India: The Dabhol Power

Corporation (B)

Events Leading to the

Cancellation
The power purchase agreement (PPA) between MSEB and DPC in December

1993 had been seen by many as an unfair deal.

There were widespread allegations of corruption and investors looked upon the
PPA as a model of contract with nay government.
Soon after getting elected, the BJP-SS coalition government appointed a
ministerial commission to investigate the prudence of the PPA.
As the committee began scrutiny, momentum to call off the project increased.
It was said that prices for the Dabhol project were inflated and that the
government would not retain the PPA unless Enron agreed to lower the prices.
Enron disagreed about Joshis claim on prices and refused to negotiate.

Decision
In August 1995, the commission announced the
cancellation of the project. The decision halted
construction of Phase I of the project, already valued at
$300 million and killed all prospects of Phase II.
GOM stated that, as per the terms of the PPA, it would
take responsibility for financial losses incurred due to
stoppage.

Decision
According to the commission There was an absence of transparency throughout the decision making process. The
details of the agreement were shrouded in secrecy from their inception and throughout
the projects progression.
Enron had just been handed the project without the normal procedure of participating in
a competitive bidding process. Also, equipment purchases and construction contracts
were also awarded in a similar fashion.
The previous government had relaxed regulations and ignored required clearances to
expedite the project.
The publicized tariff rate was intentionally misleading figure. Distribution costs were
never accounted for.
Environmental concerns had not been addressed.

Aftermath
In the chaos that ensued, Enron responded swiftly by
initiating arbitration proceedings in London, directed at
winning compensation for the cancellation.
The arbitration was set to begin on 17/11/1995.
Simultaneously, GOM began proceedings, with an attempt
to prove that Enron acted illegally, in which case it would
not be obliged to pay damages.
Enron also made clear its desire to renegotiate.

India: The Dabhol Power

Corporation
SEQUEL

Sequel
Chief Minister Joshi appointed a panel in early November 1995, to review and

renegotiate the Dabhol project.

The panel submitted its final proposal to Chief Minister Joshi on November 19 with the
concurrence of Enron.
According to the proposal, Enron would reduce capital costs and tariffs, switched from
imported LNG to locally naptha in Phase I.
The regasification facility to be built in phase II would be treated as a separate project.
The Maharashtra govt. would be offered an equity stake of 30%.
Enron will install additional power capacity, lower its rate of return, make use of local
suppliers, and utilize a bidding process for project equipment.
A modified PPA was signed on Feb 23, 1996. The central govt. delayed granting
approvals to the PPA.

The Failure
With the Enron bankruptcy, Enron's stake in DPC was bought out by GE and Bechtel.
In 2005, it was taken over and revived by the RGPPL (Ratnagiri Gas and Power Private Limited), a

company owned by the Government of India

The power plant Phase I which was renamedRatnagiri Gas and Power Pvt. Ltd(RGPPL) started
operation in May 2006, after a hiatus of over 5 years. However, the Dabhol plant ran into further
problems, with RGPPL shutting down the plant on 4 July 2006 due to a lack ofnaphthasupply.
TheQatarbased company RasGas Company Ltd. started supplying LNG to the plant in April 2007.
The power station had resumed operations at 100% of its installed capacity of 1967 MW in 2010.
The 1,980MW plant had closed down last March, but even when gas becomes available, the cost of
power from the plant will be over Rs 5.50 per unit, which is far higher than other sources of power
for MSEDCL. There is no incentive for MSEDCL to buy this power, since it is power surplus and is
selling power to others.
It seems the project is en route to becoming another non-performing asset (NPA).

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