BUSINESS STANDARD, Monday, November 19, 2001
A survival kit for Tata Power, BSES, S Ravindran Mumbai 
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THE DECCAN CHRONICLE, Monday, November 19, 2001
HC restrains Centre from encashing guarantees 

Similar story also appeared in the following publications:

THE HINDUSTAN TIMES, Monday, November 19, 2001
Govt restrained from encashing guarantees against Dabhol Power

THE DECCAN HERALD, Monday, November 19, 2001
HC disallows encashing guarantees

THE INDIAN EXPRESS,Monday, November 19, 2001
Govt told not to encash DPC cover
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THE FINANCIAL EXPRESS, Monday, November 19, 2001
DPC cancels Houston board meet, Sanjay Jog
 
Similar story also appeared in the following publication:

THE INDIAN EXPRESS, Monday, November 19, 2001
Houston meet of DPC board cancelled, Sanjay Jog 
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BUSINESS STANDARD, Monday, November 19, 2001
Blackout in the power sector, A V Rajwade 
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BUSINESS STANDARD, Monday, November 19, 2001
A survival kit for Tata Power, BSES, S Ravindran Mumbai 

The two domestic power biggies_Tata Power and BSES_are vying for Enron's 65 per cent stake in the Dabhol Power Company (DPC) in what seems like a critical battle for survival for both. Tata Power, it appears, has two primary reasons to bid for Dabhol Power: one, it gets a ready built plant when all its other projects are on paper; two, it also pre-empts arch rival BSES. This is the more important issue, for if BSES gets DPC, it will stop lifting 500 mw of power from Tata Power. For the latter, this could be tragic since it cannot possibly find a buyer for the excess power in the vicinity, especially since the Maharashtra State Electricity Board (MSEB) says it has enough generation capacity of its own. 

BSES, on the other hand, apart from dealing a severe blow to Tata Power, may also be able take a relook at several of the other contentious projects on hand. "If BSES were to gain control of the 2,184 mw power project, it would source the required 500 mw power from this project and stop buying it from the Tatas. Already, after BSES set up the 500 mw Dahanu power plant in Maharashtra, it has been buying consistently less power from the Tatas," say independent observers in the power industry. But a senior Tata executive defends the company's position. "Our power plants have been built through World Bank funding which has been guaranteed by the Union government. Under these circumstances, power would have to be evacuated till the loans are repaid. We have time till 2014 when our licence expires," he said. But gaining control of DPC is hardly a simple issue. Urmik Chhaya, power analyst at Kotak Securities says: "Any company which takes over this project will have to raise huge funds. How are they going to do that? The other question is where will they sell the power and what will be the payment security mechanism? These are the fundamental questions that will have to be addressed before any takeover of the project can be contemplated." 

But Chhaya points out that DPC will be crucial to Tata Power's overall gameplan. "After next year, how does Tata Power grow its power business?" One estimate has it that anyone wanting to take over the power project will have to pay a minimum of $700 million. "Assuming both companies bid at this reserve price, even at an exchange rate of Rs 47.50 to the dollar, they will have to pay Rs 3,325 crore. This is around 50 per cent of Tata Power's balance sheet size of Rs 6,465.95 crore and around 75 per cent of BSES's balance sheet size of Rs 4,327.40 crore. How will these two companies raise the money?" says an analyst. 

However, a senior BSES executive points out that the company has a low gearing with a debt-equity ratio of 0.25:1. "Raising Rs 2,000 crore at short notice is no problem at all. After all, what is the use of such a low debt-equity ratio otherwise," this executive asks. Tata group sources also say that raising finance is the least of their worries. "We are the country's largest independent power producer with an installed generation capacity of over 2,000 mw. We can always raise money on the strength of our balance sheet," say Tata group executives. However, a change in management control at DPC will have to be accompanied by a series of legislative changes. First, if the new owner is not allowed to sell power outside Maharashtra, the project is unlikely to make any sense for the buyer. Particularly, as the state government has made it clear that it can absorb only 740 mw of the proposed 2,184 mw installed capacity. This will mean giving the Dabhol project a mega-power status. This is far from easy as this will need an amendment by Parliament as the project was not set up through the competitive bidding route but through a memorandum of understanding. 
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THE DECCAN CHRONICLE, Monday, November 19, 2001
HC restrains Centre from encashing guarantees 

