Case

Studies in Global Business Journalism No. 2

Enrons Dabhol Power Project in India
Prepared by Patrick Smith

The Assignment
The sprawling, dramatic story of Enron notwithstanding, this case study focuses sharply on the
Dabhol power plant in India, which was to be (had it been completed) the largest foreign
investment in Indian history. How and why did Dabhol come to so calamitous an end? What are the
implications in such areas as foreign direct investment in developing nations, regulatory control,
the role of the state, the extent of corruption, the place of advanced, capital-intensive technologies
in such nations as India, and the involvement of the World Bank in endorsing (or refusing to
endorse) private investment by large Western multinationals. Please read the accompanying
instructions, How to Approach Case Studies in Global Business Journalism, before beginning your
work.
This case is fundamentally concerned with national development strategies and is intended to raise
complex questions across a range of issues. Your assignment is to weigh these questions according
to what you judge to be their significance and develop a considerably involved piece of journalism
that addresses them without sacrificing either clarity or complexity. The questions suggested
include, but are not limited to, those that follow:

What role does intellectual fashion play in how nations respond to the challenges of
economic development?

To what extent do developing nations depend upon the expertise of advanced economies
due to a shortage of human and intellectual resources on their part?

How has the role of the state in developing economies been influenced by multilateral
institutions such as the World Bank and has this influence been properly and objectively
deployed?

How can developing nations forge healthy relationships with large Western multinationals
making direct investments and can such questions as technology transfer, technological
superiority, and regulation be balanced. If so, what would this balance look like?

The Dabhol Power Co.

The Dabhol power project, located south of Mumbai, was first agreed in mid1992 in response to a
critical shortage of electric power in India. The project, with an initial price tag of US$2.5 billion,
represented the largest foreign investment in Indian history. The foreign partners were three, all of
them American: Enron, the now-defunct energy conglomerate, functioned as the project manager;
General Electric was to supply the power-generating turbines, and Bechtel was to construct the

plant. Enron Power Development Corp. was to hold an 80 percent interest in the company; its
partners would hold 10 percent each.
Dabhol was initially designed with a generation capacity of slightly more than 2,000 megawatts of
electric power. In an agreement reached in 1993, 90 percent of this power was to be purchased by
the Maharashtra State Electricity Board, the state-run power supplier for the industrialized west
coast of India, where Dabhol was located. The tariff formula in this agreement set the price of
Dabhols power so as to guarantee investors an initial return on equity of 16 percent; these returns
were to be calculated in U.S. dollars. New Delhi issued guarantees, in December 1994, backing the
electricity board's purchasing commitmentsa step that made the Dabhol project attractive to
banks considering project finance. The tariff guarantee thus exposed both the board and the Indian
government to fluctuations in foreign-exchange rates and the prices of imported fuels.
The Dabhol plant was to be developed in two stages. Phase One would initially be powered on
naphtha and produce 740 MW of electricity at full capacity. It was due to be completed in early
1997. Phase Two was to run on liquefied natural gas and generate about 1,300 MW of electricity at
full operation when it was completed about a year and a half later. The LNG for Phase Two was to
come via pipeline from a tanker terminal constructed adjacent to the Dabhol power-generating site.
Phase One was eventually to switch to LNG.
Phase One construction began in 1992. Long before it was completed, however, the Dabhol Power
Co. began to run into problems across a range of issues. Economists, energy specialists, government
officials, environmentalists, and others began to question the terms of the transaction, the costs of
the plant and the power it would produce, as well as the plants impact on the environment. In July
1993, the World Bank, which had initially supported the Dabhol project, first signaled its misgivings;
it would later decline to participate in financing for Dabhol and join critics in asserting that the
project was too costly and that the terms of the contract were too generous to the U.S. investors.
In 1995, the governing Congress Party was replaced in Maharashtra state by Hindu nationalists,
many of whom took an ideological position against foreign investment. Local animosities were also
unabated at this time; human rights organizations alleged abuses associated with maintaining
security at the project site. It was also becoming clear that Dabhols power would come at an
uncompetitive price and that the electricity board would not be able to afford to purchase it without
passing on significant rate increases to consumers. Reports at this time also began to question
whether New Delhi would honor the guarantees it had extended in support of the board.
Charges of widespread corruption were another problem besetting Dabhol. Dabhol had been
designated a fast-track projectthat is, it was given swift approval by the Indian government
and critics alleged that officials in New Delhi, including some in ministerial positions, had supported
the Dabhol plant, including its guarantee of high returns to investors, without due diligence and, in
some cases, in return for kickbacks. More broadly, it was alleged that India had exercised vastly too
little oversight, relying on Western investors as an effective assurance of the projects viability and
efficiency. This lent opposition to the Dabhol project, which had spread across India, a nationalist
tinge.
In May 1995, the Maharashtra state government announced that it would review the project. New
Delhi swiftly announced that all negotiations for IPPsindependent power projects, of which
many were under considerationwould be postponed pending the outcome of the states review.
That August, Maharashtras chief minister announced that the state would shut down Phase One
construction at Dabhol and cancel Phase Two altogether. This prompted renewed talks between
Dabhol Power and the Indian authorities. The projects capacity was increased to 2,184 MW, the

