THE FINANCIAL EXPRESS
Thursday, May 10, 2001, http://www.financialexpress.com/fe20010510/top3.html
Govt rejects DPC terms for selection of third conciliator,   Anupama Airy
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THE FINANCIAL EXPRESS
Thursday, May 10, 2001, http://www.financialexpress.com/fe20010510/news1.html
Lenders seek power, finance ministry aid to resolve Dabhol mess ,   Anupama Airy
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THE FINANCIAL EXPRESS
Thursday, May 10, 2001, http://www.financialexpress.com/fe20010510/news2.html
MSEB to pay Rs 139cr April bill 'under protest' , Sanjay Jog
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THE HINDU BUSINESSLINE
Thursday, May 10, 2001, http://www.hindubusinessline.com/stories/041056ma.htm
Dabhol project -- Enron: A rational renegotiation plan, S. Padmanabhan 
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THE HINDU BUSINESSLINE
Thursday, May 10, 2001, http://www.hindubusinessline.com/stories/141056cr.htm
Centre to back Maharashtra on tariff talks with Enron
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THE FINANCIAL EXPRESS, Thursday, May 10, 2001
Govt rejects DPC terms for selection of third conciliator,   Anupama Airy

THE finance ministry has rejected Dabhol Power Company's (DPC) proposal   that appointment of third independent conciliator for resolving the payment dispute be done either   by the London Court of International Arbitration or by the International Chamber of Commerce   (ICC). Top government officials told The Financial Express that at meeting between the union finance minister Yashwant Sinha and the power minister Suresh Prabhu on Friday, it was decided that the   two conciliators, already appointed by the Centre and DPC respectively, will now appoint the third   conciliator.

Official sources disclosed the finance ministry has also done away with the stipulation that the third   conciliator should not be a national of the US or of India. "The department of economic affairs   (DEA) felt that the stipulation over the nationality of the third conciliator was not necessary and should be done away with," the officials said.Earlier, the DEA had suggested that the appointment of the third conciliator be either left to the two   conciliators (already appointed on behalf of the Centre and DPC) or be selected by an institution   based in India.

DEA had proposed the names of two institutions - The Indian Council of Arbitration and The International Centre for Alternate Dispute Resolution - who could be asked to appoint the third independent conciliator.  However, sources said of the two suggestions made by DEA, it was finally decided in the meeting of the two ministries that the thrid conciliator be appointed with the consent of the two arbitrators, already appointed.Sources said the suggestion of DPC that the Centre give a list of six neutral individuals of appropriate standing and eminence for the appointment of the third conciliator has also been turned down by the finance ministry.
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THE FINANCIAL EXPRESS, Thursday, May 10, 2001
Lenders seek power, finance ministry aid to resolve Dabhol mess ,   Anupama Airy

FOREIGN lenders to Dabhol Power Company (DPC) have sought the   intervention of the ministries of finance and power to quickly resolve the ongoing impasse over  non-payment of dues by Maharashtra State Electricity Board (MSEB), as DPC has sought their  consent to issue a preliminary termination notice to the MSEB.Justifying DPC's plans on issuing a termination notice to MSEB, the foreign lenders, in letters to the   secretaries of finance and power dated May 1, have said, "DPC is in its rights to do so, since various events and issues have had a materially adverse effect on DPC's ability to perform its  obligations under the power purchase agreement (PPA)."

Sources informed that this issue was also discussed at the meeting between Union power minister Suresh Prabhu and finance minister Yashwant Singh on May 4. In their letters to the two ministries, foreign lenders have asked the government to quickly find an amicable solution by ensuring timely payments to DPC of all the outstanding dues, besides asking the government to increase the face  amount of the letter of intent (LoI).The lenders have also informed the government that all future disbursements for Phase-II of the Dabhol project have been stopped till this matter is resolved between DPC and MSEB.
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THE FINANCIAL EXPRESS, Thursday, May 10, 2001
MSEB to pay Rs 139cr April bill 'under protest' , Sanjay Jog

THE Maharashtra State Electricity Board (MSEB) proposes to pay the April bill   of Rs 139 crore "under protest" to the Dabhol Power Company (DPC) before the expiry of due   date of May 25.This would be the third consecutive time the MSEB would pay the bill to protest against the DPC's   refusal to accept mis-declaration and default on the availability of power on January 28 and rebate   of Rs 401 crore slapped by the MSEB. The MSEB has paid, also, "under protest," the February bill (Rs 114 crore) and the March bill (Rs 134 crore). 

