From The Enron India Newsdesk - June 2-4th newsclips ,
 THE ECONOMIC TIMES
Monday, June 04, 2001, http://www.economictimes.com/today/bn02.htm
DPC's desi lenders rush to S'pore to woo bankers, Sugata Ghosh & Anto Josep=
h=20
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THE ECONOMIC TIMES
Monday, June 04, 2001, http://www.economictimes.com/today/04edit09.htm  =20
Duellers to the end=20
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/financ11.asp?=
Menu=3D5
DPC lenders' engineers push for phase II completion
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/economy4.asp?=
Menu=3D3
Dabhol lenders set to present a united front at Singapore meet , Renni Abra=
ham=20
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/economy3.asp?=
Menu=3D3
Bechtel stays, DPC lenders transfer funds to phase II=20
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/opinion5.asp?=
menu=3D8
 'Expert knowledge' and Dabhol
Some way will have to be found to get Enron worried about the legal enforce=
ability of its agreements, writes A V Rajwade
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/opinion4.asp?=
menu=3D8
The Centre finally sees the light
If the Centre had intervened earlier, the Dabhol crisis not have reached it=
s current proportions, says P Vaidyanathan Iyer
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THE ECONOMIC TIMES
Monday, June 04, 2001, http://www.economictimes.com/today/04econ01.htm
FIs not to loan IPPs till Enron issue is resolved, Shubham Mukherjee & Jame=
s Mathew=20
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THE ECONOMIC TIMES
Saturday, 2 June, 2001 http://216.34.146.167:8000/servlet/Form
Govt working out new Enron package
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THE ECONOMIC TIMES
Saturday, 2 June 2001, http://216.34.146.167:8000/servlet/Form
Powerful suggestion
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THE ECONOMIC TIMES
Saturday, 2 June, 2001, http://216.34.146.167:8000/servlet/Form
Fitch downgrades India's rating
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THE FINANCIAL EXPRESS
Monday, June 04, 2001, http://www.financialexpress.com/fe20010604/eco1.html
MSEB refuses to backtrack from legal battle against Dabhol Power Company , =
Sanjay Jog
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THE FINANCIAL EXPRESS
Monday, June 04, 2001, http://www.financialexpress.com/fe20010604/news2.htm=
l
DPC misdeclared availability: MSEB , Sanjay Jog
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THE FINANCIAL EXPRESS
Monday, June 04, 2001, http://www.financialexpress.com/fe20010604/news4.htm=
l
DPC power cost MSEB Rs 3,363 cr since '99 , Sanjay Jog
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THE FINANCIAL EXPRESS
Monday, June 04, 2001, http://www.financialexpress.com/fe20010604/fed1.html
The gathering clouds=20
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THE TIMES OF INDIA
Monday, June 04, 2001, http://www.timesofindia.com/today/04busi1.htm
Indian FIs leave for Singapore meet on Enron=20
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THE TIMES OF INDIA
Monday, June 04, 2001, http://www.timesofindia.com/today/04busi2.htm
MSEB asks DPC to refund Rs 1,200 cr as capacity charges , By Vinu Lal=20
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THE TIMES OF INDIA
Saturday, 2 June 2001, http://www.timesofindia.com/020601/02busi4.htm
New package on cards for DPC: Gokak=20
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THE TIMES OF INDIA
Saturday, 2 June 2001, http://www.timesofindia.com/020601/02busi5.htm
MSEB opposes DPC arbitration in London , By Vidyadhar Date=20
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THE TIMES OF INDIA
Sunday, 3 June, 2001, http://www.timesofindia.com/030601/03busi2.htm
PM for central initiative to salvage DPC
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THE TIMES OF INDIA
Sunday, 3 June 2001, http://www.timesofindia.com/030601/03busi12.htm
SWAMINOMICS / Swaminathan S Anklesaria Aiyar
The many blunders of Enron=20
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THE INDIAN EXPRESS
Monday, June 04, 2001, http://www.indian-express.com/ie20010604/bus6.html
No avoidance of legal battle: MSEB, Sanjay Jog
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THE HINDU BUSINESS LINE
Monday, June 04, 2001, http://www.hindubusinessline.com/stories/040456pd.ht=
m
Dabhol Power Project: What next , S. Padmanabhan
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THE HINDU BUSINESSLINE
Sunday 3 June, 2001, http://www.indiaserver.com/businessline/2001/06/03/sto=
ries/14035604.htm
DPC power: Govt to pursue sales to States=20
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THE ECONOMIC TIMES, Monday, June 04, 2001
DPC's desi lenders rush to S'pore to woo bankers, Sugata Ghosh & Anto Josep=
h=20

IN PERSUADING foreign bankers not to pull the trigger, the most vulnerable =
lot in the Dabhol fiasco - domestic lenders - left for Singapore on Sunday =
with promises that more avenues are being pursued to save the controversial=
 project and eschew a disaster. While talks are far from conclusive, the lo=
cal lenders have already mooted the option of converting the 16 per cent do=
llar return on equity given to Enron into a rupee-denominated return, top s=
ources told ET.=20

These lenders, who perforce have taken a proactive role on the Dabhol issue=
, have also revisited the proposal to partly exclude the $500 million LNG t=
erminal from the $2.9 billion project to bring down thefixed cost and in th=
e process the power tariff. Understandably, a rupee-denominated return (as =
opposed to a dollar return allowed in the '91 power policy) has not found f=
avour with Enron. But, the lenders in consent with the state and Central go=
vernments are expected to raise the issue at the negotiating table. And, se=
ctions think that these negotiations could emerge as a benchmark in correct=
ing the Narasimha Raogovernment's liberalised power policywhich was heavily=
 loaded in favour of foreign investors. The exclusion of the LNG terminal f=
rom the project was a part of the Godbole Committee recommendations. While =
Enron may be agree to this, analysts put a question mark on the economic vi=
ability of the project, thanks to the robust and cost-effective LNG facilit=
ies that Petronet is putting up in Dahej.=20

Sources said the Indian FIs' prime agenda would be to give some comfort to =
the foreign lenders so as to prevent them from invoking the deferred paymen=
t guarantees which the local lenders had offered against their exposures to=
 Dabhol. The main overseas institutions are Miti, Japanese Exim, US Exim an=
d OND of Belgium. Some of them have the accelerated invocation clause in th=
eir contracts.
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THE ECONOMIC TIMES, Monday, June 04, 2001
Duellers to the end=20
                                        =20
THERE has extensive media coverage of Dabhol Power Company's disputes with =
MESB, the Centre and the state  government. That is explained by the high f=
inancial stakes and fears that wrong signals may affect future FDI inflows =
into power. But MESB's present stance will heat up, not cool matters. Even =
arbitration, or court cases, take time and their outcome is uncertain. DPC =
must appreciate that MSEB is in the right on its counterclaim for the compa=
ny's failure to generate optimum power within the stipulated period. But DP=
C too is correct in seeking payment according to the PPA. But renegotiated =
or not, the cessation of power drawal by MSEB can lead to complications. Al=
so, it is drastic to treat the PPA as not being valid while a solution is b=
eing sought. The legalities will matter only later, when agreement details =
are redrawn afresh.=20

It will be futile to try sale of power to third parties, or even to get oth=
er states to evacuate the entire 740 MW  (Phase-I) output. Both will be har=
d given the backdrop of high prices which deterred MESB from timely payment=
. Third party or no, few will be able to pay given the present pricing of D=
PC power, plus the wheeling charges to MESB. The right approach would be to=
 reduce the cost of power and delink from the dollar. DPC should accept a p=
rice that does not lead to loss, even if profits are lower. FIIs could inde=
ed play a role in this matter for their own good, and for DPC's. C R BHATTA=
CHARJEE, Kolkata
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BUSINESS STANDARD, Monday, June 04, 2001
DPC lenders' engineers push for phase II completion
Stone and Webster, lenders' engineers to the Dabhol power project, is pushi=
ng for completion of phase II without time and cost over-runs. The firm wil=
l make a formal presentation to the global lenders of the Dabhol Power Corp=
oration in Singapore on Monday on the technical aspects of the plant, with =
White & Case, the New York-based legal firm dealing with the legal implicat=
ions of mothballing the project.The global lenders to the project are meeti=
ng in Singapore for two days in a last-ditch attempt to keep the project af=
loat. The meetings will discuss the finer aspects of "sacrifices" to be mad=
e by the equity and debt stakeholders of the company. While DPC is ready to=
 cut the tariff and the internal rate of return (IRR), the lenders are will=
ing to cut the interest costs, stretch the maturity period of loans and rai=
se the moratorium on repayment. Cash-strapped Maharashtra State Electricity=
 Board is likely to be allowed to issue bonds to DPC, thereby deferring pay=
ments."The feasibility of adopting the securitisation route will also be ex=
plored to bail out MSEB," a source said.=20
Both the Indian and global lenders are pitching for speedy completion of th=
e project. With both the phases operational, DPC can avoid the embarrassmen=
t of delay in generating power "cold-start," "Going by the terms of the pow=
er purchase agreement, both the plants cannot be shut at the same time," sa=
id a source. The likely cost over-run -- about 30 per cent ($450 million) -=
- will be capitalised. Repayment for phase II, which is slated to commence =
in 2002, may only start in 2003, thereby raising the moratorium on loan rep=
ayment by one year. The loan amount will go up to the extent of the install=
ment slated to be cleared in one year. "The foreign lenders are not adverse=
 to supporting the Indian lenders on the issue of project completion. Colle=
ctively, they will try to convince DPC against putting phase II in cold sto=
rage," said a source. The Indian government is likely to approach the US Ex=
im and J-Exim to persuade them against invoking the accelerable guarantee c=
lause, shielding the Indian lenders.
