Dabhol Power Project

“…it [ICF] is a mix of finance, economics and, like it or not, politics.”

Reforms Galore

India opened her power sector to private foreign investors in 1991-92

Monopolistic, loss-making SEB’s aboundNeed to strengthen the grid, integrate the

power systems and make better use of installed capacities

Did we really need an IPP?

The Birth of DPC

DPC formed in 1992 (80% Enron, 10% each GE and International Generation Co)

A negotiated project under the government’s scheme of “fast track” projects – no bidding

The Agreement

1993: PPA between DPC and MSEB signed after necessary govt approvals obtained

After Enron spends millions “educating” the Indians about the benefits of such a project

Despite the World Bank evaluating it as “not economically viable” saying it would produce too much power at too high a price for the state

Despite the fact that the plant’s annual requirement of LNG (3m tonnes) would cause immense strain on India's forex reserves

State government guarantee backed up by one from the national government

State Elections And All That

1995: BJP/Shiv Sena ousts the Congress using “We’ll throw Enron into the Arabian Sea” as a campaign platform

The Project scrapped following the Munde committee report

US Ambassador deplores the cancellationRenegotiation committee appointed following

Rebecca Mark’s meeting with ThackerayCentral government re-ratifies it’s counter guarantee

on the last day of it’s 13-day tenure

The Renegotiated TermsPhase I increased in capacity from 695MW to

740MW. Overall project increased from 2015MW to 2184MW

What about Enron and the Arabian Sea??Thrice the original size approved by the new govt

within a month (original deal took nearly a year)Phase II to use LNG from an Enron project in

QatarReduced capital costs or transfer pricing gains??Switching from distillate to naphtha for Phase IState to still bear exchange rate risk and fluc-

tuations in international fuel prices

The Price of Power

MSEB to pay DPC a fixed component of Rs 95 cr every month irrespective of consumption

At 90% PLF, approx Rs 2.80 per unitAn ROE of more than 30% - nearly twice that

of other power projectsWould MSEB distribute that much electricity

to consumers?

Meanwhile…

Congress comes to power again in 1999Election campaign promises to halt DPC and

renegotiate tariff if necessaryComplete turnaround in Dec when faced with a

power shortageMSEB starts purchasing 33-60% of DPC’s outputGovernment says reduced offtake due to slow

growth of demand for power in the state

The Outcome

MSEB runs up abominable electricity bills……which it simply cannot affordGets rapped by the MERC for buying expensive

power from DPCDues amount to Rs 300+ cr for Nov 2000 to Jan

2001Exchange of a volley of notices – the judicial

system gets dragged into the matterFeb 2001: Enron decides to invoke counter

guarantee

And Finally…

April 2001: MSEB clears March bill after threat from DPC to cut off supply totally

MSEB stops buying power from DPC in July“The venture was always too big and too

expensive for the state of Maharashtra to handle” – Godbole committee (Aug 2001)

Phase 2 remains 95% complete as thousands are laid off

“Our experience would indicate that contracts with governmental authorities in India really do not seem to represent anything more than a starting point for a later renegotiation and are broken by Indian governmental authorities whenever and as often as they prove inconvenient or burdensome.”

Repudiation of the PPA following a change of government

Should not happenDefeats the entire purpose of attracting such

investment – will scare potential investors away from India

Message to the overseas investor: India does not have the legal and administrative infrastructure to resolve a DPC type problem quickly