The only Choice: Subsidise or Nationalise Enron

As critics of Enron, we owe an apology to the nation for failing to bring out the true nature of the Enron contract. Instead of Dhabol power costing Rs.4.00 and being a bad deal as we claimed, it is costing Maharashtra State Electricity Board (MSEB) more than Rs.7.00 and is a singular disaster for both MSEB and the Maharashtra Government. The average cost of power from MSEB’s own generation is in the range of Rs.2.00, and the cost of purchased power from NTPC, Bombay Suburban, Tata Electric, etc., varying from Rs.0.80 to Rs.3.00. For the first phase of 748 MW alone, MSEB is suffering a loss of more than Rs.700 crore per year due to costly Enron power, paying Enron 15% of its revenue for a measly 5% of its requirement.

Once the second stage of Enron comes on-stream next year, according to the studies done by Prayas, a group of young energy professionals, MSEB will have to pay Enron 52% of its current revenue and suffer a net loss of more than Rs.3,000 crore per year. Not only will MSEB collapse due to this huge outflow, so will the Maharashtra Government. The tariffs will have to more than double for meeting these outflows, leading to large-scale unrest. The only way that Maharashtra can pay is by handing over to Enron MSEB’s assets in bits and pieces. This is what UPSEB is doing to settle NTPC’s outstanding dues. In other words, to pay for power from a 2,192 MW power station, Maharashtra will have to hand over its 10,000 MW generating and other assets in the next five years.

What was wrong with the Enron contract? Was it just a case of bad contract by stupid Maharashtra and Central Governments? Successive Governments in both the state and the centre have pushed the Enron project and have given guarantees and counter guarantees. The 13-day Government of Vajpayee in its miniscule tenure in 1996 did only one thing of note: it gave Enron the counter guarantee without which it could not have reached a financial closure for the project. The Pawar-Salve power purchase agreements (PPA) or the Thakeray-Munde PPA both have identical features that have brought the Maharashtra Government to its current pass. If we overlook either stupidity or chicanery, there were three major mistakes in the Enron contract. First was to peg the cost of power against the dollar: if Coca Cola or Pepsi can sell colas in India in rupees, so can Enron. The second was to accept the hydrocarbon route – naphtha and LNG as the fuels for Dhabol and link our energy prices to the volatile international prices of oil. The third was to guarantee minimum off-take for paying fixed costs. These three factors taken together have ensured that Enron power today is three times MSEB’s average cost of power generation and more than twice the most expensive power produced in the state. Worse, it is likely to rise every year as the rupee continues to depreciate against the dollar.

Maharashtra Government’s plea that the centre should take over a part of its Enron liabilities is a plea that the entire country should now bail out the Maharashtra Government. If the centre lifts this power, it will have to sell it to other states at a subsidised rate. Enron’s argument that it should be allowed to trade power with other states is a spurious one, as no state will buy Enron power at these prices. What Enron and the Maharashtra Government is asking is that the centre, which has refused till now to subsidise power for agriculture, should instead subsidise Enron.

At that time the Enron deal was originally signed, Enron and its defenders claimed a tariff of Rs. 2.40 per unit, which certainly did not seem as frightening as the current figure of Rs.7.20 given by the Maharashtra power minister, Padamsinh Patil. The first stage of the Enron deal – of 748 MW — was signed under the aegis of Sharad Pawar, the then Chief minister of Maharashtra and N.K.P.Salve, the Union Minister for Power. The BJP and Shiv Sena joined in the anti-Enron movement that erupted in Maharashtra then and even cancelled their contract after coming to power. However, after high level lobbying by Enron including crucial meetings with the Bal Thackery, the remote controller of Shiv Sena, and Gopinath Munde, the BJP Deputy Chief Minister, not only was the first stage restored in 1996 but Enron was rewarded by an even bigger second stage of 1444 MW. Though the Shiv Sena-BJP Government claimed that the cost per unit had been lowered to Rs.1.86, the reality was that the cost reduction was “achieved” by taking a lower value of the dollar against the rupee prevailing then and various other fudges. Worse, the Shiv Sena-BJP Government gave various undertakings to Enron, effectively immunising their contract from future legal challenges. Instead of dropping Enron in the Arabian Sea as promised before they assumed power, the Shiv Sena-BJP Government seemed to have done this service for MSEB.

When the second stage comes on-stream, the cost of electricity will drop somewhat as Liquefied Natural Gas (LNG) is a cheaper fuel than naphtha being used currently. The catch here is that LNG contracts are take-or-pay contracts; irrespective of whether you lift LNG or not, you still have to pay for it. Currently, as the cost of Enron power is very high, MSEB has been paying fixed costs to Enron and not drawing more than 40% of its power as the variable cost of Enron power was higher than the cost of power including fixed and variable costs from other sources. However, this option will not be open in the second stage. MSEB will have to pay both fixed costs and fuel charges up to 82% of Enron’s capacity. In the first year alone, Enron’s annual power bill will be a whopping Rs.6,500 crore against MSEB’s current revenue base of Rs.12,500 crore.

The real issue that needs to be addressed is what can the people of Maharashtra now do after the earlier Congress and the Shiv Sena-BJP Government have delivered them tied hand and foot to Enron? Whatever possibilities that existed in terms of modifying the contract seems to have been killed after the second stage was renegotiated by the Shiv Sena-BJP Government. Thus, scrapping the contract is not going to be easy. Challenging the deal on grounds of corruption in the Supreme Court where the CITU case is still pending, is not easy as the courts generally ask for proof of corruption. This is not easy to furnish even with the full resources of the state let alone for organisations outside the system.

The only recourse that exists today is for nationalising Enron and paying them compensation based on what should have been a just contract and not the bloated one we have struck. This will go against the grain of the current theology — liberalisation and privatisation — of the Government. People will argue that a contract is sacrosanct and cannot be aborted. For them, I will like to point out the telecom imbroglio. When the telecom companies argued that their contracts were unworkable, the Government changed the terms of the contract to bail them out. If the contracts were not sacrosanct then, how is it that they are sacrosanct now when the people of Maharashtra have to be bailed out?