THE ENRON CONTROVERSY
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Techno-Economic Analysis and
Policy Implications
Girish Sant and Shantanu Dixit
PRAYAS
Subodh Wagle
CEEP, University of Delaware, USA
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About the Authors...
Girish Sant has done his B.Tech. and M.Tech. (Energy Systems
Engineering) from TIT, Bombay. His recent work includes: design of a
least cost alternative power plan for Maharashtra (in collaboration with
International Energy Initiative, Banglore); analysis of the power
component of the Sardar Sarovar Project, performance evaluation of the
solar water heater and wood-gasifier performance in Maharashtra; and
an analysis of power consumption of agricultural pump-sets.
Subodh Wagle has done his B. Tech, from IIT, Bombay is now
working on his Ph.D. at the Center for Energy and Environmental
Policy, University of Delaware, USA. His current interests include:
Indian power policy in the perspective of sustainability and equity;
analysis of the conceptual issues in sustainable development; issues of
sustainability and international equity in global climate change policies.
Shantanu Dixit is an electrical engineer with a post-graduation in
business management. He has been working with PRAYAS group for
last three years and has made a major contribution to PRAYAS’s recent
projects on design of least-cost alternative power plan for Maharashtra,
analysis of power component of SSP, solar waler heaters, field-testing
of a new design of efficient window (in collaboration with Lawrence
Berkeley Laboratory', USA).
Community Health Cell
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Phone : 5531518
The Enron Controversy
Techno-Economic Analysis
and Policy Implications
Girish Sant and Shantanu Dixit
PRAYAS
Subodh Wagle
CEEP, University of Delaware, USA.
PRAYAS
Contents
1.
2.
3.
Summary
9
Power Purchase Agreement (PPA) Between Dabhol
Power Company and Maharashtra State Electricity
Board:
Structure and Implications
13
The Enron Deal:
Why the First Stage Should Be Cancelled
37
The Enron Controversy:
Alternative Options For Electricity Generation In Maha
rashtra
42
4.
MNCs: New Development Messiahs and Old Justifications:
Investigating Enron’s Claims of Providing Development
Assistance To India
50
5.
Roots of Enron Controversy:
Fundamental Ills of Power Sector
63
4 • The Enron Controversy
Glossary
BHEL:
Bus-bar:
CEA:
Co-generation:
GoI/GoM:
GT:
IPP:
IRR:
MSEB:
NTPC:
PLF:
SEB:
Bharat Heavy Electricals Ltd.
Point at which power is fed to the grid by a power plant
Central Electricity Authority
Efficient
generation
of
power
and
steam
simultaneously (usually in industry)
Government of India / Maharashtra
Gas Turbine (used for power generation)
Independent Power Producer
Internal Rate of Return (a measure of profitability)
Maharashtra State Electricity Board
National Thermal Power Corporation
Plant Load Factor (capacity utilisation)
Slate Electricity Board
Lakh:
Million:
Crore:
$:
kWh:
MW:
100 thousand
1000 thousand
10 Million
U.S. $ = 32 Rs (in 1995)
one Unit of electricity
Million Watts (power)
Preface
PRAYAS is a voluntary initiative in the fields of energy, health, and
learning and parenthood. Members of the Development & Energy Group
of PRAYAS have been working on various issues in the power sector
for last four years. The major effort was a two and half year study on
alternative planning for the power sector of the state of Maharashtra in
India. A report based on this study entitled: “Least Cost Power Planning:
Case Study of Maharashtra State” provided an opportunity to enter into
dialogue with officials, researchers, and activists on problems and
prospects of power sector in Maharashtra. When the Enron controversy
erupted, it was quite logical for us to initiate a study of the deal from
techno-economic and policy perspectives. The Power Purchase
Agreement (PPA) between Dabhol Power Company (DPC) and
Maharashtra State Electricity Board (MSEB) was made public in March
1995. This served as an impetus for intensifying our efforts.
Power sector policies are especially marked by their technoeconomic esotcrica and their mystification. In this context, the Enron
controversy, on one hand, posed a challenge as it created an urgent need
to take issues related to the power policy to people in the form and
language that would not alienate them. On the other hand, the
controversy brought about an excellent opportunity as a wide section of
people and a broad range of organisation started taking keen interest in
the affairs of power sector. While remaining true to our brief,'we tried to
continually expand and refine our analysis as it has been very difficult to
gather relevant information. Simultaneously, we also tried to vigorously
interact with various researchers, government officials and various
people’s organisations working on this controversy in order to
understand their anxieties, priorities, and interests and also to provide
analytical inputsand disseminate the results of our analysis.
We had planned to write a single comprehensive and coherent
paper covering all techno-economic aspects in detail and publish it in a
booklet form. However, with the appointment of the Cabinet Sub
committee to review the Enron deal and with intensification of struggle
by local people, we felt that we should immediately present the work we
have already done to a larger audience so that a wide variety of people
could participate in the ongoing debate more effectively and decisively.
This prompted our decision to come out with this collection of five
independent papers. Being a product of a heated controversy and being
6 • The Enron Controversy
produced when the controversy is still raging, this work does have
certain limitations. However, we feel that it would certainly serve its
above-mentioned purpose very well.
We wish to express our gratitude for guidance and help from
many of our seniors and friends including: Dr Sulabha Bramhe, Mr
Sambamurthy, Mr Ashok Rao, Dr Arvind Lele, Mr Kannan Srinivasan,
Mr N S Divckar and many other friends. We arc also grateful to Dr
Sulabha Bramhe, Dr Rangan Banerjee. Dr S Rajgopalan for their
valuable comments and suggestions on the initial drafts of some of the
papers.
Subodh Wagle also wish to acknowledge the help and support
received from Dr. John Byrne, Director, Center for Energy and
Environmental Policy , University of Delaware.
Shantanu Dixit
Girish Sant
Subodh Wagle
June 13, 1995.
Preface to the Reprint
Our booklet received an overwhelming response, from all sections of
society in India and abroad, requiring a reprint in just over three months.
These three months have seen unprecedented activities in the Indian
power scene.
On August 3,1995, The GoM announced the cancellation of
second phase of Enron project, and repudiated first phase. Following
this Enron has initiated an arbitration process, to seek compensation in
excess of $ 300 Million. And is simultaneously trying to renegotiate the
deal by offering significant reduction in tariff by reducing the capital
costs and using cheaper Indian Naptha as fuel. Enron has said that claim
by Ms Powers (referred in this booklet), of spending S 20 Million to
educate Indian officials, was a mis-representation and she no more works
with the company. But it has failed to give a convincing explanation of
this expenditure. On September 6th, the GoM has appealed to the court,
seeking cancellation of the MSEB-DPC contract. The grounds on which
the government has appealed arc (i) that the contract is against the public
policy, and (ii) has been awarded based on the wrong and misleading
information.
The private power projects in general and the fast track projects
in particular, are engulfed in controversy. Some private promoters have
offered to reduce the capital cost significantly. The power projects arc
getting delayed but their cost are coming down.
Preface • 7
Earlier it was widely believed that cancellation of Enron project
will have a large international backslash. Foreign investors will shy away
and higher interest on international Ioan due to increased risk perception
was predicted. We have been arguing that this was a false bogy. Our
prediction has come true. The Mittals have negotiated a loan al a very
attractive terms.
MSEB has initiated plans to involve the Indian public and
private sector for joint venture projects in a bid to reduce the cost of the
power projects. We had pointed to the fact that the decentralised power
plants arc cheaper and have short gestation time, and are appropriate
choice at the present time. Many SEBs have started actively promoting
the decentralised power plants.
With plans getting delayed the power situation in Maharashtra
docs not look bright for the immediate future. We hope MSEB acts on
the suggestion to encourage the cogeneration and other small power
plants; and actively initiate plans for demand management and loss
reduction.
More information has become available on Dabhol project, and
there is an urgent need to draw an alternate power plan by updatcing our
earlier study on 'Least Cost Plan' for Maharashtra, but we are unable to
pursue this due to the lack of funds and time.
This reprint incorporates only small changes in section 2.3 and
3.2.1.2 of the first article, apart from the grammatical corrections. The
conclusions remain valid and rather have been strengthened by the
additional information now available. We owe special thanks to Mr Ajit
Gaunckar, Mr Sanjay Pendsc, Dr Anupam Saraph and Mr Abhay Mehta
for improving this reprint.
September 10, 1995.
<$ • The Enron Controversy
About the Enron/DPC Project
Combined Cycle Gas Turbine (CCGT)
Distillate Oil (Phase I) and LNG (after Phase II)
695 MW (Phase I), additional 1320 MW (Phase II)
Near Guhagar, Dist. Ratnagiri, about 170 Km South of
Bombay.
Promoters :
Subsidiaries of Enron Corporation, USA, General
Electric and Bechtel Inc. with equity holding of 80, 10
and 10 percent respectively.
Capital Cost : Phase I — US $ 910 Million, (with equity of $ 266
Million).
Sole Consumer : Maharashtra State Electricity Board (MSEB)
MOU signed on :20lh June 1992.
PPA signed on : 8th December 1993.
Financial Closure :1st March 1995.
Expected Commissioning :End of 1997.
Contract Period : 20 Years.
Type of plant :
Fuel :
Capacity :
Location :
Summary
This collection of papers and articles is an outcome of our efforts to
study the Enron controversy from techno-economic and policy
perspectives. It must be noted that we have not touched other equally
important aspects of the controversy including: environmental, dis
placement related , legal etc.
This collection comprises three main sections: (a) a technical
paper on techno-economic analysis of the PPA between DPC and MSEB,
(b) following three papers on analysis of three other policy issues that ac
quired special significance during the debate; and a brief overview of
problems and challenges in power sector policies in India.
The PPA between MSEB and DPC could be termed as the most
controversial document in the history of Indian power sector. It was kept
as a “zealously guarded secret” by DPC and even the earlier state
government. In the elections for state legislative assembly, there was a
change in government and DPC, sensing tough times ahead, decided to
make the PPA public. Though it had already achieved a kind of notorie
ty, when PPA was finally released it virtually opened the Pandora’s Box.
In the ensuing confusion created by agitations, public debate, lobbying,
and above all a lot of wrong information, we tried to keep ourselves
focused on the analysis of the PPA. Findings of our analysis arc
presented in the first paper on the analysis of PPA. Despite our efforts,
because of the nature of the PPA itself, this article has remained some
what difficult for a lay reader. The following brief summary could be
helpful in this context.
Some of the salient findings of our analysis :
(a) The DPC is said to be liable for stringent penalties in case of non
performance such as time over-run, capacity short fall etc. DPC
passes on most of these penalties to its contractors. It is not likely to
pay anything from its pocket and in some cases (of non-performance)
even earn profits.
(b) According to our calculations, the internal rate of return (IRR - an
indicator of profitability) for DPC is exorbitantly high, to the tunc of
28% (post-tax, real). This is equivalent to over 40% flat rate of return
in dollar terms. In short, this means that we will be borrowing capital
from Enron at exorbitant rate of about 38% in rupee terms.
!0 • The Enron Controversy
According lo the recommendations of Vanguard Capital, the con
sultant appointed by Government of India. IRR of 17% to 21% (post
tax. real) is adequate to attract foreign investment in power sector
even after considering perceived high-risk.
The higher capital cost, together with the above-normal rate of return
described above, would result in "excess payments” of about Rs.
1,100 to 1,400 crore ($ 350 to 425 million) to Enron as a one time
payment in 1996 currency.
(d) The tariff structure stipulated in the PPA is very complex. Il is
backloaded, in the sense that it has an in-built rise of 4%. In addition.
tariff would be affected by depreciation of rupee against dollar and
plant load factor (PLF). We have plotted tariff for the project period
(1997-2017) for a few possible scenarios (for PLF 70% and 90% and
for rupee depreciation rale of 4% and 6%).
In these scenarios, the price of electricity from Enron varies
from Rs. 2.55 (8 cents) /kWh (1997) lo about Rs. 12(12 cents) /kWh
(2016). Thus, the oft-quoted rate of Enron’s electricity, Rs.2.4/kWh is
quite deceptive. If required for comparison, the most realistic and
representative price of Enron's electricity is Rs. 4.18 (about 13 cents)/
kWh at busbar i.c. at the doorstep of the Enron plant and about Rs. 5.5
(17 cents) /kWh at the doorstep of an average consumer. This is the
leveliscd tariff for 70% PLF and 4% Rupee depreciation.
Coming lo the three subsequent papers, we have discussed three
policy issues that became important in the debate. In our discussions with
people in the new government as well as with individuals and
organisations engaged in the debate and struggle, we felt that these issues
need to be dealt with in detail. The following three papers deal with three
such policy issues: (a) Issue of overall economics of the First stage of the
project; (b) Issue of alternatives to the Enron project; (c) Issue of
international image.
The second paper, provides a detailed rejoinder to an article
written by the well-known energy economist and Director of the Indira
Gandhi Institute of Development Research Dr Kirit Parikh in Times of
India (28th April 1995). In the article, Dr Parikh inferred that cancelling
the first stage of the project would make ‘‘little economic sense” and,
hence, the first stage should be given the green signal. Before writing this
article. Dr Parikh had been a consistent critic of this project. This
necessitated a proper rejoinder of his argument and inference. Using Dr
Parikh’s methodology and by pointing out some crucial missing
(c)
Summary • 11
elements, our paper arrived at the conclusion that, cancelling even the
first stage makes economic sense.
With increasing analytical evidence as well as popular protest
against the project, another argument was put forth. It was argued that
there arc no tcchno-cconomically viable and immediately implementable
alternatives to the Enron project. Further, it was also argued that in the
era of financial crunch, we have no other way for arranging finance but
to go to some MNC like Enron. The third paper deals with this issue in
detail. First, it argues that there arc techno-economically viable, socioenvironmcntally less damaging, and practically feasible “immediate" as
well as "long-term” alternatives to the Enron project. Secondly, it points
out practical options to raise Finances at a fair rate.
There has been a genuine fear in the minds of many that if the
Enron deal were cancelled, the international business community (i.c.
MNCs) will react sharply and the flow of foreign capital to India will get
restricted. In our presentations and dialogues, we tried to dispel this
bogey of international backlash with three main arguments. These are
presented in the second paper dealing with the arguments of Dr Parikh
under the sub-title: International Credibility.
Through our like-minded friends in Europe, we came across a
shocking testimony by a lop Enron official to a committee of U.S. House
of Representatives. The testimony which cited Enron’s Dabhol project
contained many questionable statements and unsubstantiated claims
without any basis in reality. Thus, in the context of the bogey of
international back-lash, the fourth paper “MNCs, New Development
Messiahs
investigates claims of Enron about providing development
assistance to India and reveals the contemptuous attitude of Enron
towards India and Indians.
