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 Joseph 
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THE ECONOMIC TIMES
Monday, June 04, 2001, http://www.economictimes.com/today/04edit09.htm   
Duellers to the end 
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/financ11.asp?Menu=5
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=3
Dabhol lenders set to present a united front at Singapore meet , Renni Abraham 
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/economy3.asp?Menu=3
Bechtel stays, DPC lenders transfer funds to phase II 
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BUSINESS STANDARD
Monday, June 04, 2001, http://www.business-standard.com/today/opinion5.asp?menu=8
 'Expert knowledge' and Dabhol
Some way will have to be found to get Enron worried about the legal enforceability 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=8
The Centre finally sees the light
If the Centre had intervened earlier, the Dabhol crisis not have reached its 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 & James Mathew 
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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.html
DPC misdeclared availability: MSEB , Sanjay Jog
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THE FINANCIAL EXPRESS
Monday, June 04, 2001, http://www.financialexpress.com/fe20010604/news4.html
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 
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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 
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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 
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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 
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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 
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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 
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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.htm
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/stories/14035604.htm
DPC power: Govt to pursue sales to States 
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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 Joseph 

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 local lenders have already mooted the option of converting the 16 per cent dollar return on equity given to Enron into a rupee-denominated return, top sources told ET. 

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 terminal from the $2.9 billion project to bring down thefixed cost and in the process the power tariff. Understandably, a rupee-denominated return (as opposed to a dollar return allowed in the '91 power policy) has not found favour with Enron. But, the lenders in consent with the state and Central governments are expected to raise the issue at the negotiating table. And, sections think that these negotiations could emerge as a benchmark in correcting the Narasimha Raogovernment's liberalised power policywhich was heavily loaded in favour of foreign investors. The exclusion of the LNG terminal from 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 viability of the project, thanks to the robust and cost-effective LNG facilities that Petronet is putting up in Dahej. 

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 payment guarantees which the local lenders had offered against their exposures to Dabhol. The main overseas institutions are Miti, Japanese Exim, US Exim and OND of Belgium. Some of them have the accelerated invocation clause in their contracts.
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THE ECONOMIC TIMES, Monday, June 04, 2001
Duellers to the end 
                                         
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 financial 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 company's failure to generate optimum power within the stipulated period. But DPC 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. Also, it is drastic to treat the PPA as not being valid while a solution is being sought. The legalities will matter only later, when agreement details are redrawn afresh. 

It will be futile to try sale of power to third parties, or even to get other states to evacuate the entire 740 MW  (Phase-I) output. Both will be hard 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 DPC 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 price that does not lead to loss, even if profits are lower. FIIs could indeed play a role in this matter for their own good, and for DPC's. C R BHATTACHARJEE, 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 pushing for completion of phase II without time and cost over-runs. The firm will make a formal presentation to the global lenders of the Dabhol Power Corporation in Singapore on Monday on the technical aspects of the plant, with White & Case, the New York-based legal firm dealing with the legal implications of mothballing the project.The global lenders to the project are meeting in Singapore for two days in a last-ditch attempt to keep the project afloat. The meetings will discuss the finer aspects of "sacrifices" to be made 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 willing to cut the interest costs, stretch the maturity period of loans and raise the moratorium on repayment. Cash-strapped Maharashtra State Electricity Board is likely to be allowed to issue bonds to DPC, thereby deferring payments."The feasibility of adopting the securitisation route will also be explored to bail out MSEB," a source said. 
Both the Indian and global lenders are pitching for speedy completion of the project. With both the phases operational, DPC can avoid the embarrassment of delay in generating power "cold-start," "Going by the terms of the power purchase agreement, both the plants cannot be shut at the same time," said 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 repayment by one year. The loan amount will go up to the extent of the installment slated to be cleared in one year. "The foreign lenders are not adverse to supporting the Indian lenders on the issue of project completion. Collectively, they will try to convince DPC against putting phase II in cold storage," said a source. The Indian government is likely to approach the US Exim and J-Exim to persuade them against invoking the accelerable guarantee clause, 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 represented by its Singapore office CEO at the meeting. On the eve of his departure, 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 from phase II." The state electricity board is seeking intervention of the Centre in the issue. 
