB and the cost of power p urchased from producers such as the National Thermal Power Corporation, the Bombay Suburban Electric Supply (BSES) undertaking, or Tata Electric, which varies from Rs.0.80 to Rs.3. In the clutches of Enron, the MSEB is incurring a loss of more than Rs.70 0 crores a year: it is paying Enron 15 per cent of its revenue for a measly 5 per cent of its requirement.

And this is just for the first phase of 748 MW - the second stage will follow with even graver consequences. Once the second stage of Enron comes on-stream next year, we get to the depths of the disaster. According to studies done by Prayas, a group of y oung energy professionals, the MSEB will have to pay Enron 52 per cent of its current revenue to add less than 20 per cent to its installed capacity. This means a net loss of more than Rs.3,000 crores a year. That this huge outflow will lead to the colla pse of the MSEB is fairly obvious.

And what about the Maharashtra government? How will it survive? Tariffs will have to be increased - by more than double - to meet the required outflows. Large-scale unrest is bound to follow. If Maharashtra is to foot its Enron bill, the only way to do i t will be to hand over, in bits and pieces, the MSEB's assets to Enron. This is what the Uttar Pradesh State Electricity Board is doing to settle its outstanding dues to the NTPC. In other words, to pay for power from a 2,192 MW power station, Maharashtr a will have to hand over in the next five years its generating assets for 10,000 MW.

WHAT was wrong with the Enron contract? Was it just a case of a bad contract struck by the governments in Maharashtra and at the Centre? Successive State and Central governments have pushed the Enron project, giving guarantees and counter-guarantees. In its brief 13-day tenure in 1996, the Vajpayee government did only one thing of note: it gave Enron the counter-guarantee without which it could not have reached a financial closure for the project. The Pawar-Salve power purchase agreement (PPA) and the T hackeray-Munde PPA have identical features that have brought the Maharashtra government to such a pass.

If we are compassionate enough to overlook either stupidity or chicanery, we can identify three major mistakes in the Enron contract. The first was to have pegged the cost of power against the dollar: if Coca-Cola or Pepsi can sell cola in India in rupee s, Enron can sell its power in rupees. The second mistake was to have accepted the hydrocarbon route - naphtha and liquefied natural gas (LNG) as the fuels for Dabhol - linking energy prices to the volatile international prices of oil. The third mistake was to have guaranteed a minimum off-take to pay fixed costs. The bad news continues: the price of Enron power is likely to rise every year as the rupee depreciates against the dollar.

THE argument for inviting foreign capital in the power sector is that it provides the much-needed resources to build critical infrastructure. Let us examine the figures of foreign exchange inflows and outflows from the Dabhol project. The total cost of t he project - including Stage II - is not likely to exceed Rs.10,000 crores. Assuming that 60 per cent of it is in the form of foreign exchange inflow, the inflow would be approximately Rs.6,000 crores for Dabhol. Against this, if we assume that there is no change in the value of the rupee and the price of oil, the outflow would be of the order of Rs.100,000 crores. If we assume a depreciation of the rupee of 6 per cent per annum and a marginal 4 per cent rise in the cost of oil, the outflow will be more than Rs.200,000 crores over the 20-year life of the contract. This means the foreign exchange outflow is 15 to 30 times the inflow.

According to Enron, the cost of Dabhol power is high only because the MSEB's off-take is low; if the MSEB draws 90 per cent of Dabhol power, its cost would come down to Rs.4.02. In Enron's view, this compares favourably with the cost of power produced at the NTPC's Kayamkulam plant, which is currently Rs.4.50.

This is not the first time that Enron has tried to obfuscate issues. Initially, when critics pointed out that Enron power was likely to cost more than Rs.4, Enron had claimed that its power would cost only Rs.2.40 and compared this to various other plant s, where the cost was of the same order. The catch then was that the other plants, unlike Dabhol, had their costs denominated in rupees and were based on indigenous fuel. The comparison with Kayamkulam has a similar catch: it compares the Kayamkulam cost s at a lower off-take while pegging Dabhol's off-take at 90 per cent. If we take the current price of naphtha of about Rs.3 a unit as fuel cost and compute the cost of power for Dabhol and Kayamkulam the basis of similar off-takes, the true picture emerg es (see table). Enron and a number of media spin-doctors working for Enron hide the fact that on a similar off-take of 90 per cent, the cost per unit for Kayamkulam works out to Rs.3.94 as against Rs.4.87 for Dabhol; it is cheaper by 93 paise. This is si mply because the capital cost for Dabhol is of the order of Rs.5.02 crores per MW as against the capital cost of Rs.3.18 crores for Kayamkulam. The fixed charges for Enron are, therefore, about Rs.1.87 a unit as against Rs.0.94 a unit for Kayamkulam. Had the MSEB negotiated the same rate as was being applied for Kayamkulam, it would have saved Rs.547 crores of the Rs.700 crores loss it is incurring now for Dabhol power.

