BUSINESS: DABHOL POWER PROJECT

It's On, It's On It's Enron

The project generates more controversy than electricity. A lowdown on the latest conflict.

By Sandeep Unnithan

It has been a high-voltage drama from the beginning. Only last month the voltage frequency shot up to the levels where the tripping of Enron's phase II power plant seemed a possibility. Of course, controversy is not new to the twice-born Dabhol Power Corporation-the US multinational's Indian subsidiary.

The high tariffs of Enron could cut a huge hole in the pocket of the subsidy-hit MSEB

The latest one stems from a sudden rise in the cost of DPC's power. The sole buyer of DPC's power, the Maharashtra State Electricity Board (MSEB), had to cough up as much as Rs 7 for every unit of power purchased from DPC-allegedly the costliest power in the world. Not surprisingly, that made MSEB broke which defaulted on its payments to DPC.

In lay terms, the Enron plant works on the economies of scale-the more you buy, the less you pay. In the 18-month period between May 1999 and October 2000, the MSEB managed to buy only 60 per cent of DPC's generation capacity, though it had contracted to purchase 90 per cent. When the cost shot up to over Rs 7 a unit in July 2000, the MSEB was purchasing only 30 per cent of DPC's power. According to DPC President and CEO Neil McGregor the rate would have been Rs 4.02 at 90 per cent utilisation as against Rs 4.94 for the 60 per cent that was shelled out by MSEB.

Flat broke, the state electricity board defaulted on payments to Enron for October and November-a total of Rs 262 crore. "The choice ultimately came down to whom we had to keep waiting-suppliers of cheap coal-based electricity at Rs 1 a unit or one expensive power supplier that charges over Rs 4,'' says an MSEB official. "So we chose to keep Enron waiting.'' Though the state Government did eventually bail out MSEB with a Rs 114 crore payout last week, the board still owes the DPC Rs 148 crore.

Currently, the MSEB is paying DPC over Rs 2,500 crore a year or around 20 per cent of its revenue for less than a 5 per cent surge in the state's capacity. "You haven't seen anything yet,'' says Abhay Mehta, an independent energy expert and author of Power Play, a book that chronicles Enron's entry and operations in India. "Wait until January 2002. That's when Enron's 1,444 MW phase II starts generating electricity, and the MSEB could end up forking out Rs 7,144 crore to Enron, or nearly 80 per cent of its revenue of Rs 10,000 crore," adds Mehta. DPC officials disagree. "DPC's gas-based plant, which will charge Rs 3.85 a unit, will beat any brand new power generating unit,'' crows McGregor.

Who's at fault: MSEB or Enron?

The genesis of the problem lies in the power purchase agreement (PPA) or the contract signed between MSEB and the DPC in December 1993. The board had agreed to purchase 90 per cent of generated power. The assumption-at that time-was that since Maharashtra is a power deficit state it could do with as much of DPC's power as it could generate. As it turns out, power scarcity was probably exaggerated. Besides, the PPA also did not take into account the MSEB's capacity-or lack of it-to pay Enron for all the electricity that it generated. Like many state electricity boards, the MSEB sells power for less than one sixth its purchase cost. It buys electricity for Rs 3 a unit but sells it for 42 paise to over 90 per cent of its consumers.

The PPA also stipulates that Enron's power would be indexed to the dollar and oil prices. Fluctuations in these variables automatically resulted in an increase in the price of electricity. The upshot: last year, naphtha rose by 60 per cent after international crude prices more than doubled and the rupee fell by over 7 per cent against the dollar since April 2000.

Moreover, DPC's is a counter guaranteed project, implying that if the MSEB defaults, the state government has to foot the bill. And if the state also can't pay, the Central government will have to cough up.

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