People's Democracy

THE Godbole committee, set up to examine Enron’s Dabhol Power Project, has clearly opined that power from this project was priced way beyond what was reasonable, and the decision-making process was neither "reasonable" nor "rational". This is not a surprising revelation given that this was precisely what numerous experts and groups have been alleging in the past few years. The committee has unanimously recommended that the tariffs be lowered and a major restructuring of the Power Purchase Agreement (PPA) be carried out to lower the burden on the Maharashtra State Electricity Board (MSEB). It has also opined that Enron is free to sell its power directly, without involving MSEB, in case Enron does not agree to such a re-negotiation. This would then free MSEB of its contractual obligations.

The Committee stopped short of recommending a judicial enquiry under the Enquiry Commissions Act. While Godbole, the chairman, and EAS Sharma did indeed suggest such an enquiry, the three other members of the five-member committee felt that recommending such an enquiry was beyond the scope of the committee and could lead to delays, thus making re-negotiations more difficult. Meanwhile, anticipating that the Godbole Committee’s recommendations would go against it, Enron has already gone on the warpath and has hinted of a "political vendetta".

The 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 agreed to excessive payments, to the tune of Rs.930 crore per year, to Enron in the Power Purchase Agreement. It has given detailed examples, showing how every "error" made in the agreement favoured Enron. It has also substantiated a point that was raised by a petition filed in the Courts by the CITU (with Abhay Mehta), that the Central Electricity Authority failed to fulfil its statutory responsibility of carrying out a 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.

Damning as the Committee’s findings are, there are other issues which hint of a massive scam, that the Committee has not examined. The Committee, for example, has not commented on the much higher capital cost of the 748 mw Dabhol plant as compared to 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 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 added on to the costs, the capital cost works out to an astronomical Rs. 6.58 crore per mw (Figures taken from the submission of Prayas, an energy NGO).

It may be recalled that the Dabhol project has two stages. The first stage, with a capacity of 748 mw, uses naphtha as fuel and has already come on stream. In its submission to the Godbole Committee, MSEB has estimated that the losses being incurred for buying power from Enron for the first stage alone is in excess of Rs.1000 crore. The second stage, with a capacity of 1444 mw (yet to be commissioned), will place an even more onerous burden on MSEB. The second stage, based on Liquefied Natural Gas (LNG) as fuel would impose a double burden on MSEB. On the one hand, MSEB would be forced to buy power at a very high cost for a demand that does not exist. On the other hand, the fuel agreement is so structured that it forces MSEB to pay the price of LNG up to the amount required to produce power equal to 82% off-take of Dabhol’s installed capacity, irrespective of whether MSEB lifts the power or not (termed as a 'take-or- pay' contract).

It has been argued by some that the cost of power from Dabhol is high, as at present, because MSEB is lifting only 40 per cent of Dhabol’s capacity. It has been argued that as the capital servicing cost of the plant (currently at Rs.95 crore per month) has to be met irrespective of the amount of power lifted, a lower off-take is leading to a high unit cost. This argument is inherently flawed.

According to the Maharashtra Electricity Regulatory Commission's 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 for Dabhol alone is of the order of Rs 3.00 per unit. Thus, under the merit order despatch scheme, MSEB can lift Dabhol’s power only when all other sources are exhausted, which is why it is lifting only 40 per cent of Dhabol's capacity. If it were to lift 82 per cent of the power from Dabhol, then it would it would incur an additional loss in excess of Rs 300 crore. Hence it is cheaper for MSEB not to lift the entire power, and to pay Enron the capacity charges of Rs.95 crore per month.

What are the excess payments that the Godbole Committee has pointed out? A major portion of this pertains to Enron’s attempt to pass on to MSEB the entire cost of re-gasification of LNG. Liquefied Natural Gas or LNG is a natural gas, which is liquefied by cooling well below normal ambient temperature. It has to be kept under these conditions and re-gasified for use. The power plant would only use about 40 per cent of the total re-gasification capacity; Enron is offering the remaining 60 per cent to others even though it has passed on the entire cost of the re-gasification facility to MSEB!

Apart from the re-gasification facility, Enron has also "double charged" MSEB for facilities such as harbour charges - once as a part of the capital recovery charges of the project, and again as harbour charges. It had also built in an inflated operations and maintenance cost, and a higher fuel consumption rate for the plant, leading to a higher charge for fuel than the actual consumption. The total excess payment quantified by the Godbole Committee is of the order of Rs.930 crore per year. The Committee has commented on other excess payments, though it has not quantified them.

Apart from recommending removal of the above excess charges, one important recommendation of the Godbole Committee is the restructuring of the LNG contract. The committee has suggested that the LNG contract should be restructured in line with contracts for other fuels, such as diesel or naphtha. An other major recommendation is of lowering the PLF by 30 to 50 per cent in the initial years. The Committee felt that the above measures would bring down the cost of power by 50 per cent.

The Godbole Committee’s conclusions are quite clear on the existing contract: - the cost of power from Enron’s Dabhol plant is neither reasonable nor sustainable.

• without a re-negotiation of the contract, MSEB is unlikely to survive and even the financial stability of Maharashtra is at stake.

The Committee has left no one in any doubt about its views on how the contract was negotiated by MSEB/Maharashtra government and approved by the central government. The question now is where do we go from here?

There are three ways in which this ruinous contract can be addressed.

One is to set up an enquiry that establishes, prima facie, that the deal was brokered in a corrupt manner, and use this to cancel the deal. This manner of deeming a contract invalid has precedents under international law. The problem here is that the parties leading the coalition governments in Maharashtra and at the centre were fully involved in the shenanigans related to the Dabhol negotiations. If MSEB wilfully negotiated an increase in price and cleared excess payments in excess of Rs.900 crore, is there any doubt as to what was happening?

The second way is to ask the state regulatory commission to evaluate a fair rate for Enron power. An eminent lawyer such as 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 inflated returns on capital, but on what is deemed "reasonable" in any developed country. This can be done through suitable legislation.

Interestingly, while an "ideological" mind-set prevents a serious look at this approach in India, in the State of California in the United States this is under serious consideration. The California State, which has shelled out huge amounts to power generating companies, is now seriously examining the option of taking over these companies. Governor Gray Davis has no hesitation in calling such generators "profiteers, pirates, marauders…". Contrast this with the kid glove treatment which is being meted out to Enron. Enron’s contract calls for hard decisions, a course both Maharashtra and the central government are unwilling to take.