Repudiating Enron: More to it than Meets the Eye

The Dhabol Project of Enron now stands repudiated with the acceptance of the Munde Committee Report. The people of Maharashtra deserve all credit for this, as it was their continued struggle that kept up the pressure on this ruinous project. The significant difference between the Dhabol case and the other seven “fast track” projects is that the people of Maharashtra put up a resistance. Unfortunately, other states have shown little response to the burdens being imposed on them through Power Purchase Agreements (PPAs) that are equally one sided.

 The 26th Report of the Standing Committee of the Parliament on Energy and the Munde Committee Report both have substantiated what the critics have held all along — the cost of the project is too high and the delivered cost of power would impose heavily losses on the Maharashtra Electricity Board. With the guaranteed of 90% withdrawal from Enron’s Dhabol plant, MSEB would have to back down its own cheaper generation. Further, the tariff being denominated in dollars and imported diesel/LNG exposed the Indian economy to heavy outflows.

 The award of Dhabol contract as well as its cancellation raises a number of questions that are important for transacting future business as a nation. The award of the Dhabol project to Enron was in pursuance of a policy that was fundamentally flawed. Clearly, a policy as important as power, cannot be decided by a few bureaucrats in the Department of Power who lack an elementary knowledge of the sector. Not surprisingly, such policy exercises descend to mere sycophancy. A bad policy is difficult to implement — this the current fiasco of the fast track projects have shown. This should be a salutary lesson for all concerned, both policy makers with their own agenda and hungry multinationals, willing to wheel and deal their way into sweet heart deals.

 The cancellation of the project by the Maharashtra Government also raises  important questions. BJP -Shiv Sena alliance had made a campaign promise to cancel Dhabol and their leaders had clearly indicated in private the importance of fulfilling this pledge, if they were to make anything out of their anti- corruption campaign plank for 1996. Presumably, they had been well briefed on the Dhabol project, otherwise their campaign promise must be considered irresponsible.

 The Munde Committee Report and Manohar Joshi’s statement in Assembly do not appear to contain any new material. It does seem that the grounds taken by the Maharashtra Government were all in the public domain, once the Dhabol PPA become public.

 With all this, it is strange them that the Maharashtra Government allowed Enron to continue its construction activities and thereby boost its compensation claims. Enron initially had claimed that they had spent only 100 million dollars when the new Maharashtra Government took over and began its review. Enron has spent this entire period of review in bringing in its equity early and awarding contracts to a large number of contractors with an eye to filing large cancellation claims. This game plan was facilitated by the extension of the review period as they got more time to pad their termination claims. The claim now stands at 300 million dollars, an increase of 200 million, entirely due to the additional time granted to Enron. A much simpler course would have been to declare it a moratorium on construction during the period of review so as to cap the termination claims within the hundred million Enron claimed it had spent till then.

 The cancellation of the contract has undoubtedly won BJP the political high ground in its battle for the 1996 Lok Sabha. And the cancellation under the Clause 17.2 still allows them to reach a negotiated settlement with Enron in about 6 months time when the Lok Sabha elections are over. That way, BJP can have its cake and eat it too. The Dhabol project could stay, albeit in a somewhat modified form, while the Lok Sabha elections are fought on the basis of its cancellation. No wonder the Maharashtra Government has now gone on record that while the first stage of Dhabol has been repudiated and the second stage cancelled, the Power Purchase Agreement has not been cancelled. Obviously, there is more to it than what meets the eye on Dhabol cancellation.

 Perhaps this explains BJP’s strategy of allowing Enron to go ahead with construction while reviewing the project. The large compensation claim would justify a negotiated settlement later while delaying the review brought it closer to the Lok Sabha elections thus maximising the  impact of the cancellation. That BJP is not looking at the policy issues involved is clear from its attitude to other fast track project. While the Left, JD (minus Deva Gowda) has asked for a review of all the fast track projects, BJP has raised only the issue of Cogentrix. They are silent on the Gujrat Torrent Project, also one of the fast track areas and currently under attack. GE, one of the manufacturers has already complained that even though their bid was Rs.400 crore less than that of Siemens for the EPC contract, this has not been accepted thereby artificially inflating the cost of the project. Obviously, the Dhabol project cancellation had more to day with immediate electoral arithmetic. The Dhabol case had become a major issue in the Konkan area and had been exposed by a number of reputed experts including three former Chairmen of the Central electricity Authority. The BJP was thus able to seize a ready made issue and use it to its advantage. Its Swadeshi credentials can be truly tested only when they respond to such issues that have not yet become public campaigns. Otherwise, the Dhabol case is but another gimmick in BJP’s cynical manipulation of public opinion.

 The Enron fiasco, whatever be the final fate of the project, has shown that an ill conceived policy is difficult to implement, particularly if the people are conscious. The National Working Group on Power consisting of various experts including three former Chairmen of the Central Electricity Authority (CEA) had been very critical of Salve’s power policies. Salve and the mandarins in the Power Ministry contemptuously dismissed all earlier criticism of the policy as being “ideologically motivated.” Reacting to their criticism, Salve even categorised them publicly as those who are “dead in the Power Sector.” Unfortunately for Salve, the voice of the “dead” proved powerful enough to set people thinking. And that spelt doom for the policy.