After dealing with the Enron controversy in detail, we fell it is
necessary to present it in a larger context of power policy in India. The
paper argues that the Enron controversy is a mere symptom of a deeper
malice affecting the entire power sector. And hence, the new onslaught
of private power project is going to aggravate problems unless we take
special measures to ensure that these new projects serve the real needs of
power sector.
We have been conveying the results of our analysis to the
government. We also made a presentation to the Cabinet Sub-Committec
about the results of our work. In addition, even before the Cabinet Sub
committee was announced, we had made representation to the new state
government urging it to take immediate action to limit the liabilities, if it
10 • The Enron Controversy
According to the recommendations of Vanguard Capital, the con
sultant appointed by Government of India. IRR of 17% to 21% (post
tax, real) is adequate to attract foreign investment in power sector
even after considering perceived high-risk.
The higher capital cost, together with the above-normal rate of return
described above, would result in “excess payments” of about Rs.
1. 100 to 1,400 erorc (S 350 to 425 million) to Enron as a one time
payment in 1996 currency.
(d) The tariff structure stipulated in the PPA is very complex. It is
backloaded, in the sense that it has an in-built rise of 4%. In addition.
tariff would be affected by depreciation of rupee against dollar and
plant load factor (PLF). We have plotted tariff for the project period
(1997-2017) for a few possible scenarios (for PLF 70% and 90% and
for rupee depreciation rate of 4% and 6%).
In these scenarios, the price of electricity from Enron varies
from Rs. 2.55 (8 cents) /kWh (1997) to about Rs. 12(12 cents) /kWh
(2016). Thus, the oft-quoted rate of Enron’s electricity, Rs,2.4/kWh is
quite deceptive. If required for comparison, the most realistic and
representative price of Enron’s electricity is Rs. 4.18 (about 13 cents)/
kWh at busbar i.c. at the doorstep of the Enron plant and about Rs. 5.5
(17 cents) /kWh al the doorstep of an average consumer. This is the
levelised tariff for 70% PLF and 4% Rupee depreciation.
Coming to the three subsequent papers, we have discussed three
policy issues that became important in the debate. In our discussions with
people in the new government as well as with individuals and
organisations engaged in the debate and struggle, we felt that these issues
need to be dealt with in detail. The following three papers deal with three
such policy issues: (a) Issue of overall economics of the first stage of the
project; (b) Issue of alternatives to the Enron project; (c) Issue of
international image.
The second paper, provides a detailed rejoinder to an article
written by the well-known energy economist and Director of the Indira
Gandhi Institute of Development Research Dr Kiril Parikh in Times of
India (28lh April 1995). In the article. Dr Parikh inferred that cancelling
the first stage of the project would make “little economic sense” and,
hence, the first stage should be given the green signal. Before writing this
article. Dr Parikh had been a consistent critic of this project. This
necessitated a proper rejoinder of his argument and inference. Using Dr
Parikh's methodology and by pointing out some crucial missing
(c)
Summary • / /
elements, our paper arrived at the conclusion that, cancelling even the
first stage makes economic sense.
With increasing analytical evidence as well as popular protest
against the project, another argument was put forth. It was argued that
there arc no tcchno-economically viable and immediately implementable
alternatives to the Enron project. Further, it was also argued that in the
era of financial crunch, we have no other way for arranging finance but
to go to some MNC like Enron. The third paper deals with this issue in
detail. First, it argues that there arc techno-cconomically viable, socioenvironmcntally less damaging, and practically feasible “immediate" as
well as "long-term” alternatives to the Enron project. Secondly, it points
out practical options to raise finances al a fair rate.
There has been a genuine fear in the minds of many that if the
Enron deal were cancelled, the international business community (i.e.
MNCs) will react sharply and the flow of foreign capital to India will get
restricted. In our presentations and dialogues, we tried to dispel this
bogey of international backlash with three main arguments. These arc
presented in the second paper dealing with the arguments of Dr Parikh
under the sub-title: International Credibility.
Through our like-minded friends in Europe, we came across a
shocking testimony by a top Enron official to a committee of U.S. House
of Representatives. The testimony which cited Enron's Dabhol project
contained many questionable statements and unsubstantiated claims
without any basis in reality. Thus, in the context of the bogey of
international back-lash, the fourth paper “MNCs, New Development
Messiahs
investigates claims of Enron about providing development
assistance to India and reveals the contemptuous attitude of Enron
towards India and Indians.
After dealing with the Enron controversy in detail, we felt it is
necessary to present it in a larger context of power policy in India. The
paper argues that the Enron controversy is a mere symptom of a deeper
malice affecting the entire power sector. And hence, the new onslaught
of private power project is going to aggravate problems unless we take
special measures to ensure that these new projects serve the real needs of
power sector.
We have been conveying the results of our analysis to the
government. We also made a presentation to the Cabinet Sub-Committee
about the results of our work. In addition, even before the Cabinet Sub
committee was announced, we had made representation to the new state
government urging it to lake immediate action to limit the liabilities, if it
12 • The Enron Controversy
was planning to review the project. We had recommended urgent
formation of a multi-disciplinary group to estimate the liabilities incurred
and find avenues of limiting the liabilities till the government decision on
this project was made.
The Power Purchase Agreement (PPA) Between Dabhol
Power Company and Maharashtra State
Electricity Board: The Structure and its TechnoEconomic Implications
Girish Sant, Shantanu Dixit, Suboclh Wagle
Introduction
In the debate over techno-economic aspects of the Enron controversy, at
every stage, a barrage of new information, arguments, and allegations is
being fired by both sides. To help resolve the ensuing confusion, an indepth study of the original documents is mandatory. Among various
documents, the power purchase agreement (PPA) is the heart of any
independent power project (IPP). It guarantees market for power
produced by the IPP and the tariff at which it would be sold to the
purchaser. The PPA creates legal obligation on both the parties to
perform the previously accepted tasks in a predetermined manner.
This paper presents an analysis of the PPA between Dabhol
Power Company (DPC), the Enron subsidiary handling Dabhol project,
and Maharashtra Stale Electricity Board (MSEB). The analysis is carried
out in the techno-economic perspective and does not deal with issues like
environmental and legal. The purpose of the analysis is to clarify the
structure of the PPA and its techno- economic implications and to make
an attempt to evolve a methodology to analyse such issues. Apart from
the PPA, the analysis draws information from other publicly available
documents and communications with MSEB. The first three sections in
this paper elaborate various aspects of the structure of the PPA, while the
later four sections deal with the important techno-economic implications.
Since, a lot has been written and talked about the DPC project, a
certain level of knowledge of terms and issues is assumed. To limit
length and reduce complexity of the paper, the paper is focused only on
the first phase of the project with 695 MW capacity and using distillate
oil as fuel.
14 • The Enron Controversy
1.0
Salient Facts About the PPA Between DPC and MSEB
This section describes some important facts about DPC and PPA in order
to clarify some of the misconceptions:
The DPC plant is a build-own-operate (BOO) type of plant. The
PPA between DPC and MSEB was signed on 8lh December 1993 and
was later amended on 2nd February 1995. The PPA assures DPC that
MSEB will buy power from DPC for 20 years and make payments at the
negotiated tariff. After expiry of the contract, MSEB has an option of
buying the plant from DPC. The method of computing the cost is not
fully spelt out in the PPA.
The PPA assures MSEB that DPC will construct this 695 MW
(625 MW base and 70 MW peaking) plant in 33 months after the
financial closure. The financial closure was effected on lsl March 1995.
DPC assures 90% availability of the plant. For calculating tariff, a
minimum efficiency of 44.9% for the base load plant and 28.1% for the
peaking plant will be considered.
The cost of fuel will be passed on to MSEB. Enron Fuels
International has been appointed as the fuel manager, and will be
responsible for identifying the least cost fuel supplier. It will be paid $
2.5 million per year by MSEB, through DPC, for doing this. MSEB can
exercise control on this process and DPC will need MSEB’s approval for
these purchase contracts.
All contracts during the construction period also need to be
approved by MSEB. However, MSEB is allowed to object only if plant
specifications are materially (from safety or economic point of view)
harmful to its interests.
The PPA does not specify capital cost of the project. Change in
capital cost (either decrease or increase) will not be passed on to MSEB.
But change in costs due to change in customs duly and other taxes will
be passed on to MSEB. The new Government of India (GOI) guidelines
(which assure 16% return on equity etc.) arc not applicable to the DPC
project and in this case tariff is based on negotiated values agreed
mutually by the DPC and the MSEB. Hence, the economic analysis of
the PPA and comparison of DPC’s expected profit with that of GOI
guidelines become essential.
The Power Purchase Agreement ’15
2.0
Analysis of DPC’s Performance Guarantees and Related
Penalties.
One of the main planks of pro-Enron argument is a set of various
performance guarantees from the DPC and the related penalties it has
agreed to pay in case of default. As per the PPA, DPC will pay penalties
for the late completion of plant, shortfall in capacity, and efficiency
lower than the agreed value. Additional penalties arc applicable in case
the plant availability falls below 90%. This section lists and analyses
these guarantees and related penalties. Table 1 shows the payment by
DPC to MSEB and by DPC’s contractors to DPC in case of failure to
give specified performance. It must be noted that the agreed parameters,
when these penalties become applicable are different for DPC and it’s
contractors.
The implications of these penalties are given in the next few
sections.
Table 1: Penalties for DPC and Contractors for failure to meet agreed
parameters._________________________________________________
Parameter
I) Delay in construction
a) Upto six months
b) After six months
2) Shortfall in capacity
2.1
DPC pays MSEB
Contractors pay DPC
$ 14,000/day
$ 110,000/day
$ 100/kW
$ 250,000/day
$ 340,000/day
$ 1,892/kW
Guarantee Against Delay in Construction
DPC assures plant construction within 33 months. If the plant
construction is delayed beyond 33 months, for first 6 months of delay,
DPC will pay $14,000 /day (Rs 0.64/kW/day) to MSEB. After first 6
months, the penalty will be increased to $ 1 10,000 /day (Rs 5/kW/day).
This is on the lower side of the range (Rs 5 to 7 /kW/day) prescribed by
Vanguard Capital, the consultant to Government of India (GOI)
(Vanguard Capital, 1994). On the other hand, as per the construction
contract signed by DPC with Bechtel and General Electric (called
contractor), DPC will receive much larger penalties from the contractor.
The contractor assures construction in 33 months, and for the delay up to
6 months, contractor will pay $250,000 /day to DPC and there after
$340,000/day (IDBI, 1994). In effect, DPC will retain nearly, $230,000
per day after paying penalty to MSEB. This sum, of $230,000 is
sufficient for DPC to meet the daily interest payment on all debt and
16 • The Enron Controversy
allows an additional margin of Rs. 13 lakh per day for other
expenditures. In effect, in case of delay, DPC pays nothing from its
pocket, neither as interest on loans nor as the much talked about penalties
to MSEB. Contractor’s willingness to assure such heavy penalties to
DPC also indicates that guarantee for constructing such plant in 33
months docs not involve a big risk.
2.2
Guarantee Against Shortfall in Capacity
Between DPC and MSEB, the plant will be considered commissioned
only if it can operate at a minimum of 80% of the nominal capacity (i.c.
80% of 695 MW = 556 MW). In case, the commissioned capacity is
more than 80% of nominal capacity but less than the nominal capacity
(695 MW). DPC is allowed to make rectillcations in the plant, within 12
months, to raise the capacity up to 695 MW. If it fails to do so even after
12 months. DPC pays $ 100 /kW of capacity shortfall. This is nearly half
of the penalty amount (S 185 to 200 /kW) prescribed by Vanguard
Capital in such cases.
As per the PPA (Schedule 1), the capacity being built at Dabhol
is not 695 MW but 725 MW (4.4% more than 695). DPC will not accept
the plant from its contractor if the capacity is below 695 MW. And the
penalties for delayed construction (described above) will apply to the
contractor. If plant can produce between 696 MW and 725 MW, DPC
will accept the plant, but the contractor will be expected to make
modifications in the plant to raise capacity to 725 MW. In this period,
DPC will receive Rs 28 /kW/day for the short-fall below 725 MW.
If the contractor fails to deliver 725 MW, DPC gets $ 1,892 per
kW of capacity shortage. It can be recalled that DPC pays only $100 per
kW as penalty to MSEB (for shortfall below 695 MW). In effect, DPC
earns Rs 6 crore per MW of the shortfall (below 725) but pays MSEB
only Rs 0.32 crorc/MW of shortfall below 695.
If, for example, the final capacity is only 700 MW, then DPC
will receive $ 21,860 per day from the contractor and, further, in case of
failure of the contractor to upgrade capacity to 725 MW, DPC will also
receive $ 47.3 million. However. DPC will not pay anything to MSEB on
this account. Rather DPC has an option of selling this additional 5 MW
to MSEB as described later. In such cases. DPC make profits and not
losses!
The Power Purchase Agreement • 17
2.3
Guarantee for Heat Rate
The GE (General Electric) equipment is said to be very efficient (ET,
March 23,95). The GE guarantees DPC a maximum heat rate of 7,460
Btu/kWh1, called Guaranteed HR, i.e. an efficiency of 45.7%. If the heat
rate is more, the contractor will pay DPC $ 121,000 per Btu/kWh of the
increase. However, DPC, in turn, promises MSEB a heat rate of 7605 145 Btu/kWh higher than what GE has promissed. If the heat rate is
lower than 7605, then DPC gets a bonus for this. On the other hand, if
the heat rate increases beyond 7605, DPC will absorb the incremental
fuel cost. But gels a handsom compensation from the contractor. Thus,
by guaranteeing a lower value of HR, DPC assures itself a bonus for its
normally expected performance.
DPC may argue that over the years with continuous usage, the
plant efficiency drops and the heal rate increases and, hence, DPC’s
assured maximum heal rate of 7605 for the contract period of 20 years is
a reasonable offer. However, if a sharp rise in the heat rate is expected,
DPC could have assured an increasing heal rale over the project period
instead of the flat one it has assured now.
2.4
Assured Plant Availability
If the plant availability is below 90%, DPC will give a rebate to
MSEB. For availability in the range of 86 to 90%, the capacity payments
will decrease proportionally. In other words for each percent point
decrease, the yearly capacity charges reduce by S 2.2 million. But if
availability is even lower than 86%, the decrease in capacity charge will
be at double that rate, i.e. $ 4.4 million per year per percent decrease.
But an availability of 90% for gas turbines is an international
norm and not something extraordinary. In addition, according to the
DPC’s arguments, its actual installed capacity being higher than 695 MW
(725 MW), the effective availability it is promising on 725 MW is much
lower than 90%, which could be easily achieved. (IDBI, 1994)
To sum up, the said commendable performance being assured
by DPC needs to be viewed critically because: (a) In many cases, DPC
assures a performance (plant capacity and efficiency for example) that is
' The heat rates are based on higher heating values and arc defined for exportable
energy. The heat rate is defined as the fuel required to produce one kWh of
electricity therefore higher the heat rate, lower the efficiency.
