The Godbole Committee: A Difficult Job Well Done

The Godbole Committee, set up to examine the Dabhol Project has now made official that Enron power was priced way beyond what was reasonable and the decision making process was neither “reasonable” [nor] “rational”. The Committee has unanimously recommended that a major restructuring of the power purchase agreement be carried out to lower the tariffs and the burden on Maharashtra State Electricity Board (MSEB). It has also recommended that in case does not agree to such a re-negotiation, Enron is free to sell its power directly outside of MSEB; this would then free MSEB of its contractual obligations.

The one issue, on which unanimity was not achieved, was on the question of a Judicial Enquiry under the Enquiry Commissions Act. While Godbole, the Chairman and EAS Sharma suggested such an enquiry, the three other members of the five-member Committee felt that such a recommendation was beyond the scope of the Committee and could lead to delays making re-negotiations more difficult. Anticipating that the Godbole Committee’s recommendations will go against them, Enron has already gone on the warpath and declared a “political force majeure”.

Godbole Committee’s Report is a damning indictment of both the Government of Maharashtra and the Central Government. It has given detailed computations of how MSEB contracted excessive payments to the tune of Rs.930 crore per year in the Power Purchase Agreement (PPA). It has detailed, example by example, how every “error” made by the agencies favoured Enron. It has also substantiated a point that was raised during the CITU-Abhay Mehta petition in the Courts that the Central Electricity Authority failed to carry out its statutory responsibilities of techno-economic evaluation of the project. It has chronicled how the protracted “negotiations” carried out by MSEB from August 92 to December 93 led to an increase in the rate of power from 6.91 cents to 7.5 cents despite a drop in fuel prices in this period.

The Committee did not take into account the much higher capital cost of the 748 MW Dabhol Plant as compared to either the 359 MW Kayamkulam Plant of NTPC set up in the same period or similar plants set up internationally. While Enron claimed a capital cost of Rs. 5.02 crore/ MW, the NTPC’s cost for the Kayamkulam plant was Rs. 3.18 crore/MW; the international cost of similar plants was also around Rs. 3 to 4 crore ($500 –700 per KW) per MW. For the second stage, as the full re-gasification cost of Liquefied Natural Gas has been loaded on to the Power Project, the capital cost works out to an astronomical Rs.6.58 crore per MW (Figures taken from the submission of Prayas, an energy NGO).

Dabhol plant has two stages. The first stage, consisting of 748 MW, uses naphtha as fuel. From the submissions that MSEB made to the Godbole Committee, the losses that MSEB incurred for buying power from Enron for the first stage alone was in excess of Rs.1000 crore. The second stage of 1444 MW, which is yet to come on-stream, will be even more onerous. It forces MSEB to buy power at a very high cost for a demand that does not exist. The fuel agreement for LNG — the fuel for this stage — is structured such that whether MSEB lifts the power or not, they will have still to pay the price of LNG up to 83% off-take of Dabhol; the LNG contract is a take-or- pay contract.

 It has been argued by many that the cost of power from Dabhol is high as MSEB is lifting only 40% of Dabhol Power. As the capital servicing cost of Enron (currently of Rs.95 crore per month) has to be met irrespective of the amount of power lifted, a lower off-take leads to high unit cost. Why is MSEB then lifting only 40% of Dabhol Power? The truth is that the Maharashtra Electricity Regulatory Commission has fixed a merit-order despatch: power sources with lower variable costs have to be used before costlier power can be bought by MSEB. Due to the high cost of naphtha, the fuel cost alone for Dabhol is of the order of Rs.3.00; under the merit order despatch scheme MSEB can take Dabhol power only when all other sources are exhausted. MSEB has quantified that if it indeed had lifted 83% of the power from Dabhol, it would have incurred an additional loss in excess of Rs.300 crore.

What are the excess payments in the PPA that the Godbole Committee has pointed out? A major portion of this is from the attempt of Enron to pass on to MSEB the entire cost of re-gasification of LNG. LNG is natural gas, which is liquefied by cooling it well below normal ambient temperature. It has to be kept under these conditions and re-gasified for actual use. The power plant would only use about 40% of the total re-gasification capacity; Enron is offering the rest 60% to others, even though it has loaded the entire cost of the re-gasification facility on to MSEB.

Apart from the re-gasification facility, Enron is also “double charging” MSEB for facilities such as harbour charges: once as apart of capital recovery charges of the project and again as harbour charges. It had also built in an inflated Operations and Maintenance cost in the PPA and a higher fuel consumption rate leading to a higher charge for fuel. The total excess payment quantified by the Godbole Committee is of the order of Rs.930 crore per year. Though the Committee has commented on other excess payments in the PPA, it did not quantify them.

One of the significant recommendations of the Godbole Committee is that the LNG contract should be restructured in line with contracts for other fuels such as diesel or naphtha. The other major recommendations are lowering the PLF to 30 to 50% in the initial years, making the return on equity in rupees, etc. The Godbole Committee’s conclusions clearly show that without re-negotiating the contract, MSEB and Maharashtra are unlikely to survive. The question now is where do we go from here?

There are three ways that this ruinous contract can be addressed. One is set up an enquiry that establishes that prima facie there was corruption and cancel the deal. The second way is to ask the Maharashtra Electricity Regulatory Commission to evaluate a fair rate for Enron power. The eminent lawyer Shri Shanti Bhushan has already opined that the Maharashtra Regulatory Commission has such powers under the Act. The third way is to take over the Dabhol plant under the powers of eminent domain of the state and pay them “just” compensation based, not on such inflated returns on capital, but on what is reasonable. The California State, which has shelled out huge amounts to generators recently, is now contemplating seriously such a take over of the generators. Governor Gray Davis has no hesitation in calling such generators “profiteers, pirates, marauders.” Enron’s contract calls for hard decisions, a course both Maharashtra and the Central Government seem unwilling to take. Burying their heads in the sand will achieve little under these circumstances. Godbole Committee has done a difficult job; the task now is to follow up on its good work.