capital cost was reduced and the price Dabhol Power would initially charge the electricity board
was renegotiated.
These negotiations were concluded with renewed commitments to both phases of the Dabhol
project. In late 1996, work resumed on Phase One. The naphtha-powered part of the project began
generating power in May 1999, about two years behind schedule. Phase Two construction was
under way by this time.
There were numerous methods of measuring the cost of power from the Dabhol plant because
many variables were used: different units of electricity, different time intervals, different currencies,
and different points in the fluctuating scale between peak, average, and low demand. However, after
its first year of operation, Dabhol Powers critics were proven correct by any measure. In May 2000,
it was reported that the average unit cost of power the board purchased from all suppliers was 45
percent lower than Dabhols tariff; the cost of power the board generated at its own plants was 70
percent lower, and the price the board paid to Tata Electric, another private-sector supplier, was 52
percent lower than Dabhol charged.
At the end of 2000, Maharashtra state officials asked Enron to renegotiate its contracts with Dabhol
Power for the second time since the projects launch. By that time, rising fuel costs and a declining
rupee had sent the cost of Dabhols electricity, in local-currency terms, to two to three times the
initial projections.
In early 2001, the electricity board stopped making scheduled payments to Dabhol Power and
stopped buying electricity from the plant. Under the terms of its agreement, the board was required
to continue making payments to the company regardless of whether it consumed any of its
electricity. In March of the same year, Dabhol invoked the central governments guarantees to back
the boards obligations. Two months later, with the boards bills still unpaid, Enron announced its
intention to abandon the Dabhol project and withdraw from India. At the time, Phase Two of the
project was about 95 percent complete.
The Dabhol plant subsequently ceased generating power. Enron itself collapsed in late 2001.
Dabhol Power was eventually purchased and restarted by Ratnagiri Gas and Power Private Ltd., a
company in which two state enterprises, the National Thermal Power Corp. and the Gas Authority
of India, have shareholdings. As of mid2008, the plant was generating 350 MW to 570 MW of
electricity. One cause of Dabhols low output relative to installed capacity, company officials said,
was that General Electrics turbines were of faulty designan assertion GE denied.
Web references:

World Bank inventory of its documents on Dabhol:

http://extsearch.worldbank.org/servlet/SiteSearchServlet?q=Dabhol

Report on violence at the Dabhol plant:

http://www.multinationalmonitor.org/hyper/mm0997.04.html

An extended study of the Dabhol project from the perspective of a critical Indian economist:
Mehta, Abhay. 2000. Power Play. Orient Longman publishers

A review and discussion of the above-noted book can be found at

http://www.indiatogether.org/reviews/powerplay.htm

A collection of domestic press cuttings on the Dabhol project:

www.altindia.net/enron/Press.html

A respected nongovernmental organization with a focus on Indian energy issues:

http://www.prayaspune.org/

Dabhols Overseas Investors

Enron
Enron Corp. was a diversified energy company with interests and trading activities across the globe
in a wide range of energy- and commodity-related industries. At its peak, at the turn of the new
century, it reported revenue of slightly more than $100 billion. As reported, these derived primarily
from natural gas supplies and distribution (50 percent), electricity generation and transmission (33
percent), and metals (9 percent).
Enrons corporate roots extended back to a natural gas company founded in Omaha, Nebraska, in
the early 1930s. In the mid1980s, the corporate descendant of this company purchased a small
Texas concern called Houston Natural Gas. Under a dynamic chief executive named Kenneth Lay,
HNG became Enron and reinvented itself. Northern Natural Gas, the Omaha company, became one
of Enrons most reliably profitable assets.
Under Lays direction, Enrons reach extended far beyond the natural gas industry. It became a
leading trader in the markets for petroleum, petrochemicals and plastic; pulp and paper; and steel
and water. It also traded in a variety of capital markets products. It eventually created an online
trading system that developed into a global platform for commodities brokers. Enron moved into
broadband services, risk-management services, project development, and project-management
services. Among its fixed assets were utilities, paper and pulp-processing plants, and extensive
pipeline networks.
During its high-growth years, Enron acquired a reputation as an extremely aggressive player in its
chosen marketsmarkets it sometimes created. In 2000-01, for instance, Enron was among the
wholesalers alleged to have manipulated Californias energy market when partial deregulation
opened to the door to such manipulation.
Power generationthe construction of plants such as Dabhol and the management of their
operations once completedwas a key part of the new Enron. By the end of the 1990s, it owned,
had an interest in, or operated nearly 40 plants worldwide. Dabhol was among the largest. Others
were in the American Pacific Northwest, Latin America, Europe, and elsewhere in Asia.
By its own account, Enron grew at an extraordinary pace. In the three years ended December 31,
2000, the companys stated revenues tripled. Its stock price peaked the following summer at $90
per share. That year, 2001, Fortune magazine named Enron Americas most innovative company
for the sixth consecutive year.
Even as its stock price peaked, however, Wall Street analysts had grown increasingly concerned
that the companys apparently high growth masked critical weaknesses. The scandal that eventually
brought the company down concerned Enrons accounting methods. Assets and profits were found
to be significantly inflated, in part by the use of a technique known as mark to marketthat is, by
listing assets in financial statements according to their potential profitability. Debts and losses,
conversely, were recorded in the accounts of companies that functioned in essence as holding tanks
for Enrons failed investments and liabilities.
Enron declared bankruptcy in December 2001. Lay resigned in 2003 and was indicted on 11 counts
of fraud the following year. He was convicted on 10 counts and died just before his sentencing in
2006. Jeffrey Skilling, Enrons president under Lay, is now serving a 24-year sentence. Arthur