ICICI executive director S Mukerjee and IDBI executive director RS Agarwal =
left for Singapore on Sunday morning, while State Bank of India will be rep=
resented by its Singapore office CEO at the meeting. On the eve of his depa=
rture, Agarwal told Business Standard that the financial institutions would=
 take up the issue of MSEB slapping a termination notice on DPC. He added: =
"We can understand MSEB's viewpoint because they cannot absorb the power fr=
om phase II." The state electricity board is seeking intervention of the Ce=
ntre in the issue.=20
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BUSINESS STANDARD, Monday, June 04, 2001
Dabhol lenders set to present a united front at Singapore meet , Renni Abra=
ham=20
Domestic lenders attending the meeting of international financial instituti=
ons and other lenders of the Dabhol Power Co (DPC) in Singapore on Tuesday =
and Wednesday will press for a united stand among themselves for ensuring a=
 workable solution to the Enron-promoted power project. On Saturday, a dome=
stic lenders combine met with senior officials in the Maharashtra State Ele=
ctricity Board (MSEB) as also the state government seeking a cessation in f=
urther notices and counter-notices being issued so that the DPC imbroglio c=
ould be resolved amicably.=20
Confirming this, a senior MSEB official told Business Standard, "They (dome=
stic lenders IDBI, ICICI, IFCI, SBI and Canara Bank) want MSEB to stop liti=
gation and create an environment for a meaningful discussion with DPC so th=
at the second phase can be completed." MSEB, on its part, pointed out that =
with the preliminary termination notice (PTN) already served by DPC and the=
 board's notice for rescinding the contract already being in force, it woul=
d be a difficult task to freeze the entire process."We pointed out that the=
 PTN and our rescinding notice were completed actions, however, adding that=
 the rescinding notice in any case provided for continuing dialogue to reso=
lve the imbroglio," the official said. Earlier in the week, executive direc=
tor of IDBI R S Aggarwal told Business Standard about the proposed meeting =
with the state government and MSEB to emphasise upon the futility of legal =
wrangling that could jeopardise the DPC project."We have also decided as a =
strategic plan to combine the domestic and international lenders as a unite=
d front so as to work out a solution to the whole dispute."=20
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BUSINESS STANDARD, Monday, June 04, 2001
Bechtel stays, DPC lenders transfer funds to phase II=20
Bechtel, the engineering, procurement and construction (EPC) contractor whi=
ch holds 10 per cent stake in the Dabhol Power Company, has been persuaded =
to stay back. Bechtel had threatened to pull out of the project in the firs=
t week of June as the DPC was not in a position to stick to its payment sch=
edule for the EPC contractor. Lenders across both phase I and II have voted=
 in favour of a resolution allowing the company to transfer $5 million from=
 phase I kitty to phase II for the purpose of completion of the project wor=
k."Over 66 per cent of the lenders were in favour of this resolution. There=
 is no problem in clearing Bechtel's dues. It has agreed to stay back," sai=
d a source. It may be recalled that the phase I lenders overwhelmedly suppo=
rted the issuance the preliminary termination notice (PTN) to MSEB. But whe=
n it came to the transfer of funds from phase I to phase II to clear Bechte=
l's dues, lenders of both phases supported the motion.=20
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BUSINESS STANDARD, Monday, June 04, 2001
 'Expert knowledge' and Dabhol
Some way will have to be found to get Enron worried about the legal enforce=
ability of its agreements, writes A V Rajwade
It has now been a few weeks since the appointment of a committee under Mr G=
odbole to renegotiate the tariffs payable to the Dabhol Power Company Ltd b=
y Maharashtra State Electricity Board (MSEB). There has been hardly any tan=
gible progress in the negotiations. Legal notices issued by either side hav=
e been flying around but the problem remains intractable. At present neithe=
r DPC, nor its parent Enron, has any incentive whatsoever to hold serious n=
egotiations. It is sitting pretty on an agreement that one can be sure has =
been drafted by some very clever lawyers. And given that all obligations of=
 MSEB are guaranteed by the Government of India, it probably is not too wor=
ried about the safety of its money. It also knows that, in the interest of =
its international reputation, the Indian authorities cannot afford to take =
a cavalier attitude to the subject. In the circumstances, if progress is to=
 be achieved, some way will have to be found to get Enron worried about the=
 legal enforceability of its agreements. Only if this happens will Enron be=
 persuaded to start a serious renegotiation of the tariffs.=20
In an earlier article in this newspaper (see Business Standard May 22, 2001=
), I had referred to the now famous Procter & Gamble vs Bankers Trust Compa=
ny case in the United States. While I have not been able to get hold of the=
 P&G plaint despite an extensive search on the Web, I have managed to get h=
old of a copy of the judgement in the case. This has limitations because th=
e substance of the dispute was settled out of court. And yet the judgement =
does make a few useful points. The bulk of the judgement discusses arcane p=
oints of law, in particular the applicability of various legislations in th=
e United States to the case. On most of these points the judge has rejected=
 the contentions of Procter & Gamble, and granted summary judgement in favo=
ur of Bankers Trust. However, the judge goes on to argue that: "This does n=
ot mean, however, that there are no duties and obligations in their swaps t=
ransactions. Plaintiff alleges that in the negotiation of the two swaps and=
 in their execution, defendants failed to disclose vital information and ma=
de material misrepresentations to it?=20
"New York case law establishes an implied contractual duty to disclose in b=
usiness negotiations. Such a duty may arise where 1) a party has superior k=
nowledge of certain information; 2) that information is not readily availab=
le to the other party; and 3) the first party knows that the second party i=
s acting on the basis of mistaken knowledge?=20
"Additional cases which explicate the duty to disclose indicate that a duty=
 may arise when one party to a contract has superior knowledge which is not=
 available to both parties?" "Even though a fiduciary duty may not exist be=
tween the parties, this duty to disclose can arise independently because of=
 superior knowledge?" "The duty to deal fairly and in good faith requires a=
ffirmative action even though not expressly provided for by the agreement?"=
 "I conclude that defendants had a duty to disclose material information to=
 plaintiff both before the parties entered into the swap transactions and i=
n their performance, and also a duty to deal fairly and in good faith durin=
g the performance of the swap transactions?"=20
The judge has cited a number of court cases in support of these points whic=
h seem to be based more on case law and common law principles than on any s=
pecific legislation. As such, one would imagine that the enunciated princip=
les would have wider application than narrow infringements of specific laws=
. In the May 22 article, I had referred to the discount factor of 17 per ce=
nt per annum which seems to have been used to calculate the present value o=
f the fixed cost payable by MSEB to DPC. The discount rate is an inferred o=
ne from the available data; it seems that the actual rate of discount used =
is not available in any of the documents. This is surprising; one obvious r=
eason could be that, for what are effectively dollar payments, a 17 per cen=
t discount rate is absurd and it was obviously better not to bring it on re=
cord. Can its non-disclosure in the negotiation or in the agreement come un=
der the various points made in the P&G vs BTC case?=20
Again, an old Business Week report on the case quotes from the P&G complain=
t that it "was bound by a pricing model which (Bankers Trust) did not discl=
ose to the very party that it asserted was bound by such model...". An exac=
t parallel to the MSEB/DPC dispute?=20
A couple of other points occur to me. The Godbole Committee Report thanks I=
DFC for the excellent work done as the Committee's secretariat. Having put =
in a considerable degree of analytical input, as is evident from the report=
, perhaps the analysts may like to try out one other exercise. This is the =
projection of DPC's balance sheet at the end of the power purchase agreemen=
t, on the following assumptions:=20
?=09No dividend payment and current tax rates;=20
?=09Dollar appreciation against the rupee of 6 per cent per annum, which is=
 the actual rate of the last five years.=20
?=09Interest on rupee surplus funds at 11 per cent per cent, and domestic i=
nflation, say, 8 per cent per annum=20
The exercise would give a final value of DPC's net worth and readily permit=
 the calculation of the internal rate of return on the capital invested. Ho=
w does that compare with the returns in dollar terms assured by government =
policy? If the return turns out to be absurdly high, as it well might, this=
 could be another example of "superior knowledge" available to the investor=
 but not made known to MSEB. This apart, in its own affidavit in one of the=
 court cases, MSEB has argued why the competitive bidding process was not f=
ollowed:=20
"The competitive bid requires expert knowledge and experience for evaluatin=
g the competitive bids, which at present is still not sufficiently up to th=
e mark. For evaluation of such specialised projects, it is also necessary t=
o have knowledge of risk identification and allocation, which is not suffic=
iently developed." As if this "expert knowledge" is not needed in bilateral=
 negotiations!