MSEB sources told The Financial Express that it has received the April bill early this week for the   purchase of 128 million units at Rs 10 per unit. The fixed charges were Rs 7, while the varible  charges were Rs 2.95.   These sources said that the per unit tariff had reached Rs 21.06 in January for the purchase of 53   million units. The MSEB has not paid the January bill of Rs 111 crore on the grounds that the DPC should adjust it against the rebate amount of Rs 401 crore.   As far as the February bill is concerned, the MSEB purchased 75 million units at Rs 14.74 peer unit  from the DPC. 

In March, in view of increased power purchase at 156 million units from DPC, the per unit tariff was reduced at Rs 9.34 (total bill of Rs 146 crore).   In case of the December bill of Rs 152 crore, MSEB purchased 179 million units at the per unit  tariff of Rs 5.21. It must be mentioned here that the MSEB has paid only Rs 50 crore and not paid  the balance Rs 102 crore in view of the non-payment of rebate of Rs 401 crore by the DPC. It must be mentioned here that the DPC's per unit tariff had skyrocketted at Rs 25 for the purchase of 39 million units in June last year which later soared at Rs 7.90 in September and Rs 8.90 in November last year. 
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THE HINDU BUSINESSLINE, Thursday, May 10, 2001
Dabhol project -- Enron: A rational renegotiation plan, S. Padmanabhan 

THE MAHARASHTRA Government recently announced its plans to renegotiate the Enron-promoted Dabhol power project. In this connection, Mr R. K. Pachouri, a committee member appointed for the renegotiation, outlined the priorities of the project in a television interview: 

> To reduce the interest rate for the project debt of DPC to be in line with the current market trends; 

>To achieve higher output and identify power purchasers outside Maharashtra; and 

> To separate the LNG project from the power project. 

A business daily on May 2 reported that Indian Oil plans to supply 1.2 million tonnes of naphtha to DPC at around the international price of $290 a tonne, including sales tax of 16-18 per cent per tonne. The report indicates that DPC   has requested the Maharashtra Government to waive the sales tax so that the reduction in the sales tax can be passed on to the consumers. 

Similar news reports on the project have started appearing in both the print and visual media. These indicate that the State Government and the DPC management seem to have come to an understanding on the broad principles of  renegotiation and both are in the process of educating the public about the  benefits these various measures would bring to the project. 

No doubt, these steps would bring down the tariff. But, then, the reduction will be due to concessions and subsidies offered by the State and the financialinstitutions by way of waiver of sales tax and reduction in interest rate. It appears that DPC will not offer any reduction or concession offered in the tariff or the rate of returns. 

Reduction in project debt: When the DPC loans were sanctioned, the prime lending rate was around 14 per cent and the power projects were offered loans at 3-3.5 per cent over the PLR. Now the PLR is around 12.5 per cent and the interest rates for the power sector will be 15-15.5 per cent. Effectively, there  would be a reduction of around 1.5-2 per cent in the interest rate. However, it must be noted that the same refinancing opportunity is good for every other Indian project. If the Centre permits refinancing for DPC, it should permit  projects in other States as well to be refinanced. If it does, that will be at a  considerable loss to the FIs such as the IDBI, the IFCI and the ICICI. 

To achieve higher output and identify power purchasers outside Maharashtra:
This is not a tariff-reduction exercise. In fact, this would help DPC improve its profits and cash flows under the present PPA. DPC has a single-point tariff whichconsists of a fixed and a variable charge. Higher the output the DPC recovers, higher the fixed charges and higher the profits. Thus, without any significant changes in the existing PPA, this step would help DPC, and put more States in  trouble. Perhaps, the renegotiating committee wants other States to sink as well  with Maharashtra. 

To separate the LNG project from the power project: This is a welcome step. While it would reduce the tariff for the power project, it would not remove the financial hurdles for the State and the Centre, which would continue to be paying more for the LNG project and guaranteeing the loans of the LNG project. DPC is now recovering all the cost of the LNG project from the Dabhol project, which will consume only around 2.5 million tonnes of LNG, whereas the capacity of the LNG project is being upgraded to five million tonnes. Therefore, the mere segregation of the LNG project without readjusting the PPA or delinking the sovereign guarantee obligations does not serve the purpose. It would help DPC and not the people of Maharashtra. 