Andersen, Enrons accountants and formerly one of the big five U.S. accounting firms, ceased
operations in 2002. What remained of Enron no longer owned any assets by 2006. In 2007, Enron
changed its name to the Enron Creditors Recovery Corp.
General Electric
General Electric Co. is engaged in a variety of infrastructure, technology, and financing activities
around the world. It has operations in 15 countries in the Asia-Pacific region, 10 in the Middle East,
and seven in Latin America, in addition to its interests throughout North America and Europe. For
the 2008 fiscal year, ended December 31, it announced consolidated revenue of $183 billion and
income from continuing operations of $18.1 billion.
GE was founded in 1892, when the Edison General Electric Co., then two years old, merged with a
competitor. GE is now a leader in home appliances, aviation services, power-distribution equipment,
commercial and consumer finance, nuclear power, media, rail equipment, water-treatment
technology, and medical equipment. In mid2009 it had an order book in goods and services of
$172 billion.
GE has been active in India for more than a century. It built the nations first hydroelectric plant in
1902. It does not appear that the companys activities in India have been adversely affected by the
difficulties of the Dabhol project. GE employs more than 12,000 people in India and stated its
revenues from Indian operations in 2008 at approximately $2.6 billion. It participated in the
development of the business-outsourcing industry in the late 1990s and opened a technology
research center in Bangalore in 1999. It does not have a project that approaches the scale of Dabhol
currently on the books of its Indian operations.
Bechtel
Bechtel Corp. ranks among the worlds most prominent engineering and construction companies.
While about 40 percent of its business is in the United States, it is active in some 50 countries and
employs 44,000 people worldwide. Bechtel is privately owned and is not obliged to present
financial statements as public companies do; it does not. In its financial overview for 2008, it
reported revenues of $31.4 billion, and new work booked during the year worth $35 billion; it did
not disclose income.
Bechtel was founded in San Francisco in 1898. From its earliest days, it has focused on large-scale
projects such as dams, railroads, bridges, ports, water systems, and other basic infrastructure
facilities. In part reflecting this focus, the company also has a long tradition of doing business with
governments. Today the company is structured into units that grew out of its business as it evolved
in the last century. Bechtel National is dedicated to U.S. government contracts in defense, aviation,
environmental projects, and demilitarization. Its Civil Unit manages the core of its original
construction and engineering activities. There are also business units dedicated to mining and
metals projects; oil, gas, and chemicals projects; and electric-power projects, including nuclear-
powered generation plants.
Close connections with governments have been characteristic of Bechtels corporate culture. One of
the companys early partners, John McCone, went on to head the Atomic Energy Commission and
later the Central Intelligence Agency. George P. Schultz and the late Casper Weinberger, who served
in the Reagan administration as secretaries of state and defense, respectively, were both former
Bechtel directors.
Perhaps reflecting its unusually close ties to government, Bechtel has faced charges of corruption,
price-padding, and the like at intervals since its participation in war-related construction projects in

the 1940s. Some of these charges have led to convictions. In the late 1970s, it was investigated on
suspicion that it had bribed South Korean officials to win contracts to construct nuclear power
plants just as the nation was deciding to make a major shift into nuclear generation. In the late
1990s, Bechtel became involved in a consortium commissioned to privatize the water supply in one
of Bolivias largest cities. The La Paz government was eventually force to withdraw the contract
after substantial increases in water tariffs led to widespread protests and, in turn, martial law.
Shortly after the U.S. invasion of Iraq in 2003, the U.S. government, via the State Department's
Agency for International Development, awarded Bechtel a construction contract in Iraq valued at
almost $700 million. Some of the projects that came under this contract eventually failed. Bechtel
was also alleged to have deprived Iraqis of the technology to operate the projects.
Bechtel had nearly half a centurys experience in power-plant construction when it joined Enron
and GE to develop the Dabhol site. It now has two projects in India. In 2000, it contracted with
Reliance Industries to build a refining and petrochemical complex in Jamnagar in northwest India; it
later expanded that facility. In 2005, it began work on a second refinery that doubled Jamnagars
capacity to 1.2 million barrels per day, making it the worlds largest refinery complex. Bechtels
other interest in India is the management of a gas field under development off the nations east
coast.
Web references