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BUSINESS STANDARD, Monday, June 04, 2001
The Centre finally sees the light
If the Centre had intervened earlier, the Dabhol crisis not have reached it=
s current proportions, says P Vaidyanathan Iyer
The Indian government has clearly lost the public relations battle in the E=
nron controversy. A flashback to the turn of events in the last week shows =
why. After months of studied indifference, the Centre suddenly started offe=
ring concessions that suggest that the $ 3 billion power project may not sh=
ut shop after all. A few months ago, when the crisis started, the Centre st=
eadfastly refused to get involved - despite the fact that the Dabhol Power =
Company (DPC) has a central government guarantee. Just about every time the=
 Maharashtra State Electricity Board (MSEB) failed to honour DPC's bills, t=
he Centre insisted it couldn't do anything about it. "It is a dispute betwe=
en DPC and the Maharashtra government and needs to be sorted out between th=
em," power minister Suresh Prabhu iterated at the time. He also went on to =
say that the central power utilities had the wherewithal to generate all th=
e power needed for the country, suggesting that the private power producers=
 were redundant.=20
But all through the pre-conciliation negotiations that followed in London a=
nd in India, the Centre did little to intervene. It was only towards the en=
d of May, as things started looking grimmer and grimmer that the Centre abr=
uptly changed its stance. By then, Enron, Dabhol's US parent, had started s=
ignalling an exit by issuing a pre-termination notice, hiring Arthur Anders=
en to value its business worth in India and Jones Lang La Salle to value it=
s real estate investments. Then on May 29, the situation grew worse with th=
e Maharashtra Electricity Regulatory Commission issuing an injunction restr=
aining DPC from proceeding with arbitration till June 14, the next hearing =
date of the negotiating committee. MERC also restrained DPC from operating =
MSEB's escrow account till June 14.=20
The first signs of Centre's direct involvement came soon after K Wade Cline=
, CEO, DPC flew to Delhi on May 25 to brief the power ministry on the groun=
d situation in Dabhol. The same day, Prabhu met finance minister Yashwant S=
inha the same day - but apparently to discuss "power sector reforms". The C=
entre then got into the act. Just when Enron had made its mind - in line wi=
th its global strategy - to pull out of the generation businesses and focus=
 on trading, the Centre displayed a remarkable keenness to stop the corpora=
tion from calling it quits. The government's representative on the negotiat=
ing committee A V Gokak now said the Centre would play an "active role" in =
resolving the crisis. Madhav Godbole, who had chaired the panel that re-exa=
mined the project and made recommendation to correct its many anomalies, al=
so said he was looking at negotiating a new deal with DPC.=20
DPC reciprocated to these placatpry noises. It now said it could cut cost b=
y about 10 per cent. It was Centre's turn to "sacrifice" now. The power min=
ister asked the Central Electricity Authority to initiate talks with power-=
deficient states and check on the quantity of power they could lift from DP=
C and the cost at which they could absorb it. With this decision, the Centr=
e, in effect, has okayed third party sales, in line with the Godbole panel =
recommendations. More "sacrifices" followed from the Indian banks and finan=
cial institutions. IDBI, the lead Indian FI which has an exposure to the tu=
ne of Rs 2,158 crore said that it was ready to cut the cost of loans (the a=
verage being 16.5 per cent) by another two percentage points. All this for =
Enron to stay in the 2,144 MW project.=20
It is easy to see why the Centre is bending over backwards. DPC's fate woul=
d, in a sense, determine the future of foreign direct investment (FDI) in I=
ndia. Reforms have progressed too far for any government to want to turn FD=
I-unfriendly in global - and especially US - eyes. The point is, it's taken=
 the Centre almost six months to wake up to this reality. If it had interve=
ned earlier, not only would the crisis not have reached its current proport=
ions, the government could have saved itself the embarrassment of going bac=
k on its own words too.
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THE ECONOMIC TIMES, Monday, June 04, 2001=20
FIs not to loan IPPs till Enron issue is resolved, Shubham Mukherjee & Jame=
s Mathew=20
 THE Enron imbroglio has pulled the plug on the future of all major power p=
rojects, with FIs taking a stand that until the issue gets sorted out, they=
 will not go in for any further disbursements to independent power producer=
s for which loans have been sanctioned.=20
According to FI sources, in a recent meeting, FIs have taken a stand not to=
 disburse loans for the power projects for which they have already sanction=
ed debt. The development comes in the wake of mounting pressure on FIs to r=
educe interest rates for the Dabhol Power Project as part of a compromise p=
ackage for ending the current impasse. "We have raised funds at a particula=
r cost to lend the same to IPPs keeping a thin spread for ourselves. Now, i=
f mid-way the interest rates are to be brought down, this would create a se=
rious mismatch. In view of the Dabhol experience, we are now going extremel=
y cautious on disbursing funds to projects for which sanctions have already=
 been approved," top FI officials said. Significantly, the latest move of t=
he FIs follows the earlier decision of FIs such as IFCI and IDBI to stop fu=
nding fresh projects in the power sector. More than 50 projects are likely =
to get further delayed due to the FIs posturing. FIs have also cleared loan=
 for some mega projects like the 3,960-mw Hirma power project being develop=
ed by Reliance and Southern Energy and the Dakshin Bharat Power project bei=
ng developed by CMS and Unocal.=20
Though some of these projects are in advanced stages of operation, the deci=
sion of the FIs would be a major blow on them. A section of the industry ha=
s, however, questioned the stand of the FIs and have said that they cannot =
go back on their intent to provide finances for projects. "IDBI, for instan=
ce, has taken a stake in S Kumars' 400-mw Maheshwar power project, how can =
they refuse loan for the project?" they asked. All the same, FIs have taken=
 an in principle decision to adopt a cautious positioning and are unlikely =
to decide on making further disbursements to the next crop of IPPs in a hur=
ry, a senior IFCI official said. FIs have also not taken kindly to the pres=
sure being mounted on them for reducing interest rates for the loan disburs=
ed to the Dabhol power project to save the project. Other FIs also feel tha=
t the Enron issue is a cause of great concern to the financing community an=
d there is a lot of uncertainty in the power sector. Given the Enron experi=
ence, it would be a tough decision for FIs to pick up projects for funding =
in the future, the industry watchers said.=20
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THE ECONOMIC TIMES, Saturday, 2 June, 2001
Govt working out new Enron package
 IN order to sort out the payment crisis of the Enron power project, the Ce=
ntre is working on a new package which will be acceptable to all the affect=
ed parties. A V Gokak, the centre's representative in the negotiating commi=
ttee, met the finance minister on Friday to appraise him of the solutions t=
hat are being explored to get over the payment crisis. "A solution acceptab=
le to all is being contemplated. Things are moving in the right direction a=
nd the government is playing a constructive role in resolving the issue," G=
okak said.=20
According to him, none of the parties to the dispute are in favour of closu=
re of the $3-billion project. According to officials in the power ministry,=
 both sides are now willing to make some sacrifices which is a healthy sign=
. Union power minister Suresh Prabhu earlier met the Prime Minister to disc=
uss the Enron project. The power minister has already reiterated that the g=
overnment would make all efforts to settle the matter in consultation with =
the stake holders. Asked if any time-frame has been set to break the impass=
e, Gokak said " that the delay is in nobody's interest, but there are no re=
adymade solutions either." The negotiating committee, headed by Madhav Godb=
ole, has held two rounds of negotiations. The last round held earlier this =
week has been termed "positive" by both DPC and MSEB.=20
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THE ECONOMIC TIMES, Saturday, 2 June 2001
Powerful suggestion