The issue here, however, is not the cost of Kayamkulam power. It is simply that while the electricity boards are free to decide whether they need to take Kayamkulam power or not, the MSEB has to pay Dabhol a fixed charge of Rs.92 crores a month irrespect ive of whether it draws Dabhol power or not. Enron and its various media allies argue that the MSEB is not drawing enough Dabhol power, thus affecting Enron's image. The truth is that the Maharashtra Electricity Regulatory Commission (MERC), and not the MSEB, has decided a merit order despatch in which cheaper power sources have to be exhausted before more expensive ones can be drawn. As Dabhol power, at the current cost of naphtha, is the most expensive in the State, it can be taken only when the MSEB has availed itself of all other power sources to the maximum. With the current costs of naphtha, even the fuel cost per unit of Dabhol power is more than that from any other source. The MSEB can draw more Enron power only by lowering its off-take from ch eaper power available to it from the NTPC, the BSES and from its own power stations. This will lower the cost of Dabhol power but increase the MSEB's total outflow for the same quantum of power it supplies to its consumers. One of the key elements of the whole Dabhol controversy was the guaranteed withdrawal clause in the PPA; critics had argued that there would not be enough demand for Enron power. According to them, such a guarantee would essentially mean that the MSEB would be paying high fixed charg es to Enron without being able to evacuate power. This is exactly what is happening in Maharashtra now.

The second argument that Enron is advancing is that Dabhol, like other naphtha-based power plants, has been hit by the high cost of oil. For a company which was taking credit for changing India's fuel policy from indigenous coal to imported hydrocarbon, it should at least now admit that this was a big mistake. Enron is hiding the fact that its interest in power plants stems from its interest in selling oil and LNG - it is one of the largest energy traders in the world. That is why it had to take the liq uid fuel route to produce power, even if it means high-cost power for the end consumer.

The other issues that Enron has raised are with regard to the MSEB and its subsidy to agriculture, and transmission and distribution losses. It is difficult to understand what relevance these have for Dabhol power being twice or thrice as expensive as po wer from other sources in Maharashtra. With all its faults, the MSEB is recognised as the most efficient electricity board in the country and it was making profits before Dabhol came on-stream. Enron's friends argue that instead of providing subsidies of about Rs.1,500 crores to agriculture, Maharashtra should subsidise Enron to the tune of Rs.3,000 crores when the second stage of Dabhol comes on-line. If Maharashtra has indeed problems with transmission and distribution losses and agricultural subsidie s, how can that be an alibi for inflicting on it expensive Dabhol power?

The Maharashtra government has pleaded with the Centre to take over a part of its Enron liabilities. If the Centre responds by lifting this overpriced power, it will have to sell it to other States at a subsidised rate. Not one of the other States will b uy power at Enron's prices. So Enron's argument that it should be allowed to trade power with other States and the Maharashtra government's argument that the Centre should lift Enron power are both spurious.

The first stage of the Enron deal was signed under the aegis of Pawar and Salve. The BJP and the Shiv Sena joined in the anti-Enron movement that erupted in Maharashtra then. They even cancelled the Enron contract after coming to power. But high-level lo bbying by Enron - including crucial meetings with Shiv Sena remote-controller Bal Thackeray and BJP Deputy Chief Minister Gopinath Munde - paid rich dividends. Not only was the first stage restored in 1996, Enron was awarded an even bigger second stage o f 1,444 MW (Frontline, February 9, 1996). The Shiv Sena-BJP government claimed that the cost per unit had been reduced to Rs.1.86. In reality the cost reduction was "achieved" by fudging the figures - for instance, by taking a lower than prevailin g value of the dollar against the rupee. The Shiv Sena-BJP government also gave various undertakings to Enron, partially immunising the contract against future legal challenges. Instead of dropping Enron in the Arabian Sea as it had promised before assum ing power to do, the Shiv Sena-BJP government seemed to have done this "service" for the MSEB.