A profile of Enron provided by Hoovers, the corporate-data service:

http://www.hoovers.com/enron/--ID__10521--/free-co-profile.xhtml

Statistical data on Enrons financials, historically:

http://www.mergentonline.com/compdetail.asp?company=6125&type=financials&DataType=As
Reported&DataPeriod=Annuals&DataArea=PL&DataRange=3&Currency=AsRep&Scale=AsRep&Subm
it=Refresh

General Electrics annual report for the 2008 fiscal year:

http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf

Bechtels annual report for the 2009 fiscal year:

http://www.bechtel.com/assets/files/news/Annual-Report-2009.pdf

An article on the web site of a publication dedicated to investigating and monitoring global
corporate activity. The site provides access to archives and indexed reports:
http://www.multinationalmonitor.org/mm2005/112005/weissman.html

India's Political Economy

Indias economy has been marked since independence by the presence of an unusually large public
sector. This reflected judgments made by the nations founders even before independence was
achieved in 1947. India was impoverishedit still accounts for approximately 40 percent of the
worlds poorand it was primarily agrarian. Capital formation was weak, and industrial
development at a very early stage. In these circumstances, the first governments of independent
India adopted a strategy whereby the state sector would play a leading role in economic
development. Industrial policy resolutions passed into law in 1948, and again in 1956, called for
public sector enterprisesknown as PSUs, or public sector undertakingsto develop the core
sectors of a modern economy.

Two other dimensions of Indias political economy were to color its policy decisions for the first
four-and-a-half decades following independence. One was the ideological value attached to a
prominent public sector. Indias founders were adherents of the Fabian socialism fashionable in
Britain in the early decades of the 20th century. State ownership of strategic assets was a
cornerstone of this economic approach; it took on the aspect of a core political belief. The other
notable feature of the early political economy was Indias strong attachment to its independence
after centuries of foreign domination. This led, following the economic fashion of the era, to a broad
policy of import substitution. In simple terms, India would dedicate itself to making what it needed
rather than importing it from abroad; foreign investment was, relative to its place in comparable
economies, assigned a low priority.
In 1951, when India announced its first Five-Year Plan, there were five Central Public Sector
Enterprises; in 1990, there were 244. These operated in a broad range of sectors, including
manufacturing; steel, heavy equipment, and machine tools; utilities; pharmaceuticals and
petrochemicals; petroleum; telecommunications; trade; and tourism. In 1990, Indias state sector,
including many enterprises not classified as CPSEs, still accounted for an unusually large
percentage of the economy when compared with other nations in its GDP or per-capita-income
category.
The following year marked a fundamental turning point in Indian economic thinking. The
immediate circumstances prompting this shift were a severe balance-of-payments crisis and a
critical fiscal deficit. In this context, the government launched its New Economic Policy. Its
immediate aim was to counter the countrys twin crises; more broadly, the policy was intended to
introduce structural adjustments into the economy. As import substitution had once been the
economic fashion, at this time neoliberal market solutions were. The NEP reflected this trend.
Privatization in the state sector and the opening of industries previously the preserve of public-
sector enterprises were key parts of the NEP. Privatizations proceeded slowly. The first major
transactionthe governments sale of a 51 percent share of the Bharat Aluminium Co.did not go
through until 2001. Other planned asset sales have been delayed by litigation. In 2004, the Congress
Party was returned to power. It swiftly reversed the previous governments plans to privatize a
broad range of state-owned companies. In late 2009, another plan to privatize a range of state
companies, chiefly by selling stakes of 10 percent to the public, was announced.
The opening of economic sectors to private investment, including foreign investment, proceeded
more swiftly. Electric power generation was among the first economic sectors to be opened to
private investment after the NEP was announced. Inefficiencies in the state sector were widely
criticized in the years that followed. However, the state sector, including many state electricity
boards, has been substantially reformed since the mid1990s. Some electricity boards are now
developing strategies that incorporate alternative sources of energy such as wind and solar to
reduce, at least modestly, their heavy reliance on coal. More broadly, the managements of state-
owned companies have been given greater autonomy and made more responsible for competing in
liberalized markets. Loss-making CPSEs fell from 100 in 1997 to fewer than 60 in 2007. Many CPSEs,
it is now acknowledged, are performing well. In 2009, there were 246 CPSEs, up marginally from
their number when the New Economic Policy was announced.
Web references

An American web site providing overviews of national economies

http://www.economywatch.com/indianeconomy/indian-economy-overview.html

A second overview of the Indian economy provided by an Indian web site:

http://www.ibef.org/economy/economyoverview.aspx

A critique of Indias neoliberal economic reforms published in the mid-1990s:

http://www.multinationalmonitor.org/hyper/mm0795.04.html

An analysis by two Indian economists of the governments privatization policies, published in