IT'S time the government reconsidered its archaic rule mandating sale of po=
wer by independent power producers to the concerned electricity board. IPPs=
 must be allowed to sell power to anybody who is willing to purchase it for=
 distribution or retail sale. The Gujarat Electricity Regulatory Commission=
 has taken the lead in this direction. It is willing to let three independe=
nt power producers sell power directly to consumers.=20
India's laws classify power distribution as a state subject, and all states=
 say that generators have to sell power to state electricity boards, owned =
by state governments. Experience shows that this can't work - most SEBs are=
 broke, plagued by power theft, poor administration, graft and politically =
motivated pricing. Insolvent SEBs cannot pay for the power that only they a=
re allowed to purchase from IPPs. This has thrown all private power generat=
ion projects into jeopardy. The real reason for the controversy over Dabhol=
 Power Company is that the IPP can't be paid because the local SEB is broke=
. DPC is not the only generator in trouble: the future of the 3,700 MW Hirm=
a project as well as some smaller projects, are also in doubt. Today, all S=
EBs together owe central power utilities about Rs 26,000 crore. Given these=
 dues and the failure of most state governments to reform the SEBs, private=
 investment in power generation is likely to grind to a halt. That will be =
a disaster for power starved India.=20
The GERC's suggestion, if implemented by the Gujarat government - which own=
s the SEB - will let IPPs become viable again. If private power producers c=
an sell power to consumers who pay regularly, these generation projects wil=
l become viable. Paying consumers will be spared the trouble of frequent po=
wer cuts. If quality power supply is assured, investors can save themselves=
 the costs of setting up captive power plants. SEBs will argue that IPPs wi=
ll take away the best paying customers and with them, the most lucrative re=
venues. They have only themselves to blame for that. If SEBs run into serio=
us financial trouble with IPPs selling directly to consumers, then an impen=
ding crisis might provoke real reforms. Other states should follow GERC's e=
xample.
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THE ECONOMIC TIMES, Saturday, 2 June, 2001
Fitch downgrades India's rating
 INTERNATIONAL rating agency Fitch has downgraded India's sovereign rating =
from stable to negative, citing concerns about fiscal policy, privatisation=
 and deterioration in the foreign investment climate and the Enron fracas. =
Currently, it rates the foreign and local currency obligations of India as =
BB plus and BBB minus, respectively. The negative rating outlook reflects t=
he slow progress of the government in implementing privatisation and addres=
sing the weakness of public finances, the agency said in a release. Continu=
ed fiscal profligacy and back-paddling on privatisation and other structura=
l reforms could adversely affect sovereign credit worthiness, prompting a m=
ore severe rating action over time, it said. (PTI)
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THE FINANCIAL EXPRESS, Monday, June 04, 2001
MSEB refuses to backtrack from legal battle against Dabhol Power Company , =
Sanjay Jog
The Maharashtra State Electricity Board (MSEB) categorically told the India=
n financial institutions (IFIs) that it would not be possible to keep legal=
 battle aside against the Dabhol Power Company (DPC), although Dabhol phase=
-II is 90 per cent complete.In fact, the MSEB made it clear that, although =
it has rescinded its power purchase agreement (PPA) with the DPC, it would =
continue to participate in the renegotiations "without prejudice, but with =
a positive mind."
MSEB sources told The Financial Express on Sunday that the Indian rupee len=
ders led by the Industrial Development Bank of India (IDBI) wanted that the=
 MSEB should keep aside the legal battle and the Dabhol phase-II should be =
completed."However, we made it clear to them that MSEB has certain compulsi=
ons to continue its legal battle in view of various legal notices served by=
 the DPC. However, we are not opposed to renegotiations and will participat=
e in the process without prejudice," sources added.The board made its stand=
 clear at its meeting with IFI representatives held on Saturday. MSEB chair=
man Vinay Bansal, accounts member A Krishna Rao and state principal secreta=
ry (energy) VM Lal participated in the meeting.The board asked the IFIs to =
persuade the BJP-led government at the Centre for the despatch of Dabhol ph=
ase-II power. The board expressed its inability to purchase Dabhol phase-II=
 power at the existing tariff and said that the Centre should make all effo=
rts for its disposal.
The IFIs reiterated that the Dabhol phase-II should be allowed to be fully =
completed and "an alternative mode for distribution of power should be expl=
ored in view of MSEB's inability to absorb the phase-II power. The IFIs, wh=
ich will participate at the lenders meeting at Singapore beginning from Jun=
e 5, are believed to have explained the repercussions if Enron ultimately d=
ecided to pull out at this crucial stage. "Terminating the PPA will have se=
rious consequences with regard to the investments made by the IFIs in the p=
roject," these lenders reportedly told the MSEB.However, MSEB, while making=
 its position clear said that it had entered into a legal battle since the =
DPC disputed the misdeclaration and default on the availability of power oc=
curred on January 28, 2001. "Although we stick to our stand that DPC has de=
faulted and is entitled to pay a rebate of Rs 401 crore, DPC avoided its pa=
yment under the garb that the imposition of rebate was not as per the conve=
ntions and provisions of PPA," sources said.
Further, DPC invoked the state and counter guarantee of the Centre besides =
political force majuere. This was followed by the issuance of arbitration n=
otices to the Centre and state governments and the MSEB. The board sources =
said that the DPC did not stop here but also served a preliminary terminati=
on notice on May 19 and a notice to reactivate escrow account. "We were lef=
t with limited choice and thus issued an avoidance notice on May 23 and fil=
ed a petition at the Maharashtra Electricity Regulatory Commission on May 2=
5," the sources added.=20
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THE FINANCIAL EXPRESS,Monday, June 04, 2001
DPC misdeclared availability: MSEB , Sanjay Jog
The Dabhol Power Company (DPC) had defaulted and misdeclared the availabili=
ty of power immediately after the commissioning of Dabhol phase-I in May an=
d July 1999, according to sources from the Maharashtra State Electricity Bo=
ard (MSEB) .The board had also planned to serve a total rebate of Rs 300 cr=
ore for these defaults. However, it ultimately pardoned the DPC and verball=
y waived the rebate.
MSEB sources confirmed these misdeclarations and defaults, which took place=
 before January 28, February 13 and March 29, 2001. These sources told The =
Financial Express that in view of the series of meetings between the MSEB a=
nd DPC officials and clarification provided by the latter, the rebate was n=
ot charged. "Had MSEB slapped rebate of around Rs 150 crore for May default=
 misdeclaration, DPC was obliged to compute it in its billing statement the=
reafter as MSEB is entitled to claim rebate only at the end of four months =
block of January, May and September," sources added.=20
MSEB had argued that as per the power availability curve incorporated by th=
e DPC in the power purchase agreement (PPA), it was entitled to provide the=
 instructed power by MSEB within three hours. However, during these occasio=
ns, the DPC, though admitted that it had defaulted on the availability of p=
ower, later clarified that the Dabhol plant machines were new.The DPC had a=
lso questioned the board's move to slap rebate in the past and is believed =
to have told that MSEB cannot do so as the Dabhol plant was developed on ba=
se load capacity and not peak load capacity.
MSEB had argued that in terms of Clause 8.4(b) in the event of shortfall in=
 delivery of energy contrary to DPC's declaration, Available Baseload Capac=
ity is calculated at ten times the difference between the Declared Baseload=
 Capacity (DBC) and the Active Power produced subtracted from the total act=
ive power generation during that availability period or hour."This leads to=
 a rebate (under Clause 10), which is meant to adjust capacity payments mad=
e during the period having regard to the Rated Baseload Capacity as well as=
 to discourage misdeclaration by DPC of DBC," sources said.