When the second stage of Dabhol comes on-stream, the cost of electricity will drop somewhat - LNG is a cheaper fuel than naphtha which has been in use now. But again, there is a catch. LNG contracts are take-or-pay contracts. Irrespective of whether you lift LNG or not, you have to pay for it. At present, given the high cost of Enron power, the MSEB has been paying fixed costs to Enron, and not drawing more than 40 per cent of its power, as the variable cost of Enron power was higher than the cost of po wer, including fixed and variable costs from other sources. But this option will not be available for the second stage. The MSEB will have to pay both fixed costs and fuel charges up to 82 per cent of Enron's capacity. In the first year alone, Enron's an nual power bill will be a whopping Rs.6,500 crores against the MSEB's current revenue base of Rs.12,500 crores.

Enron's other argument is that in any pricing of power, we have to take the total pooled cost into account. In any electrical system, there are new sources of power - new power stations - and older stations. With time, the capital costs of the older stat ions get written off and the costs of their power become cheaper than those of the new stations. Thus, the NTPC's old plants such as Singrauli still supply power at Re.0.77 while its new plants charge about Rs.3. Enron's argument is that we should look a t the average cost of the power in the pool and not the individual cost of suppliers such as itself.

The scheduling of new power stations is indeed crucial to the cost of power. If we add new, expensive power capacity far above our requirement, we will increase the pooled costs substantially. Let us examine what happens to the pooled costs if the ratio of new power to older power is high as has happened in Maharashtra? In the Enron case, all of a sudden a new expensive source - generating more than 2,000 MW with a minimum guaranteed off-take of 82 per cent - is being dumped into the existing pool. This results in a huge surplus of generating capacity. As the MSEB has given off-take guarantees (in any case LNG contracts are take-or-pay contracts), they will have to back down their cheaper units. The Prayas study of the MSEB's economics shows that after the second stage starts to produce full power (scheduled for 2001-end), the average tariff for domestic and agricultural consumers will more than double - from the present rate of Rs.1.45 to Rs.3.60. Prayas has also calculated that if Enron's project ha d been scheduled for 2003, when there would have been adequate demand, and the impact on the tariffs would have been much less than it is now. The Enron experience illustrates not just a case of very expensive power but how such power should not be sched uled in the pool.

WHAT can the people of Maharashtra now do? Whatever possibilities that existed in terms of modifying the contract seem to have been killed after the second stage was renegotiated by the Shiv Sena-BJP government. Three options remain. The first and the mo st straightforward one is to take over the Dabhol Power Company. This will, of course, go against the grain of the ruling theology of liberalisation. There will be those who argue that a contract is sacrosanct. These souls may benefit from a quick second look at the telecom imbroglio. When the telecom companies argued that their contracts were unworkable, the government of India changed the terms of the contract to bail them out. Were those contracts any less sacrosanct than the contract the people of M aharashtra need to be delivered from? It is worthwhile also to look at the California example where the State Governor is threatening to take over private generators for selling high-cost power to the State.

The second option is for the MERC to exercise its regulatory powers and modify the PPA. This may well lead to a challenge before the court whether the regulator has such powers under the Energy Regulatory Commission Act. The legal opinion - given by Shan ti Bhushan, one of the country's most eminent lawyers - is that it does. The question is whether the regulator will exercise such powers.The third option, and in many ways the most difficult one, is to go back to the Supreme Court and re-open the case. A fter the Narmada judgment, it is difficult to believe that the court will offer any worthwhile relief.

The last thing we need is another round of negotiations. We have already seen what re-negotiations mean. It generally involves declaration of victory, some cosmetic changes and perhaps more "education" for the political establishment of the day. Once th e smoke clears, the consumer is still saddled with the same cost of power as before.

It is true that any successful challenge to the Dabhol contract may have an adverse effect on foreign investments. We have already seen U.S. Ambassador Richard Celeste's unseemly intervention on behalf of Enron. The good news is that India is not the onl y country with Independent Power Producer (IPP) contracts to have run into similar trouble. Sucheta Dalal, in her column in The Indian Express (January 14, 2001) has quoted a study by Kate Bayliss and David Hall, University of Greenwich, which sho ws that a number of countries - Pakistan, Indonesia, Hungary among others - have cancelled or re-negotiated such expensive IPP contracts. The alternative is to let Maharashtra sink. There are no other choices, it appears.