Enron Mail

Cc:vince.kaminski@enron.com, jeffrey.shankman@enron.com,stinson.gibner@enron.com
Bcc:vince.kaminski@enron.com, jeffrey.shankman@enron.com,stinson.gibner@enron.com
Date:Thu, 4 Jan 2001 07:30:00 -0800 (PST)


We shall forward to you shortly a copy of the message from Sandeep with the
numbers you have
requested. What follows below are the extracts from two recent articles on
the power situation in India
published by The Financial Times.

The first article describes recent power outage in northern India affecting
millions of people.
One possible line of defense is pointing out to the value of output lost due
to power
shortages. It is obvious that the value of lost production exceeds the cost
of power produced
by the Dhabol plant (expensive as it may be). The power cut affected 230
million people.

The second article is Enron specific.


ASIA-PACIFIC: Power failure hits north India
Financial Times; Jan 3, 2001

Tens of millions of people were left without electricity
in northern India
yesterday after a power grid breakdown.

Electricity was gradually switched on in some areas and
most parts of the
capital New Delhi, with 60 to 70 per cent of supply
expected to be restored
by the end of the day, according to power grid

The Associated Chambers of Commerce and Industry
(Assocham), a
leading business organisation, expressed "deep concern"
and called for a
mechanism to prevent future disruption that could
"cripple the economy".

The power failure across eight Indian states, including
New Delhi, disrupted
train services, water supplies and the telephone network
and forced
hospitals to switch to emergency generators.

The fault occurred on the Northern Grid, which provides
electricity for 226m
people, and affected the states of Delhi, Haryana,
Punjab, Uttar Pradesh,
Himachal Pradesh, Madhya Pradesh, Rajasthan and Jammu
and Kashmir.

A breakdown at a sub-station in Kanpur in Uttar Pradesh,
India's most
populous state, caused an overload of power on other
lines, which then
failed as well.

Trains stopped running for most of the day and signals
systems were
damaged. New Delhi international airport was also
slightly affected before
its own power supply could be engaged.

"We will probe into the reasons for the failure. It is
most likely to be a
technical failure, but we will investigate why it
happened," Suresh Prabhu,
the power minister, was quoted as saying by Press Trust
of India.

India suffers regularly from power problems because of
lack of funding to
upgrade infrastructure. Theft of supplies is also a big
problem. Thirty per
cent of the country's electricity is stolen, according
to analysts. In New
Delhi as much as 50 per cent is stolen.

Two years ago, a power failure blacked out Uttar Pradesh
and Delhi for

Assocham issued a statement, saying that increasing
industrial demand
would exacerbate the problems already faced by India's
inefficient power
sector. "The slow progress, particularly in
strengthening the transmission
and distribution system, and ever increasing theft will
contribute to
worsening the power supply situation further."

Copyright: The Financial Times Limited

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ASIA-PACIFIC: Energy group launches image offensive:
Enron has a
plan to reverse its reputation as a profiteering
operating in India, writes Khozem Merchant

Financial Times; Jan 3, 2001

Enron, the US energy producer and a constant target of
criticism in India, is
hitting back with a campaign to reverse its image as a

Its "myth and reality" offensive in local newspapers
follows the west Indian
state of Maharashtra's decision to review the tariff it
pays the Texas-based
company, whose Dollars 2.2bn electricity generating
plant at Dabhol is
India's biggest single foreign investment.

Maharashtra's tariff has more than doubled since 1993
and is three times
greater than that charged by other independent power
producers (IPPs).
The tariff has risen because of the depreciation of the
rupee against the
dollar and the high but now falling price of naphtha
fuel. The state also pays
a fixed capacity charge of Rs970m (Dollars 21m) a month,
reflecting the
huge project cost and, controversially, irrespective of

A showdown looks inevitable, reminiscent of a clash six
years ago that
damaged India's appeal to foreign investors. A former
official of the World
Bank, which has criticised the deal, says Enron is
emerging "as the East
India Company of the 21st century" - a reference to the
British trader that
colonised key areas of the Indian economy in the 19th

The stand-off is the latest blot on India's power
sector. The UK's PowerGen
and Cogentrix of the US have quit India recently,
frustrated by long approval
procedures, inadequate payments mechanisms or because of
returns elsewhere.