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BUSINESS STANDARD, Monday, June 04, 2001
Dabhol lenders set to present a united front at Singapore meet , Renni Abraham 
Domestic lenders attending the meeting of international financial institutions 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 domestic lenders combine met with senior officials in the Maharashtra State Electricity Board (MSEB) as also the state government seeking a cessation in further notices and counter-notices being issued so that the DPC imbroglio could be resolved amicably. 
Confirming this, a senior MSEB official told Business Standard, "They (domestic lenders IDBI, ICICI, IFCI, SBI and Canara Bank) want MSEB to stop litigation and create an environment for a meaningful discussion with DPC so that 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 would 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 resolve the imbroglio," the official said. Earlier in the week, executive director 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 united front so as to work out a solution to the whole dispute." 
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BUSINESS STANDARD, Monday, June 04, 2001
Bechtel stays, DPC lenders transfer funds to phase II 
Bechtel, the engineering, procurement and construction (EPC) contractor which 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 first week of June as the DPC was not in a position to stick to its payment schedule 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 work."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," said a source. It may be recalled that the phase I lenders overwhelmedly supported the issuance the preliminary termination notice (PTN) to MSEB. But when it came to the transfer of funds from phase I to phase II to clear Bechtel's dues, lenders of both phases supported the motion. 
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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 enforceability of its agreements, writes A V Rajwade
It has now been a few weeks since the appointment of a committee under Mr Godbole to renegotiate the tariffs payable to the Dabhol Power Company Ltd by Maharashtra State Electricity Board (MSEB). There has been hardly any tangible progress in the negotiations. Legal notices issued by either side have been flying around but the problem remains intractable. At present neither DPC, nor its parent Enron, has any incentive whatsoever to hold serious negotiations. 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 worried 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. 
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 Company 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 hold of a copy of the judgement in the case. This has limitations because the 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 points of law, in particular the applicability of various legislations in the United States to the case. On most of these points the judge has rejected the contentions of Procter & Gamble, and granted summary judgement in favour of Bankers Trust. However, the judge goes on to argue that: "This does not mean, however, that there are no duties and obligations in their swaps transactions. Plaintiff alleges that in the negotiation of the two swaps and in their execution, defendants failed to disclose vital information and made material misrepresentations to it? 
"New York case law establishes an implied contractual duty to disclose in business negotiations. Such a duty may arise where 1) a party has superior knowledge of certain information; 2) that information is not readily available to the other party; and 3) the first party knows that the second party is acting on the basis of mistaken knowledge? 
"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 between the parties, this duty to disclose can arise independently because of superior knowledge?" "The duty to deal fairly and in good faith requires affirmative 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 in their performance, and also a duty to deal fairly and in good faith during the performance of the swap transactions?" 
The judge has cited a number of court cases in support of these points which seem to be based more on case law and common law principles than on any specific legislation. As such, one would imagine that the enunciated principles 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 cent per annum which seems to have been used to calculate the present value of the fixed cost payable by MSEB to DPC. The discount rate is an inferred one 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 reason could be that, for what are effectively dollar payments, a 17 per cent discount rate is absurd and it was obviously better not to bring it on record. Can its non-disclosure in the negotiation or in the agreement come under the various points made in the P&G vs BTC case? 
Again, an old Business Week report on the case quotes from the P&G complaint that it "was bound by a pricing model which (Bankers Trust) did not disclose to the very party that it asserted was bound by such model...". An exact parallel to the MSEB/DPC dispute? 
A couple of other points occur to me. The Godbole Committee Report thanks IDFC 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 agreement, on the following assumptions: 
?	No dividend payment and current tax rates; 
?	Dollar appreciation against the rupee of 6 per cent per annum, which is the actual rate of the last five years. 