/.S " The I'iikiii Controversy
lower than what is achievable in the worst case. Thus, even if plant
performs as expected, DPC automatically gels a bonus for “good"
performance; (b) Further. (he so-called "stiff penalties” that DPC is said
to have promised to MSEB are negligible compared to those it is getting
from ils contractor. Thus, DPC has thoroughly sheltered itself from any
risk burden. Rather, it has manoeuvred itself in such an enviable position
that, in many cases, it stands to gain even if it fails to attain the
performance standards.
3.0
Tariff Structure
The price of electricity from DPC is often quoted as Rs 2.4 /kWh. Many
attempts have been made to compare this price with that of all other
projects across the board. Before going into such comparisons, we need
to understand that DPC tariff is not one fixed number. Rather, it is highly
sensitive to many factors, and is expected to increase at a steep rate in
future. For most power projects of SEBs in India, the tariff usually
decreases or increases marginally with passage of time (due to increase
in fuel and O&M costs) . To understand this crucial difference and its
implications, it is essential to carry out a detailed analysis of the two-part
tariff structure in the PPA comprising capacity and energy charges.
This tariff structure described in PPA is depicted in a simpler
form in figure 1. The numbers in parentheses indicate the share of that
component in the total tariff for the base case defined later.
3.1
/. /
Capacity charge
Components of Capacity Charge
Capacity charge, the first component of the tariff, can be understood to
be similar to ‘rent’. It is applicable in full, if plant availability (for
generation) of 90% is achieved. However, it should be noted that, it is in
no way related to the PLF (which is a measure of the extent to which the
plant actually produces electricity).
The Power Purchase Agreement • / 9
Figure 1: Structure of DPC Tariff
Capacity Charge
___________________ $ [ (54.0%)______________
s I
I »
Base Capacity
Charge (51.4%)
Peaking Capacity
Charge (2.5%)*
r$
Insurance
Payments (1.8%)
_____________
Rs-1
l$
Rs. debt
Service
(5.3%)
|
]**•/$
LNG default
Rebate (?)
Operation &
Maintenance (O&M)
(7.8%)
Capital recovery charge
RRCR*, RRTCR*. RRRCR
(36.5%)
Energy Charge
$ 1(46.0%)
$ r
Fees for
special
operations
(0.7%)
$/Rs. |
Variable
O&M
(0.3%)
Oil take-orpay charge
(—)
HS
Delivered
Energy Payment
(DEP)
_________ L
$ r
n$
Base (42.7%)
Peak (2.3%)
Note: The values in parentheses indicate the share of that component in total
payment of Rs. 1299 crore in 1997. This calculation for base case
defined in the text assumes 90% PLF of base capacity (625 MW) and
27% PLF of peaking capacity (70 MW).
— $ and Rs. symbols indicate the predominant currency in which payment
will be denominated.
—
* indicates a 4% back-loading (an increase of 4% p.a.).
20 • The Enron Controversy
Capacity charge includes various fixed charges such as:
(i)Capital repayment (denominated in $ and Rs.): This single largest
component of capacity charge, includes debt service and return on
equity. The debt service of loan in Rupees is separately identified, while
the rest of capital repayment is in dollar. The dollar component of capital
repayment is back loaded by 4% (increases 4% p.a.); (ii) Fixed operation
and maintenance (O&M) charge (in S and Rs); (iii) Insurance fees (in $):
The insurance and O&M payments are indexed to the inflation (US or
Indian inflation, as per the denominated currency); and (iv) An
undefined quantity of rebate applicable in case of default by LNG
(liquefied natural gas) supplier. Tire LNG default rebate is defined for
sharing risk of LNG unavailability, but it was undecided (up till
February. 95) when PPA was amended.
3.1.2
Basis for Capacity Charge Calculations
Capacity charge is defined in terms of a combination of Rs. and $
/kW/hr. The ‘kW’ refers to the kw of ’Rated Plant Capacity’, and the 'hr'
arc 8760 in a year irrespective of the PLF. The capacity rating is done
yearly through a capacity test. Provisions for revising the value of 'Rated
Plant Capacity’ are specified in the PPA: (i) In case of frequent and
serious forced outages, the rated capacity is to be revised through
repeated capacity tests; and (ii) The Rated Capacity could be revised
voluntarily by DPC, in case of DPC’s failure to make full Rated Capacity
available for generation for 6 consecutive months, and if DPC sees no
chances of improvement in next six months.
The capacity charges will be calculated hourly and paid in
monthly instalments. If plant capacity exceeds 695 MW (as expected),
MSEB has option, at the beginning of each year, to either buy or reject
that extra capacity. If MSEB rejects it for the year, this additional
capacity will not be available to MSEB during the year even in case of a
dire need. If MSEB decides to buy this additional capacity, MSEB will
make corresponding additional capacity payments to DPC. An important
point to be noted is that the additional capacity carries same charge as
that of the first 695 MW. In fact, this should have been substantially
lower, as DPC is installing this additional capacity in the said capital cost
of 2912 crore and will not be spending anything more for this purpose.
If the DPC plant runs as expected, the added 9 MW base and 20
MW peaking capacity will fetch DPC an additional revenue of nearly $
5.8 million /yr. (which would provide an additional 2% return on equity).
The Power Purchase Agreement ’21
Power plant capacity derates as time passes, but the possibility of
derating by more than 5% is small. And as in the case of heat rale, this
could have been accommodated simply by DPC assuring only 695 MW
but offering additional capacity, if available, at a nominal charge.
3.1.3
Adjustments to Capacity charges
3.1.3.1 Adjustments Due To the External Factors
The major chunk of DPC’s profit accrues from capacity charges. These
charges arc adjusted for a host of variables, such as, (i) possibility of
customs and sales lax exemption, (ii) change in corporate lax (income
tax), (iii) $/Rs rate fluctuations, (iv) change in government regulation /
law regarding maintaining dividend reserve, (v) any other change in
law/rcgulation that would alter DPC’s costs or require DPC to alter its
business practices. The charges arc adjusted (presumably) to maintain
DPC’s profits in case of a change in above variables. Some important
implications of these adjustments are as follows:
If DPC was granted customs and sales tax exemptions, the
capital repayment charge would have reduced by 14.23%. In 1997. this
reduction would have been $ 23.9 million. Due to decrease in corporate
tax from 57.5% to 46%, the tariff has declined. This decline will
materialise only after the 8lh year.
While signing PPA, the terms of IDBI loan to DPC were not
decided. The calculations assumed interest on Indian loan at 20% p a. In
case the interest rale is actually lower, it would save money, as is the case
(IDBI interest rate on DPC loan is 17.5%). This saving is not being
passed on to MSEB, but is taken off by DPC and that loo in dollars
(implying a protection against exchange rate). With the result, that lower
the IDBI interest rate, more is the direct profit to DPC.
Ten and hall' years after commissioning of phase I, the 4%
yearly increase in the capital repayment will cease, if GOI does not
require DPC to maintain a 'dividend reserve' for paying dividends (i.e. if
GOI docs not block DPC’s money in banks). The capital repayment
charge will then start declining at 0.42% p.a. Communication from
MSEB indicates that MSEB assumes that such reduction in tariff will be
applicable (MSEB, 1995).
But, it is not clear whether the GOI exempted DPC from this
reserve or DPC unilaterally decided to provide this concession. This
rebate has been considered in our calculations to arrive at the
‘conservative’ estimate.
22 • The Enron Controversy
3.1.3.2
Availability/Perforniance Related Adjustments
Before going into the availability rebate and bonus, we need to
understand bow
availability is defined. DPC makes an hourly
declaration of available capacity. This ‘Declared Capacity’ is considered
to be actually available (available capacity, AC) unless DPC fails to meet
MSEB's hourly supply instructions (called dispatch instructions). If DPC
can supply 95% or more than 95% of MSEB’s instructions, the
generation level achieved is considered to be the ‘Available Capacity’
(AC). But when supply is below 95%, DPC has to prove that such a
shortfall occurred despite its best efforts and was unaware that such
situation could occur. If DPC fails to prove this, it is considered as ‘False
Declaration’, and the penalty is to reduce the AC achieved in past few
days.
The ‘Average Availability’ in any period is the ratio of average
AC to the rated capacity. In effect, the ‘False Declaration’ or a supply
lower than MSEB’s instruction can lead to decreased availability. And if
this results in availability lower than the assured, DPC pays a penalty. If
this average availability falls below the target value (i.e. 86 and 92% for
monsoon and rest of the year respectively), capacity charges arc reduced.
The amount of reduction is already discussed in section 2.4.
In the PPA, there is provision for bonus for higher hourly
capacity utilisation. The GOI guidelines do not allow such bonus. The
DPC-MSEB agreement docs not follow GOI guidelines. Bonus is
defined for peak hours (16 hours) in the peaking season (8 months). This
bonus is for hourly ‘capacity utilisation’ in excess of target availability
(TA) and is defined by a complex equation. The maximum value of this
expression, with present clauses, can be 0.2 to 0.5% of the yearly
capacity charges. So. the purpose of such a complex equation is unclear.
3.2
Energy Payments
The second component of the two part tariff is the sum of energy
charges. This represents the variable charges and is nearly proportional
to the PLF. It consist of: (i) Payment for fuel consumed (or deemed to
have been consumed) called ‘delivered energy payments’ (DEP); (ii)
Variable O&M charge; (iii) Take-or-pay charges for fuel supplies; and
(i v) Special operation fees.
The first part, DEP, is the largest (about 97%) of the energy
payments, and is later dealt in detail. The variable O&M charges, which
are small, are specified separately in $/kWh and in Rs/kWh, and arc
The Power Purchase Agreement • 23
indexed to US and Indian inflations respectively. If the fuel purchase
agreement between DPC and the fuel supplier is of ‘Takc-or-Pay’ nature
and if MSEB docs not operate the power plant for sufficient duration so
as to consume the ‘Minimum Take’ quantity of fuel, then the charges to
be paid to the fuel supplier will be reimbursed by MSEB. MSEB would
approve the fuel purchase agreement. Whether the fuel purchase
agreement has been signed and if so, what are its terms is not clear as yet.
3.2.1
Delivered Energy Payments
The delivered energy payment (DEP), i.e. the fuel charge, is separately
accounted for the base and peaking capacity. The duration of operation
of base and peaking plant are, in turn, decided by MSEB’s dispatch
instructions.
3.2.1.1 Delivered Energy Payments for Peaking Energy
For the peaking plant of 70 MW, a fixed heal rate of 12,150 Btu/kWh
(i.e. 28.1% efficiency) has been agreed. Fuel consumed for peaking
operation is simply calculated by multiplying this fixed heal rate with the
net energy delivered by the peaking plant. This fuel consumption
together with price of fuel gives the DEPpcak:
DEPpcak = Price of fuel x fuel consumed.
3.2.1.2 Delivered Energy Payments for Ease Load Plant
For 625 MW base load capacity, a maximum heat rate of 7605
(minimum efficiency of 44.9%) will be considered for the payments to
DPC. The expected heat rate is lower as described in section 2.3. After
commissioning, heat rate will be tested (TestHR). The heat rate used for
calculating fuel consumed, or deemed to have been consumed is called
ContractHR and is estimated as follows:
ContractHR = 7605-max [ 1.03x(3/4)x(GuarantccdHR-TcstHR), 0|
where, GuarantecdHR is the heat rate guaranteed by contractors to DPC
(7243 Btu/kWh-gross).
This implies that, DPC assures a maximum FIR of 7605, but if
the operating HR is lower, DPC will not pass the full benefit to MSEB.
The 25% of the difference will be passed on to DPC as bonus. In the
normal operating situation (GuarantecdHR=TcslHR), DPC will get a
benefit equivalent to 144 Btu/kWh of base generation. At oil price of
$4.63/Btu, this will be Rs. 0.0216/kWh. At 90% PLF, this is nearly $ 3.3
million per year (equivalent to return on equity of 1.24%).
24 • The Enron Controversy
The GE turbines (frame 9FA). that are being used by the DPC.
arc said to have a 4% higher efficiency than the smaller turbines
manufactured by BHEL (frame 9E). However, the savings achieved due
to this higher efficiency arc taken away by DPC without even
acknowledging it as ’bonus'.
Adjustments to Contract Heat Rate : If the operating efficiency
of the base load plant changes. DPC can intimate MSEB and the Contract
HR will be recalculated through an efficiency test. The Contract HR
discussed above, is defined for the full load operation al the system
frequency of 50 hz. As operating conditions change from time to time,
the Contract HR will be adjusted for load and frequency. This adjeslcd
heat rate will be higher, and will be calculated on an hourly basis. This
will be used for payment calculations.
3.2.2
Special Operation Fees
In addition to the above charges. MSEB pays fees to DPC for some
special operations. The special operation fees include:
(i) Fuel
management fee of S 2.5 million per year, increasing at the US rate of
inflation. This fee was widely criticised on the grounds that obtaining
fuel is part of the plant operation and. hence, should be covered in O&M
charges, (ii) Fees in case MSEB unnecessarily undertakes the capacity
lest. If DPC proves that capacity test was not needed MSEB pays $
50.000 (iii) Fees for hot and cold starts.
3.2.3.
Relation between Hot and Cold Start Fee And PLF
The PPA allows MSEB to shut off one of the two gas turbines of DPC
plant. This can reduce plant output by a half. Restarting this GT implies a
hot or a cold start (depending on the duration of shut down). The hot
start fees (applicable for shutdown of less than 12 hours) are $ 10.429 for
9FA GT and S 5.015 for steam turbine. Such starts would become
regular features, if MSEB uses DPC plant as an intermediate load plant
in order to make optimum usage of its own cheap coal plants. In this
case, hot and cold start fees would be as much as S 3 million per year.
with some addition to DPC profits. Closing the GT can reduce plant
output by half (i.e. by 312.5 MW) making the cost of reducing output
equal to Rs 1.07/kW. This cost can be justified only if MSEB saves more
than these fees by running its cheaper coal plants. Considering (fuel) cost
of coal al Rs. 0.7 /kWh in 1997. and that of DPC al Rs 1.01/kWh.
savings will only start accruing if the 9FA turbine is closed lor more than
3.5 hours. For medium load operation, closing down one GT should be
The Power Purchase Agreement • 25
possible for 9 to 10 hours. In such a case, savings for first 3.5 hours are
used up for paying hot start fees, in effect DPC cals away 35 to 45% of
the MSEB savings . Thus, even though technically MSEB is allowed to
partially back-down the DPC plant, these fees act as a major barrier.
4.0
The Price of Electricity From DPC
The DPC tariff is primarily dependent on three factors: the Rs/S
exchange rate, oil price, and plant load factor (PLF). The change in
corporate tax rate, exemption of customs and sales tax and exemption to
DPC from maintaining dividend reserve will also affect tariff in a
significant way. But, the Indian and US inflation have little direct effect
on the tariff.
