Enron deal: mid-course options before MSEB

THE ENRON subsidiary, Dabhol Power Company's (DPC) electricity is stuck in Maharashtra's throat: the State can neither swallow it nor, for that matter, spit it out for both options are far too expensive.

If it decides not to deal with DPC any more, the Maharashtra State Electricity Board (MSEB) will have to find astronomical sums, far in excess of thrice the State Government's own annual plan outlay, as termination payoffs.

In the event it wants to continue to draw power from DPC's coast- based plant, the bills will be beyond the MSEB's capacity to pay.

Though politics has kept Enron alive in public memory, it is pure economic compulsion that is pushing the State power utility into a tizzy.

Enron, Bechtel and General Electric together are setting up this $2.5 billion, 2,184 MW plant in two phases. (The second phase is still under construction along with a $494 million LNG gasification unit (also under installation)).

An immediate issue is whether the second phase should be cancelled - the State government also seems to favour a review. But the wider question is: should the State government renege on the whole contract and pay a huge compensation to the other party or should it continue to pay the large bills for the monthly purchases in the hope that things will somehow sort themselves out?

Within the Government and the MSEB, many options are being weighed, including one where the Centre could buy the power from DPC and distribute it through its national grid to States that need to meet crisis situations off and on.

Another avenue before it is to lobby with the Centre to convert the project into a national project, give it tax sops and make it cheaper even as the financial institutions have begun to lower their lending rates for the project's debts.

Probably, as one official says, ``We may have to bundle all the options together and benefit.'' Clearly, tough negotiations are ahead between the MSEB and DPC.

This project, the first FDI in the power sector, once upturned by Shiv Sena-BJP more as a political upmanship with its rival Congress (I), cannot go without being reviewed or some parts of the big-ticket deal re-negotiated.

Enron, in the wake of loud and pointed protests by the left parties and strong sentiment within the Congress (I) and Nationalist Congress Party to the unbearable outgo on power bills, is not unaware that it may have to crunch numbers again but only after a lot of posturing by either sides.

Demand within the coalition government is to straightway scrap the 1,444 MW Phase II. Legal opinion proffered so far to the Government tilts the other way.

The problem started with the U.S. dollar appreciating against the rupee. The price for the power is payable under two components - one as fixed capacity charge, regardless of whether power is evacuated from the plant or not and the second as fuel charge for the energy picked up by the MSEB.

With increasing price of crude, power from this source based on naphtha became commensurately more expensive. This month, it is at Rs. 7.09 for unit as against the Rs. 1.15 per unit generation cost of MSEB's own plants with their depreciated assets.

When contracted in 1993, with 1995 as base year, the cost of power from DPC was to be Rs. 2.03 per unit; the dollar was then quoting at Rs. 32.50 whereas today it is around Rs. 46.50.

Now the MSEB thinks it should not any more commit itself to similar projects such as Ispat and Reliance sponsored projects where too the price of energy is dollar-denominated.

The State Government has been told that despite a power purchase agreement with these, they must be put on hold. Ispat's capacity will be 1,082 MW; Reliance's 437 MW and they await financial closures.

The MSEB is not buying all the power from the DPC which was linked to the State grid in November 1998. When the plant was on trial, power was evacuated at about Rs. 1.40 per unit.

In June 1999, when commercial production commenced, 226 million units were bought at Rs. 4.85 per unit and the steady fall of the rupee made things worse.

What has made things more difficult for the MSEB is the Maharashtra State Electricity Regulatory Commission's (MERC) directive that insists on buying power from various sources on a merit order despatch.

This means the power utility has to pick up the cheapest power first and the most expensive last.

But there is a catch. Since MERC has stipulated a limit of 3,044 million units and no more from DPC, the MSEB buys power up to about half the capacity of DPC's Phase I running on naphtha and pays a capacity charge of around Rs. 93 crores per month, calculating the rupee cost at Rs. 46 per dollar.

Regardless of how much power is bought, the capacity charge for this phase will vary not with the quantum of energy bought but with the rupee value of the dollar.

The capacity charge for Phase I and Phase II when the latter is operational, at today's prices, will be Rs. 230 crores per month. The fuel charges will float with the price of oil and the rupee value of the dollar.

The current price of Rs. 7.07 being paid per unit is made up of two components, Rs. 3.67 per unit as capacity charge and Rs. 3.40 per unit as energy charge.

But it is unrealistic to assume that the charges would remain at these high levels, for all time to come, during the 20 year contract with the independent power producer.

Once both phases are on stream, and all the power produced is picked up, at a plant load factor of 90 per cent, the power is likely to be cheaper. Also, the petroleum-based naphtha will be replaced by cheaper liquefied natural gas as fuel.

Capacity charges, if spread over the larger volumes bought, will push the price of the energy from DPC, according to MSEB's own estimates, to about Rs. 3.52 per unit even by October 2002.

Today's power, if all of the Phase I's 690 MW of power is picked up, will be, calculations show, cost about Rs. 5.40 per unit but only half is being bought because of the merit order despatch directive of the MERC.

Simply put, the less you buy, the more you pay; the more you buy, the less you pay. The problem is, MSEB does not have the resources to pick up such bills and is bewildered.

Mahesh Vijapurkar

in Mumbai

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