?	Interest on rupee surplus funds at 11 per cent per cent, and domestic inflation, say, 8 per cent per annum 
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. How 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 followed: 
"The competitive bid requires expert knowledge and experience for evaluating the competitive bids, which at present is still not sufficiently up to the mark. For evaluation of such specialised projects, it is also necessary to have knowledge of risk identification and allocation, which is not sufficiently 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 its current proportions, says P Vaidyanathan Iyer
The Indian government has clearly lost the public relations battle in the Enron controversy. A flashback to the turn of events in the last week shows why. After months of studied indifference, the Centre suddenly started offering concessions that suggest that the $ 3 billion power project may not shut shop after all. A few months ago, when the crisis started, the Centre steadfastly 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, the Centre insisted it couldn't do anything about it. "It is a dispute between DPC and the Maharashtra government and needs to be sorted out between them," 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 the power needed for the country, suggesting that the private power producers were redundant. 
But all through the pre-conciliation negotiations that followed in London and in India, the Centre did little to intervene. It was only towards the end of May, as things started looking grimmer and grimmer that the Centre abruptly changed its stance. By then, Enron, Dabhol's US parent, had started signalling an exit by issuing a pre-termination notice, hiring Arthur Andersen to value its business worth in India and Jones Lang La Salle to value its real estate investments. Then on May 29, the situation grew worse with the Maharashtra Electricity Regulatory Commission issuing an injunction restraining 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. 
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 ground situation in Dabhol. The same day, Prabhu met finance minister Yashwant Sinha the same day - but apparently to discuss "power sector reforms". The Centre then got into the act. Just when Enron had made its mind - in line with its global strategy - to pull out of the generation businesses and focus on trading, the Centre displayed a remarkable keenness to stop the corporation from calling it quits. The government's representative on the negotiating 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-examined the project and made recommendation to correct its many anomalies, also said he was looking at negotiating a new deal with DPC. 
DPC reciprocated to these placatpry noises. It now said it could cut cost by about 10 per cent. It was Centre's turn to "sacrifice" now. The power minister asked the Central Electricity Authority to initiate talks with power-deficient states and check on the quantity of power they could lift from DPC and the cost at which they could absorb it. With this decision, the Centre, in effect, has okayed third party sales, in line with the Godbole panel recommendations. More "sacrifices" followed from the Indian banks and financial institutions. IDBI, the lead Indian FI which has an exposure to the tune of Rs 2,158 crore said that it was ready to cut the cost of loans (the average being 16.5 per cent) by another two percentage points. All this for Enron to stay in the 2,144 MW project. 
It is easy to see why the Centre is bending over backwards. DPC's fate would, in a sense, determine the future of foreign direct investment (FDI) in India. Reforms have progressed too far for any government to want to turn FDI-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 intervened earlier, not only would the crisis not have reached its current proportions, the government could have saved itself the embarrassment of going back on its own words too.
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THE ECONOMIC TIMES, Monday, June 04, 2001 
FIs not to loan IPPs till Enron issue is resolved, Shubham Mukherjee & James Mathew 
 THE Enron imbroglio has pulled the plug on the future of all major power projects, with FIs taking a stand that until the issue gets sorted out, they will not go in for any further disbursements to independent power producers for which loans have been sanctioned. 
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 sanctioned debt. The development comes in the wake of mounting pressure on FIs to reduce interest rates for the Dabhol Power Project as part of a compromise package for ending the current impasse. "We have raised funds at a particular cost to lend the same to IPPs keeping a thin spread for ourselves. Now, if mid-way the interest rates are to be brought down, this would create a serious mismatch. In view of the Dabhol experience, we are now going extremely cautious on disbursing funds to projects for which sanctions have already been approved," top FI officials said. Significantly, the latest move of the FIs follows the earlier decision of FIs such as IFCI and IDBI to stop funding 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 developed by Reliance and Southern Energy and the Dakshin Bharat Power project being developed by CMS and Unocal. 
Though some of these projects are in advanced stages of operation, the decision of the FIs would be a major blow on them. A section of the industry has, 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 instance, 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 hurry, a senior IFCI official said. FIs have also not taken kindly to the pressure being mounted on them for reducing interest rates for the loan disbursed to the Dabhol power project to save the project. Other FIs also feel that the Enron issue is a cause of great concern to the financing community and there is a lot of uncertainty in the power sector. Given the Enron experience, it would be a tough decision for FIs to pick up projects for funding in the future, the industry watchers said. 
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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 Centre is working on a new package which will be acceptable to all the affected parties. A V Gokak, the centre's representative in the negotiating committee, met the finance minister on Friday to appraise him of the solutions that are being explored to get over the payment crisis. "A solution acceptable to all is being contemplated. Things are moving in the right direction and the government is playing a constructive role in resolving the issue," Gokak said. 