To exempt sales tax on naphtha: This is like robbing Peter to pay Paul. As IOC suggested, if $290 is the price of naphtha per tonne, it works out to Rs 13,630 (one $ = Rs 47). Given that DPC gets paid fuel cost per kWh at 2,000 kcal (heat rate) and the naphtha has a heat value of 11,000 kcal, one tonne of the fuel will  give DPC fuel price for 5,500 kWh, that is at the rate of Rs 2.48 per kWh for  naphtha. If sales tax of 16 per cent is exempted from this price, the naphtha price drops to Rs 11,750 and the per kWh fuel price for DPC drops to Rs 2.14 from Rs 2.48. IOC expects to supply 1.2 million tonnes of naphtha for producing 6,600 million kWh and the sales tax exemption effect will be Rs 225 crore (0.34  per kWh). 

What is DPC`s contribution in this reduction? On the same account, every power project would seek to reduce the sales tax on the fuel they use. Remember that if the State sacrifices revenue in one area, it will recover the loss through some other taxes. When the current trend is to remove subsidies in all the sectors, the State and the renegotiating committee are opening up new subsidies to support DPC. An alternative The renegotiating committee should reduce the real tariffs from DPC`s fixed  costs, rather than making cosmetic changes in the taxation structure. The following steps are needed: 

To remove the corporate veil protecting the DPC project documents: The public at large are paying for the revenues of DPC and no government can have the right to keep a veil of secrecy on the documents. This will help the public at large and the experts in the industry understand the implications and suggest  viable alternatives. 

To change DPC tariff formula from a single-part to two-part tariff: The Centre has a two-part tariff policy which stipulates recovery of fixed cost under certain circumstances. The most critical issue of this policy is the recovery of all fixed costs at a capacity utilisation (PLF) at 75 per cent. DPC has adopted a single part tariff system where the fixed costs are paid for all capacities and, thus the return of DPC increases as the capacity utilisation rises. While this method may promote efficiency, DPC has tied the State in tight knots with this higher capacity utilisation and, will make very high levels of profits. Therefore, it is essential that the single-part tariff is renegotiated at lower levels or better still scrapped and two-part tariff adopted. 

Renegotiating the station heat rate: DPC has a station heat rate of 2000 kcal per kWh. Thus, for every unit of electricity it produces the fuel -- naphtha " it is reimbursed to DPC at the rate of 2,000 kcal per kWh. At $290 per tonne (Rs 13,630 at one $ = Rs 47) of IOC price this works out to Rs 2.48 per kWh. DPC  uses GE 9FA machines-gas turbines which burn naphtha at around 1,700 kcal per  kWh. In other words, DPC uses 1,700 kcal of naphtha and gets paid for 2,000 kcal. Thus, it spends Rs 2.11 per kWh on fuel but gets paid Rs 2.48 per kWh, making a profit of Rs 0.37 for every kWh. On 2,100 MW at 80 per cent capacity, this is a whopping Rs 550 crore. While there may be technical grounds to pay at a level higher than 1,700 kcal due to considerations of part load, there is no justification for paying at 2,000 kcal. In fact, the Centre and the CEA as well as other States have been successfully forcing all power producers to reduce from the 2,000 kcal levels while Maharashtra has not been able to do this. This is a  key issue in negotiations. 

To source naphtha only from domestic sources: 

India has a surplus of naphtha as of now and there is no need to import it. DPC should be forced to buy fuel only from domestic sources so that the profits remain with domestic companies, and not allow DPC to make higher profits of fuel handling. 

What if renegotiation fails? 

DPC will not agree to changes in the PPA as it would feel that it is a signed and sealed document. Maharashtra may look at cosmetic changes, and may make sacrifices to reduce the tariff. But in the long run, the contract will run aground because of the inability of the State Government to use and pay for the power produced by DPC. Given the background of Enron worldwide, it would press ahead with its perceived advantages -- legal and contractual. It is better for the State to ready a back-up action plan. The following line of action is suggested:

* To terminate the PPA and other project contracts and give notice to Enron to wind up operations; 

* To inform the lenders, the beneficiaries of the sovereign guarantee, that the Centre will pay up its commitments. Perhaps, this may involve setting up an escrow account and placing sufficient debt reserve funds that the lenders may request, pending final payments; 

* To quickly move towards an arbitration process primarily to determine the amounts payable to Enron towards contract termination; 

