From Generation to Degeneration

 - Dasu Krishnamoorty

The Enron-promoted Dabhol Power Corporation (DPC) has generated more controversy than power since its inception and is fast reaching a denouement even as the second phase of the project is nearly ready. All efforts to salvage the iniquitous and flawed power purchase agreement (PPA) have come to nought. Both parties, DPC and the Maharashtra State Electricity Board (MSEB), have slapped preliminary termination notices on each other, each thinking the other would blink first. Trouble began when DPC demanded payment of arrears of monthly bills for supply of power to MSEB, which promptly paid one or two bills but later demanded that they be set off against penalties due from DPC for not honouring power supply demands. The central government found a pretext not to honour its counter-guarantee till the DPC settled MSEB claims totalling Rs.400 crores.

When a panel (headed by Madhav Godbole) to renegotiate the agreement met this Tuesday,

DPC belatedly offered to cut its power tariff by 10 % but the MSEB promptly rejected the offer as inadequate and also stopped buying power from DPC. It also refused to activate its escrow account, which means DPC will have no access to the credits MSEB has with its bankers. The escrow arrangement is an important component of the PPA, in addition to guarantees by the State government and counter-guarantees by the central government. MSEB was put off by DPC directly asking its bankers to activate the escrow account. The last straw came from the Maharashtra Electricity Regulatory Commission, which restrained DPC from initiating arbitration proceedings against MSEB or invoking the escrow, provisions.

History provides ample evidence of the troubled working of the agreement between the two parties. The last three weeks showed with what great difficulty and with what colossal cost to the State exchequer the two parties have continued with their asymmetrical relationship. At one point, MSEB found it could no more pay the monthly bills and began defaulting payment. For a while, the State government and the central government tried to stand by the guarantees and counter-guarantees they had offered the DPC. In less than two months, they found that they were not financially strong to honour these commitments.

Then MSEB suddenly discovered a provision in the PPA not only to stop making payments but also claim relief and damages worth Rs. 400 crores from DPC for misrepresenting its power generation capability. MS

EB says DPC had admitted that its performance did not match the schedules in the PPA. Such failures occurred on 28 January, 13 February and 29 March and three times later too. MSEB, therefore, sought to rescind the PPA alleging that the capability of Dabhol power station was materially different from the contractual parameters mentioned in the agreement. DPC immediately invoked the force majeure clause in the PPA to assert its inability to perform obligations under the PPA.

The Maharashtra government, too broke to honour the guarantees it had offered to DPC, and the central government, providing a cover in case the Maharashtra government failed or reneged on its contractual obligations, have found ways of wearing out DPC and forcing it to terminate the PPA. Experts have divided themselves into two camps, the first arguing that DPC's exit would cost the state and central exchequers dearly and scare away prospective foreign investors and the second maintaining that it would be a lesson to others who take the country for granted and that the DPC exit may not extract too high a price.

If DPC scraps the PPA, there are several versions of what it would cost different parties:

1. According to Aditya Chatterjee and Pooja Kothari, the central government will have to pay Rs 1,500 crores, equivalent to one year's electricity bill and Rs 1,410 crores as termination fee; but if the arrangement continues, the central government has to pay the DPC Rs 1,500 crores every year for ten years; this means scrapping would save the central government Rs. 15,000 crores (Rs.9,217 crores after inflation discount). Indian financial institutions will lose what they have lent, i.e., Rs 2,835 crores because these loans are not covered by any guarantee; Even if all these loans are taken into account and added to the one-time payment of Rs. 2,910, the total cost to the government would be Rs. 5,178 crores, still lower than Rs. 9,217 crores. Thus the termination option will prove less costly for the nation than proceeding on the present terms.
2. Saying it should be scrapped, Jay Dubashi says one should not take Enron estimates of cost of scrapping the PPA seriously because one estimate says that the penalty would be just Rs 3,000 crores including the termination fees;
3. A PTI report puts the cost of termination for MSEB and the Maharashtra government at Rs 17,000 crores.

All this, if we go by the law of contracts. But this contract is voidable for several reasons. The entire PPA is one-sided, benefiting only the DPC, and on the face of it suggests that it is the outcome of misinformation. Experts say that the Indian Contracts Act renders a contract voidable on grounds of misrepresentation and by a party whose consent had been obtained by deception. This point is about the DPC's ability to supply MSEB's power needs within three hours of demand. According to MSEB, the DPC sold the former knowingly poor quality project and "despite claims in the PPA it failed to deliver on decided norms." It is this ability to deliver which the DPC has been peddling all the time and which is part of the PPA.

A Prayas (a Pune-based group of energy analysts) report clearly shows that the Indian side had put its signature to the PPA without the expertise that is necessary to understand the complexities of mega power projects. The report pointed out excessive and undue payments to Enron from the MSEB on the following counts:

Undue burden of regassification facility

Even though the power plant requires only 42% of the regassification capacity (even at 90% plant load factor), Enron is charging full cost to the MSEB. This implies overcharging about Rs. 253 crores per year.

Undue recovery of shipping and harbour charges

Even though the cost of these facilities is included in the capital recovery charge, Enron is charging approximately Rs.233 crores per year for these facilities. Excluding the reasonable charge of shipping charter, Enron is charging over Rs. 100 crores per year extra to the MSEB.

Undue recovery of O and M charges

Enron is charging O and M charges much higher than the norm stipulated by the government of India for such projects which is around RS. 214 crores a year whereas Enron's PPA fixes it at about R.450 crores.

Undue charges through inflated claims of fuel consumption

As per the existing PPA, fuel cost is based on fuel consumption at 1878 kCal/ kWh, but the actual fuel rate guaranteed by the equipment manufacturer is much less. Thus it can easily be said that Enron is overcharging the MSEB by Rs. 930 crores every year. (Prayas report is based on a report submitted by the Godbole committee).

Some people stress on the sanctity of contracts. When the contract at the very outset reeks of payoffs and betrayal, there is no sanctity attached to it. The DPC-MSEB contract is very political in nature and is not binding under all circumstances. When the contract is full of 'infirmities', as Godbole pointed out, there is no harm in going back on it if that does not cost the nation too much. History is full of instances where governments disowned contracts when they found that they harmed the interest of the nation.

Costa Rica cancelled contracts with 15 IPPs (independent power producers). Two years ago, the Hungarian parliament declared that a PPA signed with the multinational RWE was unconstitutional. Last year, the Croatian government tore up a contract signed between Enron and an earlier government. A month later, Philippines decided not to renew financially crippling contracts with IPPs. Our own media experts warn us that any extreme step would keep foreign capital at bay. But despite all the bending and bowing we did, we attracted only four billion dollars against the 50 of China and 31 of Brazil. It is time that this nonsense of attracting foreign investments at any cost should stop. Those who favour foreign investments at any cost must tell us who are the beneficiaries of this investment. Did the Enron investment reduce the cost of power to the consumer and thus increase its consumption, which is an input in development?

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