2

Events in 1992

2. On 17th of June 1992 a team from Enron arrived in Bombay.

3. On the 20th June 1992, within three days of its arrival, Enron and MSEB signed a Memorandum of Understanding (MOU) for a plant “with a minimum capacity of 2000 MW”. The MSEB agreed to the “need to set up a 2000 MW plant” to be run on Liquefied natural gas (LNG).The term sheet annexed to the MOU states that:

“Electrical Power Purchase Contract”

Contract for 20 years term between Power Venture and MSEB.”

“Contract to be structured to achieve an all in price of US $ 0.073/Kwh.”

4. Thus, the decision to set up a huge power generation project in the private sector with a foreclosed obligation on a statutory corporation to buy power at a predetermined unprecedentedly high rate was taken in a great hurry without there being any detailed consideration of the matter or any application of mind whatsoever or any public debate.

It is now an admitted position by the GOI, among others, that the size of the plant was well in excess of the demand of and the nature of demand for electricity. The size of the project being determined by the economics of supplying gas in the form of LNG. Enron’s main line of business is in trading Natural Gas and not Electricity.

Questions and analyses of among other things, Maharashtra’s needs (peaking versus baseload), the pricing and its impact, the relative economics of coal versus imported natural gas, the forex considerations, the meta economics, pricing, inviting other parties to quote a price etc. etc. ad infinitum did not appear to have been considered at all.

5. On 8th of July 1992, The World bank Wrote to the GOM and MSEB stating, inter alia, that “..this large project which is nearly 20% of its (MSEB’s) installed capacity, is likely to have an adverse financial impact..(on MSEB )..” (Emphasis supplied). Observations were made on the “one sided nature of the MOU”.

6. On or around July 1992, the CEA commented on the MOU and pointed out that

“Price:

The all-in-price is a departure from the existing norms and parameters notified by the Government under Section 43 A(2) of the Electricity (Supply) Act, 1948.

Denominating the price in US dollars is also a departure from the existing norms.

The current equivalent of US $ 0.073 in Indian Rupees works out to Rs. 2.19 paise/Kwh which is considered high.

“the entire MOU is one sided..”.

7. On 13th July 1992, Enron wrote to the GOM, that “..we would advise you against auditing project costs and predetermining return on equity”.

It is pertinent to note that return on equity was capped by law. Moreover, project costs require approval of the CEA.

This “advise” has been followed to date by the GOI, the GOM, the CEA as well as the MSEB.

8. On 7th August 1992, commenting on the scope of the enquiry under Ss 30 and 31 of the Act vis-à-vis tariff and the proposed power purchase agreement (the ‘PPA’) the Chairman, CEA wrote to the GOI stating that

“CEA concurrence under Section 31 is statutory and cannot perhaps be dispensed with.

There are difficulties in making the PPA subject to CEA clearance. The PPA would normally have to specify the sale price of energy and quantum of energy to be produced. Both these aspects have to be examined by the CEA under Section 30. A situation could arise when after examining the Project Report, the CEA suggests modifications under Section 31 in respect of sale price of quantum of energy to be produced. This could lead to a breach of agreement”

He also expressed his concern, on the need for an increase in capacity of this magnitude in Maharashtra.

9. On 18 August 1992, the High Powered Board meeting took a decision, inter alia, that the CEA should “consider the total foreign exchange outgo”.

10. On 4 September 1992, Enron’s English Solicitors wrote to the MSEB and subsequently to the GOI, setting out The “PROBLEMS CONCERNING THE APPLICATION OF THE INDIAN ELECTRICITY ACTS”. “The object of this note is to highlight the problems that the provisions in these Acts raise for the Dabhol Power Project.” The solutions they offered included

“amending legislation (although we understand that this is regarded prima facie as politically impracticable):”

“further administrative direction or notifications, to modify the tariff structure published under Section 43-A:”

“contractual undertakings from GOI and/or MSEB regarding the practical application of the relevant provisions in the case of the Dabhol Power Project”

Both notifications modifying the tariff structure as well as contractual undertakings from the MSEB in the PPA and from the GOM elsewhere, to modify/dilute/subvert law were used to “rectify” the “Problems” in the “Indian Electricity Acts” and to permit its subversion.

11. On 21st September 1992, the MSEB wrote to the GOI, basing their comments “on advice of our legal experts”, stating, inter alia, that

“.. DPC....will have cast upon it statutory duties and to that extent is likely to be subject in the due performance of such duties to public and judicial scrutiny. This may not be acceptable to foreign promoters”. (Emphasis supplied )

“One such area of scrutiny would be .. under Section 18-A ‘to operate and maintain in the most efficient and economical manner, the generating stations...”

(Emphasis in the original ).

Instead of telling Enron, that all persons are subject to laws in India were bound to comply with all laws of India and were subject to all judicial review and scrutiny that were available to the people of India, the then Chairman of MSEB forwarded the note to the GOI and in turn set out the conditions of Enron.

12. On 30th September 1992, the Chairman of MSEB, after “joint discussions between Enron, MSEB and Govt. of Maharashtra”, wrote to Jt. Secretary (IPC) Government of India, and again reiterated that

“public and judicial scrutiny of business policy and decisions as per the Act will not be acceptable by a company like DPC.” (Emphasis supplied)

13. On 30.10.1992 GOM wrote to the GOI, admitting that “...clearance of tariff was necessary from the CEA” and that techno-economic clearance would depend thereon.

Back Next