* To initiate an international competitive tendering process, with the permission of the lenders, to sell the power project and the LNG terminal as independent projects -- the process should also permit bids from Indian companies; 

* To make a serious effort to complete the bid finalisation and selection of the successful bidder in two-three months; 

* The bidding process should have two parameters for the bidders to quote: 

a) tariff payable to the bidder for the next 20 years (in the case of LNG terminal  -- price of gas on long term basis); 

b) price for the assets; 

c) The bid would attract several international power players including American companies for the power and the LNG projects and the bids offered will be attractive. Also Indian companies or consortia would line up for the bid; 

d) Simultaneous with this exercise, as soon as determination of amounts payable to Enron becomes clear, to place the funds so determined and accepted with an escrow agent acceptable to Enron; 

e) To set up an investigating team to go into the approval process to determine whether there has been any corrupt practice in the process of granting approvals. There is a Supreme Court case (filed by CITU) pending decision on charges of corruption. The investigating team to focus, with the cooperation of the US Government, on the issues relating to Foreign Corrupt Practices Act (FCPA) of the US. Violation of the FCPA by any American corporate is a serious issue attracting criminal prosecution. There can be a time bound investigation; 

f) To proceed with the prosecution of all people concerned if found guilty " if Enron is found guilty the compensations may not be payable and the US law agencies will step in to prosecute Enron; 

j) If Enron is not found guilty, to pay the monies due to it by releasing the amounts in escrow. By this time the asset takeover and the debt repayment issues would have been resolved; 

k) Conservatively, it is believed that there would be an ultimate gap of $1,000 million (Rs 4,700 crore at one $ = Rs 47) after the assets are sold and debts transferred to the new owners. It is suggested that the State float a public debt issue for paying this to Enron and levy an `Enron Cess' to recover the loss and  repay the debt issue over the next 15-20 years. At a return of 10 per cent per annum on Rs 4,700 crore over the next 15 years and assuming that 100 per cent of the loss is recovered from the 2,100 MW project and assuming an 80 per cent PLF, the `Enron Cess' per kWh of energy produced will be Rs 0.42. 

But will the Central and State governments have the political will to force this issue? 

 (The author is a power-finance consultant.) 
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THE HINDU BUSINESSLINE, Thursday, May 10, 2001
Centre to back Maharashtra on tariff talks with Enron

THE Centre has conveyed that it would support the Maharashtra Government on the contentious issue of tariff renegotiations with Enron for power purchase from Dabhol Power Company (DPC). Talking to newspersons here on Wednesday, the Union Minister for Power, Mr Suresh Prabhu, said the Centre had already appointed the Solicitor-General of India as its nominee in the panel set up by the Maharashtra State Government headed by Mr Madhav Godbole to renegotiate the terms of the power purchase agreement. Enron's executives were due to meet the panel on May 11 in this  connection, he added. 

Replying to questions on Enron's proposals to exit from DPC, he said that neither the Maharashtra Government nor Enron had conveyed their desire to exit from DPC. ``We will support the State Government,'' he emphasised. He said that the Centre was not in a position to intervene in the matter since it was for Enron to take a decision on the issue. However, the Centre's counter guarantee liabilities in DPC would be confined to the extent of the State Government's payment defaults. Earlier speaking at the inauguration of CII institute of quality, he said that the Centre's new focus was on conservation of power rather than adding fresh capacity. 

The Karnataka Chief Minister, Mr S.M. Krishna, who was also present, said that WTO's impact on the agriculture sector needed to be addressed and said that the Prime Minister should call a meeting of the Chief Ministers to discuss the outcome of the WTO and future steps that needed to be taken. He added that the Congress had initiated reforms -- liberalisation and globalisation -- and there was no intention of retreating on them. However, it was necessary to have a mid-term appraisal on them. 

Dr K. Kasturirangan, Chairman, Indian Space Research Organisation said,``Behind every successful company is a quality culture, and that in the  unforgiving environment of space strict quality awareness was very essential and any violation would mean that we have to pay heavily in space.'' He added that space had given to the world configuration, control and management and in the Rs 1,000 crore GSLV programme, over 10,000 computer simulations had been done in th last six-seven years, before it was considered flight worthy. Almost 1000 major reviews were done and input collected not only from senior engineers, but from youngsters too, ``as their minds are fresh. We worked towards transparency and fairly and frankly exchanged ideas. Around half a million a A-4 size papers documentation was done on the programme,'' he added.