Under Clause 10.2(b), the capacity payments payable by MSEB are subject to =
adjustments of rebate in January for the first four months of the peak seas=
on (October to January) and as per Clause 10.2(c) in May for the whole of t=
he peak season.=20
The board is entitled to a rebate under these provisions. The DPC is oblige=
d under Clause 11.1(b) to compute such rebate in its billing statement for =
the months of January, May and September. The reason being that in the PPA =
the year is divided into the peak season (October to May) and monsoon seaso=
n (June to September).In addition to this, MSEB had said that the DPC shoul=
d follow standard and not ambient conditions at the time of declaration of =
base capacity.
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THE FINANCIAL EXPRESS,Monday, June 04, 2001
DPC power cost MSEB Rs 3,363 cr since '99 , Sanjay Jog

The Maharashtra State Electricity Board (MSEB), which has recently refused =
to pay the April bill of Rs 136 crore to Dabhol Power Company (DPC), has in=
curred total expenses of whopping Rs 3,362.90 crore over the purchase of 6,=
451.78 million units from DPC between May 13, 1999 and April 2001.MSEB, whi=
ch suspended the power purchase since May 29, 2001 after serving an avoidan=
ce notice to DPC, has purchased 163 million units at a per unit tariff of a=
round Rs 10. DPC may send the power purchase bill close to Rs 140 crore to =
the MSEB by June 7. MSEB has paid as high as Rs 25.51 per unit for 39.12 mi=
llion units in June 2000 and as low as Rs 3.02 per unit for 327.58 million =
units in August 1999. MSEB had paid an average per unit cost of Rs 4.98 for=
 power purchase quite below the 90 per cent availability as incorporated in=
 the power purchase agreement (PPA).MSEB sources told The Financial Express=
 that in view of its "precarious" finances, MSEB restricted the power purch=
ase at around 180 mw with a monthly fixed charges maintained at Rs 95 crore=
. "The question of resuming power purchase from DPC does not arise at this =
point as the power purchase agreement has been rescinded since May 23 and t=
he matter has been taken up at the Maharashtra Electricity Regulatory Commi=
ssion (MERC)," sources said.=20
According to MSEB, it was managing the show until May 2000 when the per uni=
t cost was ranging between Rs 3.78 and Rs 3.49, except Rs 4.85 (226.88 mill=
ion units) in June 1999, Rs 4.49 (298.79 million units) in July 1999, Rs 5.=
79 (249.03) in October 1999 and Rs 4.37 (447.49 million units) in April 200=
0. Majority of these purchases were below 90 per cent availability. "Howeve=
r, the per unit tariff suddenly skyrocketted to the level of Rs 25.51 in Ju=
ne 2000 following the hike in the naphtha prices in the international marke=
ts and thereafter it became an unmanageable show," MSEB sources said.In Jul=
y 2000, MSEB's outgo towards per unit tariff was Rs 7.81 (179.47 million un=
its) which was reduced to Rs 6.81 (231.45 million units) in August 2000, an=
d to Rs 5.10 (257.75 million units) in September 2000. Curiously, the per u=
nit tariff rose at Rs 6.90 (267.26 million units) in October, Rs 8 (179.02 =
million units) in December 2000 and Rs 21.06 (52.92 million units) in Janua=
ry 2001. The per unit tariff again fell at Rs 14.74 (75.04 million units) i=
n February, Rs 9.34 (156.82 million units) in March and Rs 10 (128.46 milli=
on units) in April. "Had MSEB purchased power at 90 per cent availability, =
the per unit tariff would have remained in between Rs 2.92 and Rs 5.21. The=
 average per unit tariff would have been Rs 4.02," sources said.
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THE FINANCIAL EXPRESS,Monday, June 04, 2001
The gathering clouds=20
Too many negative voices on the economy=20
The plot indeed thickens on India's economic front. A pessimistic outlook f=
or the second decade of its reforms by a leading international magazine, Th=
e Economist, and a downgrade of the country's ratings outlook by Fitch add =
to the onset of gloom over recent performance. While reforms since 1991 res=
ulted in faster growth and improved the balance of payments, the second dec=
ade of reforms began on a dull note: growth slowed to less than 6 per cent =
last fiscal. A series of scandals intensified the crisis of governance. The=
 dismantling of quantitative restrictions has "spooked" India's farmers and=
 industrialists. And the end game has begun for the saga of the Dabhol Powe=
r Company versus Maharashtra's electricity board - which is sending out sig=
nals that India is not serious about power sector reform. The government ne=
vertheless hopes to raise growth to 8 per cent and attract FDI of $10bn, up=
 from $2bn now. But these targets are not easy: they entail raising investm=
ent from 25 per cent to 38 per cent of GDP and policies that "rekindle the =
excitement of the early 1990s", to borrow an expression from The Economist.=
=20
Nowhere is this more evident than on the fiscal front. The combined deficit=
 of the centre and the states is 10 per cent of GDP, hardly different from =
the early 1990s. Failure to address such fiscal imbalances resulted in the =
change in India's rating from stable to negative by Fitch. The latest offic=
ial numbers also point to a slippage from budgetary targets for 2001-2002: =
the government's borrowings in April-May work out to more than half of the =
target for the fiscal. Thanks to this binge, real interest rates remain hig=
h; resources are crowded out for private investment and a stop-go growth cy=
cle has been triggered. Last fiscal, the centre's fiscal deficit was limite=
d to 5.2 per cent of GDP through cuts in spending. This is bad news for rai=
sing growth, as plan capital expenditures were slashed. Additional resource=
s will be available for such expenditures only if revenue deficits are cont=
rolled - but this is not happening. This implies recourse to more borrowing=
s, pushing the fisc deeper into an internal debt trap. It is time for serio=
us stocktaking, not for quibbling on judgements, however pessimistic.
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THE TIMES OF INDIA, Monday, June 04, 2001
Indian FIs leave for Singapore meet on Enron=20

MUMBAI: Representatives of Indian financial institutions on Sunday left for=
 Singapore to attend the two-day lenders' meeting beginning on June 5 in a =
last ditch effort to defuse the escalated financial crisis between the Maha=
rashtra State Electricity Board (MSEB) and Enron-promoted Dabhol Power Comp=
any (DPC). The FIs team is led by Industrial Development Bank of India (IDB=
I) executive director R.S. Agarwal, who is also a DPC board member. The gro=
up also comprises representatives of State Bank of India and ICICI.=20
The domestic lenders would update their foreign counterparts about the curr=
ent imbroglio and legal tangles, including MSEB's petition filed in Maharas=
htra Electricity Regulatory Commission (MERC) and the board's simultaneous =
decision to stop drawing DPC power from May 29 noon. "One thing worrying th=
e Indian FIs is the foreign lenders' probable decision to encash their secu=
rities, which runs into more than Rs 2,500 crore," a senior state official =
said here. "I think, the divide between the domestic and foreign lenders wi=
ll widen on this issue. The former are desperately trying to save their gua=
rantees from being encashed," he added.=20
Last week, IDBI acting chairman and managing director S.K. Chakrabarti had =
said that the total exposure of Indian lenders was Rs 6,600 crore. IDBI's e=
xposure was Rs 2,158 crore, including guarantees worth Rs 1,528 crore and r=
upee loans of 630 crore, he had added.=20
FIs had on Saturday evening, held a meeting with MSEB, trying to comprehend=
 the state electricity board's views and stand on resolving the crisis befo=
re embarking on the visit to Singapore. "MSEB has firmly told us that it wi=
ll be able to draw power from DPC's first phase only at a renegotiated less=
er price and it wanted the Centre to take over phase II," FI sources said.=
=20
The foreign lenders have already taken a tough stance on the issue and had =
also approved the preliminary termination notice in the April 23 meeting he=
ld in London, the sources added. Prime Minister Atal Bihari Vajpayee is und=
erstood to have asked Union power minister Suresh Prabhu in a meeting betwe=
en them on June 1 in Delhi to pursue the sale of power to deficit states as=
 part of efforts to help DPC. Government sources had said that sale of powe=
r to other states had emerged as the only option for the Centre to help the=
 troubled project as purchase of power by central utilities was not possibl=
e. The success of central initiative would also hinge on the stance taken b=
y the Maharashtra government and MSEB on the issue, the sources had added. =
(PTI)=20
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THE TIMES OF INDIA, Monday, June 04, 2001
MSEB asks DPC to refund Rs 1,200 cr as capacity charges , By Vinu Lal=20

In another counter attack on the Dabhol Power Company (DPC), the Maharashtr=
a State Electricity Board (MSEB) has demanded a refund of Rs 1,200 crore to=
wards undue capacity charges paid to the company till April 2001. This is i=
n addition to the penalty of Rs 760 crore slapped on Enron for misdeclarati=
on of capacity.=20
The board claims that money paid to DPC since May 1999 as capacity charges =
were not legitimate since the company defaulted on its declared capacity. T=
his has also been incorporated in its petition filed before the Maharashtra=
 Electricity Regulatory Commission (MERC) last week. Till April 2001, MSEB =
has paid a whopping Rs 3,499 crore to Enron as bill payments. Here out of R=
s 3,499 crore, the board claims that Rs 2,087 crore is paid as capacity cha=
rges and since the company defaulted on capacity Rs 1,200 crore should be r=
efunded to the board. However, the company has not responded to this demand=
 since the penalty dispute has been referred to arbitration. As per the pow=
er purchase agreement, if the Dabhol plant fails to generate its maximum ca=
pacity within 3 hours of notice, the board can claim penalty for the same, =
which in this case have amounted to Rs 760 crore for default in two instanc=
es.=20
Meanwhile, representatives of all domestic financial institutions met Vinay=
 Bansal, chairman, MSEB on Saturday to clarify on the stance taken by the b=
oard.``The lenders wanted to know MSEB's stance on the entire controversy a=
nd whether we are willing to participate in renegotiations. All issues, esp=
ecially on the penalty dispute was discussed at length and they wanted MSEB=
 to explain the impact,'' said Bansal. Lenders were apprised of the recent =
developments which are crucial before their Singapore meet. Banking sources=
 informed that domestic lenders made it clear to the board that the penalty=
 issue should not be clubbed to monthly bill payments and that it should be=
 treated independently. However, it is learnt that the board officials were=
 not agreeable to this proposal. Sources added that lenders were quite peev=
ed on the way MSEB advised the Centre not to acknowledge the sovereign guar=
antee. Institutions informed the board that the foreign lenders have taken =
a serious note of this development.