According to him, none of the parties to the dispute are in favour of closure 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 discuss the Enron project. The power minister has already reiterated that the government 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 impasse, Gokak said " that the delay is in nobody's interest, but there are no readymade solutions either." The negotiating committee, headed by Madhav Godbole, has held two rounds of negotiations. The last round held earlier this week has been termed "positive" by both DPC and MSEB. 
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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 power 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 independent power producers sell power directly to consumers. 
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 are allowed to purchase from IPPs. This has thrown all private power generation 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 Hirma project as well as some smaller projects, are also in doubt. Today, all SEBs 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. 
The GERC's suggestion, if implemented by the Gujarat government - which owns the SEB - will let IPPs become viable again. If private power producers can sell power to consumers who pay regularly, these generation projects will become viable. Paying consumers will be spared the trouble of frequent power cuts. If quality power supply is assured, investors can save themselves the costs of setting up captive power plants. SEBs will argue that IPPs will take away the best paying customers and with them, the most lucrative revenues. They have only themselves to blame for that. If SEBs run into serious financial trouble with IPPs selling directly to consumers, then an impending crisis might provoke real reforms. Other states should follow GERC's example.
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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 the slow progress of the government in implementing privatisation and addressing the weakness of public finances, the agency said in a release. Continued fiscal profligacy and back-paddling on privatisation and other structural reforms could adversely affect sovereign credit worthiness, prompting a more 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 Indian 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 lenders 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 compulsions to continue its legal battle in view of various legal notices served by the DPC. However, we are not opposed to renegotiations and will participate in the process without prejudice," sources added.The board made its stand clear at its meeting with IFI representatives held on Saturday. MSEB chairman Vinay Bansal, accounts member A Krishna Rao and state principal secretary (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 phase-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 efforts 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 explored in view of MSEB's inability to absorb the phase-II power. The IFIs, which will participate at the lenders meeting at Singapore beginning from June 5, are believed to have explained the repercussions if Enron ultimately decided to pull out at this crucial stage. "Terminating the PPA will have serious consequences with regard to the investments made by the IFIs in the project," 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 occurred on January 28, 2001. "Although we stick to our stand that DPC has defaulted and is entitled to pay a rebate of Rs 401 crore, DPC avoided its payment under the garb that the imposition of rebate was not as per the conventions 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 notices 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 termination notice on May 19 and a notice to reactivate escrow account. "We were left with limited choice and thus issued an avoidance notice on May 23 and filed a petition at the Maharashtra Electricity Regulatory Commission on May 25," the sources added. 
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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 availability of power immediately after the commissioning of Dabhol phase-I in May and July 1999, according to sources from the Maharashtra State Electricity Board (MSEB) .The board had also planned to serve a total rebate of Rs 300 crore for these defaults. However, it ultimately pardoned the DPC and verbally 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 and DPC officials and clarification provided by the latter, the rebate was not charged. "Had MSEB slapped rebate of around Rs 150 crore for May default misdeclaration, DPC was obliged to compute it in its billing statement thereafter as MSEB is entitled to claim rebate only at the end of four months block of January, May and September," sources added. 
MSEB had argued that as per the power availability curve incorporated by the DPC in the power purchase agreement (PPA), it was entitled to provide the instructed power by MSEB within three hours. However, during these occasions, the DPC, though admitted that it had defaulted on the availability of power, later clarified that the Dabhol plant machines were new.The DPC had also 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 base 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 Capacity is calculated at ten times the difference between the Declared Baseload Capacity (DBC) and the Active Power produced subtracted from the total active power generation during that availability period or hour."This leads to a rebate (under Clause 10), which is meant to adjust capacity payments made 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 season (October to January) and as per Clause 10.2(c) in May for the whole of the peak season. 
The board is entitled to a rebate under these provisions. The DPC is obliged 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 season (June to September).In addition to this, MSEB had said that the DPC should 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 incurred 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, which suspended the power purchase since May 29, 2001 after serving an avoidance notice to DPC, has purchased 163 million units at a per unit tariff of around 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 million 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 purchase 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 the matter has been taken up at the Maharashtra Electricity Regulatory Commission (MERC)," sources said. 