In an ad-interim order, Mumbai High Court has restrained the Centre and customs authorities from encashing guarantees undertaken by State Bank of India in regard to customs duty payable by Enron-promoted Dabhol Power Corporation for importing equipment to build liquified petroleum gas terminal in its Dabhol plant. The ex-parte injunction was granted by Justice D G Karnik on November 15 on a petition filed by DPC challenging the showcause notice issued by customs authorities asking the company to pay Rs 245 crore as import duty on the equipment. The Court also restrained the SBI to make payment under the guarantees undertaken by it on behalf of DPC. The Judge, however, allowed DPC to file an appeal before customs, excise and gold appellate tribunal within a period of four weeks from the date of his order. He also ruled that the ex-parte injunction order shall automatically stand vacated from December 15 subject to the orders that may be passed by the tribunal. Meanwhile, the court directed DPC to keep the bank guarantee enforceable. 
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THE FINANCIAL EXPRESS, Monday, November 19, 2001
DPC cancels Houston board meet, Sanjay Jog 

The Enron-promoted Dabhol Power Company (DPC), which is yet to recover from the shock following its acquisition by Dynegy last week, has cancelled its board meeting scheduled for November 19. The DPC board, which consists of two directors from the Maharashtra State Electricity Board (MSEB) and one representing the state government, was to meet on Monday at Houston to delegate necessary powers to the Enron India managing director K Wade Cline for issuing a final termination notice to the MSEB. The DPC company secretary, in a faxed communication, has informed the MSEB chairman Vinay Bansal and the state principal energy secretary Vinay Mohan Lal that the board meeting slated for Monday has been cancelled until further announcement. 

Curiously, the DPC communication is silent over the reason for the cancellation of the November 19 meeting. Mr Bansal told The Financial Express on Sunday, "I have been intimated by the DPC that November 19 meeting has been cancelled." When contacted, DPC spokesman Jimmy Mogal declined to comment. MSEB, which holds 30 per cent stakes in the Dabhol phase-I (740 mw) in its letter of November 12 had asked the DPC not to hold a board meeting on November 19 in view of the Mumbai High Court restraining the DPC from issuing a final termination notice until further orders. The High Court in its judgement delivered on November 9 over a civil suit filed by the Indian financial institutions (IFIs) has slated the next hearing on December 3. 

Analysts said that the DPC's decision to cancel the November 19 meeting was quite expected as the company was aware that the situation in the wake of Enron's aquisition by Dynegy was fluid and it would need some time to take stock of the situation. Further, the Mumbai High Court's order, which gave a much-needed repreive to the MSEB as well as IFIs, came as a major setback to the DPC, which had already served an asset transfer notice to the MSEB on December 5. The MSEB had already communicated to the DPC that it would not be party to the DPC's decision to appoint a valuer after the issuance of asset transfer notice since it has rescinded the power purchase agreement on May 29 following a material misrepresentation and default on the availability of power by DPC. The IFIs had prayed that the issuance of final termination notice by DPC to MSEB would jeopardise their interest as well as investments in the "distressed" Dabhol project. 

The November 19 meeting was also to take up issues related to the asset preservation, the financial position of DPC relating to the phase-I, debt servicing, safeguarding the legal position of its directors and opening of letter of credit for shipping. The DPC board was quite worried especially over the upkeep of the Dabhol plant, which has been closed since May 29 when MSEB suspended power purchases. The construction contractors have also suspended construction works on Dabhol phase-II (1,444 mw) from June 17 in view of DPC's inability to make their payments. The DPC board would also have taken up the issue relating to the DPC's decision to pull out of the Dabhol project. The company, which had decided to sale its stakes at $1.2 billion, recently expressed its desire to reduce it at around $850 million. 
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BUSINESS STANDARD, Monday, November 19, 2001
Blackout in the power sector, A V Rajwade 

Every foreign company in the Indian power sector wants to exit. Of these, the most controversial has been Enron and its Dabhol Power Company Ltd (DPCL). This apart, the experience of investors in the "reformed" power sector in Orissa is also unhappy. Five years ago, Orissa was the first state to adopt the World Bank-recommended model of separating generation, transmission and distribution of power, and an independent regulator. The Godbole Committee has recently recommended the same for Maharashtra as well. Clearly, separating the three functions is a complex restructuring. Maybe it helps privatisation, the current fashion on the subject having been set in Thatcherite Britain. While some privatisations in UK have succeeded, the experience has not been consistent all over. 

