Enron: Chronicle of a millstone foretold

When the global history of foreign investment projects that went terribly wrong is drawn up, the Enron power project will be high up in the list. When case studies of how not to involve the private sector in the infrastructure sector are prepared, Enron or the Dabhol Power Company (DPC) will once again be taught in class rooms.

Less than two years after it started producing power, everything that everybody from the Centre for Indian Trade Unions to the Swadeshi Jagran Manch and innumerable independent (and honest) energy analysts had predicted in the early/mid-1990s has come true - and earlier than expected. Phase I (740 MW) of DPC is producing expensive power and is placing a heavy burden on the already financially troubled Maharashtra State Electricity Board (MSEB).

To save MSEB from DPC power will require giving further concessions to the Enron firm, which only means making a bigger millstone of the project around the necks of the Maharashtra Government, the Union Government and the Indian economy.

The immediate issue for the State Government is whether or not it should cancel the second phase (1,744 MW) of the project. Various figures are being put out about the compensation MSEB has to pay Enron if the second phase were to be cancelled - the most commonly mentioned figure is in the region of around Rs. 30,000 crores. However, no official has been able to make clear how this figure has been arrived at.

The first thing that the State Government can do now is to at least this time conduct an independent and impartial inquiry into what cancellation will cost. (Unfortunately, the Enron project has been subject to other inquiries in the past which have been the cause of the present problem.

Most infamous was the renegotiating committee of 1995 which in order to show that it had succeeded in bringing about a reduction in capital costs - when actually there was no reduction - it combined the two phases. In its first avatar, the second and larger phase was only an option for the MSEB. The 1995 committee made Phase II a contractual burden.)

A tendentious argument that is making the rounds is that if only MSEB was in a sound financial position it would have been able to pick up DPC power at a 90 per cent plant load factor, which would have resulted in the cost of DPC power at around Rs. 5.40 a unit as against Rs. 7.09 that it actually cost in October. (Both are more than double the under Rs. 2.50 a unit that was projected in the mid-1990s).

It is true that in a two-part tariff comprising a capacity charge and energy charge, a lower PLF increases the former and therefore raises the cost of power.

However, the situation here is that the Maharashtra Electricity Regulatory Commission has correctly placed DPC power low in the priority - because the dollar-denominated tariff and imported- fuel based power of DPC makes this far more expensive than any of the power produced by MSEB's other plants. Even if the MSEB was in the pink of financial health, the high cost of DPC power would have dragged the utility down quickly.

The real reason for the true picture of Enron power coming to light so quickly is simple and was forewarned ad nauseum at the height of the controversy. First, a dollar-denominated tariff is a recipe for expensive power as the rupee is bound to depreciate against the dollar. Second, the dependence on imported fuel, especially petroleum-related, as Enron is (naphtha now and LNG on completion of Phase II), opens the door for the cost of power to go through the roof when the global situation takes a turn for the worse.

This is precisely what has happened in recent months, when the rupee has steadily fallen and global naphtha prices have sharply risen. It is claimed that once a switch to LNG is made the cost of DPC power will decline. Maybe LNG will make a difference and may be OPEC will have a change of heart. But there is another danger lurking round the corner: According to the agreement, there is a back-loading of the tariff. That is , the capital costs of the project will be recovered more in the future than now, another route to more expensive power.

In the many lessons that must be leant from the Enron project, the first three are very simple: never go in for a power plant run on imported petroleum fuel, never agree to a dollar- denominated tariff and never back-load the tariff. Unfortunately, a number of private projects on the drawing board and at different stages of clearance contain one or more of these features. There are more Enrons in the making.

The options that are now being advocated to save Phase II include lowering customs tariffs for equipment to be imported and reducing the cost of domestic loans.

Another is to change the terms of the contract so that DPC power can be fed into the entire western power grid - by submerging expensive DPC in the larger system the true cost of DPC power will be hidden in the larger average. The one gives DPC more concessions and the other is just a subterfuge.

The sordid saga of the clearance, cancellation and renegotiation of the Enron project has shown few of the participating political actors ranging from the Congress(I) to the Shiv Sena and BJP and also the officials and academics in either the State or at the Centre in a positive light.

The question now, in the next phase of this murky drama, is if any of the current crop of actors will show greater integrity of purpose than their colleagues and mentors did in the past. There is one message that they should learn.

During the earlier controversy, ``What will happen to foreign investment?'' was a bogey sounded to pressure the decision-makers to retract cancellation. We now know the benefits that this particular foreign investment project - totalling over a billion dollars and in its time the single largest case of FDI in the country - has brought to the economy.

Pakistan is not always the best example for our policymakers. But it cancelled the supply of power from the billion dollar HUBCO foreign power project three years ago, in spite of protests from the international financial community. It has just completed re- negotiations which will lead to a lowering of tariff and result in a saving of $3 billion, according to the Government of Pakistan.

CRR

(An analysis - ``Enron deal: Mid-course options before the MSEB'' - is published on Page BS I of the Business Review today.)

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