2003:
http://www2.ssc.upenn.edu/about/PrivatizationKapurRamamurti.pdf

A scholarly paper, written by an Indian economist, on the structure and evolution of the Indian
public sector:
http://dpe.nic.in/newpayrevision/Chapter-1-Overview%20&%20Profile_Final.pdf

Dabhol and the Indian Power Grid

The Dabhol project had an emblematic character in India from its inception. In 1991, P.V.
Narasimha Rao was elected prime minister and quickly began to move India toward a major
economic shift away from postwar concepts such as import substitution and the necessity of state
participation in key industries. Privatization, in the new environment, became a much-discussed
theme among Indians in government and in the business community. Western investors and
Western institutions tended to encourage Indias new thinking.
The privatization theme was especially pronounced in sectors such as power generation, where
there were chronic supply shortfalls and strained finances. Foreign investment was also considered
in a new light. In 1992, a year after the new government took office, New Delhi announced that the
power, petroleum, and telecommunications sectors would be opened to private investment for the
first time. Memoranda of understanding in the Dabhol deal were exchanged shortly thereafter. It
was widely considered the model for what would come to eight fast-track projects intended to
boost Indias electricity capacity. The only hope is the private sector, N.K.P. Salve, the new power
minister, said at this time.
There are many ways to measure what was developing into a critical power shortage when the
Dabhol project was launched. At the time, India had an installed generating capacity of about 70,000
MW. With wide variations from one segment of the national grid to another, the nations power
producers ran at an average of 57 percent of capacity. This left India about 20 percent short of
power when demand was at its peak. Overall, the country lived with a 9 percent shortfall in its
energy needs.
Projections of future demand were not encouraging. As Phase One of Dabhol was under
construction, the Five-Year Plan then in force forecast a need for slightly more than 30,000 MW of
new capacity at a cost of US$33.4 billion. Against this, the government had approved spending
US$24.9 billion, leaving a capital shortfall of roughly US$8.5 billion.
The national budget announced in March 1993 provided for substantial incentives intended to
encourage investment in Independent Power Projects. Tax holidays would extend to five years,
there would be cuts in customs and excise duties, and New Delhi would increase its spending on
power projects by 22 percent, to US$1.95 billion for the new fiscal year.
Foreign investors responded with enthusiasm to the Dabhol deal and the governments
liberalization of the power sector. Soon after the Dabhol project was launched, European, American,
and Asian companies proposed 41 projects totaling almost 20,000 MW of capacity and US$16.5
billion in capital investment. Nineteen of those projects involved American companies. Eventually,

MOUs were signed for nearly 100 IPPsless than a third of them on the basis of competitive
bidding.
Electricity costs and leakage from the national grid were considerable problems for India. The price
of power had long been politically sensitive, especially among farmers. Accordingly, state electricity
boards such as the Maharashtra State Electricity Board paid an average of 1.61 rupees per unit of
electricity and charged an average of 1.31 rupees per unit to consumers. In the case of Dabhol, there
were many calculations of the price of power the plant would generate; none was less than
approximately twice the national average charged to consumers.
In addition to their pricing problems, the state boards suffered chronic losses in the transmission
and distribution processes. Officially, poor equipment, corruption, andthe worst of these
problemstheft resulted in a loss of 22 percent of generated electricity. Unofficially, the loss was
typically put at close to half of all power generated.
At present, India continues to suffer chronic shortages of electricity. Power cuts are commonly
reported across the country. In September 2008, the Maharashtra's electricity board warned that
shortages of coal supplies and frequent breakdowns at the Dabhol plant could jeopardize its supply
of power across the state. At the time, peak demand in Maharashtra had exceeded 15,000 MW on
some occasions; against this, the electricity board faced a supply shortage of 4,000 MW to 5,000
MW.
Some IPPs have proceeded, but privatization and large foreign investments are no longer viewed as
panaceas or magic bullets, as they once were. Instead, India embarked after Dabhol upon a major
restructuring of its state electricity boards. In states that adopted this strategy, generation,
transmission, and distribution were made into separate operations. Funding from banks and other
financial institutions was focused on viable power projects that could deliver power at a
competitive market rate.
Appendix I: Enron Financial Data
Source: Mergent Online.
As Reported Annual Income Statement
Currency

12/31/20
12/31/19
12/31/19


00
99
98

USD

USD

USD

Auditor Status

Not
Qualified

Not

Qualified

Not

Qualified

Consolidated

Yes

Yes

Yes

Scale

Millions

Millions

Millions

Natural gas & other products

50,500

19,536

13,276

Electricity

33,823

15,238

13,939

Metals

9,234

Transportation

588

627

Other revenues

7,232

4,750

3,418

 Total revenues

100,789

40,112

31,260

Cost of gas, electricity, metal & other prod

94,517

34,761

26,381

Operating expenses

3,184

2,996

2,352

Oil & gas exploration expenses

49

121

Depreciation, depletion & amortization

855

870

827

Taxes, other than income taxes

280

193

201

Impairment of long-lived assets

441

Total costs & expenses

98,836

39,310

29,882

Operating income

1,953

802

1,378

87

309

97

Gain on sale of non-merchant assets

146

541

56

Gain on issuance of stock by TNPC, Inc

121

Interest income

212

162

Other income, net

(37)