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THE TIMES OF INDIA, Saturday, 2 June 2001
New package on cards for DPC: Gokak=20

A new package acceptable to all is being evolved to resolve the seven-month=
 old wrangle between Enron-promoted Dabhol Power Company and Maharashtra St=
ate Electricity Board (MSEB) over the issue of cost of power and payment of=
 bills, A.V. Gokak, Centre's representative in Maharashtra's negotiation co=
mmittee said on Friday. "Solution acceptable to all is being contemplated. =
Things are moving in the right direction and the government is serious to r=
esolve the crisis," Gokak said after a meeting with finance minister Yashwa=
nt Sinha here. Gokak said that none of the parties to the dispute were in f=
avour of closure of the $3 billion project.=20
Earlier, Centre had asked Central Electricity Authority (CEA) to explore po=
ssibility of selling DPC power to deficient states. But power minister Sure=
sh Prabhu had ruled out possibility of National Thermal Power Corporation (=
NTPC) lifting DPC power. Prabhu had stated that the government would make a=
ll efforts to settle the matter in consultation with the stake holders. Ask=
ed if any timeframe had been set to break the impasse, Gokak said "delay is=
 in nobody's interest, but there are no readymade solutions." The negotiati=
ng committee, headed by Madhav Godbole, has held two rounds of negotiations=
 with the last round held earlier this week being termed "positive" by both=
 DPC and MSEB. Gokak is believed to have put forward alternative solutions =
in resolving the crisis.=20
Asked if sale of power by DPC to states other than Maharashtra was part of =
the new package being considered, Gokak said "I will not say anything at th=
is moment. There are so many ramifications as number of technical aspects h=
ave to be taken into consideration." "There are so many alternatives and an=
gles. We are looking at all with an open mind and there are positive develo=
pments," he said, but declined to give any further details.=20
Gokak, however, said that the government was not in favour of DPC shutting =
down its operations. The thrust of the efforts was to find a solution accep=
table to all concerned parties, which meant evolving a package. The seven-m=
onth long wrangling between MSEB and DPC has seen the latter serving a prel=
iminary termination notice while the former resorting to cancelling the pow=
er purchase contract and refusing to buy any further electricity from the 7=
40 mw phase-I. 1,444 mw phase-II was to be commissioned this month but is u=
nlikley to see the light of the day following MSEB's decision not to purcha=
se any more power from DPC till the issue of cost of power was resolved.=20
Of late, DPC has indicated that there was a possibility of reducing cost of=
 power by up to 10 per cent, but it hasn't come out with any official annou=
cement to this effect. (PTI)=20
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THE TIMES OF INDIA, Saturday, 2 June 2001
MSEB opposes DPC arbitration in London , By Vidyadhar Date=20

The arbitration in London sought by Dabhol Power Company (DPC) regarding it=
s dispute with the Maharashtra State Electricity Board (MSEB) cannot be rec=
ognised by any law in India, the MSEB has said in its petition to the Mahar=
ashtra Electricity Regulatory Commission (MERC). Opposing the arbitration m=
ove, MSEB said it would incur a huge cost to the board and would be a futil=
e exercise since it would not be enforceable in India.=20
DPC has given notice of arbitration under clause 20 3 a of the power purcha=
se agreement (PPA). This is an attempt on the part of DPC to obfuscate real=
 issues and deflect attention from misrepresentations made by DPC in the PP=
A, the board said. MSEB has also opposed the move of Dabhol to invoke the p=
olitical force majeure clause. DPC had alleged that the government of Mahar=
ashtra, the central government and MSEB had sought to frustrate the corpora=
tion's obligations under the PPA. The board urged the commission to order D=
PC to pay Rs 458 crore of damages due to the shortfall in supply because DP=
C failure to generate energy on demand on January 28, February 13, March 29=
, April 23 and May 3, 16 and 17. DPC should also pay Rs 1200 crore which it=
 wrongly charged to MSEB between March 1999 and April 2001. While MSEB has =
taken its battle with DPC to the commission, the trade unions in the energy=
 sector, irrespective of party affiliations, have decided to take the fight=
 against Enron to the streets.=20
`We expect 10,000 people to attend the demonstration in front of the Dabhol=
 generation station on Tuesday,' said AB Bardhan, president of the MSEB wor=
kers' federation and All India federation of electricity employees. He desc=
ribed as ridiculous the offer made by Enron to reduce the tariff by 10 per =
cent. This would make little sense since the tariff was steep and thoroughl=
y unjustified, he said.=20
Bardhan called for scrapping the PPA with Enron. If small states like Pakis=
tan and Croatia can do that there is no reason why we cannot show Enron its=
 place, he said. He said Enron was involved in the energy crisis in Califor=
nia and the region's governor Gary Davis had threatened to prosecute the po=
wer company for its wrongdoings. ``At present in the name of renegotiations=
, some people are focussing on ways to bail out Enron. The point is to resc=
ue the public from the crushing burden imposed by Enron,'' he said.``It is =
now being projected as a dispute between MSEB, Enron and the government wit=
hout taking into account the interests of consumers and power workers and e=
ngineers,'' Bardhan said.
