Supreme Court refuses to take up the case.
In 1991, under new policies
announced by the Govt. of India, additional private sector participation was
allowed in the power sector.
On
15th June ’92, a team of Enron officials arrived in India. On 20th
June, a US $35 billion Memorandum of Understanding (MoU) was signed with the
Maharashtra State Electricity Board (MSEB) for the Indian subsidiary of Enron,
Dabhol Power Company (DPC), to build, own and operate a power station at Dabhol,
Maharashtra with a minimum capacity of 2000MW.
No
other parties were invited to quote prices for this power plant. Enron's
contract was signed without competitive bidding and in unseemly secrecy,
violating all established norms.
The
terms include the import of nearly everything including the equipment and fuel,
no transfer of technology and payments more or less totally in foreign exchange.
The Enron plant would run
on liquefied natural gas (LNG). LNG is produced by compressing natural gas at
extremely cold temperatures (-165 degrees Celsius). The process of liquefying
natural gas requires a capital investment of US $4 billion dollars. The
transportation requires specially refrigerated ships, each of which costs about
US $200 million. At the receiving end, specialized degasification terminals are
needed to convert LNG back to natural gas for the power generation.
Enron
is the second largest producer of natural gas.
There
are enormous reserves of one of the world’s best qualities of coal at
Chandrapur, Maharashtra. LNG costs about 4 times as much as coal.
The
contracted annual payments to Enron will absorb one-half of Maharashtra's entire
budget expenditure. This will take away from government spending on education,
healthcare and other essential civic services. Already, Maharashtra's tariff for
industry is India's highest, and among the world's costliest. Annual payments to
DPC start at about $1.4 billion (Rs.5, 000 crores) a year.
The
extraordinarily high costs of the project could result in MSEB’s inability to
pay Enron its dues.
If
MSEB cannot pay Enron, the Maharashtra state government has signed a guarantee
that makes it liable for all MSEB’s dues to Enron.
If the Government of Maharashtra cannot make these payments, the
Government of India has staked all its assets (including those abroad, save
diplomatic and military) as surety for the payments of the MSEB to Enron.
The
MoU with Enron states that Enron would be paid the same amount whether the MSEB
consumes 50, 75 or 90% of the plant’s capacity. This blatantly violates Indian
law, which states that a power company can enter into a contract only to sell
the electricity that it actually generates and not its generating capacity.
The
demand for power varies drastically at various times in a day. The maximum
demand is called the peak demand and the average is called the base load.
Maharashtra has an arguable need for peaking power supply. The Enron contract is
to provide a base load power supply. Consuming power from Enron would mean
refusing to consume power already generated from existing coal plants at a
fraction of the cost of the Enron power.
On
March 12, ’93, the finance ministry approached the World Bank to secure
finances for the project. The report of the World Bank, dated April 30, ’93
summarily dismissed the project on purely economic terms. The report stated
“LNG generation at a variable cost of about paise 150/kWh would displace
coal-based power costing paise 30/kwH … an LNG-based power plant operating in
base-load was not the least cost option for expanding power supply .. the
suggested load increase is unproven and the proposed high forecast is not a
suitable basis for evaluating the project.”
Indian
law states that the price the public pays for electricity must conform to the
stipulated "least-cost" approach. The Enron project will supply
electricity at Rs. 3.50-plus a unit, roughly twice the cost of Maharashtra State
Electricity Board's own plants.
Indian
law limits the return on equity of power generating companies to 16%. Enron’s
profit margins go up to 52% by the 15th year of production. Enron’s
total return on equity is estimated at 300%.
The
Indian Electricity (Supply) Act mandates the Central Electricity Authority (CEA)
to conduct a critical examination and give its approval of the technical and
economic aspects of all power plants. This examination by the CEA is the only
protection accorded to the public under the law. The CEA study showed reasonable
capital costs for the Enron plant to be Rs. 1.91 crore per MW. Enron’s
estimate is Rs. 4.49 crore per MW. Enron’s estimate is 2.2 times the cost it
incurred in setting up a similar plant in Teesside, England.
Clearly,
the contract makes no sense technically or economically.
The
CEA, the Central Electricity Authority whose examination is the only protection
to the public, repeatedly asked Enron to supply an itemized breakup of costs of
components amounting to US $2.6 billion. Enron’s response was “Your request
for more detailed project costs of equipment/system/works other than those
provided in the capital cost summary cannot be supported and is not deemed
necessary.”