181

51

Income bef interest, minority int & inc tax

2,482

1,995

1,582

Interest & related charges, net

838

656

550

77

76

77

Minority interests

154

135

77

Income tax expense

434

104

175

Net income before cumulative acctg

changes

979

1,024

Cumulative effect of accounting changes,

net

(131)

Net income

979

893

703

Preferred stock dividends

83

66

17

Earnings on common stock

896

827

686

Weighted average shares outstanding-

basic

736

705

642

Weighted average shares outstanding-

diluted

814

769

696

Year end shares outstanding

751.628

715.527

662

Earns per share before acctg chng-basic

1.22

1.36

Equity in

subsidiaries

earnings

of

unconsol

Dividends on Co-obligated pfd securs of

subs

 Earns per sh-cumul acctg chng-basic

(0.19)

Net earnings per common share-basic

1.22

1.17

1.07

Earns per share bef acctg chng-diluted

1.12

1.27

Earnings per share acctg chng-diluted

(0.17)

Net earnings per common share-diluted

1.12

1.1

1.01

Dividends per common share

0.5

0.456

0.48

Total number of employees

20,600

17,900

17,800

Number of common stockholders

58,920

57,895

58,598

Number of second preferred stockholders

160

182

209

Depreciation, depletion & amortization

855

870

827

Appendix II: The State Government Statement on Dabhol

Text of the Maharashtra state governments statement on the Dabhol project, delivered by
Chief Minister Manohar Joshi at the State Assembly, August 3, 1995. The statement was
delivered in Marathi and translated by Reuters.
America's Enron Power Corporation, Bechtel and General Electric have come together and set up
Dabhol Power Company (DPC) in India. The state government had signed up with this company on
June 20, 1992 to set up the 2,015 megawatt (Base Load) capacity power project at Dabhol in
Ratnagiri district in Western Maharashtra. On December 8, 1993, DPC signed a power purchase
agreement (PPA) with the State Electricity Board with the consent of the state government. This
project will be commissioned in two phases with phase one being set up with imported distillate oil
and phase two with liquified natural gas (LNG). Phase one will have a capacity of 695 megawatts
and phase two of 1,320 megawatts. On completion of the project the entire 2,015 megawatt
capacity will be generated using LNG. The total cost of phase one will be 29,120 million rupees
($910 million) and phase two 61,180 million rupees ($1,912 million). The decision to take up phase
two is with Maharashtra State Electricity Board (MSEB) as per the terms of the PPA. The financial
arrangement for implementing phase two, however, is December 1, 1995 or any other later date
convenient to MSEB and DPC.
On December 10, 1994, the state government gave a guarantee to cover up any payment default by
MSEB to DPC as per PPA. On September 15, 1994, the central government gave a counter guarantee
for any default by the state government to the extent of unpaid electricity charges and any other
damages arising out of contract violations. Towards this a tripartite agreement was signed between
the state government, central government and the Reserve Bank of India (RBI) on September 15,
1994.
The Maharashtra government had agreed to provide basic facilities and signed the "Government
Cooperation Contract" (June 24, 1994), land lease contract (November 22, 1994) and a contract to
construct a jetty (November 23, 1994). The PPA was modified on February 2, 1995. A tripartite
agreement was signed on February 25, 1995 between DPC, Enron Fuel International and MSEB on
fuel arrangement. The state government on March 1, 1995 issued a letter to DPC on the legal

binding of the contract. Financial arrangements have been completed and the project has
commenced and is scheduled to be completed by December 1, 1997.
Power capacity in Maharashtra state as on March 31, 1995 is 11,582 megawatts with a provision
being made by MSEB for an additional 7,906 megawatts in 1994-95. According to the power survey
report put out by the central government in July 1995 peak demand by the year 2002 will be 13,147
megawatts. To provide this, installed capacity should be 20,500 megawatt. Keeping these facts in
mind the state government will have to undertake multiple power projects. However, the
government's financial constraints will be a stumbling block in financing these projects. It is
important for the state government to take advantage of private participation in the power sector
which was initiated by the liberalisation programme. Projects generating 4,417 megawatts are
under consideration. These include Dabhol (2,015 MW), Nagothane (410 MW), Khaperkheda (New
500 MW, old 420 MW) and Bhadravati (1,072 MW). Contracts for Nagothane and Khaperkheda
were awarded after competitive bidding and discussions on these projects are underway with
MSEB. Similarly for Bhadravati project the state government had issued a clearance and discussions
are on the PPA. Dabhol project is the only one of its kind where construction work is already
underway and if completed on schedule will generate 695 megawatts by December 1, 1997.
There were agitations against the Dabhol project and there is no section of society which do not feel
strongly about it. To keep its election promises the Shiv-Sena Bharatiya Janata Party (BJP) decided
to review the project. After the Central government opened up Energy to private participation three
senior officials of the Central government travelled to America and Europe to invite investments.
After returning from this tour, the Energy secretary, on June 10, 1992, told officials of MSEB that a
team of Enron officials will visit the state and asked them to show suitable sites. An Enron team
toured Maharashtra in the second week of June, 1992 and a MOU was signed on June 20, 1992. The
speed at which the MOU was signed is like "Enron came, saw and conquered". The World Bank and
Central Electricity Authority (CEA) termed this MOU as one-sided in their letters dated July 8, 1992
and July 26, 1992.
Five irregular points regarding the Enron deal:

not inviting competitive bids

lack of transparency
environmental aspects not given adequate consideration
approving unnecessarily massive costs for the project
rising costs of electricity due to the project not conducive to the state and the consumers

The previous state government entered into a one-to-one contract with Enron through private
negotiations and committed the state to a financially expensive proposition. In the common interest,
it is a common practice to invite participation by many players. There has been no satisfactory
explanation as to why other foreign parties were not given a chance. It would have served the
state's interests best if three or four participants were invited to bid. It is surprising that the central
government on the one hand is dismantling trade barriers and subjecting domestic industry to
foreign competition to provide more value for the consumer. On the other hand even minimal
competition is not there in the Power sector. The reasons are not difficult to fathom.
In my opinion even if there were two competitors for the Dabhol project the outcome would have
been much better. At least the government would have had a basis for comparison. As competitive
bids were not invited Enron appears to have a complete say.
Even after going through the papers at MSEB and the state government files, I do not know what
actually transpired in the deal. I am aware that various courts in India have absolved all involved

parties of any irregularity in the entire Enron deal. The courts have also stated that it is not illegal to
invite only a single party to quote. However, when it comes to spending public money it is
imperative to have competitive bidding for the sake of transparency. The central government has
subsequently realised this mistake and issued strict guidelines for multiple parties tendering for
any contract. The wall of secrecy raised by Enron, has also been exposed by our government making
available a copy of PPA and other related contracts to the general public.
The people of Maharashtra are aware of the hazards to the environment. The people of Dabhol feel
that the impact of pollution on the lives and means of livelihood of ordinary people should have
been given more consideration. The fear in the minds of people has increased although the project
work has commenced and local employment has increased. More thought should have gone into the
attempts to make Konkan (the coastal region where Dabhol is situated) into a California. Thought
has also not gone into the fuel used, namely distillates and LNG instead of Coal or any other fuel.
The most mysterious part of the project is the cost estimation of 44.9 million rupees per MW in
fixed coats. Dabhol is the only project in the country to use imported LNG. Therefore, it is
impossible to compare it with other projects. Excluding costs for storage, port facilities and other
onetime costs, the Phase One will cost 37.60 million rupees for every megawatt and 35.70 million
rupees for the entire project. The Gandhar project, in comparison, coming up in the neighbouring
Gujarat state will cost 37.6 million rupees. The Kathalgutti project commissioned in March 1995
cost 41.5 million rupees which is comparable to the Dabhol project. While doing the financial
evaluation of the Dabhol project the Industrial Development Bank of India (IDBI) took into account
a report submitted by consultants Stone & Webster. This report stated that the project cost of the
DPC was comparable to any other gas fired project in the country. Enough thought has not been
given to the composition of long term fixed costs which will eventually influence the final cost to the
consumer. Many experts feel that the fixed costs are on the higher side. Despite the fact that gas
fired projects are cheaper, the cost of the Dabhol project is higher than coal fired projects. The
entire project is a loss making proposition for the state because the previous state government did
not negotiate properly.
It has been widely reported that the cost to the consumer will be 2.40 rupees per unit. But this cost
is only 54% of the total cost and it is my estimate that the eventual cost will be in the range of 5.00
rupees per unit. Secondly there is no guarantee that MSEB will be able to obtain the electricity at
2.40 rupees per unit because of two unpredictable elements, the rupee/dollar exchange rate and
the cost of imported fuel. On both counts foreign elements will have a greater control and say. It is
my impression that in other similar projects in the country, with the passage of time the there is an
overall reduction in cost of production. In the case of Dabhol, the cost aspects will rise all the time.
It is the opinion of our government that the five points raised above are the main limitations in the
project. Similarly there are limitations in the new power policy announced by the central
government. The government has used the same reference sets used for signing up coal based
power projects to sign agreements on gas based projects. This has resulted in unreasonable and
untenable benefits being passed on to this project. It is possible to easily maintain a plant load
factor of 85% on a gas fired project. Hence, it is unreasonable to assume a plant load factor of 68.5%
for a gas fired project and plan return on investment on that basis. The central government has
committed returns to the project on a dollar basis and protected the returns from the fluctuations
in the foreign exchange market. Because of all kinds of guarantees offered by the state & central
governments as well as the Reserve Bank of India, along with a guaranteed offtake by the MSEB, the
Dabhol project is an extremely profitable venture for the foreign investors. it is my impression that
the 3 main collaborators who have financed the entire project will on project commissioning sell off
at least 50% of the equity for a profit and recover all investment made by them. In that eventuality

