Sucheta Dalal :The Enron fiasco
Sucheta Dalal

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The Enron fiasco  

December 20, 2000

Enron Corporation's power project in western Maharashtra -- the Dabhol Power Company, is undisputedly India's most controversial infrastructure project. Also, like the proverbial cat, it has survived innumerable attempts to extinguish its existence and bounced back everytime.

First, it weathered corruption charges during the Congress regime (under Sharad Pawar) and triumphantly scraped past 18 court cases. However, the very same charges defeated the Pawar government and Gopinath Munde, who was the most vociferous campaigner against Enron became Maharashtra's deputy chief minister under a Shiv Sena-BJP coalition; he also held the energy portfolio. Munde colourfully threatened to throw the Dabhol project into the Arabian Sea, instead of negotiating tariffs and foolishly acted on his threat.

But Enron was far from vanquished. It continued to 'educate' the new government about power politics and politics. By its own admission before the US Senate hearings, Enron spent a hefty USD $ 60 million in 'educating' our netas, babus and locals.

Such 'education' clearly works, because Enron bounced back thrice the capacity cleared by the same government which threw it out. Also this time the international community sneered at India and refused to believe all those who said the tariffs that would emerge from the gold-plated project were unsustainable.

The re-negotiation was wrapped up with the flimsy cover of a reduction in costs during the second phase, which was twice as large as Phase I. A Rs 1,800 crore reduction was concocted which included a fudge in the rupee-dollar parity and other costs.

Until early last year, Enron's Indian chief Sanjay Bhatnagar claimed to Indian newspapers (Business Standard) that Phase II power will cost Rs 2.54 per unit. Clearly this is false. Far from paying lower tariffs, the state will end up paying far higher capacity charges after the second phase goes on stream.

How did Enron manage to push through such an outrageously expensive project? Simple. Rebecca Mark, its global power woman, argued it was investing in India at a time when nobody was willing to look at investment in India. Her high powered lobbying made here one of the most visible faces in India and her repertoire of evocative stories such as missing the serial bomb blast of 1992 by a few metres, surviving the Mumbai riots and stomping through backward Indian villages educating illiterate villagers were enormously appealing to the foreign media and its financiers. In fact a modern Mother Teresa, bringing light to the ignorant.

"India needs power at any cost" was the slogan which drowned out all sensible voices in the power sector who said that reforms in power distribution, an re-assessment of subsidies, a crackdown on the enormous power theft and serious efforts to improve the plant load factor of existing power plants was far more crucial than setting up a series of high cost Independent Power Projects.

So powerful was Enron's campaign that even the World Bank's worries about cost of power were ignored. Enron also scored a couple of other firsts which are turning into serious problem areas.

Firstly, it was a negotiated project at a time when the new power rules required competitive bidding. The reason: Since nobody wanted to invest in India there was no question of bidding. This claim has never been verified, but it clearly ignores the fact that domestic public sector companies such as Bharat Heavy Electricals Ltd were setting up world class projects at a fraction of Enron's cost and without demanding any guarantees.

Secondly, the tariff negotiated by Enron, was far beyond what was permitted by the government under the power reform measures. Under these the government hiked returns to power generation companies from 12 per cent to 16 per cent on a plant load factor of 68.5 with a in-built bonus for higher generation. Enron's rate of return remains a mystery and is variously estimated at anywhere over 24 per cent to 30 per cent.

Power experts say some charges such as high heat rates, higher specific fuel consumption, 90 per cent deemed generation, a fixed capacity charge and high auxiliary power consumption costs which were built into the tariff were incongruous with the modern technology of Combined Cycle Gas Turbine installations. The result: Enron's power costs Rs 7.80 a unit when private power generators such as Tata Electric Companies continue to be paid just around Rs 2 per unit.

Thirdly, few in India understood the complexities of working out the tariffs and guarantees of an Independent Power Project. Until Enron came along, most power projects were set up by public sector companies and private ones such as BSES and TEC could either accept the returns paid by government or lump it.

Today, the cost of Enron power is so high that even an averaging of tariffs would force government to treble tariffs to domestic consumers.

So far, the Maharashtra Electricity Regulatory Commission has shielded consumers by ordering the Maharashtra State Electricity Board to purchase power on a merit order dispatch basis – that is, pick up the largest quantity from the lowest cost producer.

MSEB still has to pay Enron a hefty capacity charge of Rs 95 crore per month irrespective of whether it buys any power or not, but the irony is that it is cheaper to do that than purchase more power from Dabhol.

With Phase II of Enron set to go on stream in the first half of next year, the money payable to Enron is also set to treble. At the same time the state government as well as MSEB are bankrupt and the Centre has rejected Maharashtra's pleas to declare Enron a central government project.

This only underlines how foolishly the project has been negotiated and leads to the suspicious that such an expensive and one-sided contract could have been cleared by a set of intelligent bureaucrats and politicians without terrific inducements.

Enron's tariffs have moved exactly as predicted by energy analysts and NGOs in 1994 and nailed its claims. Other IPPs have also begun to supply power at far lower rates than Enron. The question then is where does the state go from here? So far Enron has maintained a studied silence in public while it continues to lobby hard in private. The state is toying with the idea of repudiating the contract and taking its chances with the legal consequences. But the best solution would be for Enron to unilaterally reduce tariffs substantially.

Since it is clear that neither MSEB nor Maharashtra will be able to pay the negotiated tariffs, it would be in Enron's interest to come forward with a workable solution. After all, Enron is an international company and faced with embarrassing evidence of its unaffordable tariffs, has more to worry about than a bankrupt state in India and its equally bankrupt power utility. Also all those who were righteously indignant at the cancellation of the contract earlier and stood by Enron have now been silenced by the size of its power bills to MSEB.

Rebecca Mark is already out of the country and the head of its Indian business had recently been shifted. Surely a new team can start afresh without the baggage of past hustling.

-- Sucheta Dalal