4.1
Base Case Definition
The most talked about case of 90% PLF. with some additional
assumptions, is defined here as the base case. The assumptions arc:
i) Inflation rate of 8% p.a. in India and 4% p.a. in USA.
ii) No change in Real oil price. In the last few years, international oil
prices have dropped (in real $). But for long term planning, the major
international utility planning manuals assume a significant increase in
oil prices (increase at 2 to 4% p.a. in real S).
iii) Rs depreciate at 4% p.a. in relation to the US $. Historically Rs has
depreciated at a minimum rate of 4.5% p.a. and a maximum of more
than 8% p.a.
iv) 90% PLF for base capacity and 27% for peaking capacity,
v) The dividend reserve rebate is applicable from the I 1111 year, i.c. the
capital recovery charges decrease at the rate of 0.42% p.a.
4.2
Estimate of DPC Tariff and Its Components
The DPC tariff is applicable at the door of DPC. MSEB is responsible for
transmitting and distributing this power, and will bear the associated
costs and losses. For the base case, this tariff in 1997 will be Rs.2.5/kWh.
implying a total payment of Rs 1.240 crore ($ 387 million) in 1997.
Figure 2 shows total yearly payments by MSEB to DPC for base case
scenario and if the oil price (real) decreases at 2% p.a. About 5% of this
payment is in Rupees and rest in Dollar terms. The contribution to total
tariff from various components is shown in figure 1.
26 • The Enron Controversy
For calculating MSEB's effective cost for supplying DPC’s
power to average consumer, we need to consider T&D cost, T&D losses,
and other expenses incurred by MSEB. T&D losses of 10% is assumed.
As a conservative estimate, the total downstream costs of T&D network
strengthening, metering, billing etc. is considered at 60 paisa/kWh,
(constant for 20 years). The electricity duty levied by Government of
Maharashtra (GOM) is expected to be around 25 paisa/kWh in 1997
which is assumed to increase with Indian inflation. Hence, in 1997, the
total cost to MSEB for supplying DPC’s power to the average consumer
would be about Rs 3.57/kWh.
4.3
Sensitivity to PLF and $/Rs. Exchange Rate
In general, the combined cycle gas turbines (CCGT) arc not economical
for base load operation as their fuel cost (oil in this ease) is far more than
that of coal plants. This is also true in the case of the DPC’s plant. It is
estimated that, barring a transitional period of the next few years, it will
be economical for MSEB to use DPC’s base capacity at a PLF of 65 to
70%. The peaking plant, of 70 MW, is likely to be used at 27% PLF. The
most likely scenario, a PLF of 70% for base and 27% for peaking plant,
is taken here as the second ease for sensitivity analysis.
Figure 3 shows yearly tariff at DPC busbar for base ease (called
90- busbar) and for the second case (called 70-busbar).
It is assumed that the Rs would depreciate at 4% p.a. relative to
the US $. If the exchange rate variation is different from this, it will
directly affect the tariff as more than 95% of the tariff is denominated in
dollars.
S Million
The Power Purchase Agreement • 27
28 • The Enron Controversy
Figure 3: DI*C Tariff (at tie Buslxir) Sensitivity to PLF & Rs/$ Ex.Rate
The Power Purchase Agreement • 29
4.4
Representative Price of Electricity From DPC
As mentioned earlier, usually the cost of electricity from power plants
does not increase throughout its economic life, (except for changes in
fuel price) as it does in the case of DPC. The capacity charge in the
DPC tariff has an in-built increase of 4% p.a. Hence, it is inappropriate to
directly compare the said DPC tariff of Rs 2.4 /kWh, in 1997 with the
cost of generation from other projects. Only the tariff over the full life
time of the project can be compared. This life-time (levcliscd) tariff, for
DPC plant is Rs.4.18/kWh, for 70% PLF scenario2. This is the most
representative price of electricity from DPC, and can be used for
comparison. For the base case, this levalised tariff is Rs 3.63/kWh. This
tariff is later compared to that of alternative plants.
Table 2 indicates the sensitivity of tariff to the major variables.
The values indicate the levcliscd tariff in nominal Rs. Assumptions are
same as those of the base case.
Table 2: Tariff Sensitivity to Oil price, Rs/$ rate and PLF
90% PLF
70% PLF
3.44
3.99
$ 4%, Oil -2%
4.18
$ 4%, Oil 0%
3.63*
4.68
$ 6%, Oil 0%
4.06
= $ appreciate w.r.t. Rs @ 4% p.a.
Note : $ 4%
Oil 0% = Real oil price increase is 0% p.a. etc.
*
= base case scenario.
5.0
Estimating Profitability of DPC
In this section, DPC’s profitability is estimated for the base case
specified earlier. The financial assumptions used are specified in the
Anncxure. DPC’s profitability is calculated by deducting the DPC’s
payments from its revenue as defined below.
Major income for DPC comes from : (i) capital repayment
charges (RRCC), Rupee debt repayment (RCR), indirect bonus for heat
rate lower than heat rate assured by DPC to MSEB. While the DPC’s
payments arc: (i) debt repayments and (it) applicable corporate tax.3
3 Throughout the analysis the levcliscd costs and the net present values
are calculated using a discount rate of 12% p.a.; i.e. nominal discount
rate of 17% for US dollar streams and 21% for Rupee streams.
30 ‘ The Enron Controversy
Figure 4 shows the debt repayment and applicable lax
(superimposed on the debt repayment). Difference between these values
(which is shaded) shows DPC profits. For a better picture of DPC’s
profitability, the yearly changing profits are converted to a stream of
constant profits (levelised profits). This profit is equivalent to little over
40% of ‘return on equity’ (as defined by GO1). If the GOI guidelines
were adopted DPC would have been allowed to receive a maximum of
31% return on equity.
5.1
IRR Estimation
DPC’s profitability in terms of internal rate of return (real, post tax IRR
in $) is estimated to be around 28%. This IRR docs not include possible
hidden profits to DPC such as: (i) through sale of additional capacity to
MSEB, (as much as 2% on the equity), (ii) construction profits, as
obtained by ENRON in Teesside plant, UK (Enron, 1992) (iii) through
use of plant infrastructure for other commercial activities, (iv)
Availability bonus, etc.
A report by Vanguard Capital submitted to the GOI says that,
after considering the perceived high business risk in India, foreign
investors would expect an IRR of about 17 to 21% (post tax, real $). This
IRR assumes no hidden benefits. Using this estimate (IRR of 19%),
MSEB will be paying $ 200 million extra to DPC over the 20 year period
(1996 NPV).
6.0
Whether DPC Project Makes Economic Sense for MSEB
Usually, in India, cost of generation from a new power plant is
higher than the existing average tariff. The average tariff reflects the
historical average cost of generation. The difference between this
average cost of generation from all plants and the higher cost of new
plant can be considered as the loss to the SEB owing to this new plant.
Usually, the cost of generation from any plant docs not increase rapidly.
But the average tariff, keeps increasing due to addition of new plants,
increasing T&D costs etc. Hence, SEBs make losses in the initial years of
operation of a power plant. But, with passage of time, the losses decrease
and eventually SEBs start making profits from selling power from the
said plant.
32 • The Enron Controversy
In this light, MSEB should take up any project only if MSEB
expects profit in the life-time of the project. The same logic should have
been applied in the case of the DPC proposal. As expected, in this case
loo MSEB would make huge losses by selling DPC power in the initial 7
to 8 years. Later, if MSEB’s tariffs increase adequately, MSEB would
start making profits through the sale of DPC power. The concept of nelprcscnt-valuc (NPV), is used to define profitability.
As mentioned earlier, unlike most projects, the DPC tariff is
expected to increase rapidly with time. For the base case scenario defined
earlier, DPC tariff increases from Rs 2.55/kWh in 1997 to Rs. 8.6 /kWh
in 2016. The effective cost of DPC power by the time it reaches the
average consumer, would be Rs. 3.6 /kWh and Rs. I 1/ kWh for the
respective years (a leveliscd cost of Rs. 4.88/kWh) for the base scenario.
The average tariff of MSEB is expected to be around Rs
2.2/kWh in 1997. Based on this, an estimate could be made of the rate at
which MSEB tariff should be increased so that MSEB makes a net profit
(a positive NPV) on account of DPC in the lifetime of the project.
For the base-case scenario, it has been estimated that, MSEB
can make profits from DPC plant only if it’s average tariff increases at a
rate higher than 15.5% p.a. (This can be compared to the average tariff
increase of MSEB, in last decade, of about 12% p.a.). Hence, DPC
project makes economic sense to MSEB only if the average tariff
increase is more than 15.5% p.a. for the next two decades. This would
result in a tariff of over Rs. 30/kWh in 2016 (an increase of 7.1% p.a. in
real terms, and a tariff in 2016 of Rs 8.1/kWh in the constant 1997 Rs.).
Even in most favourable case of Rs. depreciation by 2% p.a. and real oil
price decrease by 2% p.a. MSEB tariff will have to be increased by over
6% p.a. (real). In this case the tariff by 2016 will be Rs. 6.6/KWh (1997
Rs.) If the increase in tariff is not so sharp, DPC project will result in net
losses to the MSEB.
In the likely case (of 70% PLF, no real increase in oil price),
MSEB can make profit on DPC project only if MSEB’s tariff increases at
a rate of 17.25% p.a.!
7.0
How Much in Excess arc We Paying
The LNG/oil fired base load plant is not an economical option for the
power sector. In fact, the Least cost plan for the stale of Maharashtra
indicates very substantial savings if we adopt options different from such
The Power Purchase Agreement • 33
plants (Sant, Dixit 1994). But for the time being, it is assumed that
projects such as DPC are inevitable. This section quantifies the excess
payment by MSEB on account of DPC’s high capital cost and high
profitability.
1) Some experts have argued that a plant similar to that of DPC
(inclusive of the infrastructure costs) can be built with much lesser
capital. The figures of Rs. 3 to 3.75 crore per MW are claimed and
supported by these experts against the estimated capital cost of 4.19
crore /MW of the DPC project.
2) An IRR of 19% is considered as reasonable against the estimated IRR
of DPC is over 28% (post tax, real, in US $).
Table 3 shows the excess payments by MSEB, if reduction in
capital cost and the IRR is achieved. This is expressed in two ways: (a)
the yearly saving in crore Rs. (the levalised savings). This can be
compared to the levelised capacity payment of Rs. 950 crore to DPC. and
(b) in terms of one time saving (1996 NPV). This can be compared to the
capital cost of the project, around Rs 2910 crore.
Table 3: Excess payments by MSEB
Capital cost (Rs. Crore/MW)
3.0
3.75
Yearly excess payment (Rs. Cr./Yr.)
290
225
1,350
1,050
One-time excess payment (Rs. Cr.)
Note: The reduction in corporate tax for the alternate plant, as compared
to that of DPC is ignored.
The levelised tariff for the alternative plant (capital cost of Rs
3.75/MW, and IRR of 19%) is compared with the levelised tariff of DPC,
for two assumptions. The values below arc in nominal Rs.
Table 4: Comparison of the Levelised Tariff of DPC and the Alternative
Plant.
________________
Base Case PLF 90%
Second Case PLF 70%
DPC
Alternative
3.75 Cr./MW
Plant
3 Cr./MW
3.63
4.18
3.19
3.62
3.0
3.45
34 • The Enron Controversy
Conclusion
This paper demonstrates following important results:
(i) Various performance guarantees from DPC and related penalties
it has assured do not constitute any substantial burden on the
DPC. On the contrary. DPC would receive bonuses even for its
ordinarily' expected performance.
(ii)Thc levclizcd tariff for DPC’s electricity varies from Rs. 3.44 /
kWh to Rs. 4.68 / kWh depending upon the changes in oil prices,
PLF, and Rs./$ exchange rate.
(lii) DPC’s profitability (estimated at a real, post tax, IRR of 28%) is
quite high compared to that prescribed by GOI consultants (17%
to 21%).
(iv) MSEB ends up paying about Rs. 225 crore extra each year if the
effects of higher capital cost and higher profitability arc
considered.
(v) The DPC project would be viable for MSEB only if MSEB’s
average tariff keeps increasing at a rate more than 15.5% p.a. for
the next two decades. This tariff rise is more than that of the last
decade.
References
Enron, 1992. Annual report to the Shareholders and Customers.
IDBI, “Detailed Appraisal Note Dabhol Power Company (DPC)’,
Industrial Development Bank of India. 1994.
Mark, Rebecca, Economic Times, March, 23, 1995.
MSEB, Personal fax communication, dated. May 16 and May 31,95.
Sant Girish. Dixit Shantanu, 1994 “Least Cost Power Planning: A case
study of Maharashtra”.
Vanguard Capital Ltd., “Principals to be adopted in Negotiating PPAs
for Indian Private Power Projects”, Report to the Ministry of Finance,
6 Grosvenor Gardens, London, SW1W ODH, 1994.
The Power Purchase Agreement • 35
Annexure
Financial assumptions for DPC profitability estimation :
It has been assumed that 5% of DPC equity is brought in the initial year
and loan equivalent to 95% of equity (with 12% interest in US $) is
brought in the next year. This Ioan is later replaced by real equity before
commissioning.
The financing package of DPC has been assumed as follows;
the interest indicated is the effective interest rate, and the term indicates
repayment period after construction.
Million $
Total Cost
Equity Capital
Indian Loan
US Exim Loan
OPIC
Other $ loans
910.0
266.2
95.6
298.2
100.0
150.0
Interest %
( P-a.)
—
—
17.5%
8.4%
10.0%
1 1.0%
Term
(Yr.)
—
—
9.5
8.5
12.0
7.5
This article was published in the Economic and Political
Weekly (June 17, 1995; Vol XXX, No 24).
The Enron Deal:
Why the First Phase Should be Cancelled
Subodh Waglc, Girisli Sant, Shantanu Dixit
The debate on the Enron project has now reached a decisive stage. This
is reflected in the article by Dr. Kirit Parikh (Director, Indira Gandhi
Institute of Development Research) published in the Times of India (dt.
28/4/1995). Despite being the head of a quasi-govcrnmental institution,
Dr. Parikh was pioneer in criticising the Enron deal and endured heavy
counter-criticism in the process. In this context, his above-mentioned
article acquires a special significance as he seems to be singing to a
different tunc therein. Though the article carries the sub-title
“Renegotiating the Second Phase”, the theme of almost the entire article
could be summed up as “Going Ahead With the First Phase”. Dr. Parikh
is, certainly, not alone in advocating this, but this article might become
the mainstay of the argument of Enron supporters in the next phase of
this debate. Here is an attempt to point out some serious problems in his
calculations that demands reworking of the entire argument.
Dr. Parikh’s Argument
To start with, let us understand Dr. Parikh’s methodology and argument.