Faced
with pressure on numerous fronts, the CEA abdicated its statutory responsibility
to provide a techno-enonomic clearance. On Nov 12, ’93 it gave the project a
technical clearance, allowing the Ministry of Finance and the Ministry of Power
to provide the economic clearance instead.
Public
opposition to the project started soon after some of the details became public.
On 13 July ’94, the Opposition political party BJP filed a court case in the
Bombay High Court. The challenge was based primarily on the notion that for such
a huge project there ought to have been tenders and that the project had been
awarded by secret negotiations. On 19 Aug ’94, the High Court ruled,
“Nothing was done secretly. There was total transparency at every stage of the
negotiations. We do not find any impropriety.”
Extract
from testimony of an Enron employee, Ms. Linda Powers in her sworn testimony to
the Committee on Appropriations, U.S. House of Representatives: “Our company
spent an enormous amount of its own money – approximately $20 million – on
this education and project development process alone, not including any project
costs.”
In
April ’95 a new government comprising of the BJP and Shiv Sena was elected
into power mainly on the platform of allegations of corruption against the
previous Sharad Pawar government in the Enron deal. The new government vowed to
“throw the project in the Arabian Sea”.
True
to its word, a Cabinet sub-committee was appointed in May ’95, to
review the Enron project. This committee had complete access to all the
confidential files and records of the deal. After two months of detailed
deliberation, the committee issued a damning indictment of the project.
It unanimously recommended that the project be cancelled.
Two
days after the project was cancelled, on Aug 3rd, ’95, the Chief
Minister of Maharashtra made a formal announcement on the floor of the House
that the Govt had decided to “scrap Phase 1 and cancel Phase 2 of the Enron
project”.
On
3rd Nov ’95, the CEO of Enron, Rebecca Mark, flew into Bombay to
meet Bal Thackeray, the head of Shiv Sena. On 8th Nov ’95, the Govt
of Maharashtra constituted a renegotiation committee. On 19th Nov,
the committee concluded these “renegotiations” and submitted a report. In 11
days, the committee claimed to have achieved significant reduction in tariff and
several concessions. Every one of these claims was subsequently proven to
be a lie. The contract had actually taken a turn for the worse. The second phase
of the plant was optional in the first contract. This new contract made that
binding also.
A
counter-guarantee to the new contract was needed from the Central Government. In
May ’96, a minority govt. headed by the BJP lasted at the Center for 13 days.
On the last day, while the no-confidence motion was running in the House, the
cabinet met and ratified the counter-guarantee.
The contract was sealed and
Phase 1 began.
The
first phase comprising of 740-MW was completed in March 1999.
Given
the nature of the contract MSEB will have to purchase all the power generated
even if we didn’t need it. In
October 2000, Maharashtra Energy Minister Dr Padmasingh Patil admitted that the
high cost of power purchase from DPC and foreign exchange liability have further
worsened the already-ailing MSEB. “the MSEB is finding it difficult to
purchase the entire power from DPC's first phase of the 740-MW project.'' The
MSEB recently needed an emergency grant of Rs. 862 crores.
In the past year the MSEB
requested a 20% increase in the rates paid for power by the Maharashtra
consumer. They were granted permission for a 7% increase.
The
second phase of 1444-MW comes online in July 2001. How will we pay for that?
On
April 6th, ’96, the Center for Indian Trade Unions (CITU) and Abhay
Mehta filed a public interest writ petition against the Enron plant in the
Bombay High Court. The primary
issue in the petition was that the CEA’s clearance was a breach of statute and
the contract was therefore void. On Dec 2nd, the High Court issued
its verdict: “This case has highlighted to the people as to how even after
50 years of independence, political considerations outweigh the public
interest”. However, the Court completely sidestepped the real issues at
hand and dismissed the case.
The
petitioners then took the case to the Supreme Court. In
a remarkably poor display of civic responsibility, the Supreme Court has refused
to take up this case until today (October 2000).
Maharashtra State Electricity Board (MSEB) needs an annual tariff hike of 24% to be able to pay Enron its yearly dues. This situation was predicted by the project reviews in 1994.
In 1999, MSEB submitted a proposal for a 20% tariff hike - the state regulatory board rejected this and allowed only a 6% hike. MSEB will request a 24% hike this year.
Power tariffs in Maharashtra are already amongst the highest in the world.
Industries are shutting down due to high power costs.
There has been little increase in demand for power in Maharashtra over the last 4 years.