Enron Mail

To:kenneth.lay@enron.com, mark.frevert@enron.com, greg.whalley@enron.com
Subject:FW: Article sent from The Hindu
Date:Tue, 16 Oct 2001 08:10:54 -0700 (PDT)

Ken, Mark, and Greg: a thoughtful piece regarding Dabhol by The Hindu. Jim

-----Original Message-----
From: Leach, Doug
Sent: Tuesday, October 16, 2001 9:21 AM
To: Lundstrom, Bruce; Walls Jr., Rob; Derrick Jr., James
Subject: FW: Article sent from The Hindu


-----Original Message-----
From: thehindu@admin.hinduonnet.com@ENRON
Sent: Tuesday, October 16, 2001 8:43 AM
To: undisclosed-recipients:;@ENRON
Subject: Article sent from The Hindu

An interesting article. Could it happen?
This article is emailed to you by tushar s. dhruv ( tushar.dhruv@enron.com )
Source: The Hindu (http://www.hinduonnet.com)

Dabhol and the do nothing Government

By Prem Shankar Jha

Ever since the Vajpayee's Government came to power more than two
and a half years ago, the economy has been sliding relentlessly
into the deepest recession it has ever known. In the nine months
since December industrial growth has averaged 1.7 per cent. The
decade when it averaged 9 per cent and the months, only five
years ago, when it touched 16.2 per cent, are now but a distant
memory. Consumer demand was utterly flat before the September 11
terrorist strikes in the U.S. It has now shrunk dramatically -
vehicle sales dropped by 20 percent in September and colour TV
sets registered a growth of a measly 3 to 4 per cent. With no
demand to power it, inflation, measured by the consumer price
index, has fallen almost to zero. The share market is dead and
there is no fresh investment. Employment in the organised sector
is shrinking in absolute terms for the first time in human

In the past three years two million new job seekers have tried to
find a place, however humble, in the organised sector of the
economy but been turned away. By 2004, the number will have risen
by another three million. But Mr. Yashwant Sinha is confident
that a good monsoon will revive demand and by itself solve all of
the country's problems.

But one recent event highlights the government's paralysis more
sharply than any ream of statisitcs can ever do. This is its
failure to react to the defeat in a London Consumer court of the
Maharashtra State Electricity Boards's attempt to foil Enron's
bid to take it before an international arbitration court by
claiming that a case was pending before an Indian court
challenging the arbitration clause in the power purchase

The London Court correctly maintained that just as a government's
international obligations as defined by the Treaty or the
agreement supercede its obligations under domestic law,
proceedings in an international court must take precedence over
those in a domestic court. The way has, therefore, been cleared
for India to face the humiliation of being dragged before an
international tribunal for a breach of it contractual

Given the fearsome proficiency of Enron's lawyers, both those
whom they retain and those who drafted the power purchase
agreement, it is virtually a foregone conclusion that the MSEB
will lose the case. If that happens, then by a conservative
estimate, India will have to pay around $5 billion, in costs and
damages. In addition it will have to spend a little more to
complete phase II of the project. Thus in the end the project is
likely to cost not $3 billion but more like $5.2 to 5.4 billion.
For much of the year or more that this demeaning dispute has
dragged on, the Centre played ostrich and pretended that this was
simply a dispute between a State Government and a private
company, and it had no say in the matter. That pretext in any
case wore thin when New Delhi refused to honour its counter-
guarantee after the MSEB stopped paying its monthly dues. But
today it has been exposed for the hollow sham it was because
neither the MSEB nor the Maharashtra Government is even capable,
let alone willing, to pay such an enormous penalty. So the bill
will, inevitably land at the Centre's door. And that means the
taxpayer's door.

The Centre will have no option but to pay. But having done so,
will it then gift the project to the Maharashtra government? The
answer, obviously, is no. What it will be forced to do is
transfer it to the National Thermal Power Corporation to complete
and operate. But since no one can possibly run a $5 billion power
plant generating 2,100 MW of power profitably, the NTPC too will
insist on the capital value of the project being substantially
written down first. Judging from the offers that the Tata
Electric Company and the Bombay Suburban Electricity Supply
Company (BSES) were making to Enron, the written down value will
not exceed $2 billion. Thus, whichever way we look at it, the
country will end by paying for a Dabhol-size power plant ($3
billion) without getting a single watt of electricity or for that
matter anything else) in return.

None of the above criticism is intended to deny that Enron
probably did gold plate the Dabhol project once the Narasimha Rao
government agreed to price its power on a cost-plus basis. Nor is
it intended to mitigate the criticism of the Rao government that
had it only brought the Maharashtra government and more
particularly the MSEB into the negotiations from the beginning
the latter's inability under law to pay backup charges at more
than twice the rate being demanded by public sector power plants
would have been exposed long ago.

But the mistakes of the past cannot in any circumstances justify
even greater mistakes in the future. For better or for worse, the
Enron deal was struck, and it was struck not once but twice. As a
serious, responsible government that knows the importance of
honouring one's word in a world where contract is king, the
Vajpayee Government must honour the country's contractual
obligations. This does not in any way preclude its trying to
alter its terms by negotiation to avoid pitfalls that it did not
see, but by definition all future changes must be by mutual

The changes that Enron will accept and will make Dabhol's power
affordable, are known to all. As the 1995 Renegotiating Committee
and the Godbole Committee recommended, the Government should buy
the $800 million LNG regasification plant and turn it into a
separate company that can supply gas to all the current and
future users on the west coast. In fact, it could go one better
and bring in a foreign strategic partner to invest in and manage
the plant. This is entirely feasible because its installed
capacity is more than twice what Dabhol is likely to need. This
will bring down the capital cost, upon which backup charges and
cost per unit of power will be calculated, to $2.2 billion.

Second, the Central Government should buy 30 per cent of the
equity in Dabhol from the promoters. This was negotiated with the
1995 committee but the MSEB could not raise the funds to do so.
This will bring down the cost that has to be serviced in foreign
exchange to $1.9 billion and the debt portion whose servicing
represents a fixed charge in foreign exchange to $1.2 billion.

The Centre could also follow up a suggestion made by the chairman
of BSES to convert a part of the foreign exchange into rupee
debt. That will reduce further the vulnerability of electricity
tariffs to changes in the exchange rate. With the price of oil
having fallen (for India) to around $20 a barrel, these changes
will bring down the cost of Dabhol's power at 90 per cent
capacity utilisation own to below Rs. 2.40 a unit. This will make
it entirely viable, especially if Maharashtra and the
neighbouring states agree to make a marginal increase in the
average power tariff or are able to bring down power theft and
reduce subsidies to the pseudo-rural sector.

The right course for the centre even at this late stage will be
to take over the project from the MSEB, renegotiate it with
Enron, or if Enron wants to opt out, then buy the project from it
at cost and make the above structural changes on its own before
handing it over to the NTPC. Getting dragged to court will
neither solve the problem of paying for Dabhol's power nor answer
the more basic question - how can any electricity grid add new
power plants to itself without raising the average tariff it
charges for electricity.

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