In essence, he calculates: (a) excess payments to Enron over the entire
project period (20 years), and (b) loss to economy (if the deal were
cancelled) in a two year period before an alternative project can be
commissioned. He claims that the loss to economy is somewhat on the
higher side, and, hence, arrives at the conclusion that even without
considering non-quantiliable losses, like the loss of credibility in the
international market, cancelling the first phase al this stage makes “little
economic sense”.
With the numbers he has presented, this inference seems quite
puzzling. The total cost of Enron’s Dabhol project is nearly Rs. 3,000
crore. Dr. Parikh estimates that the excess payments to Enron (at the
present discounted value, NPV) amount to Rs. 1,800 to 2,700 Crore and,
still, he argues that a delay of even two years (till another equivalent
j6’ • The Enron Controversy
project conies up) would wipe out all the savings achieved by avoiding
these excess payments. Let us look into his numbers in some detail.
Before presenting the results of his calculations of excess
payments to Enron. Dr. Parikh lists a scries of objections and questions
that have been raised in this controversy. After considering these
objections, he arrives at what according to him is the “bottom-line of the
Enron deal”. This comprises of two important elements: (a) capital cost
of the plant which according to him is inflated by 20% and (b) guarantee
of 86% load factor. Dr. Parikh estimates effect of these two factors and
arrives al the figure of Rs. 1 SO to 270 Crore as yearly extra payments.
Missing Elements
However, if we look into the list of objections he has dismissed, two
elements seem to be too crucial to neglect. First clement is the internal
rate of return (IRR) for Enron, an indicator of the profitability. Dr. Parikh
accepts that the IRR is 30% on "claimed equity”, but he finds this value
of IRR as “ reasonable." First of all, if he agrees that the capital cost is
inflated by 20%. the effective IRR on "real equity” will be much higher
and he should lake this value of IRR into consideration. Nevertheless,
according to the recommendations of Vanguard Capital, an international
firm appointed by Government of India as consultants, IRR value of 1721% (post tax, real and with no hidden benefits) would be sufficient for
attracting foreign capital in India even after accounting for the high risks
perceived by these foreign investors. An IRR value should be even lower
in case of Enron deal, because, as our analysis of PPA indicates, most
risks in the project arc borne by MSEB and this is virtually a no-risk
proposition for Enron. Our analysis also shows that ENRON gets a real,
post lax IRR between 26% to 32% on “claimed equity” (depending on
when equity is brought in). Our preliminary estimates indicate that this
would add another Rs. 70 to 90 crore annually to the excess payments to
Enron.
The second clement neglected by Dr. Parikh is that of various
other indirect benefits and inflated payments to Enron including: bonuses
for higher capacity utilisation and higher efficiency, high O&M costs,
payments for hot and cold starts etc. These would increase Enron’s
returns by another 5% requiring an upward revision of Dr Parikh s
estimate of excess payments of nearly Rs 50 crore per year. For example,
one important rationale for inviting Enron is that it has proposed to
employ technologically sophisticated GE turbines (54%)as against the
The Enron Deal • 39
BHEL turbincs(49%). However, according to PPA Enron will automati
cally get extra bonuses for efficiency beyond 47%.
Coining to the results of Dr. Parikh’s calculations of “loss to
Indian economy” if the Enron deal were cancelled, he has included two
major factors in this calculation: (a) a penalty to Enron which he
estimates as Rs. 300 Crore; and (b) “opportunity cost of the unmet
demand”. The third aspect he included but found unquantifiablc is "loss
to India’s credibility”. Regarding the first factor, thorough investigations
arc needed to ascertain the amount of penally MSEB will have to pay as
there is vast difference between the two estimates quoted by Dr. Parikh
(60 Crore and 300 Crore).
While calculating the second factor, "opportunity cost of unmet
demand”, one needs to be more cautious as it seems to be turning the
balance decisively in favour of Dr. Parikh’s inference. It is not clear
whether Dr. Parikh’s calculations have taken cognisance of following
elements: First, it seems that his assumption is that even in first two years
the “unmet demand” will be equivalent to the entire capacity of the first
phase (695 MW). This convenient but questionable assumption
substantially inflates the estimate of the ‘lost generation’ and, hence, that
of loss to the economy. Secondly, it has been the experience in the past
that if there is small shortfall in the power, the agricultural and domestic
(rural) sectors bear the brunt and not the industry. Hence, it seems
inappropriate to apply Rs.5/kWh as the opportunity cost indiscriminately
to the entire quantity of ‘lost generation'.
When he calculates the magnitude of economy-wide effects of
“unmet demand" if the Enron deal were cancelled, Dr. Parikh needs to
include all the economy-wide benefits that may accrue if we send back
the consortium of Enron, GE, and Bechtel who boast that they arc
bringing everything from the USA except local labour and construction
material. Just, as an example, consider lhe economy-wide benefits, that
would accrue if the construction contracts worth Rs 1823 Crore were
awarded to BHEL and other Indian companies. A multiplier effect of
around 3 to 5 is talked about by economists, implying a gain to the
economy of over Rs. 5,000 crore if we cancel the Enron deal.
Thus, there is hardly any net “loss to economy" if the Enron
deal were cancelled, whereas there arc “excess payments” to Enron
involving large amounts if the present deal of the first phase is accepted.
Hence, we strongly feel that there is not even an “economic justification”
for continuation of the first phase of the Enron deal.
40 • The Enron Controversy
International Credibility
This brings us to the third factor: “costs of loss in credibility and
consequent disruption in the flow of foreign investment into the
country.” We are indeed happy that Dr. Parikh found it unquantifiable.
This oft-raised bogey of the international stigma needs to be demystified
urgently. It is quite clear that Enron tried to pull off quite an unfair
bargain, to say the least. The international business community is (and
if not, it better be) mature enough to understand difference between a fair
business deal and outright plunder. Further, at least in the energy sector,
we are in a buyer’s market and hence, a country like India which is a
giant consumer need not worry much about the so-called international
back-lash. If we look at how various MNCs, despite their earlier experi
ences, arc trying hard to get more business in countries like China, Iran,
and Iraq, we can be sure that there will be plenty of companies eager to
come if we offer them a fair deal.
Rather, considering the size, economic robustness, and scientific
and technological capacity India possesses, we want to argue that it is the
obligation of a country like India to send the “right signals” to the
international business community. The community needs to be told in
clear terms that economies of developing countries arc not up for the
grab. This obligation carries an appropriate reward, especially, if we
ourselves opt for cheaper technology from the third world (for example
our own BHEL technology). This could also equip other developing
countries to negotiate and demand for cheaper technology from the third
world.
Finally, thanks to the much slighted democratic system in this
country, the politicians and bureaucracy have to consider another aspect
of this deal which elite experts and media can easily afford to forget.
While worrying about the “international credibility”, the elected
politicians also have to give equal, if not more, priority to their “internal
credibility” which these experts and the media often tend to dismiss as
“populist pressures”.
$100 Million Question
Now let us try to answer the “100 million dollar question” posed by Dr.
Parikh: “should the deal be cancelled?” In our opinion: (a) as
demonstrated earlier, present deal is economically unjustifiable; (b) there
are other tcchno-cconomically viable, socio-environmcntaliy desirable,
and immediately implementable alternatives to the Enron project; there
The Enron Deal '41
are emergency options that can be resorted to, in order to satisfy the
shortfall in capacity during the period before these alternative options
become operational; (d) there are many innovative options for financing
the alternatives to the Enron project as well as financing the emergency
options. (The last three arguments are discussed in a separate paper.)
Thus, based on these four arguments our unequivocal answer to the $100
million question is: we should cancel even the first phase of the Enron
project.
In fact, our contention is that this 100 million dollar question is
inadequate, especially, when we are talking about the deal which has
such far-reaching and severe implications. The question should be
broader and should deal with the possible implications of this deal to the
very health of the power sector in Maharashtra and the interests of the
power consumers in Maharashtra. As mentioned by Prof. A.K..N Reddy.
the Indian power sector in general is plagued by four crises: capital,
performance, equity, and environment. Looking to projects like Enron as
a panacea and inviting them at any cost, betrays a shallow understanding
of the responsibilities and the problems of the power sector in India.
They may appear to help us out of capital crunch in the short run, but, as
it is clear by now, in the long run, we will end up paying exorbitantly.
Certainly, these mega-projects would never help us to resolve the other
three crises, especially. Hence, in addition to carrying out the project
specific analysis, we need to evaluate mega-deals like Enron with criteria
based on these larger and long-term considerations.
An abridged version of this article was publishes in Tinies of India dated
31s' May 1995.
The Enron Controversy:
Alternative Options for Electricity in Maharashtra
Shantanu Dixit, Girish Sant, Subodh Wagale
The issue of alternatives to the Enron project has become an extremely
critical in the debate on this controversy. But. before grilling the anti
Enron groups over this issue, it should be understood that the onus of
providing the answer to this question is on MSEB (Maharashtra State
Electricity Board). MSEB should have prepared a detailed power plan
for the period 1997-2010 well before the Enron project was proposed in
June 1992. And if MSEB has been sitting content with projected shortfall
without seeking other alternatives, then this failure of government
agencies should not be allowed to become an excuse for bringing in a
disastrous project like Enron.
Coming back to the question of alternatives to the Enron
project, there arc two problems here: (i) If the Enron project were
cancelled, what are the immediately implementable options which would
satisfy the “unmet demand” during the period (1997 end to 1999 end)
before the alternative projects come on line. Let us call these “immediate
alternatives;” and (it) If the project were cancelled what arc the
alternatives to satisfy the demand after year 2000? Let us call these
“long-term alternatives."
The neglect of the distinction between these two types of
alternatives as well as neglect of various political, organisational, and
practical complications involved in both these types results into
rendering most of the suggested alternatives as soft targets for Enron
supporters. A range of such suggestions on alternatives — ranging from
home-made turbines to brochures of Danish and Swedish technologies
—could then be easily dismissed as techno- regressive, unrealistic,
costly, or with insignificant benefits. Thus the two challenges in the issue
of alternatives should be understood clearly. On one hand, it is necessary
to continue to work on seemingly futuristic and unrealistic alternatives in
order to transcend limitations imposed by the prevailing conventional
paradigm and to arrive at a fundamentally different policy framework.
On the other hand, it is also necessary to understand the need for some
practical, step-wise program for transition towards a new policy
The Enron Controversy : Alternative Options • 43
framework lor the power sector. Hence, this paper deals with these two
types of alternatives separately.
Section 1: Immediate Alternatives
The main argument of Enron supporters is that if the project were to be
cancelled, then alternative capacity addition will be delayed by two
years, and the losses due to the “unmet demand" during these two years
would wipe out all the benefits due to the savings achieved by avoided
“excess payments" to Enron. We, on one hand, do not agree with the
calculations underlying this inference (dealt with in a separate paper).
And, on the other hand, we want to point out that there arc some
alternatives that can be brought in immediately to stave off this danger of
"unmet demand” totally. Even according to the MSEB plans, during
1997-1999, the contribution of the Enron project will only be 695 MW
(first stage). So, for the first two years (1997 end - 1999 end) even if we
plan for about 600 MW, (here should not be much shortfall. Out of this
600 MW, about 200 MW could be generated through two options: (i) co
generation in sugar and other industries; and (ii) Timc-of-Use metering.
MSEB is dragging its feet for too long on implementing these and could
easily exceed 200 MW mark if pressurised.
To satisfy the remaining demand for 400 MW, we suggest
following two alternatives: (a) diesel generator (DG) sets and (b) gas
turbines (GT). With removal of restrictions on importing petroleum
products for power generation, it is possible to employ these options.
(a) Large DG sets of 15 tot 20 MW capacity are available in the market.
These DG sets could be clubbed together in groups of 2 to 7 to erect
small power stations of 40 to 140 MW according to the magnitude of
local demand. Such large DG set based power stations arc being built
at Yclhanka (Karnataka) and Bramhapura (Kerala) after securing
necessary environmental clearances. The capital cost of this option is
about Rs. 3 crore/ MW including other necessary basic facilities.
(Compared to this, the capital cost of the Enron project is being
quoted between 4.1 and 4.35 crore/MW.)
(b) Gas turbines of up to over 100 MW capacity arc being manufactured
by BHEL. Siemens has purchased these GTs from BHEL and has
installed them in Germany. A large market of refurbished turbines
also exists. These GTs could be installed to suit the local demand and
availability of fuel. The capital cost of this option is between Rs. 2.8
to 3.0 crore/ MW.
44 • The Enron Controversy
One general objection against decentralised options is that they
lose on account of adverse economies of scale. However, as the Enron
project has demonstrated that the principle of economy of scale need not
hold true for all projects all the time. Further, the very decentralised
character of these alternatives would allow their siloing to be
commensurate with the local demand patterns. This would allow great
savings on account of: (a) reduced need for new T&D (transmission and
distribution) facilities to utilise the new capacity; and (b) reduced T&D
losses.
While suggesting these alternatives, we have put ourselves in
the shoes of the new state government and have tried to understand its
anxieties, limitations, and compulsions. Though aware of the various
limitations and objections to these options, we are proposing these for
two reasons. Firstly, being within the conventional techno-economic
perspective, these two alternatives could be easily implemented with the
present manpower and organisational structures. Secondly, they are
suggested only as part of a salvage operation and are justified only on
that ground.
1.1
Economic and Financial Aspects
Let us look at the economic and financial aspects of these alternatives.
The total cost of electricity to MSEB from these options will be around
Rs. 2.2 / kWh (at busbar i.e. at the doorstep of the plant) without any
inbuilt increases like those in case of Enron. Compared to this, Enron’s
price will be more than Rs. 2.5/ kWh even in the first two years. Besides
cost advantages, these options have two other merits. First of all, being
dispersed, they involve considerably reduced T&D losses. And,
secondly, after the long-term alternative options to the Enron project
conies on line, this 400 MW capacity will be a reserve capacity for peak
demand.
With capita] cost around Rs. 3.0 crore/MW, the total capital
requirement for generating 400 MW will be Rs. 1,200 crore. Considering
the dispersed nature of this power options, not more than Rs. 400 crore
will be required on account of transmission and distribution (T&D) for
the entire 600 MW additional capacity. Thus total capital requirement
including T&D would be about 1600 crores. Now. in order to utilise
Enron’s 695 MW capacity. MSEB will be spending at least Rs. 1000
crores (approximately @ Rs. 1.5 crore/ MW) from its internal resources.
The Enron Controversy : Alternative Options *45
Deducting this leaves about Rs. 600 crore to be raised front external
sources.
Raising this amount need not be a big task for MSEB. Financial
experts have suggested many innovative options for raising finance for
the power sector. Here, we arc presenting two immediately
implementable options: (a) Structured Obligation and (b) Sell and LeaseBack. These can be employed in combination with other financial
options:
(a) Structured Obligation: In this option, a group of customers with
guaranteed payment is selected. Payments from these customers arc
deposited in a separate bank account on which bond holders in this
scheme have “first right of withdrawal." By solving their credit
problem in this innovative manner. SEBs can raise required finances
from the open market. Rajasthan SEB has recently raised Rs. 250
crore through private placements of bond with this approach, at the
rate of Rs 14.5%. (The effective rate of interest in Enron option is
about 40 %.)