Take UK's rail sector. While privatising, the government in its wisdom decided to separate the ownership of the rail network (Railtrack) and the ownership and operation of trains. The contractual relationship between the various operating companies and Railtrack were governed by a byzantine, bewilderingly complex system of penalties and incentives, to be monitored by an independent regulator. Such separation had no parallel. Besides, Railtrack suffered from poor management, cost escalation in modernisation of tracks, etc. Several serious accidents occurred and fixing responsibility became difficult. The "reform" did not work, and Railtrack was put back under public control last month. 

What are the chances of trifurcation of the power sector in India succeeding? Pretty poor, if the experience of Orissa is any guide. It faithfully separated the three functions, and privatised distribution and part of generation. AES, a foreign company, was 49 per cent investor in a generating company, and 51 per cent in CESCO, a distribution company. As Gajendra Haldea analysed in this paper on August 27, "The policy and regulatory framework was inadequate and myopic." Distribution losses, a euphemism for power theft, were much larger than the companies had been led to believe at the time of privatisation. CESCO defaulted in paying the dues of GRIDCO, the transmission company, which in turn defaulted to the generating company. Indeed, all CESCO's cash inflows are now escrowed, leaving it no money even to pay salaries. For all practical purposes, the distribution companies seem to be in a difficult situation, perhaps beyond redemption, and the "reform" is a total mess. The crux of the problem in the power sector is not whether a unified SEB is less efficient than trifurcated companies _ it is the political unwillingness to charge a price which covers the cost to all consumers. For a while, cross subsidisation worked with commercial consumers subsidising the household and the agricultural segments. 

However, as the burden became too large, the commercial sector started moving to captive generation, further worsening SEB finances. An "independent" regulator for power tariffs may not solve the problem. He may fix economic prices _ but will the state come forward to protect the bill collectors, punish power thiefs, face social unrest if power to recalcitrant consumers is cut off? So long as the answers to these questions are in the negative, as, sadly, they are, the institutional restructuring is no substitute for substantive action. No wonder all foreign investors in the power sector want to get out! 

Enron too wants out _ but it has many more problems in its home country, over and above its dispute with MSEB. It had attracted a lot of adverse publicity for gouging power consumers in California, a state in a power crisis (see World Money, February 2, 2001). The Internet craze also had a hand in Enron's misfortunes. It became an energy trader, established an electronic trading platform, had broadband ambitions, went into a disastrous diversification in water supplies which, if I remember correctly, led to Rebecca Mark's exit. Perhaps it went into too many areas too quickly under Jeffery Skilling, ex-McKinsey, and was notorious for opaque, complex accounts. 

To top it all, last month it announced that it will take an extraordinary $1.2 billion charge in its third quarter results for losses in financial activities. Enron's chief financial officer, who was supposed to be in charge of these, has resigned amidst reports that a private equity fund associated with him was involved in them. The SEC is investigating the affair and Enron's share price is down 67 per cent since mid-October. There are some reports that Shell may make a bid for Enron. After its ratings were downgraded, Enron is desperate for liquidity and anxious to dispose its assets. DPCL was already on the platter; now a sale has become even more urgent. Reportedly, Tatas and BSES are interested; so are the lending institutions. Clearly, if a settlement is to be reached, this is the optimum time. But one is not very optimistic. For one, Delhi and Mumbai will be involved, and bureaucracies never understand opportunity costs. Our byzantine decision-making processes make timely decisions impossible. Further, if a deal does take place, there will be the inevitable allegations of corruption. It is much safer for the reputation of the concerned ministers in Mumbai and Delhi to allow the drift to continue, to "let the law take its own course", whatever the costs! Sadly, as Jairam Ramesh said in this paper, Indian politicians respond to developments only out of compulsion, not conviction.