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The Enron Saga

"This case has highlighted to the people how even after 50 years of independence, political considerations outweigh the public interest and the interest of the state and to what extent the government can go to justify its actions and not only before the public but even before the courts of law."

- Bombay High Court's passing remark after dismissing a bunch of petitions that had challenged the legality of the Enron power project.
"Enron's India odyssey which started with the largest American FDI in India is ending in a whimper."

- Business Today, February 21, 2001.

he Enron Saga: Introduction

In 1996, Rebecca Mark, CEO, Enron Corporation,managed to wrest the controversial Dabhol Power Company (DPC) from the jaws of death. Five years later (2001), the survival of DPC was at stake. Both DPC and the Government of Maharashtra (GoM) have been accused of corruption and economic insanity. With the controversy regarding the price of power still raging and the latest payments crisis that the Maharashtra State Electricity Board (MSEB) faced, both Enron and GoM were desperately looking for a solution. The MSEB was not able to lift even the first phase supply fully. It was caught in a vicious circle with high fuel prices leading to low off take of Dabhol power into the grid. This in turn caused the unit capacity cost to rise. In October 2000, the price of Dabhol power touched Rs. 7.09 per kWh, due to the high price of fuel and the worsening exchange rate. In January 2001, responding to Business World's query on the state government's stand, Padmasinh Patil, energy minister, GoM, said, "We will set up a review committee shortly. There are complex issues to work out". Analysts felt that the possibility of Enron selling out or invoking penal clauses in its contractual agreement with MSEB, to exit could not be ruled out.

In Quest of Power
In June 1992, a team of officials of the Government of India (GoI) toured the USA with the aim of inviting power producers in the USA to invest in India.1 Prior to this, the government drew up a list of projects in which the private sector could participate. In addition to the coal based projects, (Refer Exhibit II) there were two or three gas-based projects in the list. The Enron Corporation showed interest in setting up a power station in India based on the import of Liquefied Natural Gas (LNG). Enron was one of the world's leading power companies and figured in the list of the 500 largest corporations in the USA. In 1993, Enron's total sales stood at US$ 7.1 billion (Rs. 22,000 crore). At the time of coming to India2, Enron's experience in building and running power stations was

limited to a few stations in the US and the Philippines. (capacities ranging from 28, 105 and 110 MW stations in the Philippines and a 110 MW station in Puerto Rico, to 149 to 450 MW plants in the USA). In India, the size of the proposed station would be 2500 MW. On 15 June 1992, a team of officials from Enron Corporation arrived in New Delhi. On 18 and 19 June, the team visited over half a dozen potential sites in Maharashtra and on 20 June 1992, the MSEB signed a Memorandum of Understanding (MoU) with Enron. The MoU specified that the MSEB would buy electricity and/or capacity from Enron which would build, own and operate (but not transfer) a plant of about 2000-2400 MW capacity. The power station would be built near Dabhol in the Ratnagiri district, about 300 km south of Mumbai. The MoU also specified that the MSEB agreed that there was a need to set up a 2000 MW plant to be run on LNG. The "electrical power purchase contract" would be a contract for 20 years and would be structured to achieve a price of US $ 0.073/kWh (Rs. 2.34 per unit at the then prevailing exchange rates)." At the price quoted by Enron for a unit, MSEB would be paying a sum of US $ 1300 million (Rs. 400 crores) every year for the total capacity of 2000 MW. The total payments for 20 years would be around 35 billion US dollars.

The Power Sector

In India the power sector was dominated by Central and State government owned organizations. In most of the cases, any State Electricity Board (SEB) was the sole generator, transmittor and distributor of power. Power was generated by Central Utilities such as NTPC, NHPC, Nuclear Power Corporation, Damodar Valley Corporation and NEEPCO; State Electricity Boards which were state-owned utilities; licensees such as BSES and CESC and Independent Power Projects (IPPs). Table I Power Generation (1999-2000) Sector Central Sector State Sector Private Sector Licensees IPPs Others All India % 34.00% 58.10% 6.50% 3.90% 2.60% 1.40% 100.00%

Source: Transmission and distribution was mostly in the hand of SEBs with the sole exception of Orissa where power distribution was in the hands of the private sector. In 2000, India's power