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THE TIMES OF INDIA, Sunday, 3 June, 2001
PM for central initiative to salvage DPC
=20
Prime Minister Atal Bihari Vajpayee is understood to have asked power minis=
ter Suresh Prabhu to pursue the sale of power to deficit states as part of =
the efforts to help Enron-promoted Dabhol Power Company. The option of sale=
 of power from 2nd phase of the three billion dollar project in Maharashtra=
 was discussed in detail in a 90-minute meeting Prabhu had with Vajpayee on=
 Friday to consider the fallout of Enron imbroglio, cited by international =
rating agency Fitch as one of the reasons for lowering India's rating from =
stable to negative. Official sources said the meeting sought by Prabhu was =
fourth in the series after the Enron controversy erupted due to payments pr=
oblems seven months ago.=20
The meeting assumes importance in the wake of Maharashtra State Electricity=
 Board (MSEB) refusing to buy power and challenging the validity of the pow=
er purchase agreement with DPC which in turn stopped commercial electricity=
 generation. While Prabhu could not be contacted for comments, government s=
ources said that sale of power to other states had emerged as the only opti=
on for Centre to help the troubled project as purchase of power by central =
utilities was not possible. While Vajpayee wanted the project to continue, =
the success of central initiative would depend on the paying capacity and r=
eforms pursued by states which could be interested in buying power from DPC=
 if it lowered the tariff. Cabinet Secretary T R Prasad was also present du=
ring the meeting, sources said. (PTI)=20
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THE TIMES OF INDIA, Sunday, 3 June 2001
SWAMINOMICS / Swaminathan S Anklesaria Aiyar
The many blunders of Enron=20
The Dabhol saga goes on and on. Most commentators think that Enron took Mah=
arashtra officials for a ride. This is partly true. But it is equally true =
that Dabhol is a bad deal for Enron.=20
Enron's first blunder was to see liquefied natural gas as the fuel of the f=
uture, clean and non-polluting. In the early 1990s, many power plants in Ja=
pan and Korea came up using LNG. Coal and fuel oil were considered dirty fu=
els with no future. LNG prices are linked to oil prices, and many observers=
 then thought that oil would remain cheap. Enron sank billions into an LNG =
project in the Gulf, to supply Israel and India. In retrospect, this emphas=
is on LNG was an error. Japanese households now pay a whopping Rs 10 per un=
it for power based on LNG. It is simply not the fuel of the future.=20
The second blunder was Enron's judgement in 1992 that the Maharashtra State=
 Electricity Board was viable. In fact MSEB, like other SEBs, was heading d=
eep into the red, with huge line losses and unsustainable subsidies. Few pe=
ople remember that Enron originally did not ask for a Central counter-guara=
ntee, so confident was it of MSEB's solvency. Other shrewder foreign invest=
ors insisted on counter- guarantees for their proposals, and New Delhi made=
 counter-guarantees a matter of policy. Enron then took advantage of this. =
But note, it was saved from its own folly by other foreign investors.=20
The third blunder--arguably the worst--was to jump the gun on Phase II of t=
he project. New Delhi gave no counter-guarantee for Phase II, so Enron shou=
ld have made doubly sure that this was viable. The Central Electricity Auth=
ority had said that MSEB should not proceed with the 1,400 MW of Phase II b=
efore making sure there was enough demand for so much power. The Godbole Co=
mmittee has castigated MSEB for going ahead nevertheless. Enron needs to ca=
stigate its Mumbai officials no less. The 695 MW of Phase I could conceivab=
ly have been absorbed with a lag, but not the 1,400 MW of Phase II.=20
The fourth blunder was the notion that clever negotiations could ensure a h=
igh rate of return on equity, maybe 30 per cent. But such cleverness turns =
to folly if the commercial and political risks are high. If the commercial =
risks are high--if the buyer is in poor shape and cannot pay suppliers--the=
n the supposedly high return will turn out to be illusory. Counter-guarante=
es from sovereign entities may ease the commercial risk, but cannot elimina=
te political risks, as Enron has discovered. Supposedly clever foreign inve=
stors who hoped to make money out of the Hubco power project in Pakistan fo=
und to their dismay that the government entity buying the power could not p=
ay, and ultimately had to renegotiate the deal with a much lower margin. Th=
e Paithon power project in Indonesia promised high returns to foreign inves=
tors, but Indonesia's currency collapse after 1997 made the dollar-based ta=
riff totally uneconomic, so the project is a write-off. The lesson for inve=
stors is clear: When striving for a high return, keep in mind the buyer's c=
apacity and willingness to pay.=20
The fifth blunder of Enron was to assume that it could complete the project=
 within budget. Cost overruns in Indian power projects are notorious. Kawas=
 I, for instance, was supposed to cost Rs 500 crore, but ended up costing R=
s 1,500 crore. NTPC nevertheless made good money from it because of the cos=
t-plus pricing of the time. But the Dabhol contract obliged the company to =
absorb all cost overruns. Phase II has suffered an overrun of $ 400 million=
 already, and this could rise if project completion is delayed (as seems li=
kely). So, before getting a single dollar as dividend, Dabhol's shareholder=
s have already lost $ 400 million, almost half the company's equity. So muc=
h for supposedly super- profits.=20
Too many observers assume that the high price of Dabhol's power means super=
-profits. Not so. Remember that the equity structure gave Enron only 50 per=
 cent of Dabhol's shares, and MSEB 30 per cent. If indeed the project was s=
uper-profitable, MSEB would have money pouring out of its ears. In fact the=
re are no returns, only cost overruns. For want of cash, MSEB failed to tak=
e up its equity share in Phase II, something it would have hardly done if t=
he project was super-profitable.=20
The price of Dabhol's power is high because (a) naphtha and LNG have become=
 very high-cost fuels; (b) MSEB buys barely one-third of Dabhol's power, an=
d the cost of unutilised capacity is very high; (c) the project was finance=
d when interest rates were very high in India (IDBI lent money at 21 per ce=
nt). Renegotiating a lower return on equity will offset these factors only =
modestly.=20
This looks a bad deal from Maharashtra's view today: That is well known. Bu=
t it also looks a bad deal from Enron's viewpoint, and this is less well kn=
own.=20
Rebecca Mark and others who launched Dabhol have left or been eased out of =
Enron. Its current chief, Jeff Skilling, said some time ago that capital-in=
tensive projects in oil and power (like Dabhol) constituted a poor use of s=
hareholders' money. He ordered the sale of Enron's interests in oil whereve=
r feasible, including in India. He switched from the production of energy t=
o trading in newly deregulated sectors like electricity in the US, a switch=
 that has greatly boosted profitability.=20
Indians may believe that the Dabhol contract gave super-profits to Enron. B=
ut from the viewpoint of Enron's shareholders, Dabhol was a multi-faceted e=
rror. It was an error to invest so much in LNG or power, an error to underp=
lay the political and commercial risks involved, an error to sell power to =
a monopoly buyer unable to pay its bills, an error to think that super-prof=
its could be ensured by counter-guarantees and escrow accounts. Financial g=
urus the world over have applauded Enron for increasing its profitability b=
y getting out of energy production and into energy trading. Only in India d=
o people still believe that Enron can make a lot of money by producing ener=
gy.
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THE INDIAN EXPRESS, Monday, June 04, 2001
No avoidance of legal battle: MSEB, Sanjay Jog
THE Maharashtra State Electricity Board (MSEB), in no uncertain terms, told=
 the Indian Financial Institutions (IFIs) that it would not be possible to =
keep legal battle aside against the Dabhol Power Company (DPC) despite the =
90 per cent completion of Dabhol phase-II. In fact, MSEB made it clear that=
, although it has rescinded its power purchase agreement (PPA) with DPC, it=
 would continue to participate in the renegotiations "without prejudice but=
 with a positive mind."
According to MSEB sources the Indian rupee lenders led by IDBI wanted that =
the MSEB should keep aside the legal battle and the Dabhol phase-II should =
be completed. "However, we made it clear to them that MSEB has certain comp=
ulsions to continue its legal battle in view of various legal notices serve=
d by the DPC. However, we are not opposed to the renegotiations and we will=
 participate in the process without prejudice," sources added. MSEB made it=
s stand clear at its meeting with IFI representatives held in the late even=
ing on June 2. MSEB chairman Vinay Bansal, accounts member A Krishna Rao an=
d state principal secretary (energy) V M Lal participated at the meeting.
MSEB asked the IFIs to persuade the BJP-led government at the centre for th=
e despatch of Dabhol phase-II power. MSEB expressed its inability to purcha=
se Dabhol phase-II power at the existing tariff and said that the centre sh=
ould make all out efforts for its disposal. The IFIs reiterated that the Da=
bhol phase-II should be allowed to be fully completed and "an alternative m=
ode for distribution of power should be explored in view of MSEB's inabilit=
y to absorb the phase-II power. The IFIs are believed to have explained the=
 repercussions if Enron ultimately decided to pull out at this crucial stag=
e.