(b) Sell & Lease-Back: In this option, some of SEB's assets (with
useful life) arc revalued and sold to leasing consortia which lease
them back to the SEB. In this manner while continuing production
through these assets, SEB can raise finances at a rate of interest far
less than the effective rate at which interest would have to be paid to
Enron. Madhya Pradesh SEB has recently raised about Rs 100 crore
using this option.
These practically feasible and immediately implementable
alternatives will provide a valuable respite to the new state government
to rethink power policies in a wider and long-term perspective without
getting unnecessarily concerned over the departure of Enron.
Section 2 : Toward Long Term Alternatives
When we start thinking seriously about the long-term alternatives to the
Enron project, many deep-rooted problems start reappearing from the
underside of the proverbial carpet. As students of power policies, we arc
aware that there arc no simple and straight-forward answers to these
problems. However, as the Enron controversy is itself a product of the
tendency to postpone confrontation with these problems, they need to be
tackled immediately.
46 • The Enron Controversy
2.1
Fundamental Problems In the Indian Power Sector
At this stage, the Enron controversy is often posed as a dilemma of two
contradictory imperatives. The choice is portrayed as the one between
(a) rejecting Enron which, admittedly, is not a fair deal and saying no to
prospective power customers (and, hence, to future development in the
state) and (b) accepting the Enron Project with its baggage for future
development. In a crude form, the dilemma is between accepting the
expensive Enron project and rejecting future development. This
reduction of the controversy into a crude and deceptive dilemma is itself
dangerous. But more dangerous is the fact that this dilemma is used to
suggest that the Enron project is indispensable for development. In this
context, the issue of alternatives becomes immensely important.
Let us trace the roots of this so-called dilemma. On one side, the
power sector in developing countries in general and in India in particular
is facing four crises: Capital Crisis, Performance Crisis, Environmental
Crisis, and the Social Equilability Crisis. All these crises arc interlinked.
For example, Performance Crisis is often cited as the root cause of
Capital Crisis, whereas Capital Crisis and Performance Crisis are said to
be aggravating the Social Equitability Crisis. However, only Capital
Crisis gets overemphasised and isolated attempts to resolve Capital Crisis
(like the Enron project) end up worsening the other Crises.
On the other side, there are some basic problems in the planning
process. First, there is a clear lack of relevant data and in-depth analysis
based on state-of-the-art techniques. For example, MSEB has not
computed (or published) the capital required if the plant was to be
constructed by MSEB itself. This computation is absolutely essential to
assess the merit of the bids by the private generating companies. The
second problem is the lack of comprehensive and integrated planning
procedures. MSEB has not made an in-depth assessment of all the
available options of power generation. Nor has it employed an integrated
approach to resolve any of the above mentioned crises. Due to these two
factors, there is a dangerous tendency on the part of the MSEB and other
planning agencies to go for straight-forward and often simplistic
solutions like Enron.
These two factors— limited analysis and constricted perspective
— arc two important underlying causes of the conventional paradigm
comprising: (a) macro-economic growth rather than development as the
driving rationale; (b) increase in the energy consumption rather than
provision of energy-services as the criteria of success; and the strong
The Enron Controversy : Alternative Options • 47
supply-side bias with total reliance on large, centralised projects based on
conventional sources. The so-called dilemma between choosing Enron
and foregoing development is the product of this conventional paradigm.
The only way to resolve this dilemma is to transcend the
conventional paradigm. This could be done at three different levels. At
first level to rethink the basics of power sector policies to arrive at a
proper framework for designing power policies. At the second level to
question the very basis of the larger energy policy which is now being
entirely dominated by the power sector. And at the third level to
challenge the foundations of our development policy which determines
our energy policy and consequently the power policy.
Though there has been some work at the second and third level,
it is not yet adequate for arriving al concrete suggestions for power sector
policies. But coming to the first level of rethinking, we have ourselves
made one such effort in the form of a two and half year long study on
designing an alternative power plan for Maharashtra state.
2.2
Least-Cost, Integrated Power Plan for Maharashtra
Starting from the least-cost plan designed by Prof. A.K.N. Reddy and
others, we have prepared a detailed power plan (Least Cost Power
Planning : Case Study of Maharashtra Slate) for the state of Maharashtra
for the decade of 1991 to 2001. This plan is based on economic and
technical analyses of sixteen different options. These include options
which arc being implemented by MSEB like reduction in T&D losses,
cogeneration, time of day (ToD) metering as well as options that have
not been considered by MSEB al all such as: reduction in demand
through efficiency improvement of refrigerators, lights, motors, fans etc.
Our study demonstrates that these options arc capable of substantially
reducing our dependence on large centralised plants like Enron and at the
same time they arc cheaper than these centralised plants.
Table I shows the potential and cost of demand side
management (DSM) options. It must be noted that these options are
cheaper than the centralised plants.
48 • The Enron Controversy
Table I: Potential of major DSM options in Maharashtra by year 2001.
DSM Option
Compact Fluorescent
Lamp
Solar Water Heaters
Peak Power
Saving
MW *
Energy
Saving
MU *
Annualised Cost
(Rs/kWp/Yr.)
680
1670
1,866
250
950
8,196
6,424
35
335
Refrigerator Efficiency
Improvements
6,1 14
540
170
Commercial sector
3,855
390
2790
Irrigation Pump Set
900
2.793
165
LT industry
3300
2,793
310
T industry
3,368
1400
175
T & D loss reduction
Nil
2,156
250
Industrial Load Shifting
* These are indicative figures. More precise figures are used in the LCPP
report.
** Rs/kWpeak/Yr. is the annualised cost (of investment, O&M etc.) per
peak kW saved in 1992 Rs.
Note: Life cycle costing and Screening curve method is used to compare
and integrate these options with the supply options (of centralised and
decentralised plants).
Table 2: Potential of Decentralised generation option considered in the
LCPP analysis_____________________________________________
Option
Installed Capacity
MW
Cost
Rs/kW/Yr.*
10,046
500
Sugar Cogeneration
13,964
500
Co-generation (in other
industries)
6,889
Small Hydcl Plants
200
100
13.518
Producer Gas
* This is life cycle cost in 1992 Rs. at 100% PLFn. Table 1 & 2 arc
adapted from LCPP report mentioned at the end. Costs given in these
table are Life Cycle costs, and as such are not directly comparable with
often quoted capital costs in Rs./MW terms. Please refer LCPP for more
details on table 1 and 2.
The Enron Controversy : Alternative Options • 49
Our analysis revealed that for meeting the same demand of
energy services (such as motive power, lighting etc.) the options chosen
on the basis of the integrated, least-cost plan would cost 25% less! They
would also reduce our dependence on large fossil fuel burning plants by
more than 50% 1
In many developed countries it is a common practice to design
such integrated plans. In most states in the USA, it is even mandatory.
One such plan prepared by Pacific Gas and Electric Company (a large
utility in California) for early 21s1 century found that one third of their
incremental demand would be met by renewables, another third by
efficiency improvements, and rest by conventional generation.
Due to resource and data limitations, our plan need further
refinement before it could be adopted as a full-proof plan. However, it
has served two important functions: (i) to validate the claim that de
centralised generation and efficiency improvement options can meet a
large share of increasing power demand at a substantially lower financial
and social cost as compared to the conventional plan, and (ii) to
strengthen the methodology for such integrated and least-cost planning.
To sum up, we feel that if rational decision-making processes
are allowed to operate, then various techno-cconomically feasible, finan
cially viable, and immediately implementable alternatives to projects like
Enron can be adopted.
Reference:
Sant, Girish and Dixit, Shantanu (1994). Least Cost Power Planning —
A Case Study of Maharashtra. Unpublished but widely distributed
report. (This report is available at the PRAYAS address. A
contribution of Rs 60/- towards photocopying and postage cost will
be appreciated.)
MNCs: The New Messiahs and Old Justifications:
Investigating Enron Corporation’s Claims of
Providing Development Assistance to India
Subodh Wagle
Summary
In her recent testimony before the US House of Representatives, Ms.
Linda Powers, the Vice President. Global Finance, Enron Development
Corporation. USA claimed that the private companies (MNCs) arc now
providing vital development assistance to developing countries (Powers,
1995). To support her claim, she described, in detail, activities of Enron
Corporation through its controversial Dabhoi project in India. In this
article, based on their own analysis of Enron’s Dabhoi project in India,
the present authors investigate the claims made by Ms. Powers. The
entire testimony is very insulting and contemptuous towards developing
world in general and India in particular. The present article makes a
strong plea to lake serious note of various claims made in the testimony
and the underlying attitude. At the end, this article raises some crucial
questions that developing countries should ask before letting multi
national companies (MNCs), especially the private power producers,
into their economies.
Two Images of MNCs
Multi-national or trans-national corporations (MNCs) have been in the
eye of many a storm in developing countries. Even their staunch
supporters Find it hard to absolve them from responsibilities in episodes
like Exxon Valdez and Bhopal disaster in 1984. As a result, the image of
MNCs as callous, anti-pcople, profit-mongering conglomerates is too
familiar in countries like India. It is often alleged that this image of
MNCs in developing countries is strengthened by the left-dominated
media and academia and by political parlies and bureaucracies that have
direct interest in a statist approach. However, even the so-called non-lcft
(e.g. Gandhians and Sangh Parivar in India) have always been sceptical
about the role of MNCs and their intentions.
MNCs: The New Messiahs and Old Justification ‘51
In contrast, in the new era of structural adjustments and
liberalisation, privatisation, and globalisation (LPG) of developing
economies, a new positive image of MNCs is being gradually cultivated.
The image is grounded in the argument for a “new path” of development
in the context of the failure of the “old path” based on two main tenets:
(a) active role of the state in the development process and (b) control
over private and especially foreign interests. This argument highlights
inefficiencies, corruption, and wastage involved in the “old path" and
pitches for “new path” based on efficiency, productivity, and
technological sophistication. The argument is further strengthened by
overemphasising the financial crunch currently faced by many
governments in the developing world . In conclusion, the neo- classical
panacea of LPG is recommended as the only alternative left for all
developing countries who arc expected to follow the trail-blazing Asian
Tigers. Here come the MNCs, playing an important role of suppliers of
badly-needed capital and sophisticated technology. Their entry is thought
of as mutually beneficial to both the MNCs and the inviting country.
They arc portrayed as business houses that, in the process of earning fair
profits, will pass on the benefits to the host countries in the form of
improved infrastructure, sophisticated industry, and a strong and
vigorous economy.
The New Role Of The MNCs: Development Messiahs
However, our recent discovery indicates that this positive image of
MNCs is bland and inadequate in comparison to the role these MNCs
arc claiming for themselves. According to this claim, MNCs are not just
business houses working for fair business profits but also benefiting the
developing economics in the process . But it is claimed that, through
their business ventures and using their own money, MNCs arc supplying
the much- needed development assistance and relief to the developing
world. Further, it is also claimed that this development assistance is
provided in such a magnitude and with such effectiveness that any
bilateral or multilateral assistance program is no more needed.
This new role of the MNCs as “development messiahs” is
exactly and precisely the core argument pul forth by Ms. Linda Powers,
Vice President of Global Finance, Enron Development Corp, in her
testimony to the Committee on Appropriations, U.S. House of
Representatives (Powers, 1995).
52 • The Enron Controversy
The argument put forth by Ms. Powers of Enron has two major
elements: (a) that the MNCs arc doing exactly what any foreign
assistance program ought to do and (b) hence, all money that goes into
assistance and aid should be diverted to lending agencies to provide
loans to these pioneering MNCs. This article deals only with the first
element about which Ms. Powers argues as follows,
“Private parties, like our company and others, arc now able to
develop, construct, own, and operate private infrastructure projects in
these countries. In the process of doing so, private parties arc able to
achieve the two [key] things which U.S. foreign assistance efforts have
since long been trying (without much success) to achieve: (1) the
projects are serving as action- forcing events that arc getting the host
countries to finally implement the legal and policy changes long urged
upon them; and (2) as an adjunct to these projects, to win local support,
the private developers are installing substantial (emphasis ours) amounts
of medical facilities, schools and the like to alleviate current problems in
these countries (Powers, 1995:2).”
To support her claims. Ms. Powers cites the facts and figures of
Enron's controversial project near Dabhol in India. In the process, she
comes with a panoply of puzzling, questionable statements and claims
which can not al all be substantiated if we consider facts and analysis
carried out by many in India. But, first let us restrict ourselves to the
investigation of her claim of being a ‘development messiah'. Here, there
arc again two parts of her claim. According to her, “private parlies arc
bearing the costs” of discharging two important functions of
development assistance: (i) effecting the “growth and development of the
recipient countries” and (ii) “alleviating current problems”.
Enron’s First Claim: Working for Development
The first function of effecting growth and development of the recipient
country is carried out "not only by addition of physical assets to the
country, but, equally important, the creation of ‘commercial
infrastructure’ “(p.5). Ms. Powers explains the term “commercial
infrastructure” as “the policies, laws, and practices that arc the basic tools
of a market economy" (p.7). In this context, according to her, Enron’s
Dabhol project has been a god-sent opportunity for ignorant government,
bank, and other officials in India to learn a few things about their
profession. In her words:
MNCs: The New Messiahs and Old Justification • 53
“Working through this process (of evolution of Enron’s Dabhol
project) has given the Indian authorities a real and concrete
understanding of the kinds of legal and policy changes needed in India,
and has given the Indian banks a real and concrete understanding of
sound project lending practices. Moreover, our company spent an
enormous amount of its own money — approximately $20 million — on
this education and project development process alone, not including any
project costs (p. 6).”
However, the reality is totally different. The entire process of
development of Enron’s Dabhol project was completely shrouded in
secrecy and mystery. It is alleged that the involvement of government
officials was kept minimal and the agreements were drafted by Enron’s
experts. As one author has pointed out , the initial memorandum of
understanding for this first-ever private power project was signed in just
twenty four hours after initial contact with the olficials (Samant, 1995).
Further, even basic information was restricted to very few officials and
was denied to elected representatives of the people even after the power
purchase and other agreements were signed. It is also alleged that
objections raised by experts from the Indian lending banks were
overruled using political arm-twisting (Sridhar ct al., 1995).
Unfortunately, strategy to get this information through legal channels
was not successful for the lack of adequate information and resources on
the part of activists who were not united in their ranks. So much for the
educational process.
Further, Enron tried to include this amount of $20 million
(which is mentioned in the quote as spent on “education” of officials and
project development costs) in the capital costs on which it had planned to
earn exorbitant returns. However, it is reported that officials of Indian
banks forced Enron to relent on this issue. One interesting question: if
Enron did not spend this huge amount of money on education of officials
as it claims, then where has this money gone?
