READ THIS.

 -----Original Message-----
From: 	Cline, Wade  
Sent:	Friday, May 11, 2001 8:10 AM
To:	McDonald, Rebecca; Hughes, James A.; Walls Jr., Rob; Lundstrom, Bruce
Cc:	McGregor, Neil
Subject:	Friday Renegotiation Committee meeting and other events

Here is overview of day. I've tried to summarize most of what happened.

Mohan and I met early in morning with the lenders' observers to the meeting, Mr. Kharkanis and Abhay Ahuja. Both are attorneys who work for the same lawfirm, India Legal Advisors (previously affiliated with White & Case). This firm has represented Dabhol lenders in the past. Mr. Kharkanis is former chief legal counsel at IDBI. Very pleasant meeting. Three points they made -- (a) very difficult to resolve unless someone is willing to take all the power, (b) this committee is probably not a proper committee to be renegotiating with as it is comprised of all Review Committee members, who are already biased in their conclusions, and (c) they asked about the misdeclaration issue. I told them we felt we had a strong case and were willing to go all the way in arbitration or, assuming a big picture renegotiation could work, resolve it in context of that renegotiation. But I pointed out a renegotiation, while possible, was going to be difficult, and it would be an absolute non-starter unless GOI stood up and said they could take power.

At Renegotiation Committee (RC) meeting, only 3 of 9 members from their side were present. Dr. Godbole, chair; Mr. Lal, Energy Secretary; and Ms. Bansal, MSEB chair. Notably absent was any GOI representative. Their offered rationale for this absence was that Mr. Gaukak (not Mr. Harish Salve as earlier reported) had been appointed only last night and could not make it. It is clear to me that (a) GOI is still taking a hands-off approach and they delayed appointment until late enough so they could not make meeting, and (b) GOI's commitment to finding workable solution is in question as they don't seem to be giving this any type of serious consideration based on who they appoint (Mr. Gaukak is former secretary in Telecom Dept.).

The press was allowed in at the beginning of the meeting only to take photos. They left and the meeting began. We agreed after the meeting that neither party would discuss with the press about the meeting. As we left, we were absolutely mobbed and we "no commented" our way through the mob and left. The mob was quite large and the walking space was small and going downstairs, so there were a couple of reporters who tripped and fell and dropped cameras. Hopefully, the headlines will not read "Enron stomps Journalist."

The meeting lasted almost 2 hours. The RC opened up by saying their position was on the table through the Godbole Committee Report and wanted us to respond. I read from my prepared notes, and told them we were open minded, willing to listen but we had serious constraints. My key points from my notes were (a) who was going to buy the power from this 2184MW baseload plant that had to operate at high PLF for it to be economical, (b) our project was out of money and would probably have to shut down absent further funding from lenders, which depended on favorable gov't response to lender letter (this did not seem to bother them at all), (c) the main problem was their failure I told them I felt it was major issue that GOI was not present and not engaging in this dialogue. I said the absence of GOI meant that very little would be accomplished today as the key to any solution involved GOI involvement, and we needed to know what GOI's position was. The RC responded by saying they were disappointed that we did not have representatives from shareholders, lenders (and they objected here to the lenders' observer role versus an active participant role), fuel suppliers and others here and they did not know whether to interpret that as lack of seriousness/commitment or not.

The most disturbing thing to me was the Dr. Godbole was very clear, to the point of stating this and repeating it again, that the original project was a mistake and DPC should pay for that mistake. He said that DPC proposed a 2000 MW LNG facility with high PLF, and thus now that such a project is not working, it is DPC's fault (his rationale being that without DPC proposing the idea originally, it never would have come about) and we should pay. When I asked him what tariff he thought should be appropriate, he quoted from the Godbole Committee report -- the lowest tariff available to any gas-based plant in the country, with no ToP. Since the whole LNG idea was DPC's, we should bear 100% of any LNG costs except for a reasonable per MMbtu price that MSEB would pay as if they had a natural gas pipeline running already in place and running by their plant. Yes, folks, it was that ludicrous.

It's clear that among the 3 people there, Dr. Godbole was the firmest in his extreme positions. And he is firm in those positions. Mr. Lal and Mr. Bansal were more conciliatory and trying to find some middle ground, although since they only represent MSEB/GOM, their ability to do this is limited to only one power block, and even on that, they are looking for tariff relief and ToP relief beyond our ability to handle. But they are trying to move to the middle, whereas the chairman is not.

Even in absence of GOI, we talked at length about the fact that they had to play a role. The RC said they were not sure if GOI was willing to play a role other than counter-guarantor, and even if they were, the GOI could not be expected to pay more than a "market" price -- whatever a SEB in India is willing to pay. Currently, that ranges around Rs. 2.50. It is clear that Dr. Godbole feels no responsibility whatsoever for 2 power blocks, and he thinks DPC should take responsibility, including convincing GOI to buy some amount of this at the "market" price. On this market price issue, I made it clear that it was not our problem that the market price in India was an unrealistically low price influenced by subsidies, lack of tariff rationalization, etc. and we would not be able to meet their demands. We discussed the need for having a creditworthy buyer for power from DPC at 90% PLF, before we could talk any tariff relief, and even then, tariff relief expectations had to be reasonable (not the 30% they are asking for but less than 10%). 

LNG terminal separation from power plant: They asked if an LNG terminal split was possible, and we asked what did they think that would get them. They said tariff relief and absence of ToP. We pointed out tariff relief had been given in 1995 renegotiations when LNG terminal had been originally split, and even when the terminal was included added back, the tariff relief had remained to MSEB's favor. We stated that the ToP would remain with the ultimate customer, even if the terminal was split. They said why should the power plant pay for all excess capacity in LNG terminal and we reminded them again that the LNG terminal capacity was built solely for the power station as MSEB had required, and that 2 separate independent consultants had confirmed this.

RC asked for various proposals on what our tariff would be at various PLFs, assuming a certain reduced % tariff. We told them that since the project only made sense at a high (90%) PLF, the key was for them and GOI to identify buyers for 90%, and then tariff is known.

Conclusion: they wanted to meet again and have a further discussion. We agreed to meet on May 23, but agreed that in interim, we had to know what the role of the GOI was. We agreed that we would both go back and think about what had been said and see if solutions were there, but we said that key was where were the buyers for this power.