TRADE: India to Pay Power Bills in Controversial Power Deal

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Feb 7 2001 (IPS) - The Indian government has agreed to pay 19 million U.S. dollars in electricity bills owed to American energy giant Enron Corp., ending speculation on the fate of the world’s biggest private power project in western Maharashtra state.

The row over the project focused on claims by critics that the terms of the power purchase agreement with Enron were unfavourable and needed to be renegotiated by the state government.

Last year, Maharashtra’s Chief Minister Vilasrao Deshmukh declared as financially unviable the power purchase agreement that a previous government had entered into with Enron in 1993.

New Delhi has finally agreed to pay, but only after Enron sprang its trump card on Tuesday — an iron-clad counter-guarantee by the central government that could be invoked should the state government or its utility, the Maharashtra State Electricity Board (MSEB), fail to honour its bills.

“We are disappointed that this decision had to be taken,” said Neil Mc Gregor, president of Enron’s unit in India, Dabhol Power Corporation (DPC) in a statement Tuesday.

The bill is for November, according to the statement. Another bill worth 40 million dollars for December is also due for payment to DPC.

Meantime, the DPC plans to launch the second phase of its two- phase, 2163-megawatt project at the port town of Dabhol, Maharashtra state. The project cost is 3 billion dollars.

“We are under legal obligation to pay,” said Union Power Minister Suresh Prabhu. But Prabhu left a final decision on how future bills would be paid until after the opinion of the Maharashtra government was obtained at a meeting with representatives scheduled on Wednesday.

Earlier, U.S. Ambassador to India Richard Celeste warned that perceptions among foreign investors would be adversely affected if Deshmukh insisted on renegotiating the power purchase agreement (PPA) that threatens to bankrupt the Maharashtra electricity board.

For a while, Deshmukh seemed inspired by the Croatian government’s action tearing up in August last year of a similar agreement with Enron.

“American businessmen are a cautious lot and their caution increases dramatically in response to indications from any country that legal contracts openly arrived at might be subject to renegotiation,” Celeste told Deshmukh late last month at a public function in Mumbai, the capital of Maharashtra.

The deal, entered into by India’s Congress government seven years ago, became a key issue in Maharashtra state elections in 1995.

But the successor Bharatiya Janata Party-Shiv Sena government which came to power, instead of “throwing Enron into the Arabian sea” as promised, renegotiated for what critics call even more unfavourable terms.

Girish Sant of PRAYAS, an independent research organisation specialising on power policy, asks how open to public scrutiny the electricity tariff arrangement with the Dabdhol Power Corporation was.

Sant says that apart from Enron’s Dabhol Power Corporation, most of the ‘fast-track’ deals entered into by the government with transnational corporations after India opened up its power sector to foreign investors in the early nineties, were marked by lack of transparency.

Similar deals entered into by multinational power firms in Asian countries have had to renegotiated or canceled last year, reported the Public Service International Research Institute (PSIRI) at the University of Greenwich.

In the Philippines, the government has warned that contracts would not be renewed to avoid burdens caused by private power producers. The state utility, the National Power Corp, owes more than nine billion dollars under such agreements.

Electricity deals entered into by the Suharto regime in Indonesia have left the state utility PLN with 50 percent more capacity than it needs on the main Bali-Java grid. PLN has negotiated nationalisation of one power plant to make prices more viable, according to PSIRI.

PRAYAS predicted what the government seemed unable to foresee — that the price of power from DPC would far exceed the six cents a unit which Enron originally promised to charge when it first signed the Dabhol deal in 1993.

Indexed as it is to dollar and petroleum prices, the cost of power from DPC is highly variable. Last year, it soared with international prices of crude, while the rupee’s value against the dollar dipped steadily.

Currently, the rates are an exorbitant 20 cents a unit. To meet the PPA terms, the state utility has had to cut back production from its own coal-fired plants that produce power far more cheaply than Dabhol. The Dabhol plant is fuelled by imported naphtha.

Under the terms of the PPA, the utility has to pay Enron fixed charges of 250 million dollars annually, regardless of how much power is actually lifted from Dabhol. What is not lifted would be considered, and deemed, generation.

DPC president McGregor has argued that any debate on the Dabhol tariff must be viewed from the perspective of the prevailing environment of India’s power sector, marked by political interference that has resulted in the bankruptcy of state utilities.

McGregor added: “The Dhabol tariff is not high, especially when compared with other new plants fueled by naphtha which has seen an extraordinarily high price increase in recent months.”

According to McGregor, tariffs might have been lower had Maharashtra electricity board been lifting 90 percent of the power made available from Dabhol, rather than the 45 percent it has been restricted to by the Maharashtra Electricity Regulatory Commission in an attempt to save costs.

McGregor wants DPC to be allowed to sell power to other states and users, which it cannot do under Indian laws. These laws prevent trading in power and requires all producers to sell solely to government utilities for transmission and distribution.

Corrupt utilities in India have not only run up huge debts due to political interference, but allow large-scale power thefts by industrial units with powerful political patrons. This has pushed transmission and distribution losses up to 50 percent.

“A market in which power can be freely bought and sold in a national context will result in surpluses offsetting deficits and reduce, in the long run, the quantum of capital required for investments in this sector,” said Mc Gregor.

But Prabir Purkayastha, a power consultant and activist for the Delhi Science Forum, contests the idea that free trading in electricity could bring down costs.

“Just look at the recent blackouts, bankruptcy of utilities and rising electricity bills in California state caused by private power companies holding up supply during peak demand periods to jack up prices,” he pointed out.

Indeed, California Governor Gray Davis said in his Jan. 8 state address: “My friends, electricity is not an exotic commodity like pork bellies, to be traded in the chaotic equivalent of a futures market; electricity is a basic necessity of life.”