According to MSEB, it was managing the show until May 2000 when the per unit cost was ranging between Rs 3.78 and Rs 3.49, except Rs 4.85 (226.88 million 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 2000. Majority of these purchases were below 90 per cent availability. "However, the per unit tariff suddenly skyrocketted to the level of Rs 25.51 in June 2000 following the hike in the naphtha prices in the international markets and thereafter it became an unmanageable show," MSEB sources said.In July 2000, MSEB's outgo towards per unit tariff was Rs 7.81 (179.47 million units) which was reduced to Rs 6.81 (231.45 million units) in August 2000, and to Rs 5.10 (257.75 million units) in September 2000. Curiously, the per unit 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 January 2001. The per unit tariff again fell at Rs 14.74 (75.04 million units) in February, Rs 9.34 (156.82 million units) in March and Rs 10 (128.46 million 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 
Too many negative voices on the economy 
The plot indeed thickens on India's economic front. A pessimistic outlook for the second decade of its reforms by a leading international magazine, The 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 resulted in faster growth and improved the balance of payments, the second decade 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 Power Company versus Maharashtra's electricity board - which is sending out signals that India is not serious about power sector reform. The government nevertheless 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 investment 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. 
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 official 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 high; resources are crowded out for private investment and a stop-go growth cycle has been triggered. Last fiscal, the centre's fiscal deficit was limited to 5.2 per cent of GDP through cuts in spending. This is bad news for raising growth, as plan capital expenditures were slashed. Additional resources will be available for such expenditures only if revenue deficits are controlled - but this is not happening. This implies recourse to more borrowings, pushing the fisc deeper into an internal debt trap. It is time for serious 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 

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 Maharashtra State Electricity Board (MSEB) and Enron-promoted Dabhol Power Company (DPC). The FIs team is led by Industrial Development Bank of India (IDBI) executive director R.S. Agarwal, who is also a DPC board member. The group also comprises representatives of State Bank of India and ICICI. 
The domestic lenders would update their foreign counterparts about the current imbroglio and legal tangles, including MSEB's petition filed in Maharashtra Electricity Regulatory Commission (MERC) and the board's simultaneous decision to stop drawing DPC power from May 29 noon. "One thing worrying the Indian FIs is the foreign lenders' probable decision to encash their securities, 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 will widen on this issue. The former are desperately trying to save their guarantees from being encashed," he added. 
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 exposure was Rs 2,158 crore, including guarantees worth Rs 1,528 crore and rupee loans of 630 crore, he had added. 
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 before embarking on the visit to Singapore. "MSEB has firmly told us that it will be able to draw power from DPC's first phase only at a renegotiated lesser price and it wanted the Centre to take over phase II," FI sources said. 
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 held in London, the sources added. Prime Minister Atal Bihari Vajpayee is understood to have asked Union power minister Suresh Prabhu in a meeting between 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 power 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 possible. The success of central initiative would also hinge on the stance taken by the Maharashtra government and MSEB on the issue, the sources had added. (PTI) 
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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 

In another counter attack on the Dabhol Power Company (DPC), the Maharashtra State Electricity Board (MSEB) has demanded a refund of Rs 1,200 crore towards undue capacity charges paid to the company till April 2001. This is in addition to the penalty of Rs 760 crore slapped on Enron for misdeclaration of capacity. 
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. This 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 Rs 3,499 crore, the board claims that Rs 2,087 crore is paid as capacity charges and since the company defaulted on capacity Rs 1,200 crore should be refunded to the board. However, the company has not responded to this demand since the penalty dispute has been referred to arbitration. As per the power purchase agreement, if the Dabhol plant fails to generate its maximum capacity 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 instances. 