 The repercussion of Salve’s failure to provide a viable policy for expanding the power sector is that the Indian power program now has a gaping hole. Power shortages will now dog the economy for the next decade. The 8th Plan had envisaged at least 5,000 10,000 MW of private power. We will be lucky if we see even a tenth of this materialise. The 9th Plan scenario is even bleaker. No advance action for the 9th Plan is being taken as the Power Ministry expected the private sector to take on the mantle for expanding the power sector. With private investments in power in a logjam following Enron, the prospects of large scale private investments in the 9th Plan may not materialise. Meanwhile, the State Electricity Boards are continuing to lose heavily, their annual losses running at about Rs.8,000 crore currently.

 The 8th Plan power program was supposedly for adding 33,000 MW. The slow pace of the program makes it unlikely that we will add even 16,000 MW. While this will still mean an installed capacity of 86,000 – 89,000 MW at the end of 8th Plan, this falls far short of requirements if the system performance does not improve.

 The Power Ministry’s vision has been the simplistic one that the installed capacity has to expand in proportion to meet the future peak demand. As the Government has no resources and the power sector cannot generate adequate internal resources, therefore what Prof. A K N Reddy, one of our leading energy planners terms as the “mendicant’s approach — go begging all over the world for private investments.  And if the same is not forthcoming, offer more and more concessions.

 The final package of concessions was such that the Internal Rate of Return on Equity, the basic investment parameter in business, was in the range of 30-32%. This may be contrasted with the staid 11-14% that these companies can earn in their home beat. No wonder, the present Chairman of British Gas said in their Annual General Body that British Gas had to go to unregulated markets to earn bigger margins. Echoes of a “If you want to make your fortune, go East, young man” from the colonial era.

 It is true that the Enron case had some deviations from the two part tariff formulations of the current policy. However, the high rate of return, incentive to inflate project costs and use of imported fuels are all common to most of the projects being considered with private investments. The Cogentrix case in Karnataka has already been brought to public notice. In the case of Vishakapatnam project of the Hindujas and Enron’s Dhabol project, the Parliamentary Standing Committee on Energy (26th Report) found that there was clear evidence of cost padding. In the case of Nyevelli “Zero” Unit, the Standing Committee uncovered that the whole project passed in private hands in mere four days. It is also a project with the exceptionally high cost of Rs.5.5 crore per MW.

 If the current policies are not viable, what should be the core of the alternate ones? And what should be the regulatory regime that needs to be followed? On the supply side, the major thrust should be for renovations and modernisation of the existing capacity. Shri D.V. Kapoor, a former Chairman of NTPC has suggested that with an expenditure of less than a crore per MW, 7,000 to 10,000 MW can be generated additionally from existing power stations. Strengthening inter state tie lines for transferring power from surplus to deficit areas can provide another 8,000 to 10,000 MW. If some of these measures are taken, the existing peak to installed capacity ratio will change from the pathetic 60-62% it now is to about 70-75%. Even then, these figures are lower than the global averages. It makes little sense to plough huge resources in adding to generation if full potential of the existing capacity is not made use.

 This will still leave a gap between the future demand and the installed capacity that will have to be bridged by new investments. The new investments can be either through the state, private sources or from a combination of both. However, unlike any other industry, the Electric Supply Industry has two important characteristics. The withdrawal of power must match the supply at all instants of time as electrical energy can not be stored. Further, the distribution of electricity is always a monopoly as the distribution lines can not be duplicated. Therefore, any induction of private investments must take place within a strong regulatory framework so as to ensure grid discipline and a fair deal to the consumer. Unfortunately, there is no evidence that the Government is even with thinking about an appropriate regulatory regime. Even the meagre powers of the Central Electricity Authority are being whittled down with reportedly the World Bank even suggesting that it closes shop.

 This brings out the significant omission in the current debate. If the Electricity Boards and the powers that be decide to have “sweet heart deals” with private power generators by agreeing to high cost power, there is no agency to protect the consumers’ interest. A high cost power regime benefits the private investors who are putting up the plants, the equipment manufacturers who can gold plate their equipment and those in power who decide the cost that the Boards will pay for the electricity produced. The only losers are the consumers, who have to buy power at whatever cost the Boards decide. Therefore any scheme of large scale private generation must be preceded by setting up a strong regulatory structure. UK set up the regulatory structure before restructuring and privatisation of the Electric Supply Industry. Here, instead of a competitive regime, we have the continuation of the licence-permit raj with the inclusion now of foreign power investors in the scheme of things.

 The Enron fiasco has brought the pitfalls in the current path of power development in the country. It is time that we take quick remedial measures before the power situation gets completely out of hand. The need is for a package of reforms that restore health to the State Electricity Boards and work out the least cost expansion of the power sector. India will do well to learn from the South Korean experience. The South Koreans have expanded the state sector for providing basic infrastructure like power and telecom while looking to the market for other areas. Instead of working out our distinctive path of development appropriate to our stage of development, the Government is substituting slogans for policy. Unless this is reversed and hard thinking goes to working out concrete alternatives, the future of the power sector looks bleak.