The Enron fiasco

The state of Maharashtra witnessed a successful bandh on April 25, called by trade unions, to protest, among other things, the blackmail by Enron. The anti-Enron movement is picking up momentum in that state as well as in the rest of the country. In fact, the Enron controversy has become a cause célèbre for the anti-globalsiation movement. But the Enron spectre continues to torment the political class. The bills presented by Enron, promoted Dabhol Power Company of the USA, from October 2000 onwards are hot potatoes, which the MSEB, the Maharashtra Govt. and the Center are finding difficult to handle. The IPPs (Independent Power Producers), invited with so much enthusiasm in the early 1990s, are turning out to be the white elephants. The prospect of paying Rs. 1,800-2,000 crore per annum for next 13 years t o Enron alone is horrifying the governments. The next round of charges and counter charges between the two major national parties is muted as both have been caught with their pants down for sometime now.

Faced with the huge bills the early enthusiasts have changed colors. They are now blaming the PPA for the problem. According to them, there are a few problems with the agreement but the Govt. should not scrap the PPA as it would send wrong signals to the international community. Further, many more such green field projects are required, if India and the Maharashtra were to meet the power shortfall in the coming years. They further argue that the weak link is the MSEB, which is in such a bad shape that it should unbundled, restructured and privatized. The import of the argument is that the Enron problem will simply blow away once the MSEB is privatized and Phase II is commissioned. It is pointed out that cost of its power is comparable to any other green field project. At around 60% capacity the cost comes down to around Rs. 4.90 per unit. At 80 to 90% capacity the cost comes down to Rs. 4 per unit.

What is wrong with the Enron Deal

  1. In 1993, to accommodate the project the MSEB adds overnight 2053 MW to peak demand projection of the CEA (Central Electricity Authority). The DPC uses jacked up demand projection in its feasibility report.
  2. PPA has “back-loaded tariff structure” – i.e., fixed charges constantly going up over time.
  3. Monthly fixed charges of around Rs. 95 Crore in Phase I & Rs. 383.41 crore for Phase II was agreed upon.
  4. Fuel charges of Naptha was denominated in dollars.
  5. Padding up of project cost: In Bangladesh, the WB-supported gas project of AEC costs $510/kw (which is normal cost world over) as against the DPC cost of $920/kw ($1400/kw if the Re-gas terminal is used). The cost difference in two projects is $895 million (more than the equity in the DPC project).
  6. In 1998, the MSEB chairman projected absurd growth rate of base load of over 15% p.a. to fulfill CEA conditions. In 2001, he admits that base demand was 45% lower than the earlier projection.
  7. Negotiation blunders: for Phase II renegotiations the project cost used the US inflation rate to make the cost comparable to Teeside Project of Enron (which was used as benchmark), overlooking the fact that power plant equipment costs were falling, not increasing with inflation, during the period.
  8. Lack of transparency: DPC/MSEB refuse to submit such basic documents as financing documents for Phase II, worksheet tariff calculation model, evidence of financial closure and even clearances to MERC.
  9. Everything is “guaranteed” for Enron – profits, loans and all.

Reform MSEB – Privatize? No!

There is little doubt that MSEB cannot function in the present manner for a long time. The arrears from consumers are scandalously high at close to half year’s revenue, there is up to 30% theft of power, and a negative return of 20% on equity.

Judging against the backdrop of a healthy 3% rate of return and the fact that if MSEB was a model of efficiency till as late as 1994-95, one should question how it came to such a pass.

Was it inherent incapacity of the public sector units to function smoothly or is there a deliberate effort to cripple the State Electricity Boards?

Privatization of energy sector is full of pitfalls. Instead of now fashionable wholesale privatization, a much more mundane and administrative approach of installing tamper proof meters for all consumers, accurate and timely reading, billing and bill collection and control of theft, proper inventory of fixed assets etc. will reap a rich harvest. There is a need to strengthen the grid, integrate the power systems and make better use of installed capacities. Rationalisation of tariffs needs to be done. And, of course, there has to be a will to be self-reliant.

Cheap and affordable power is very much possible. Within the specific context of Maharashtra and Enron, we give below some of data taken from the presentation made by Prayas to the Energy Review Committee of Government of Maharashtra.

Where is the power shortage?

So far as the specter of severe power shortage is concerned, the Cassandras of doom are really off track.

Demand-Supply Projection: Only 5% growth is expected in the next 3 years (considering relief in energy terms from load shedding is only 30% of the claimed load shedding). The capacity addition for next three years under the most desirable scenario should be NIL. Improvement in operation of existing plants itself will give benefit to the tune of 1470 MW. Additional 400 MW can be procured from other sources.

Given a rate of 5% growth, the demand of 1998-99 (Actual) 67500 MU is expected to reach 86,200 MU in FY 2003-04 (Projected). Possible generation from existing Plants can be 87,060 MU. Hence there is no need to add capacity for meeting energy needs, for next three years.

In the short run, generation can be maximized in MSEB coal plants by using blended imported coal (supply augmentation of 670 MW, 4800 MU). Uran’s idle capacity of 500 MW can be utilized by revamping multi-fuel facility (additional generation of 1200 MU). And state-wide optimization of capacity (of TEC, BSES and MSEB generation) can be undertaken. Even the peak hours can be easily managed.

