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The future looks bleak for Dabhol

Each day of investigation in the United States reveals a little more about the lengths to which Enron was prepared to go in order to earn its mega bucks.

If the energy trading company could dream up strategies codenamed 'Death Star', 'Fat Boy' and 'Get Shorty' to inflate prices in California, by congesting pipelines and blocking power flow, how much further would it have gone in a far-away Third World country already listed among the most corrupt in the world?

US energy companies gleefully made money while California suffered unthinkable rolling blackouts and brownouts.

In India, the same companies who have rushed to set up independent power projects would have stood by and collected their pound of flesh even if state treasuries went bankrupt, people lit candles to save power bills and scarce national resources were diverted to 'honour' an exploitative contract which needs to be taken apart line by line.

In the light of new revelations in the US, Justice Kurudkar, who heads the judicial inquiry into the Dabhol Power Company deal, would have to examine each of its costs, claims and contracts with a fine toothcomb. But until then the controversial power project languishes and decays in a country that is reeling from power shortages.

A few months ago, it seemed as though Indian financial institutions would ram through the sale of Enron's equity. This would have been in the interest of all the three US promoters of DPC (of which Enron was the largest), but Enron did not co-operate.

Today, even those companies (bidders like BSES, Tata Power Company, Reliance, Gas Authority of India, Gaz de France and Shell) who had put down earnest money to conduct a due diligence into DPC concede that a quick equity sale seems unlikely.

DPC is far too big a mess for the Maharashtra government to resolve without help from the Centre, and the Central government views it as too much of a hot potato to get involved again.

(Remember how the 13-day Vajpayee government had extended the sovereign guarantee during its dying minutes in office?)

At the very core, the issue is simple. The 2,184 MW DPC project is viable only if power can be generated at Rs 3 per kilowatt (ideally at Rs 2.5 per kw).

Even this rate is more expensive than the Rs 1.10/kw to Rs 1.90/kw at which power continues to be generated by private producers such as Tata Power Company and government-owned giants like the National Thermal Power Corporation.

This rate of Rs 3.00/kw would be thrice as much as the cost of power in China, which is India's nearest global competitor and already giving Indian manufacturers a run for their money.

Secondly, Maharashtra simply does not need all the power that DPC can produce. The demand-supply projections that formed the basis of the DPC negotiations were a complete sham; even after scrapping three large projects that had been were planned along with DPC, the state will be hard pressed to utilize even the 720 MW of power that forms Phase-I of DPC.

Moreover, if the Maharashtra State Electricity Board actually begins to purchase the entire Phase-I power at Rs 2.50, it would still need a steep tariff hike in order to afford the power. And therein lies the rub.

Although Indian lending institutions found bidders for Enron's equity in DPC, a sale will materialize only if the new owners can sell the 1,400 MW of power generated from DPC-Phase II. The bidders have demanded distribution rights of 1,000 MW within Maharashtra as part of the sale condition.

This demand is unworkable and had been shot down by the MSEB. Lopsided industrial development and heavy subsidies to agriculture and powerlooms have created a situation where the industrial zone around Mumbai accounts for the biggest chunk of MSEB's revenues (industry is already charged an extortionately high tariff of Rs 6 unit), while large chunks of the state pay as little as Rs 0.50 per unit.

There is no way that 1,000 MW of distribution can be given away to a private power producer without at least doubling tariffs for the rest of the state.

Selling Dabhol power outside the state is equally difficult. Although several Indian states are crippled by power shortages, most of them have bankrupt public-sector distribution utilities and cannot afford expensive power. Most states also have their own expensive and controversial independent power projects, which followed Enron into India in the hope of reaping spectacular profits.

Private bidders for Enron's equity assert that there is no alternative to tough decisions, tariff hikes and privatization of distribution; but they also realize that this is easier said than done.

Frequent scams, communal violence and a sluggish economy have created a fragile political climate that has pushed harsh reforms off the government agenda.

As things stand, Enron seems in no hurry to co-operate. It first tried to take away key electronic components, e-chips and coded CDs without the permission of the lenders or other equity holders.

It later claimed that they had been taken to London for safekeeping (there are also allegations that DPC has wiped out all electronic communications from its machines going back to 2001). Next, it refused access to documents and project details for due diligence by potential buyers of its stake.

Left with no option, the Indian financial institutions moved the high court in Mumbai for appointing a receiver and obtained an injunction to help preserve DPC's assets.

The court also ruled that none of the claims relating to DPC should be transferred to New York courts where Enron's companies have filed for Chapter 11 bankruptcy.

Interestingly, although Enron, General Electric and Bechtel Corporation own 85 per cent of Enron's equity (65+10+10 per cent, respectively), nearly 65 per cent of the equity is also pledged with Indian FIs.

Yet, when the FIs moved court, Enron accused them of attempting to seize its entire equity in DPC without paying them anything. It also blames the court action for the delay in selling its DPC stake.

At the same time, Enron has been quietly unwinding its less controversial businesses in India through asset sales of its own. It has exited its broadband services venture through a sale to Reliance Infocom Ltd, it exited the successful oil exploration joint venture with Reliance Industries and among the first of its businesses to go was a deal with Metgas for gas distribution.

It now has a bid from the Gas Authority of India Ltd to purchase outright the LNG Terminal at Dabhol, which was to be used as a base to develop a LNG distribution business.

Incidentally, the Madhav Godbole committee appointed to examine the Enron deal had found that large chunks of the cost of its other businesses had been loaded on to the DPC project. The committee also believes that tariffs charged by DPC before the contract was rescinded by the MSEB can easily be halved.

Clearly, selling Enron's equity in DPC is a daunting task. As time goes by and DPC's problems get pushed off the front pages - there seem only two, equally difficult ways to resolve the DPC mess.

The first is for the financial institutions to take a big knock on their loans and sell the assets to the government-owned NTPC so that it can generate power at around Rs 2.50.

NTPC might be in a position to make the project viable, if the more expensive DPC power is averaged out with NTPC's lower cost of production. This would require co-operation by the central government.

The second option is inevitable if financial institutions and Enron remain recalcitrant. And that is to simply allow the plant to die and write off the financial institutions' investment to the tune of $1.2 billion or more.

Unless the cost of power can be reduced, there is no point in trying to run the plant. As energy analysts have been pointing out, over the long run, it may be cheaper for the country to write-off even a couple of billion dollars than to try and run a bleeding white elephant that guzzles expensive imported fuel, finds no takes for its power and makes huge losses.

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