About the “education” of Indian bank officials, Ms. Powers
claims:
“Five lending Indian banks arc playing a major role in the total
financing package for our power plant project. They have not previously
done project financing, but through the financing process on our project
they have developed a thorough understanding of project finance,
international lending practices, project credit evaluation and security
requirements (p.7).”
54 • The Enron Controversy
However, this claim has no basis al all in reality. Though Indian
banking practices are different in certain aspects from those of the U.S.,
giving an impression that Enron taught project financing to the
concerned Indian banks is the height of audacity. To give a rough idea of
the nature and scale of the operation of the concerned Indian banks
following information would help. Industrial Development Bank of India
(leading bank financing the Rs. part of the DPC project) had assets of
nearly Rs. 31,000 crore (S 9.7 billion) in 1992-93 (Business India, 1994).
This is not an isolated example of such audacious and completely false
claims. But it is sufficient to indicate how these MNCs arc, on one hand,
creating a bad image of India and Indian institutions and, on the other
hand, deceiving U.S. government and legislators to further their own
interests.
Enron's Second Claim: Providing Immediate Relief
Let us investigate the second developmental function Ms. Powers refers
to. This relates to providing relief to immediate problems by making
available “medical, educational, employment, and other benefits.”
According to her:
“Specifically our capital expenditure budget for the project
includes $24.5 million (emphasis original) for a fifty-bed hospital, a
primary school, a vocational school, drinking water pipelines for the
surrounding villages and road improvements. The budget also includes
an additional $75 million (emphasis original) for port improvements
(dredging, new jetties, etc.) that will be available for general public use.
Finally, the project includes employment for several hundred persons,
both at plant and elsewhere, with an annual payroll of $5 million
throughout the life of the project. We provide extensive training for the
employees, and these arc high value jobs relative to the local economy
(p. 7).”
Firstly, the $24.5 million provides for various major heads of
expenditure which include the cost of land for plant and fuel facilities,
resettlement and rehabilitation of people displaced by the project, road
upgrading for the transport of equipment and waler pipelines about 70
km long. The remaining small amount would be spent on the facilities
listed in quote. This is nothing but the strategy of throwing some crumbs
to silence possible trouble-makers and has nothing to do with
development assistance.
MNCs: The New Messiahs and Old Justification • 55
Coming to the $75 million invested in port facilities which arc
claimed to be “available for general public use”, prevalent public
understanding in India is that the Indian people and governments will get
very small share of benefits from the port facility. As per present public
knowledge, Enron will hand over the construction jetty (just 150 meters
in length) to the government only after the construction of the project is
over (i.e. when it will be obsolete for Enron). Whereas, the fuel jetty of
1000 meters (which would be equally useful to the Indian government)
will be the exclusive property of Enron.
Regarding the issue of provision of employment, Enron’s
Dabhol power project would provide employment only to about 93
people in the first phase (IDBI, 1994). Most of these employees will be
highly qualified and will come from major cities in India, if not from
abroad. Very few local people will find direct employment at the project
and that too on low income menial jobs.
In case of the annual payroll of $5 million, first, it must be
noted that this will come directly from MSEB’s (Maharashtra State
Electricity Board) customers and not from Enron’s funds and, hence,
cannot be claimed as development assistance from Enron. Secondly, it is
not such a big amount when compared to the revenue Enron would be
collecting from MSEB, which is estimated to be between $ 400 million
(1997) to $ 800 million (2017) per year. Finally, an important question is
what portion of this amount would be utilised to pay foreign employees
and consultants from subsidiaries and sister companies of Enron,
Bechtel, and GE
To sum up, the claim that MNCs in general and Enron in
particular are “footing the bills for development assistance and producing
more visible results” has no basis at all in reality. The money Enron is
spending on project development costs can not be called as development
assistance, as Enron is not providing any substantial immediate relief.
Further, all this money would have to be repaid al exorbitant interests
rates (estimated to be around 33% p.a. in $s) by Indian taxpayers. This
certainly is an interesting way of these new messiahs of providing
development assistance.
Some More Questionable Claims and Statements
Here arc additional examples from the testimony of similar statements
and claims and our rejoinders, based mainly on our study of Enron's
Dabhol project in India.
56 • The Enron Controversy
Statements and Claims: In trying to project Enron’s image as a
protector of the divine principles of market economy, Ms. Powers
dismisses the idea of ‘natural' monopolies and praises the developing
countries for accepting "intense competition” as the appropriate way
(p-3).
Ms. Powers in similar vein also recommends “transparency and
predictability" in regulatory reforms (p.5).
Rejoinder: It is alleged that Enron prevailed upon the key
decision- makers in the state and central governments to avoid
competitive bidding. So much for the "intense competition”.
Ms. Powers’ plea for “transparency” in regulatory reforms is
hypocritical. Firstly, Enron itself tried its best to keep this deal secret and
successfully avoided public scrutiny of its agreement until it was forced
to publish the document due to a combination of factors. The earlier
opposition parties that were critical of the deal came to power and
declared their intention of making public the details of the deal. Some
journalists got hold of the power purchase agreement and published
some important pages of the document in a national magazine. Secondly,
by devising a combination of elaborate legal bindings and highly
punishing penalty structure in the agreements, Enron has attempted to
nip in the bud any future attempt to regulate its affairs.
Statements And Claims: Ms. Powers takes great pain to paint
MNCs as innocent businesses with clean intentions: “When a firm like
Enron .. goes into a foreign country to undertake a project, just what do
we do? In the simplest terms, we identify the need, select a suitable site,
design an appropriately sized facility, work out fuel supplies, develop
relations with local and central government officials, negotiate power
sales contracts, finance and construct the facility, and operate and
maintain it over its useful life (p.5).”
At another place, in the same vein, she states that the MNCs
“undertake enormous risks and costs, get compensated for these risks and
costs, and still deliver the services more reliably and cheaply than the
existing public projects in these countries (p.4)”
Rejoinder: Talking about the “need” and “appropriate sized
facility”, in case of Dabhol project, there was no need for such a large
base load project in the state of Maharashtra according to criticisms by
the World Bank. The Government of India had chosen nine suitable sites
for gas based power project from the perspective of power planning in
India. Enron’s present site at Dabhol was not among them and was
chosen by Enron not to suit to the needs of Indian power planning, but to
MNCs: The New Messiahs and Old Justification • 57
suit to the main clement of its own future plan: marketing gas in India
in a big way .
Coming to the next quote, Enron’s claim of taking enormous
risks and getting compensated for these risks appears straight forward
and reasonable. But the analysis of the actual agreements demonstrates
that, in addition to the most comprehensive and expensive insurance
cover (paid for by Indian taxpayers), Enron has passed the burden of all
kinds of possible risks to MSEB (Maharashtra State Electricity Board) or
to its contractors to the extent that the project is virtually risk-free for
Enron. However, Enron still demands an absurdly high rate of return as
compensation for the so-called high risks. Our estimates indicate that the
effective internal rale of return (IRR) Enron is demanding for this project
is as high as 28% on “claimed equity”. Further, it is alleged that the
project cost is inflated by about 20% which would further raise IRR
value on the “real equity”. As against this the reasonable IRR for this
risk-free proposition should be in the range of 17 to 21%.
The claim of delivering electricity at cheaper prices compared
to the existing public projects is again not true in case of the Dabhol
project. The issue of high price of Enron’s electricity is dealt with in
detail in our paper on techno-economic analysis in this collection.
Statement: While claiming that Enron has been successful in
effecting many changes, that the World Bank and other institutions have
for long been recommending, Ms. Powers states: “The state of
Maharashtra, where our project is located in India, is now revamping its
electricity rate structure to end electricity price subsidies.”
Rejoinder: This is a baseless statement. In the case of the
Maharashtra State Electricity Board (MSEB), there is no price subsidy,
what MSEB has is cross-subsidy. In this arrangement, the industrial
sector earning profits bears the burden of subsidising the agricultural
sector and domestic sector. The MSEB is not loosing any money due to
this cross-subsidy. No American corporation, and especially one working
in oil and natural gas sector, has any right to object to cross subsidy.
First, the entire American infrastructure is built on heavy subsidies from
the federal government. Secondly, it is widely known that the main
intention underlying the whole Gulf War which the American
government recently fought at a huge cost to the American exchequer
and heavy loss of human life, is to protect the interests of the American
oil and gas companies in the region.
58 • The Enron Controversy
New Colonialism and Old Justifications
While exposing the lies perpetrated by MNCs, we also need to take
cognisance of the insulting and contemptuous attitude of these MNCs in
general and of Enron in particular towards India and other developing
countries. The general tendency, especially in academia and bureaucracy,
is to dismiss any attempt to object to this contemptuous attitude as an
emotional over-reaction. This results into overlooking of the dangerous
implications of this attitude. On one hand , adopting such an altitude,
further emboldens the MNCs into imposing more and more atrocious
demands and manipulating the developing countries so as to extract
increasingly unfair profits that amount to sheer plunder. On the other
hand, it allows the MNCs to be audacious enough to put such lies on
record causing unimaginable damage to the image of developing
countries like India.
Before going into the wording and undertone of the testimony,
let us sec in what position Enron has managed to manoeuvre MSEB
(Maharashtra State Electricity Board), the state Government of
Maharashtra (GoM), and the sovereign Government of India (Gol).
Though all concerned parties arc now disowning the responsibility of
securing the counter-guarantee from Government of India, it is quite
clear that Enron has benefited immensely from such a counter-guarantee.
This is in addition to a guarantee from the State Government of
Maharashtra to protect Enron from the possibility of the evasion of the
responsibility of payment through “(arbitrary') government fiats.” These
guarantees are a one-sided affair and MSEB, GoM, or Gol have no
protection against any disasters or lapses on the part of Enron or its
proxies. The need for such protection against the misdeeds of the
unscrupulous MNCs is obvious from India’s past experience with
Union Carbide at Bhopal. Despite this, both the (earlier) GoM and Gol
accepted such humiliating treatment as if they were habitual defaulters
or despondent rulers of some banana republic.
This insult hurts furthermore if we consider the amounts
involved. The yearly payments to Enron from MSEB arc about $ 400
million while the yearly cross-subsidies MSEB provides is to the tunc
of $ 500 million. For such small amounts, the GoM and the Gol have
agreed to sign guarantees under which Enron can take recourse to the
English laws and attach all assets of these governments including the
Parliament House and Presidential Palace. This kind of treatment betrays
MNCs: The New Messiahs and Old Justification • 59
the real attitude of MNCs which are often hailed as honest business
partners interested in fair business.
Coming back to the testimony of Ms. Powers, it is entirely
marked by an underlying contemptuous tone. She describes the situation
in all developing countries including India as follows: “the lights don’t
stay on, the water isn’t safe to drink, the roads are dangerous and
congested, and phone calls are impossible to make or receive (p.4).” And
the conclusion is: hence, MNCs arc going into these countries to teach
Indians and others how to manage these simple things and be civilised.
If viewed in the proper perspective the dangerous implications
of this argument will become clearer. Imagine what the reaction of an
American would be if somebody makes equally audacious and insulting
suggestions. For example one could suggest that the semi-government
public transport agency in Bombay BEST (which operates a huge fleet
with far belter performance) should go to Los Angeles and other U.S.
cities and towns to leach a few lessons about public transport to US
authorities and “convince” the U.S. government about implementing
necessary policy changes like Energy Tax. This would significantly
reduce the menace of the global warming which threatens the very
existence of the world. In addition, it would also help the ghettoised and
riot-ridden poor of south- central LA, to reach available jobs.
Another suggestion could be about sending the present Indian
Chief Election Commissioner to manage the next Presidential elections
in the U.S. in 1996. In recent elections, in a poor and ‘utterly backward’
country like India, he had successfully motivated and helped around 70%
of adult population, mostly poor and illiterate, to exercise their franchise.
He would be a great help to the U.S. in improving the democratic
participation within the USA where around half the adult populations
(mostly blacks, women, and poor) is kept away from voting using
regressive laws and deliberate tactics and just about one-third finally
manage to vole.
Finally, the situation in the U.S., the home country of Enron,
could be described in the following terms: “Families arc breaking down,
educational standards arc abominably low, teen mothers give birth to
crack babies, crime rate is very high”. These conditions arc much worse
than those ol India as described by Ms. Powers in the above quote.
Firstly, Enron needs to work on these equally serious problems in its
home country before worrying about India. And, secondly, if these arc
the secondary effects of the ‘development; then we Indians need to
think twice about these.
60 * The Enron Controversy
The testimony of Ms. Powers not only ereates a bad image of
India, but docs something more serious. The contemptuous attitude
therein could be compared to the justifications provided by the colonial
regimes of the last couple of centuries that were here to ‘civilise’ the
‘barbaric natives’. Thus, while claiming to be the new messiahs of
development, the MNCs seems to be taking on the ‘while man’s burden’.
The economic benefits of the MNCs operation for the host country is
itself a matter of debate. But. this attempt to legitimise the economic
operations using the old colonial justifications like the ‘white man’s
burden’ is far more dangerous and needs to be resisted with all possible
might.
Precautions Against MNCs
As mentioned before, this new claim of MNCs of being development
messiahs and the misinterpretations and lies that arc pul forth to support
this claim will have to be exposed and resisted. It is especially important
in view of the large-scale , unquestioned acceptance of the neo- classical
panacea of LPG by the mainstream media, academia, bureaucracy, and
political parties in developing countries. These mainstream macro
organisations have already convinced themselves about the inevitability
of the entry of the MNCs on their terms. In the process, they have
accepted MNCs as honourable business houses with the clean intention
of making honest fair profits. This testimony by Ms. Powers and the
recently raised serious objections on the Enron project in India, together,
point at the true nature of MNCs and. hence, underscores the dangers in
accepting this image of MNCs.
Further, it is also necessary to juxtapose this lack of honesty and
integrity on the part of MNCs with their immense economic and political
power. If allowed to remain unconstrained, this deadly combination
would wreck havoc in developing countries. This fear and need for
international surveillance and regulation of MNCs is also underscored by
UNDP (UNDP, 1994). Another dangerous aspect is the entry of
espionage agencies like CIA which are reported to be helping these
MNCs in winning contracts in developing countries. CIA’s role in
Enron’s success in clinching this deal is clearly exposed in these reports
(Rajghatta, 1995). In this context, developing countries need to take
some extremely important precautions.
Firstly, they need to really check the fundamental rationales and
justifications put forth while inviting the MNCs to every proposed
MNCs: The New Messiahs and Old Justification • 61
project in the infrastructure sector. For example, in the ease of Enron’s
Dabhol project MSEB should have asked: (i) docs the state of
Maharashtra really need what the project is offering viz. base load
capacity?; (ii) docs it really have to resort to a power plant based on
Enron’s gas imported from Qatar?; (iii) docs it really have to invite
Enron’s capital and GE’s technology considering the exorbitant prices
charged for both.