Meanwhile, representatives of all domestic financial institutions met Vinay Bansal, chairman, MSEB on Saturday to clarify on the stance taken by the board.``The lenders wanted to know MSEB's stance on the entire controversy and whether we are willing to participate in renegotiations. All issues, especially 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 peeved on the way MSEB advised the Centre not to acknowledge the sovereign guarantee. 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 

A new package acceptable to all is being evolved to resolve the seven-month old wrangle between Enron-promoted Dabhol Power Company and Maharashtra State Electricity Board (MSEB) over the issue of cost of power and payment of bills, A.V. Gokak, Centre's representative in Maharashtra's negotiation committee said on Friday. "Solution acceptable to all is being contemplated. Things are moving in the right direction and the government is serious to resolve the crisis," Gokak said after a meeting with finance minister Yashwant Sinha here. Gokak said that none of the parties to the dispute were in favour of closure of the $3 billion project. 
Earlier, Centre had asked Central Electricity Authority (CEA) to explore possibility of selling DPC power to deficient states. But power minister Suresh Prabhu had ruled out possibility of National Thermal Power Corporation (NTPC) lifting DPC power. Prabhu had stated that the government would make all efforts to settle the matter in consultation with the stake holders. Asked 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 negotiating 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. 
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 this moment. There are so many ramifications as number of technical aspects have to be taken into consideration." "There are so many alternatives and angles. We are looking at all with an open mind and there are positive developments," he said, but declined to give any further details. 
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 acceptable to all concerned parties, which meant evolving a package. The seven-month long wrangling between MSEB and DPC has seen the latter serving a preliminary termination notice while the former resorting to cancelling the power purchase contract and refusing to buy any further electricity from the 740 mw phase-I. 1,444 mw phase-II was to be commissioned this month but is unlikley to see the light of the day following MSEB's decision not to purchase any more power from DPC till the issue of cost of power was resolved. 
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 annoucement to this effect. (PTI) 
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THE TIMES OF INDIA, Saturday, 2 June 2001
MSEB opposes DPC arbitration in London , By Vidyadhar Date 

The arbitration in London sought by Dabhol Power Company (DPC) regarding its dispute with the Maharashtra State Electricity Board (MSEB) cannot be recognised by any law in India, the MSEB has said in its petition to the Maharashtra Electricity Regulatory Commission (MERC). Opposing the arbitration move, MSEB said it would incur a huge cost to the board and would be a futile exercise since it would not be enforceable in India. 
DPC has given notice of arbitration under clause 20 3 a of the power purchase 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 PPA, the board said. MSEB has also opposed the move of Dabhol to invoke the political force majeure clause. DPC had alleged that the government of Maharashtra, the central government and MSEB had sought to frustrate the corporation's obligations under the PPA. The board urged the commission to order DPC to pay Rs 458 crore of damages due to the shortfall in supply because DPC 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. 
`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 workers' federation and All India federation of electricity employees. He described 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 thoroughly unjustified, he said. 
Bardhan called for scrapping the PPA with Enron. If small states like Pakistan 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 California and the region's governor Gary Davis had threatened to prosecute the power 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 rescue 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 without taking into account the interests of consumers and power workers and engineers,'' Bardhan said.
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THE TIMES OF INDIA, Sunday, 3 June, 2001
PM for central initiative to salvage DPC
 
Prime Minister Atal Bihari Vajpayee is understood to have asked power minister 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 problems seven months ago. 
The meeting assumes importance in the wake of Maharashtra State Electricity Board (MSEB) refusing to buy power and challenging the validity of the power purchase agreement with DPC which in turn stopped commercial electricity generation. While Prabhu could not be contacted for comments, government sources said that sale of power to other states had emerged as the only option 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 reforms 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 during the meeting, sources said. (PTI) 
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THE TIMES OF INDIA, Sunday, 3 June 2001
SWAMINOMICS / Swaminathan S Anklesaria Aiyar
The many blunders of Enron 
The Dabhol saga goes on and on. Most commentators think that Enron took Maharashtra officials for a ride. This is partly true. But it is equally true that Dabhol is a bad deal for Enron. 
Enron's first blunder was to see liquefied natural gas as the fuel of the future, clean and non-polluting. In the early 1990s, many power plants in Japan and Korea came up using LNG. Coal and fuel oil were considered dirty fuels 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 emphasis on LNG was an error. Japanese households now pay a whopping Rs 10 per unit for power based on LNG. It is simply not the fuel of the future. 
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 deep into the red, with huge line losses and unsustainable subsidies. Few people remember that Enron originally did not ask for a Central counter-guarantee, so confident was it of MSEB's solvency. Other shrewder foreign investors 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. 