The implications of “business as usual” scenario (after downscaling MSEBs’ projected capacity addition of 6,540 MW to 2,082 MW) will be enormous. Consumers otherwise will be paying Rs. 7,000 crore more compared to “desirable scenario” (no capacity addition) in next 3 years. During the same period Maharashtra Government’s capital expenditure on health and education will be Rs. 2,300 crore.


There is increasing clamor these days for allowing free trading of power by private players. Lot of ills plaguing the Indian market can be corrected if the power is allowed to be traded, it is argued. Simultaneously, Enron has announced that it was looking to offload part of its stake in the DPC. It reportedly feels that power trading, telecommunications, data centers etc. are the markets with more potential. These are precisely the areas opening up in India and other developed countries. Enron knows its strong points very well, with or without Rebecca Marks. Not for nothing does it have a dubious reputation in the US, and is darling of the politicians here.



Privatisation will lead to California-like Crisis

Is privatization an answer to the power crisis? The experience of California is instructive (more so, as our own Draft Electricity Bill 2000 is modelled on it).

The sunny state of California, home to the digital revolution and the Silicon Valley, is in the throes of an unprecedented electricity crisis. California is faced with rolling blackouts, bankrupt utilities and rising electricity bills. The electricity rates for the consumers with the San Diego Gas and Electric Utility jumped by as much as 240% in just one month this summer.

Critics, including various regulatory authorities have charged that the power generators in California are holding up supply during peak demand periods, creating artificial shortages. In order to meet the demand, the utilities and the independent system operator (ISO) then were forced to buy on occasions in 2000 at prices even 20 times that of the year before. Not only did the electricity prices rise astronomically during the peak periods, they ‘refused’ to come down during the periods of low demand. Obviously, those generating power made a killing as California’s purchasers paid out an estimated $10.9 billion more last summer for electricity than in 1999.

Why did this come about? The genesis lies in ‘restructuring’ that California carried out in 1996. This forcibly separated electricity generation from transmission and distribution, hiving off major power plants from three major utilities in California and leaving them with transmission and distribution only. It was argued that once generators became independent of the utilities, they would compete against themselves bringing down prices.

What the lawmakers failed to understand was that if an artificial scarcity were to be created in the spot market, this would drive the prices through the roof in the real time power market, a phenomenon now called ‘gaming’ the market. By gaming the market, the private generators have reaped windfall profits of 800 to 900 per cent last summer. In one week alone, ending June 14, 2000, the purchasers of power in California spent $1.2 billion or one-eighth of their total cost of power for all of 1999. Governor Davis has called the power generators “pirates, marauders, gougers and greedy profiteers”.

From – The Economic Times

Present Capacity and Generation

00-01 ( MU)
Possible ( MU)
MSEB Hydro 2,402 90% 4,113 4,091
MSEB Thermal 6,396 82% 39,187 45,944
MSEB Gas 912 85% 3,700 4,900
NTPC Thermal # 1,183 85% 8,031 8,809
NTPC Gas # 392 85% 2,224 2,224
NPC(TAP/KA# 297 78% 1,957 1,957
DPC Ph I # 728 90% 3,044 5,740
TEC. BSES Coal* 1,650 84% 10,528 12,141
TEC Gas * 180 90% 1,275 1,255
  14,140   74,059 87,060

Note * -- Actual for year 1998-1999; # -- Auxiliary Generation not included.
Energy Generation constraint considered for Gas and Hydro

Cogentrix Mangalore Project


Ib valley
Hinduja Bros. Vishakhapatnam
GVK Reddy & Spectrum Gujarat
Enron Dabhol
Israel Yamuna Nagar


While Enron and other IPPs were putting their considerable expertise and resources in “educating” Indian politicians and drafting of PPAs, the public sector behemoth, NTPC, was putting up a sterling performance against all odds. Deprived by Narsimha Rao Govt. of all its planned green-field projects (see box) in 1992, the NTPC began to scout all over again for new locations. In 8 years, it has added considerable capacity and improved efficiency (see box). All this, through its own internally generated cash and commercial borrowings at the rates of interests ranging from 12.5% per annum to 19% per annum. NTPC plans to add further 20,000 MW to its capacity in next 12 years. That will rank it among the top five thermal power producers in the World.

Source – The Economic Times


NTPC – Then and Now


1992 2000

Installed Capacity

11,333 MW 19,405 MW

Power generation per employee units

2.86 million 5.58 million units

Value addition per employee

$42,040 $90,660

Turnover per employee

$70,310 $1,79,040

Contribution to profits per Employee

$13,210 $36,960
Net Profit Rs. 750 Crore Rs. 3,525 Crore


1992 – Center Invites Enron to set up ‘ Fast Track ‘ power project.
Dec’ 1993 – First PPA signed with MSEB
1994 – Enron starts construction.
1995 -- The Sena–BJP Govt. scraps Enron.
1996 – State govt. renegotiates the project.
1996 -- 13-day Vajpayee Govt. approves counter guarantee
1996 – State Cabinet clears PPA.
1999 May 13 -- Phase I commissioned.
1999 July -- Financial closure of Phase II.
2000 Oct. -- MSEB defaults on payment, subsequently stops paying monthly bills.
2001 Feb 5 – Enron invokes counter guarantee of Rs. 79 Crore for Nov’2000. Invokes Govt. of Maharashtra
2001 April -- Godbole committee recommends renegotiation of PPA.
-- Enron looks for new partners.


— Girish Ghildiyal