Enron Corp's Dabhol Power Station project, worth over-$3 billion, has, arguably, been India's most talked about project since the beginning of the 'economic reforms' in the early 1990s. The 2,184 MW power project was acclaimed as the flagship project of the LPG regime that was ushered-in in 1991, but has, unfortunately, been mothballed since May 29, 2001, after the Maharashtra State Electricity Board (MSEB) stopped purchasing power from its 740 MW first phase unit.
The Dabhol project, since its inception, has been riddled with controversy; the integrity of both Enron and government officers, as well as that of politicians, who negotiated the PPA came under the hammer. The project was envisaged in two phases, the 740 MW unit 1 fired by naphtha or distillate which began operations on May 13,1999 and the 1,444 MW unit 2, which is yet to be commissioned. The project also involved the development of a harbour and an LNG facility with a capacity of nearly 5 million tonnes per annum. At the time of the MSEB rescinding the PPA in 2001, unit 2 was in an advanced stage of construction; it was expected then to go commercial in 6-8 months.
A post-mortem of the Dabhol saga, also brought out by the Godbole Commission in 2001, has squarely questioned the very basis -demand projections by the MSEB- that signalled the go ahead for the project. The unrealistic demand projections by the MSEB and even then more strangely for base load when the shortage was more in terms of peaking requirements coupled with the unique 'take or pay' component of the Dabhol PPA meant that even fuel costs were to be treated as sunk costs for the Dabhol power project! The working of the original PPA was such that no other state was ready to enter into a long term contract with Dabhol at anything above Rs1.5/unit while the MSEB eventually agreed to all of Phase 1 power at Rs 2.8/ unit but in effect ended up paying over Rs 7/unit due to the unique nature of the PPA, contracted after much 'education' of many in India.
The issue now, however, is how to resolve the colossal mess that the country simply cannot afford. The GoI strangely has not been pushing for an early solution to the imbroglio that has sullen the image of India as a global business destination and continues to stigmatise the investment environment in the country. The GoI didn't object to GE and Bechtel acquiring Enron's equity stake in the project recently, reportedly at a very low price, even as Indian FI's remain exposed to the tune of Rs 6,200 crores in the project and Industrial houses like Tata's and Reliance envisaged a strong interest in the project.
The foreign equity holders are determined to stretch the case in court believing that the gains from compensation and penalties would be a better deal than renegotiating the project. That the fundamentals of the existing PPA remains flawed is evident from the fact that despite the passage of the of EA03 the promoters have not tried to rework the project as a captive station using the open access clause or applied for a distribution license to market the station's power, independently.
The unwarranted delay in resolving the Dabhol tangle is working against the interest of India, more so at a time it is undertaking an ambitious program of doubling the generation capacity in the country in a decade. Recommencing the Dabhol station will have to be preceded by financial re-engineering determining the 'hit' the equity holders in the project will be required to take. The PPA too will have to be reworked along the now accepted two-part tariff structure involving fixed and fuel costs and substantial capacity be left 'free' for the power trading market along the guidelines for new IPP's. The restructured Dabhol will have to stand on its own in the new electricity market of India, devoid of state guarantees and counter guarantees. But first the GoI, as an active partner, must resolve the imbroglio over the 'hit' each party must take to make Dabhol once again financially viable. Sooner so the better.
* Views expressed in this article are those of the author and do not necessarily reflect those of Observer Research Foundation.
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