The third blunder--arguably the worst--was to jump the gun on Phase II of the project. New Delhi gave no counter-guarantee for Phase II, so Enron should have made doubly sure that this was viable. The Central Electricity Authority had said that MSEB should not proceed with the 1,400 MW of Phase II before making sure there was enough demand for so much power. The Godbole Committee has castigated MSEB for going ahead nevertheless. Enron needs to castigate its Mumbai officials no less. The 695 MW of Phase I could conceivably have been absorbed with a lag, but not the 1,400 MW of Phase II. 
The fourth blunder was the notion that clever negotiations could ensure a high 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--then the supposedly high return will turn out to be illusory. Counter-guarantees from sovereign entities may ease the commercial risk, but cannot eliminate political risks, as Enron has discovered. Supposedly clever foreign investors who hoped to make money out of the Hubco power project in Pakistan found to their dismay that the government entity buying the power could not pay, and ultimately had to renegotiate the deal with a much lower margin. The Paithon power project in Indonesia promised high returns to foreign investors, but Indonesia's currency collapse after 1997 made the dollar-based tariff totally uneconomic, so the project is a write-off. The lesson for investors is clear: When striving for a high return, keep in mind the buyer's capacity and willingness to pay. 
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 Rs 1,500 crore. NTPC nevertheless made good money from it because of the cost-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 likely). So, before getting a single dollar as dividend, Dabhol's shareholders have already lost $ 400 million, almost half the company's equity. So much for supposedly super- profits. 
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 super-profitable, MSEB would have money pouring out of its ears. In fact there are no returns, only cost overruns. For want of cash, MSEB failed to take up its equity share in Phase II, something it would have hardly done if the project was super-profitable. 
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, and the cost of unutilised capacity is very high; (c) the project was financed when interest rates were very high in India (IDBI lent money at 21 per cent). Renegotiating a lower return on equity will offset these factors only modestly. 
This looks a bad deal from Maharashtra's view today: That is well known. But it also looks a bad deal from Enron's viewpoint, and this is less well known. 
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-intensive projects in oil and power (like Dabhol) constituted a poor use of shareholders' money. He ordered the sale of Enron's interests in oil wherever feasible, including in India. He switched from the production of energy to trading in newly deregulated sectors like electricity in the US, a switch that has greatly boosted profitability. 
Indians may believe that the Dabhol contract gave super-profits to Enron. But from the viewpoint of Enron's shareholders, Dabhol was a multi-faceted error. It was an error to invest so much in LNG or power, an error to underplay 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-profits could be ensured by counter-guarantees and escrow accounts. Financial gurus the world over have applauded Enron for increasing its profitability by getting out of energy production and into energy trading. Only in India do people still believe that Enron can make a lot of money by producing energy.
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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 compulsions to continue its legal battle in view of various legal notices served by the DPC. However, we are not opposed to the renegotiations and we will participate in the process without prejudice," sources added. MSEB made its stand clear at its meeting with IFI representatives held in the late evening on June 2. MSEB chairman Vinay Bansal, accounts member A Krishna Rao and 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 the despatch of Dabhol phase-II power. MSEB expressed its inability to purchase Dabhol phase-II power at the existing tariff and said that the centre should make all out efforts 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 explored in view of MSEB's inability 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 stage.
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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 biggest and the best in the business. The project can serve the people of Maharashtra and India for the next 20 years at least. 
Is a settlement possible on commercial lines? From Enron's point of view, this will mean redrawing the contracts and it would be at a great disadvantage while re-negotiating the deal. For Maharashtra, it will mean reduction in its commitment. 
For Enron it will a major climb down on the following issues: 
a) At one $=Rs 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 are to be segregated as independent projects. Assuming a benchmark cost of Rs 3.50 crore per MW for naphtha projects, the power project segment will have to be at Rs 7,644.00 crore and the LNG plant Rs 5,650 crore. Can Enron justify such a high cost for the LNG terminal (5 million tonnes)? A comparison will surely be made between Enron and other LNG projects such as those at Dahej, Mumbai, and Cochin. 