generation capacity stood at around 96600MW (Approx. 478 billion units)3. The major portion of the capacity was set up by SEBs (58%). This was followed by centrally controlled plants which contributed 34%. IPPs started contributing to installed capacity only as recently as 1996. Central Utilities dominated the Indian power generation sector. Even after the new power policy of 1991came into effect, their share in power generated, as well as new capacity added, did not diminish significantly. This was largely due to the failure of IPPs to take off. Central Utilities included Powergrid Corporation of India, Power Finance Corporation of India, Rural Electrification Corporation and Power Trading Corporation of India. To meet the growing shortage of power, the government encouraged private (including foreign) participation in the power sector. The new power policy permitted 100 per cent foreign owned companies to set up power projects of any capacity and type (coal, gas, hydel, wind or solar). An Independent Power Producer (IPP), after getting government approvals for its specified plant size, could generate power and sell it to the respective SEBs under a Power Purchase Agreement (PPA). Licensees were predominantly private companies that generated and distributed electricity to urban areas. Prominent among these were Mumbai based licensees such as Tata Electric Companies (TEC), BEST and BSES, Calcutta-based CESC and Ahmedabad-based AEC. Between 1991 and 2000, power demand grew by 7.5-8% annually fuelled by industrial growth and urbanization. The demand was expected to grow at the rate of 9 % annually between 2001 and 2010.

The Power Factor

The MoU between Enron and MSEB was signed prior to the examination of the terms and conditions and implication of the project. Among the parameters that should have been examined were the capital cost of the plant (on which the price of electricity depends), the type of fuel to be used, the location of the plant etc. An autonomous organization, the Central Electricity Authority (CEA)4 was supposed to examine these aspects. In July 1992, the CEA examined the MoU and pointed out that the price agreed on was a "departure from the existing norms and parameters notified by the Government." It also pointed out that "denominating the price in US dollars was also a departure from the existing norms." According to the CEA, the price that had been agreed upon was "considered high." In July 1992, the Government of India asked Enron to submit a break-up of the project costs and the return on equity that was assumed. Enron wrote back stating, "...We advice you against auditing project costs and predetermining return on equity." Having signed the MoU, Enron now wanted to rush through the PPA5. Since the project was to be examined as per the provisions of law, Enron's lawyer, Adrian Montague carried out an analysis of Indian laws. In September 1992, a note called "The Problems Concerning the Application of the Indian Electricity Acts" was sent to the Secretary of Power,

GoI highlighting the problems that the provisions in these Acts raised for the Dabhol power project. The problems identified by Enron were, "Power of MSEB and CEA to regulate DPC activities"; that the DPC would "have to follow all directions of MSEB" and the tariff regulations published by the government. The tariff regulations were found by Enron to be "incompatible with the financial structure of a power station." The Electricity (Supply) Act laid down certain duties of a generating company. These included operating and maintaining the power station in the most efficient and economical manner. Enron was concerned about the consequences of a breach of this provision. It wanted to know who would enforce these provisions. The last problem identified by Enron was that the DPC like any other limited company would be required to abide by the provisions of the Companies Act. Enron had to furnish to the CEA, account, statistics, returns of other information relating to the generation, supply and use of electricity. In September 1992, after joint discussions between Enron, the MSEB and the GoM, the Chairman of MSEB wrote to the GoI stating that, "Public and judicial scrutiny of business policy and decisions as per the Act will not be acceptable by a company like DPC". To facilitate the signing of the PPA, the law had mandated that the price of power and technical aspects of the project be cleared by the CEA. However, Enron made it clear that it did not want to have the price it had set down examined by anyone. Enron was trying to sign the agreement with the MSEB without the necessary "techno-economic" clearance of the CEA6. The MSEB also insisted that it be allowed to sign the agreement with Enron first and seek clearance later. Meanwhile, in March 1993, Enron informed the GoI that since it was in no position to procure gas supplies, it would split the project into two phases7. In April 1993, Enron submitted a document, which it claimed was a project report to the CEA. The report, however, did not reveal any of the critical parameters required for evaluation of the project. The CEA was being pressurized by bureaucrats and politicians to clear the project, despite the lacunae. In August 1993, Sharad Pawar, the then Chief Minister (CM) of Maharashtra took a decision that the CEA would be bypassed completely and that the "misgivings" raised by it would be ignored. The CM put forth a proposition that issues like the import of fuel, total foreign exchange outgo and tariff were "minor issues to be clarified." On November 11, 1993, a day before the CEA was to meet, to consider whether it should give clearance to the project or not, it received a letter from the Ministry of Power (MoP), GoI which stated, "The Finance Secretary observed that the question of cost of power had been looked into and it had been found that it was more or less in line with other projects being put up in Maharashtra."8 On November 12, 1993, the CEA met to consider the project's techno-economic clearance. Faced with pressure to clear the project, the CEA examined only the technical aspects and decided to accord only technical clearance. On November 23, 1993, the MoP told DPC that it would "expedite consideration of all clearances which fall within the ministry's "competence." On November 26, 1993, the CEA gave technical clearance to the project.9 On December 8, 1993, the PPA was signed between the MSEB and the DPC. The agreement specified that the company would build, operate and sell electricity in the form of available

