Enron update

—Girish Ghildiyal 

Domestic lenders are in a bind. Not only are they the biggest lenders to the project, they have also guaranteed 85% of the loans of the foreign lenders (Rs. 4,200 Crore) under DPG (deferred payment guarantee). Total exposure of domestic and foreign lenders to the project is at Rs 6,600 Crore. 

The Enron way of doing business – Chori aur Sina Jori

One of the key parameters of the plant at Dabhol Power Plant is that it could ramp up upto 100 per cent load within 3 hours. Since the commissioning of the Phase I plant in May 1999, the DPC has been billing MSEB for capacity payments based on the rated base load capacity for each availability period.

Since January this year DPC has failed to generate the base load capacity at least on 3 occasions on demand by MSEB. DPC has refused to pay the rebate for such failures as per the PPA. MSEB has imposed a Rs 4 billion penalty upon DPC for non-availability of power. 

Enron India managing director, K Wade Cline has this to say : “We get paid on the basis of our ability to supply power to MSEB, which in turn controls the dispatches from DPC based upon its projected requirement. There is a technical point in the power purchase agreement (PPA) whereby if the DPC lies and intentionally misleads the MSEB on the availability of power from its end, it would invite a stiff penalty.” 

“DPC requires about five to six hours to reach a full load generation from a total standstill (shutdown) and begin transmission of power to the MSEB grid, he explained….. However, of late, the MSEB has been resorting to emergency shutdowns. It follows this with a demand for power and uses the availability criterion if the power is not supplied in three hours time. “This smacks of attempts to throw darts at the situation instead of finding a solution,” Cline said. (emphasis ours) 

The PPA clearly stipulates that MSEB is paying for performance by DPC. It is clearly stated with graphs that the DPC would be able to reach full capacity within 180 minutes. If they are unable to do so they should declare the same. They have done so in the past. 

MSEB says “Simply speaking, we have a commercial relation with DPC. Just like they did not want to invoke the Maharashtra government guarantee or the Government of India counter-guarantee, but had to do so to ensure power bill payments by MSEB, we too have to point out their lapses since we are paying for a machine that does not seem to deliver.” 

The Godbole Committee report, released on 10th April 2001, has set the stage for final denouement of Enron saga. The report is very explicit and damning of the entire process by which the deal was finalized and hints at complicity of the bureaucrats and politicians in the deal.

According to the report, the arguments put forward in support of granting approvals for the project appeared to be “unconvincing” and “prima facie against public interest”. The committee said it is “troubled with the failure of governance that seems to have characterized almost every step of the decision-making process on matters relating to Dabhol Power Corporation.” Expectedly the report has touched the raw nerve of Enron, which has gone about questioning the capability of the Godbole committee to look into such issues.

Despite damning evidence politicians like Sharad Pawar have not been averse to monkey around with mischievous suggestions. Fortunately, his stock these days is so low that within a day of accusing Godbole Committee of “negative attitude”, his bluff was called and he had to retract the comments. Meanwhile both parties to the dispute have upped the ante. DPC has served the PTN ( Pre Termination Notice) and in return the MSEB first issued notice to cancel the PPA and then stopped purchasing power. Both parties now have a period of 6 months to come to a solution, failing which the contract will finally be terminated. 

The high cost of termination (approx. Rs. 17,000 Crore) seems to be weighing too heavily in the mind of the Government and therefore dissuading it from scrapping the contract altogether (though there are solid grounds to avoid penalties). The trouble is that there is no way that MSEB can keep on purchasing power from Enron at astronomical costs. Stupidity in finalizing the deal is such that every year MSEB will have to increase the prices of electricity by 15% just to break even. The payments to MSEB are indexed to all thinkable economic indices and the payments in rupee terms are to increase at the minimum by 12% per annum (in all other cases as the plant gets older the cost of power goes down).

Project cost is inflated by 50 to 60% and domestic FIs have lent 55% of the inflated cost, and indirect lending is (by way of guarantees to the foreign lenders) is to the extent of 18% of the inflated costs. When one adds MSEB’s equity stake, it is clear that Enron has made money during the construction itself.

Remedy worse than the disease

The solution to the imbroglio now sought by the Central Government seems to be as murky as the original deal. Enron has flatly refused to bring down its more than 30% IRR (more than 60% if actual costs are taken). According to it the basis for renegotiation should not be Godbole Committee report but the willingness of Indian side to purchase power from both the phases of the power project: total capacity 2184 MW. In this scenario the Center is contemplating various options to lower the cost of electricity. It is reportedly trying to bring the rates of interest at which domestic lenders have lent to the project (these will result in huge burden on domestic FIs who have borrowed at high rates for on lending to Enron). It is thinking of reduction in custom duty on LNG and cutting down on sales tax etc. (which is another way of paying on behalf of Maharashtra Government by forgoing revenues). The Center is also thinking in terms of roping in other central utilities like Power Trading Corporation, NTPC, Power Grid Corporation etc. to purchase power from Enron.

All said and done it is unwilling to take the bull by horns. Recommendations of Godbole Committee with regard to Enron are quite explicit and all the energies should be spent on renegotiating along those lines. If Enron does not cooperate the government will have to nail the lies of Enron. Even today Enron is in severe breach of contract and is legally on weak wicket. The best way to put Enron on the mat is to press for ordering a judicial enquiry into the deal as recommended by the Godbole Committee.