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THE HINDU BUSINESS LINE, Monday, June 04, 2001
Dabhol Power Project: What next , S. Padmanabhan

ENOUGH HAS been said about the past. Whatever the blunders committed by the=
 political parties, the fact remains that the Dabhol power project has not =
gone away. It is a good asset, the criticism of Enron notwithstanding. The =
project has been built by Bechtel and the turbines are from GE -- the two b=
iggest and the best in the business. The project can serve the people of Ma=
harashtra and India for the next 20 years at least.=20
Is a settlement possible on commercial lines? From Enron's point of view, t=
his will mean redrawing the contracts and it would be at a great disadvanta=
ge while re-negotiating the deal. For Maharashtra, it will mean reduction i=
n its commitment.=20
For Enron it will a major climb down on the following issues:=20
a) At one $=3DRs 47, the project cost, as approved by the CEA, is Rs 13,294=
 crore ($2,828 million) for generating 2,184 MW and the LNG terminal. This =
works out to Rs 6.09 crore per MW. The LNG terminal and the power project a=
re to be segregated as independent projects. Assuming a benchmark cost of R=
s 3.50 crore per MW for naphtha projects, the power project segment will ha=
ve to be at Rs 7,644.00 crore and the LNG plant Rs 5,650 crore. Can Enron j=
ustify such a high cost for the LNG terminal (5 million tonnes)? A comparis=
on will surely be made between Enron and other LNG projects such as those a=
t Dahej, Mumbai, and Cochin.=20
b) The current power tariff as per the PPA is 8.8 cents (assuming the crude=
 price at $28 a barrel) -- Rs 4.13 per kWh (unit) on the assumption that th=
e MSEB uses 90 per cent of the 2,184 MW. Assuming a naphtha price of $290 p=
er tonne and a heat rate of 1,800 Kcal per kWh utilisation, a 6.50 per cent=
 rupee depreciation and an auxilliary generation of 3.50 per cent, the vari=
able component (fuel cost) per unit of the power works out to Rs 2.32 and t=
he fixed cost to Rs 2.11. At 90 per cent of 2,184 MW -- 17.22 billion units=
 -- Enron will recover an annual fixed cost of Rs 3,633 crore ($773 million=
 at one $=3DRs 47) what ever the utilisation level. When the power project =
cost is reduced to Rs 7,644 crore, there has to be a corresponding reductio=
n in this fixed cost also. Can Enron afford to reduce this?=20
c) Enron's LNG terminal has a 5 million tonne capacity whereas the Dabhol p=
ower project will use only 2.1 million tonnes. The balance is to be sold to=
 others. However, as per the PPA, Enron recovers the full fixed cost of the=
 LNG project even though less than half the LNG capacity is dedicated to th=
e power project. Enron will have to forego fixed cost recovery from a part =
of the LNG project. Perhaps, it will have to become a dedicated LNG supplie=
r to Dabhol power which position may not allow Enron to recover any guarant=
eed fixed cost for its LNG segment. It will have to assume market risks. Wi=
th not many projects in pipeline, where will Enron sell the balance of the =
fuel?Any re-negotiation and reduction in price will show up Enron as being =
weak and similarly threaten projects elsewhere. Enron knows that India is o=
n a weak wicket and given its global plans of getting out of asset-based bu=
sinesses, it stands to gain if it goes for arbitration. Perhaps, Enron will=
 negotiate successfully a lower exit price than what it is eligible for as =
per the contract.=20
For Maharashtra it is a Hobson's choice on the following issues:=20
a) The Government cannot use so much power but having agreed to grant deeme=
d generation at 90 per cent capacity it cannot at this stage ask for a lowe=
r capacity; at best it can ask for segregation of the project costs.=20
b) Naphtha is not an economic fuel at this time. However, LNG will also pro=
ve to be uneconomic if the oil prices stay at current levels. LNG prices ar=
e around $3.50 per million BTU at a base crude price of $18 and an addition=
al 13 cents for every dollar increase in crude prices. Thus, at $28 to a ba=
rrel, the LNG prices will be $4.80 per million BTU which translates to a fu=
el cost of Rs 1.79 per kWh assuming a 2,000 kcal heat rate per kWh and one =
$=3DRs 47. In addition the fixed charges will become payable.=20
c) The State Government cannot justify extending the federal guarantee to t=
he LNG project -- at least on that portion which is not useful to Dabhol po=
wer. Obviously, this get the lenders up in arms as they would not like to l=
ose their security. Credibility will be at stake.=20
Any re-negotiation will have to result in a significant benefit for the Mah=
arashtra Government politically and economically and the decision will have=
 to be justified in public. The Government may not have the political will =
and courage to come to a settlement and may try to pass the buck to the Cen=
tre.=20
Very soon, therefore, there will be a stalled project, a cancelled PPA, arb=
itration notices and the invocation of the Central guarantee and a lot of i=
nternational media commentary from leading lenders and, of course, a set of=
 harassed domestic financial institutions whose share prices will take a no=
sedive in the medium run because of higher NPA provisioning. The Centre wil=
l have to intervene to salvage its credibility arising out of the federal g=
uarantee given to Enron and its lenders.=20
So where do we go?=20
A lot of people have said that there is no life after Enron envisaging a fl=
ight of a large number of foreign direct investors. Perhaps, this will also=
 have a serious effect on the stock market which will dive further on the d=
ay of reckoning -- the day Enron cancels the PPA and invokes the federal gu=
arantee.=20
Perhaps, life after Enron will be one of caution for the State and Central =
governments as well as the foreign investors. The Centre will have to tread=
 carefully in untangling this mess carefully. Some of the steps it may have=
 to take are:=20
a) Move quickly to respond to any public criticism -- that the Centre has r=
eneged on its commitments. Perhaps, the Government is already moving in thi=
s direction by organising industry meets and seminars in India and abroad.
b) Assure the international lenders that they are safe and that their liabi=
lities would be met in full. The lenders have lent money to the project not=
 out of love to Enron, but based on their analysis of India's credit rating=
. They have no part in this controversy and their sensitivities must be res=
pected. Fortunately, India has more than $45 billions in reserves and that =
coupled with speedy action in assuring the lenders will resolve the problem=
. The emphasis should be in reassuring that Enron is only one of its kind a=
nd this is no across-the-board phenomenon.=20
c) A quick settlement with Enron will raise the confidence among investors.=
 There has to be a greater sense of honour while retracting and recognising=
 the loss -- particularly from a grave mistake.=20
d) A clear and sensible approach in dealing with the assets -- the power pr=
oject and the LNG terminal. It is a useful asset built by reputed companies=
 and, therefore, several players should come forward to take them over at a=
 fair price.=20
e) The Centre must move fast to implement power sector reforms. We have sev=
eral priorities -- primary is providing low-cost power. Experience has taug=
ht us that such fuels as naphtha, or natural gas are extremely price sensit=
ive in a country that imports petroleum products and, hence, power plants b=
ased these fuels cannot be the mainstay. Over the last nine years we have n=
ot been able to implement even one power project based on imported coal for=
 fear of the fluctuating currency rates.=20
The real answer is staring at us -- developing pithead coal-fired power pla=
nts. This means the projects can come up in the coal-belts of Bihar, Jharka=
nd, Chhattisgarh, MP and West Bengal. The creditworthiness of these States =
is not clear and, therefore, it may be necessary to get Power Trading Corpo=
ration to become a proactive nodal agency for buying and distributing power=
 and perhaps also act as a security provider.=20
This also means that the Centre will have to hold the hands of the investor=
s for some more time in the process of developing low-cost power projects.=
=20
f) Last, there has to be a move towards the reform of the State governments=
 and their electricity boards. Given our experience in Balco, privatisation=
 of the public and power sectors would continue to be uneasy as they are su=
re to be politicised. While this cannot be avoided, we need to move ahead h=
owever slow the progress. This would mean that the States may not have the =
capability to support the private power projects till such time the reforms=
 are introduced and till then the Centre would have to shoulder this respon=
sibility to ensure an energised India.
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THE HINDU BUSINESSLINE, Sunday 3 June, 2001
DPC power: Govt to pursue sales to States=20

THE Government is actively pursuing the option of identifying power-deficit=
 States in its attempt to find buyers for the Dabhol Power Company power. T=
his follows a meeting held today between the Prime Minister, Mr A.B. Vajpay=
ee, and the Union Power Minister, Mr Suresh Prabhu. According to officials,=
 the Central Electricity Authority (CEA) is currently identifying the power=
 demand situation in the neighbouring States over the next two years in the=
 prospect of bringing together the buyers for the Dabhol power. By not entr=
usting this task to the Power Trading Corporation, the Government has signa=
led that it would play the role of only a facilitator and not involve itsel=
f financially in the power sale transactions. Officials point out that Cent=
ral mediation has provided a meeting point for the stakeholders -- DPC and =
the State Government -- to arrive at a mutually-acceptable solution.
nikita.varma@enron.com