capacity. The total payments would be fixed, and these would be almost independent of the amount of electricity drawn by the MSEB. The MSEB seemed to have virtually surrendered all rights including that of inspecting the power station and fuel tank10 and even the right to enter the station. As per the PPA, only "duly authorized" MSEB personnel, who had been approved by the DPC in advance, could enter the station. The PPA made it a precondition for the MSEB to build at its own cost the 400 kV lines for the transmission of electricity from the plant site to the load centres.11 Under the agreement, if there was a delay in plant construction, the DPC would pay nothing from its pocket. The DPC was liable to penalties only in case of non-performance such as time over-run, capacity short fall etc. The purchase of electricity by the MSEB was governed by various agreements. These included the guarantee by the State of Maharashtra, the counter guarantee by the GoI and the tripartite agreement between the GoM, the GoI and the Reserve Bank of India (RBI). In the event of the MSEB failing to make the payments, the DPC's first recourse would be the irrevocable Letter of Credit (LC)12 that the MSEB was supposed to open in the DPC's favor. In the event of the MSEB failing to make the payments, the Guarantee signed by the GoM promised, irrevocably and unconditionally, to pay to the DPC any and every sum of money which the MSEB was liable to pay under the PPA. Under the terms of the counter guarantee, the GoI counter guaranteed the payments due to the DPC in the event of default by the GoM. Analysts have expressed serious concern at the magnitude of the proposed liability that the governments had undertaken in guaranteeing the payments. The total exposure in the case of the GoM alone amounted to well over Rs. 2,00,000 crore. Said one, "The risk of these guarantees being invoked is not too farfetched..." The Department of Economic Affairs had also expressed a fear that the "... risk of the counter guarantee being invoked was not unreal given that SEBs had been defaulting in payments."

The Peak Load

The project generated much controversy in Maharashtra. Of the two main opposition parties (the BJP and Shiv Sena)13, the BJP was in the forefront of the opposition to the project on a number of grounds. Their primary contention was that the deal indicated corruption at the highest level. In January 1995, elections to the Maharashtra state assembly were announced. Enron was made a key issue in the elections. Gopinath Munde, leader of the BJP, visited the Enron site and promised to throw "the project in the Arabian Sea". Business Line and Frontline carried long and detailed articles on the PPA, which had been kept secret up till then.14 In February 1995, the BJP and the Shiv Sena alliance won the elections. The new ruling alliance immediately began investigations into the award of the contract, the economics of the project and the consequences for Maharashtra if the project were to go ahead. It went on to form a high level official committee to investigate the deal. The first conclusion reached by the committee was that the previous government had "committed a grave impropriety" by resorting to private negotiations on a one-to-one basis with Enron. Because of this, the Enron-MSEB arrangement on Dabhol lacked transparency. The committee went on to conclude that there was absolutely no compelling reason for not to involving a second contender for Dabhol. On the question of capital costs and the rates for power

from the Dabhol plant, the committee concluded, "capital cost of DPC project was inflated." It went on to say that because of the denomination of tariff for power in dollar terms, the consumer would have to pay a much higher price than was justified. Based on the committee's recommendations, the GoM unanimously decided to cancel the project. On August 3, 1995, the CM of Maharashtra announced that the GoM had decided "to scrap phase I and cancel phase II of the project." It looked as if the project would meet the same fate as that of Cogentrix. (Refer Exhibit II). On November 3, 1995, Rebecca Mark, CEO, Enron, met Shiv Sena leader Bal Thackrey and convinced him to reconsider the decision. After the meeting, the GoM announced renegotiations and constituted a renegotiation committee to revive both phases of the project. On November 19, 1995, the renegotiation committee submitted its report. The report claimed that the capacity was increased by renegotiations to a binding 2184 MW and the tariff was lowered for phase I. However, analysts felt that there was absolutely no decrease in tariff. After the renegotiations, the entire project was made binding upon the MSEB15. This voided the centre's counter guarantee since it had been earlier specified that any change to the PPA would render it void. However, in May 1996, the GoI ratified the counter guarantee on the grounds that if this was not done, the GoM would be liable to pay Rs. 86 lakh a day. On August 8 1996, a binding PPA was signed with contractual binding payments by MSEB to DPC exceeding US $ 30 billion (Rs.1, 20,000 crore). Also in August 1996, a division bench of the Mumbai High Court directed the CM of Maharashtra to file affidavits stating the reasons for scrapping the project and then renegotiating it. On September 3, 1996, the CM filed an affidavit stating that all allegations of fraud, misrepresentation and corruption made against DPC were on the basis of newspaper reports. The various steps taken by the GoM, like reviewing the project, canceling the project, filling a suit, renegotiating the terms and conditions of the project and withdrawing the suit were all done in a bonafide manner in the larger interest of the consumers and the people of Maharashtra. On December 2, 1996, the High Court while expressg reserervations, (see quote in the beginning) dismissed a bunch of petitions that had challenged the legality of the Enron power project, and the way was cleared for work on the project to start. In December 1996, Business India wrote, "For the DPC, the Bombay High Court's order is yet another vindication of the consistent stand that there is nothing wrong with the project or the contract it had originally signed in 1993." In January 1998, Enron announced that it would begin generation at Dabhol by December 1998, four months earlier than the date mentioned in the PPA. By May 1999, the first phase was ready to supply electricity to the national grid and construction on the second phase had begun. By mid 2000, officials in the MSEB voiced their concern about the efficacy of the payments to DPC. In 2000, MSEB purchased electricity from DPC at the rate of Rs. 7.00 per kWh. MSEB would pay DPC as much as 12% of its average monthly revenue of about Rs. 800 crore in fixed charges alone, when Dabhol contributed only 6% towards its overall energy pool. In January 2001, MSEB was to pay Rs. 2,000 crore to the DPC and in December 2001, when phase II would be commissioned, the bill was likely to be Rs. 6,000 crore. Analysts felt that even