"India has lost time and opportunity and has driven
returns down by six
percentage points," says Gerry Grove-White, former India
general manager
of PowerGen, which has sold its 655MW plant in Gujarat
to China Light &
Power of Hong Kong.

India's national plan for the five years to 2002 says
generating capacity
must rise by 40,000MW to about 120,000MW. But since
1992, IPPs have
added only 3,000MW and 2,500MW remains under
construction. This is
insufficient to support official projections of 6 to 8
per cent economic

Enron was a bellwether of India's liberalisation,
winning fast-track project
approval in the early 1990s. Phase 1, a 740MW plant
fuelled by expensive
naphtha came on stream in May 1999, and phase 2, a
Dollars 1.87bn plant
of 1,624MW capacity that will run on cheaper liquefied
natural gas (LNG),
will be completed this year. Only two of seven other
fast-track proposals
have achieved financial closure.

From the outset Enron encountered attacks, culminating
in Maharashtra's
then nationalist government cancelling the project
before renegotiating
terms no less onerous. Vilasrao Deshmukh, chief minister
of the successor
government, says the power purchase agreement is

Enron, whose attackers also include cultural
chauvinists, wants to maintain
good political relations in a hostile but lucrative
environment. Enron views
India as a testing ground for its evolution from a
traditional manager of
power plants to a broad-based trader of commodities,
such as energy, gas
and bandwidth.

To support these ambitions Enron hopes to trade energy
between power
surplus and deficit states, once legislation is passed
this year. It is building
an LNG terminal and pipelines to trade imported natural
gas. And it is
laying a 15,000km fibre-optic network to trade bandwidth
space in a country
desperately short of this new economy commodity.

In any event, Enron believes it has a watertight
contract. It is supported by
many that believe any subversion of the contract would
confirm investor
perception of Maharashtra, India's financial and
industrial hub, as an
unreliable destination for investment.

Mr Deshmukh - who has avoided the language of his
predecessor, which
threatened to "dump Dabhol into the Arabian Sea" - is
under pressure from
radical members of his wobbly coalition. But his options
are limited.
Scrapping the project would be ruinous for an
economically troubled state
that would have to compensate shareholders.

Maharashtra State Electricity Board, the local utility
and Enron's main
client, is obliged to dispatch or "off-take" 90 per cent
of Dabhol's output. Yet
MSEB has never honoured these guarantees. Its off-take
has averaged 60
per cent since the plant opened and, in effect, MSEB has
been paying a lot
more while consuming a lot less power.

One reason off-take is low is because the state's tough
new regulator has
told MSEB to buy from cheaper sources. Enron says the
tariff would be
Rs4.02/kWh if MSEB's off-take averaged 90 per cent. But
with off-take a
third lower, the average tariff is Rs4.94 per unit, and
often higher. In
October, the tariff was Rs6.91 per unit, when off-take
was about 49 per
cent. Enron says tariffs should come down when phase 2,
run on cheaper
LNG, starts.

These cost pressures have forced MSEB to take up only
half of a 30 per
cent equity option in phase 2. Enron has acquired the
balance and
mandated bankers to find a buyer.

Enron's difficulties have undermined the appeal of IPPs,
which have failed to
deliver the flood of investments. Potential IPPs feared
they would never be
paid by state generating boards that have become a
byword for corrupt
management of power.

Reform of state electricity boards, whose uneconomic
pricing means
industrial users subsidise poor farmers, as well as
transmission and
distribution (T&D) services to check huge theft and
technical losses, is
overdue. "Given the limited resources, money would be
better spent on T&D
rather than on new plant," says Oliver Blackaby,
managing director of N M
Rothschild in India, which is advising Karnataka on the
privatisation of its
distribution network.

For the moment, attention is fixed on Enron's ability to
satisfy the
competing interests of investors and clients. As Sanjay
Bhatnagar, chief
executive officer of Enron India, said in a recent trade
magazine, one of the
key lessons learned from phase 2 is "having flexibility
to deal with

Copyright: The Financial Times Limited

, Copyright The Financial Times Limited 2000. "FT" and "Financial Times"
are trademarks of The Financial Times. Privacy Policy | Terms & Conditions.