Sucheta Dalal :Buying DPC power: Is it the right decision? (11 November 2002)
Sucheta Dalal

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Buying DPC power: Is it the right decision? (11 November 2002)  

Maharashtrians have been saved an immediate hike in power tariffs by another hurdle to restarting the 700 MW first phase of Dabhol Power Company’s controversial project. Last week the State government announced its decision to purchase DPC power at Rs 2.80 per unit at 83 per cent Plant Load Factor (PLF). Since DPC is still some way from being revived, several factors relating to the proposed tariff need to be examined by those of us who will pay for the power, before the plant gets started.

For starters, in fixing the new tariffs, the government has made little effort to address serious flaws in the capital structure of its earlier deal with the now defunct Enron Corporation. For instance, although interest cost has been reduced to 10 per cent, forex and fuel price fluctuations are to be worked on a pass through basis. “This means that the effective cost of power will be not be less than Rs 3.25 per unit even under present circumstances”, says Pradyumna Kaul of the Enron Virodhi Andolan.

Secondly, while news reports had suggested that Indian financial institutions had taken charge of Enron’s assets through a court receiver, it is not entirely true. They have yet to file for foreclosure and formal liquidation. This means that DPC will be revived with the same exaggerated capital structure, despite clear recommendations in this regard by the Madhav Godbole committee on how to restructure costs and who would bear the loss. The status quo over the capital structure is probably why Enron has quickly appointed four new nominees on the DPC board and General Electric and Bechtel are also keen on reviving the project. This raises some interesting questions.

Who was responsible for foisting the DPC white elephant on the people of Maharashtra? A quick answer would be: various political parties with the help of friendly bureaucrats, careless financial institutions and loads of ‘education’ by Enron. The role of each of these constituents is currently being examined by a Judicial Commission set up under Justice Kurudukar following the Godbole Committee’s recommendations. But as Kaul says, “they are simply making a mockery of the Kurudukar commission”.

The very same government Secretaries who have been issued notices by the Kurudukar Commission are heading committees and are making key decisions about reviving DPC all over again. Many of them have not even replied to Commission’s notices. As things stand, the FIs have been mounting a lot of pressure to revive the expensive DPC-I, in order to avoid classifying their loans (in excess of Rs 6,000 crore) as NPAs. Curiously enough, these institutions whose shoddy due diligence processes are as much to blame for the Enron mess are not taking any hit on their ill-considered lending so far, except to revise interest rates downwards. The question then is, should a government committee be fixing the DPC tariffs and attempting to revive an expensive and unviable project or should it explore alternative and cheaper sources of power? On paper, the government claims to be doing both. Three power stations whose maintenance shut down had been used by vested interests to whip up a scare regarding Maharashtra’s power situation are up and running. That alone ensured, that load shedding was much lower during the Diwali season despite higher consumption of electricity.

Secondly, the government has decided (on paper) to start the 500 MW Uran plant, which has been lying idle for want of fuel; it has also decided to import coal to get some of MSEB’s thermal plants operating to full capacity. This will probably add another 600 MW to MSEB’s generating capability. Also, the replacement of poor quality capacitors will also increase the distribution efficiency and power supply of MSEB. If all these decisions are implemented swiftly, why do we need to revive the expensive DPC? The sequence of events suggests that Maharashtra (read MSEB) which had categorically refused to purchase power at anything above Rs 2.25 per unit showed a new enthusiasm to revive DPC ever since the Bombay Suburban Electric Supply (BSES) expressed an interest in running the plant. While the government has fixed the tariff, there is no further talk on reviving the competitive bidding process to decide who gets to re-start the expensive DPC project and other infrastructure that comes along with it (regassification plans, oil terminal, jetty etc). There is also no mention about who will pay the higher tariff. At Rs 2.8 per unit, MSEB will again lose upward of Rs 700 per year due to DPC alone. These losses over just two years alone could help set up a cheaper thermal plant the size of DPC phase-I. Moreover, while the tariff proposed by the State has still to be cleared by the Maharashtra Electric Regulatory Commission.

In the past, MERC had taken the stand that IDBI, as a lender has no locus standi to approach it regarding tariffs. This situation will continue because Enron is under liquidation internationally and IDBI has not moved for foreclosure of DPC’s assets. This would probably force the institutions to find a quick buyer for Enron’s equity even as the spadework for restarting the plant gets going. Even if MERC does clear a higher tariff, it is unlikely to scrap its earlier direction to the MSEB regarding merit order purchases. This time too, DPC’s expensive power would have to be the last to be purchased by MSEB, and if the State government seriously explores cheaper alternatives listed above, it may not even need the DPC power.

Finally, there is the question of allocating the higher tariffs. Maharashtra already charges a steep Rs 4.62 per unit to commercial consumers and Rs 4.2 per unit to industrial users. Most industrial users have already made it clear that they simply cannot bear anymore tariff hikes and remain viable. They have also set up captive consumption units to reduce their dependence on the State utility. Since power looms and agriculturists are heavily subsidised by the government and it is politically difficult to change that situation, the bulk of the tariff increase may have to be borne by residential users.

Is the government prepared for the uproar this would cause as it moves towards another election? Indications are that the State government has not even thought through the various implications of reviving the ill-fated DPC project—it is simply being tugged in different directions by vested interests and political considerations

-- Sucheta Dalal