with a tariff increase it was unlikely that MSEB could pay this amount. In January 2001, Enron officials announced that the company would invoke the LC to recover its dues from MSEB amounting to Rs. 262 crore for the months of October and November. Since the LC was for Rs 136 crore only, Enron threatened to invoke the state government guarantee. On January 6, 2001 the GoM agreed to give MSEB Rs. 114 crore so that it could pay the October bill. The GoM, however, decided not to pay DPC's November bill. With the GoM deciding against the payment of subsequent bills, it seemed likely that DPC would invoke the counter guarantee of GoI. On February 7, 2001, DPC invoked the GoI counter guarantee. In late February 2001, the GoM turned down the MSEB's proposal to provide nearly Rs. 200 crore for paying the December and January bills to DPC. DPC had set February 25, 2001, as the deadline for the payment of both the December and January bills. Jimmy Mogal, spokesperson, DPC, said, "The invocation of the state guarantee and sovereign guarantee will be one of the options the company may consider if the MSEB fails to meet the deadline by February 26, 2001." On February 27, 2001, Enron announced that it would discuss the future course of action with its lenders. Said a Spokesman of Enron, "Around 40 parties from different countries are involved with us and we would be taking them into confidence. We will not be taking any action in a haste."

A Tripp
The MSEB's inability to pay DPC was rapidly emerging as a threat to the viability of phase II of the project which involved a generating capacity of 1, 400 MW and an LNG terminal of 5 million tons. There was an increasing possibility that the dispute over phase I might end up in international arbitration, if MSEB failed to pay up and the state government refused to bail out the ailing MSEB. The PPA had provisions for arbitration in case a dispute could not be resolved through negotiations. The DPC and the MSEB would have to work out alternative options as the project was unviable in its present form. Said Kirith Parikh, former director, Indira Gandhi Institute of Development Research (IGIDR), "Yes, the power from Enron is currently expensive, but a solution needs to be worked. Throwing the Enron project into the sea is not an option." 1. One option could be allowing the DPC to sell power to other states. That would keep the plant running at full capacity and keep the per unit cost low. But the Electricity Act did not allow any trading of power, and prevented the DPC from selling power to anyone but the MSEB. Implementing this would mean a change in the Indian Laws. On February 8, 2001, a high level tripartite meeting of DPC, GoM and MSEB agreed to explore the possibility of selling power from Dabhol to other parties. DPC was of the opinion that up to 700 MW could be sent to other states through the existing transmission systems. 2. There were reports of efforts to sell DPC's power to Karnataka. But according to power experts, the transmission lines between the west and the southern grid were too weak to permit a sale of more than 380 MW of power to Karnataka. The other states in the western grid were Gujarat and Madhya Pradesh. Of these, Gujarat was fully occupied with the consequences of the earthquake16 and was not in a position to absorb DPC's current capacity of 740 MW, let alone its expanded capacity of 2,100 MW by the end of 2001. Madhya Pradesh's State Electricity Board

was in even worse shape than Maharashtra's. 3. In early 2001, GoM appealed to the GoI to bail it out by getting NTPC to pick up equity stake in DPC17. If MSEB or NTPC were to take another 20% stake in DPC, they would gain control of the project. This would also allow them to renegotiate the PPA. In early 2001, Enron made it clear that it was no longer interested in power projects in India and its focus would be broadband and data centres. Accepting this proposal would allow Enron to walk away from DPC. 4. The third option would be renegotiation of the contract. But Enron refused to consider that. If Enron agreed to renegotiation then one possibility was that the tariff could become back-ended instead of being front-ended.18 Under the renegotiated contract, a risk management mechanism against the price of oil could also be worked out. The average price of fuel could be agreed upon in advance and any movement away from that price could be negotiated into the next year's bill.