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 the MSEB uses 90 per cent of the 2,184 MW. Assuming a naphtha price of $290 per 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 variable component (fuel cost) per unit of the power works out to Rs 2.32 and the 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 $=Rs 47) what ever the utilisation level. When the power project cost is reduced to Rs 7,644 crore, there has to be a corresponding reduction in this fixed cost also. Can Enron afford to reduce this? 
c) Enron's LNG terminal has a 5 million tonne capacity whereas the Dabhol power 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 the 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 supplier to Dabhol power which position may not allow Enron to recover any guaranteed fixed cost for its LNG segment. It will have to assume market risks. With 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 on a weak wicket and given its global plans of getting out of asset-based businesses, 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. 
For Maharashtra it is a Hobson's choice on the following issues: 
a) The Government cannot use so much power but having agreed to grant deemed generation at 90 per cent capacity it cannot at this stage ask for a lower capacity; at best it can ask for segregation of the project costs. 
b) Naphtha is not an economic fuel at this time. However, LNG will also prove to be uneconomic if the oil prices stay at current levels. LNG prices are around $3.50 per million BTU at a base crude price of $18 and an additional 13 cents for every dollar increase in crude prices. Thus, at $28 to a barrel, the LNG prices will be $4.80 per million BTU which translates to a fuel cost of Rs 1.79 per kWh assuming a 2,000 kcal heat rate per kWh and one $=Rs 47. In addition the fixed charges will become payable. 
c) The State Government cannot justify extending the federal guarantee to the LNG project -- at least on that portion which is not useful to Dabhol power. Obviously, this get the lenders up in arms as they would not like to lose their security. Credibility will be at stake. 
Any re-negotiation will have to result in a significant benefit for the Maharashtra 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 Centre. 
Very soon, therefore, there will be a stalled project, a cancelled PPA, arbitration notices and the invocation of the Central guarantee and a lot of international media commentary from leading lenders and, of course, a set of harassed domestic financial institutions whose share prices will take a nosedive in the medium run because of higher NPA provisioning. The Centre will have to intervene to salvage its credibility arising out of the federal guarantee given to Enron and its lenders. 
So where do we go? 
A lot of people have said that there is no life after Enron envisaging a flight 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 day of reckoning -- the day Enron cancels the PPA and invokes the federal guarantee. 
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: 
a) Move quickly to respond to any public criticism -- that the Centre has reneged on its commitments. Perhaps, the Government is already moving in this direction by organising industry meets and seminars in India and abroad.
b) Assure the international lenders that they are safe and that their liabilities 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 respected. 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 and this is no across-the-board phenomenon. 
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. 
d) A clear and sensible approach in dealing with the assets -- the power project 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. 
e) The Centre must move fast to implement power sector reforms. We have several priorities -- primary is providing low-cost power. Experience has taught us that such fuels as naphtha, or natural gas are extremely price sensitive in a country that imports petroleum products and, hence, power plants based these fuels cannot be the mainstay. Over the last nine years we have not been able to implement even one power project based on imported coal for fear of the fluctuating currency rates. 
The real answer is staring at us -- developing pithead coal-fired power plants. This means the projects can come up in the coal-belts of Bihar, Jharkand, Chhattisgarh, MP and West Bengal. The creditworthiness of these States is not clear and, therefore, it may be necessary to get Power Trading Corporation to become a proactive nodal agency for buying and distributing power and perhaps also act as a security provider. 
This also means that the Centre will have to hold the hands of the investors for some more time in the process of developing low-cost power projects. 
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 sure to be politicised. While this cannot be avoided, we need to move ahead however 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 responsibility to ensure an energised India.
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THE HINDU BUSINESSLINE, Sunday 3 June, 2001
DPC power: Govt to pursue sales to States 

THE Government is actively pursuing the option of identifying power-deficit States in its attempt to find buyers for the Dabhol Power Company power. This follows a meeting held today between the Prime Minister, Mr A.B. Vajpayee, 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 entrusting this task to the Power Trading Corporation, the Government has signaled that it would play the role of only a facilitator and not involve itself financially in the power sale transactions. Officials point out that Central mediation has provided a meeting point for the stakeholders -- DPC and the State Government -- to arrive at a mutually-acceptable solution.