In this connection, developing countries also need to doublcchcck whether they have already exhausted indigenous options that are
less costly. In ease of Enron’s Dabhol project, MSEB needs to check
whether it has really exhausted technologically practicable and
economically viable options that arc cheaper than Enron option like
efficiency improvement, demand-side management, and renewable
energy sources.
Secondly, developing countries need to check whether
proposals coming from MNCs arc fair by their national as well as by
international business standards. Again, in case of Enron’s Dabhol
project, MSEB need to investigate this entire deal in detail. How much
would it be paying over the entire project period? What arc the capital
costs and what is the profitability of the project to Enron in this project?
How much would the MSEB be paying for the improved technology
imported by Enron and the risks Enron would be taking, and whether the
amounts involved would be worth the benefits? What would the
implications of this project in general and these payments in particular
for the health of the power sector and the interests of taxpayers in the
state of Maharashtra.
Finally, developing countries also need to actively and urgently
work to improve their capabilities to monitor, control, and regulate the
functioning of these MNCs possessing sophisticated technology,
immense economic power, and without much scruples and slakes in the
country and its people. Again, in case of the Enron’s Dabhol power
project and that of a host of other indigenous and foreign private power
projects following it, India needs to ask an extremely important question:
does it have technology, policy software, expertise, and above all public
awareness and political will that arc critical necessities to initiate any
effort to control, monitor, and regulate the power generating private
companies and ensure the health of its power sector and interests of its
taxpayers?
62 • The Enron Controversy
References:
IDBI (Industrial Development Bank of India). (1994). Detailed Appraisal
Note on Enron’s Request for Finance.
Powers. Linda. (1995). Testimony before the Committee On Appro
priations, Sub-Committec On Foreign Operations, U.S. House of
Representatives (31s1 January 1995).
Rajghalta, Chidanand. (1995). "CIA Helped Enron bag Stale Contract” in
Indian Express (22nd February. 1995).
Samant. P.B. (1995). "Enroncha Dabhol Prakalp: Shap ki Vardaan?”
(Enron’s Dabhol Project: A Curse Or A Boon?) in Loksalta (Dt. 16th
April 1995)
Sridhar, V., Ram, N., Chandra Perez. (1995). "The Scandalous Enron
Deal” in Frontline (7lh April 1995).
UNDP. (1994). Human Development Report.
Business India, 1994, "Gearing for Change”, Anon. p. 16; February 14,
1994.
Note: This article has been submitted to an international Journal for
publication.
Roots of the Enron Controversy:
Fundamental Ills of the Power Sector
Girish Sant, Shantanu Dixit, Subodh Waglc
J.O
Present Crises in the Power Sector:
The Indian power sector which is currently in the eye of a storm is facing
a peculiar situation. On one hand, it is under increasing pressure to
satisfy continuously growing demand for power, whereas on the other
hand, as described by Prof. Reddy, it is dogged by four major crises:
Capital, Performance, Environmental, and Equity (social justice).
India’s electricity demand is growing at a rate of 7% p.a. This
would require doubling of the present installed capacity by year 2004.
This needs massive investments of about Rs 173 billion in the Power
Sector each year. At the same time, Government owned State electricity
Boards (SEBs) arc facing acute financial crises. The SEBs have total
accumulated losses of Rs 40 billion. Financial support from the
government’s development plan is already high (more than 20% of the
plan expenditure) and can not be increased further. Even the
multinational agencies, like World Bank, have declared their total
inability to fund such large investments expected in the developing
countries.
In addition to this Capital Crisis, the internal efficiency of the
power sector is dismal. There is a tremendous scope for improvement in
the various related aspects like the efficiencies of the power plants and
of the transmission and distribution (T&D) networks, the internal
resource generation, the speed of project implementation, and the
operation and maintenance of plants as well as networks. This
Performance Crisis has been talked about for a long time but without
much impact.
At the same time, the crises of environment, and of social
justice related to power sector policies, which are not discussed much at
official flora, have aggravated. Despite over 30 years of support through
planned development expenditure in the name of the poor and despite
claims of 100% electrification of villages in many states, only 50% of the
households in the country are actually connected to the grid. Affluent
64 • The Enron Controversy
sections of the society arc mainly responsible for increasing power
consumption but the social and environmental costs of power production
are largely born by the poorer sections of society with little direct benefit
out of it. The price paid by these people is in the form of displacement,
increased hardships due to increased pollution, and in many cases,
complete loss of control over the natural resource base and hence of
livelihood.
2,0
The Mainstream Logic Underlying New Power Policies
Though all the four crises are equally important and need equal con
sideration in policy making, the governments, stale as well as central,
seem to be focusing on the Capital Crisis while totally neglecting the
other three. The underlying logic epitomises the conventional paradigm
of development. First, environmental concerns as well as issues of social
justice are seen as digressions from, if not brakes on, the progress of the
power sector. Secondly, future development of the power sector is seen
as possible only by generating more and more power and that loo only
through centralised, capital-intensive, and large-scale conventional
options. This logic restricts the future development to a single capitalintensive path. It inflates the Capital Crisis out of proportion and
relegates the other three crises to obscurity. Further, as mentioned before,
it is no longer possible to resort to multilateral borrowings while it is
politically unattractive to go for internal resource generation. The
simplistic solution to the over-bloated Capital Crisis is, then, to invite
indigenous and foreign private investors.
The gaps in this logic underlying new power policies focusing
on privatisation are important and critical. First of all, with world-wide
acceptance of ideas like sustainable development and people’s
participation in development, total neglect of social and environmental
concerns cannot be justified. Secondly, with great advances in the
technical and economic viability of renewable energy and energy
efficiency options, total dependence on capital-intensive conventional
options is equally unjustifiable. The new power policy measures in India
need to be viewed in this context.
3.0
New Policy Measures and Their Hasty Implementation:
In the early nineties, the government of India initiated a scries of legal,
financial and administrative measures and offered incentives to attract
private investment in the power sector. Indian Electricity Act was
The Roots of Enron Controversy • 65
modified to remove legal obstacles to the private ownership of genera
tion plants and T&D networks. Now, 100% foreign equity and a debt :
equity ratio of 4:1 is allowed in power projects. Major incentives for
private investors are: (a) a two-part tariff which guarantees a minimum
of 16% post lax return on equity, in any foreign currency, at normative
operating performance and (b)guarantce by the concerned state
government and counter guarantee from the Central government to
honour financial obligation of SEBs towards independent power produc
ers. For new projects (other than fast track projects) different
mechanisms are being formulated to guarantee payments by SEB to the
promoters.
Another striking feature of the policy guidelines is the lack of
differentiation between specific technology characteristics.
For determining the return on equity, same norms for
availability arc applied to the gas and coal based projects. Gas based
projects have am inherently higher availability then the coal based plants.
This implies excessive profits to the promoters of gas based projects.
While, the state owned power utilities are obliged to bear the
social responsibilities and to continue uneconomical operations, they arc
not allowed to charge remunerative tariffs to all sectors, which at times
results in huge operating losses. This partisan treatment of the private
sector is not limited only to this issue. Generally the SEBs are neither al
lowed to raise funds from the market nor to have an equity base.
Obviously they do not have the freedom to change tariffs and subsidies
to earn even the monetarily sensible and legally justifiable level of
profits.
In addition to this, there is a complete lack of incentives to the
private parties to minimise project costs, as competitive bidding
procedures are normally avoided. However, the guaranteed profits are
linked to the capital cost.
Moreover, the new policy measures, even in their totality, arc
hardly comprehensive. They leave out a variety of important issues like
the financial viability and the future role of Stale utilities, the social
responsibilities today undertaken by the SEB’s, the social and
environmental implications, and the impact on the economy in general
and on other public sector units like BHEL in specific.
Two main features of the present practice that strike one
immediately arc; the lack of a comprehensive and long term perspective
underlying these changes in the policy, and their hurried implementation.
Lack of comprehensive and long term perspective leaves many old
66 • The Enron Controversy
questions unanswered and poses many new ones. International
agreements and obligations promised in the new policies will have farreaching and critical implications for the well-being of the national
economy. The long term impact of such policy measures, in a capitalintensive and core sector like power, are serious, critical, and difficult to
judge without an in-depth analysis and forecasting. The lack of such
analysis represents a serious lacuna in present power planning. The
importance of these transactions is apparent, considering the likely drain
foreign exchange and burden on the central government, due to just a
handful of private power producers. If the terms offered to Enron arc
extended to the first 5.000 MW of the seven fast track projects, that arc
in the offing, then the foreign exchange outgo would be to the order of
Rs 7,500 crore (US $ 2.34 Billion) each year for next 20 years (‘Current
Power Policies A Critique’, National Working Group on Power Sector.).
4.0
Effects of the lack of a holistic approach towards the
power sector:
Presently, conflicting claims and counterclaims are being made about the
financial, technical, social, and economic benefits and implications of
these policy measures. For example, it is argued that privatisation will
help in making the power sector more efficient and will be able to
provide much needed power to the industry which, in turn, will be
beneficial to the economy. At the same time, some experts feel that
privatisation will benefit the industrial sector at the cost of other sectors,
because the new private (independent) power producers will cater mostly
to the profitable industrial consumers, thus depriving the SEBs of their
main revenue source. As a result, the socially required investments for
the benefit of the disadvantaged sections of the society (c.g. rural electri
fication) would be reduced. Il is also felt that heavy dependence on for
eign capital will prove disastrous to the economy.
Secondly, the government has often tried to go ahead
stubbornly with the intended policy changes without coming out with
clear and frank responses to various concerns and objections raised. This
hurried and repressive implementation has created an atmosphere of
distrust and helplessness among people and the organisations concerned
about these issues. The opposition and resistance to many power projects
such as Sardar Sarovar Project (Narmada Dam), Singhrauli, and more
recently ENRON can be cited as examples. Though these conflicts have
concentrated on different aspects of each project, they have their origins
The Roots of Enron Controversy ’67
in the government’s failure in formulating an open, viable, envi
ronmentally sustainable, and socially just power policy.
5.0
Enron as a symbol of the ills in the power sector:
The Enron controversy has brought out these issues once again. And
there are many more projects that arc in the pipeline al different stages of
finalization. If the present situation is allowed to continue, there would
be utter chaos on the policy front. On one hand, the government agencies
will try to push forward every single project without any clear cut
standards or criteria, essential to carry out a rigorous and honest appraisal
of the projects. On the other hand, with no basis for carrying out a
fruitful dialogue, the increasingly suspicious people’s organisations will
continue to resist each and every project, on every single ground, and
with all possible might. In the ensuing confusion, the people and their
interests will ultimately suffer.
The above analysis highlights the need for a comprehensive
power policy which would be based on in-depth analyses, and would be
capable of protecting the interests of the people. It must be clearly
understood that there is no easy way out. The proposed privatisation and
globalisation of our erstwhile state-controlled power sector is a major
fundamental decision. And it will require equally fundamental changes in
the power policies and structures that arc in line with our national objec
tives. On one hand, this will need learning from experiences of many
other countries, developed as well as developing. But, on the other hand,
any effort towards the wholesale import of policies from any other
country would be dangerous.
In this context, we feel the need to carefully evolve a process of
designing appropriate polices. In our opinion, this process will have to be
sensitive to two important issues:
Firstly, any effort to impose policies without taking the people
and their organisations into confidence would continue to create further
confusion and strife. It is important that the government should ensure
that the entire process of policy design and decision making is
thoroughly transparent. The people and their organisations should be
given an opportunity of direct and real participation and should have a
say in the entire process. We suggest two immediate steps in this
direction: (a) The central and all the state governments should
immediately publish white-papers giving detailed and full technoeconomic, financial, and organisational information as well as a detailed
68 • The Enron Controversy
picture of proposed policy reforms; (b) The central and stale
governments should create properly empowered structures with adequate
representation to various people’s organisations to see the process of
policy design. In the meanwhile, these same structure should be
empowered to review decisions about future developments in the power
sector.
Secondly, we need to make a well-co-ordinated and focused effort to
equip institutions other than the official agencies to analyse and effec
tively participate in the monitoring and regulation of the affairs of the
future power sector dominated by powerful national and transnational
private companies. This is especially required in view of the clear failure
of present government institutions in ensuring interests of the people and
the power consumers. In this context, universities, research institutions,
research wings of public sector power companies, and retired officials of
public sector agencies can play a major role. If some foreign institutions,
multilateral bodies, or bilateral projects are found to be helpful to this
healthy process, then their help should also he welcomed.
An Appeal
A Clearing House for the Information and
Analysis of the Power Policy in India (CHIAPPI)
While (he Enron controversy has reached a decisive stage, it is now
time to think about and prepare for the future challenges and actions.
For those striving to bring in rational and people oriented power sector
policies, it is important to consolidate the' benefits and gains during the
debate over the Enron controversy, while improving upon the identified
shortcomings and lacunae in their efforts. Success of their efforts was
constrained due to many factors including: duplication of work;
inconsistency in conclusions and recommendations; methodological and
analytical shortcomings; and a severe lack of information.
This calls for immediate actions to facilitate vigorous and continu
ous interaction — through exchange of ideas, information, and analysis
— among activists, researchers, policy makers, and officials working
for desirable power sector policies that are politically inclusive, socially
equitable, techno-economically viable, and environmentally sustainable.
To carry out such activities the idea of a Clearing House has been
conceived.
Proposed Activities of the Clearing House
Developing a depository of information and analyses of power
privatisation in India.
ii) Preparing, publishing, and periodically updating: (a) a classified
catalog of individuals and organizations working on various
aspects of privatisation of power sector in India; (b) an anointed
bibliography (with abstracts) of published and unpublished
research and analytical work on different aspects of power
privatisation in India.
iii) Preparing and publishing notes and small articles for activists
and lay public.
We. al PRAYAS, have been doing some work in this direction. But, in
our understanding, considering the immense challenges and meager
resources, these will have to be combined efforts, with a wide base and
participation. We request all interested people to participate and support
this common endeavour. Please contact PRAYAS for more information.
i)
This collection of papers and articles,
aimed at a broad cross-section of the populace,
deals with the follotwing issues:
The real price of Enron power.
The performance guarantees from Enron and related penalties in
case of default, and what they mean for Enron and for MSEB.
Answer to the argument that “though the Enron project is
expensive, we should go ahead with the first phase, because ‘no
power’ is costlier than any power”.
Viable, immediate and long-term alternatives to Enron.
The issue of international back-lash if the Enron project is
cancelled.
What Enron says to the U.S. government about the Dabhol project
as well as about India and its officials.
Lessons we can draw from the Enron controversy towards
ensuring the health of the power sector in India in view of the large
number of private power projects coming up in the near future.
Second Edition: September 1995
Position: 2817 (3 views)