the state government will not be in a position to do anything. The interest of the state and the
consumer have obviously not been kept in mind while signing the contract.
The Dabhol project has been cleared by various committees in the state government, the central
power ministry and Foreign Investment Promotion Board (FIPB). However all these committees
ignored the advice of the World Bank which through correspondence in April and June 1993
advised that a project of this size for Maharashtra does not make much sense. This advice was
however ignored by the various committees. The bank had further advised that instead of a Base
Load Power project, a higher value Intermediate Load project for the entire Western Grid should be
considered. I have no doubt that the country and Maharashtra require large foreign investments.
The investors also require a reasonable return on investment. However if any government decides
to provide more than a reasonable return, the people will not forgive such a government. Keeping
the Shiv-Sena Bharatiya Janata Party election promise, all documentation on this project has been
put up before the people. The committee set up to review the project looked at all aspect of the
project and sought advice from experts. This committee comprised Deputy Chief Minister Mr.
Gopinath Mundhe, Revenue Minister Mr. Sudhie Joshi and Industry Minister, Advocate Lilladhar
Dhake. After going through all aspects of the project starting from the MOU to the special privileges
extended to the project, the committee has come to the conclusion that the project is not in the
interest of Maharashtra. The reasons being the excessive investment in fixed costs, uncertainties in
the various clauses of the PPA, leading to a high cost to the consumer.
The state cabinet after taking into account factors like future power requirements, existing and
planned generating capacities, the gap between the minimum and maximum load has decided that
the Enron project has a more than normal fixed cost, rising revenue costs, a return of 29% on
investment and has not given enough consideration to the environmental issues. It is therefore not
possible to continue with the contract.
In my tour of the United State I have mentioned many times that it is not a case of Maharashtra
versus the United States but pertains purely to the DPC. A lot of other American and other foreign
companies are investing in Maharashtra and we extending our complete cooperation to them. The
Maharashtra government has a lot of privatisation projects in the pipeline and I would request that
everybody should participate in these. In my view, the state government has the complete right to
make changes in the contract and in many places contracts get cancelled when governments change.
In my visit to Canada I was informed of two such contracts being terminated by the succeeding
government. So it is wrong to say that what we are doing is something different or something that
has never happened anywhere before.
This deal is against the interest of Maharashtra. Accepting this deal would indicate an absolute lack
of self respect and would to betraying the trust of the people. Such a contract is not a contract at all.
If the government has to bear financial costs it is imperative to reject the deal in the better interest
of Maharashtra and its pride. We also plan to investigate the reasons for entering into a contract by
the previous government. The current government has decided to instruct the Maharashtra State
Electricity Board (MSEB) to take appropriate legal steps. In summary the state government's
decision is as under :
1. Cancellation of the Phase Two of the project is within the purview of the state government and
the government has decided in principle to scrap the project. The federal power ministry and MSEB
will be informed shortly of the same.
2. The first phase work we are not interested in continuing and we will instruct Enron to stop work
at the site.

Appendix III: The Indian economy at a glance

GDP (FY 2008): $1.21 trillion ($1,210 billion).
Real growth rate (2008 est.): 6.6%.
Per capita GDP (PPP, FY 2008): $2,900.
Natural resources: Coal, iron ore, manganese, mica, bauxite, chromite, thorium, limestone, barite,
titanium ore, diamonds, crude oil.
Agriculture: 18% of GDP. Products--wheat, rice, coarse grains, oilseeds, sugar, cotton, jute, tea.
Industry: 29% of GDP.
Products--textiles, jute, processed food, steel, machinery, transport equipment, cement, aluminum,
fertilizers, mining, petroleum, chemicals, and computer software.
Services and transportation: 54% of GDP.
Trade: Exports (FY 2008)--$176.4 billion; engineering goods, petroleum products, precious stones,
cotton apparel and fabrics, gems and jewelry, handicrafts, tea.
Software exports--$22 billion.
Imports (FY 2008)--$306 billion; petroleum, machinery and transport equipment, electronic goods,
edible oils, fertilizers, chemicals, gold, textiles, iron and steel.
Major trade partners--U.S., China, U.A.E., EU, Russia, Japan.
Web reference
http://www.state.gov/r/pa/ei/bgn/3454.htm#econ

Appendix IV: Documentaries

Enron: The Smartest Guys in the Room, by Alex Gibney
The following link leads to a noted 2005 documentary on the rise and fall of Enron. It is based on a
2003 book of the same name written by Bethany McLean and Peter Elkind, who were reporters for
Fortune, the business magazine:
http://www.youtube.com/watch?v=o5clNtt7PgM
Windmills of God, by Sudarshan Kumar
The following web link leads to a brief documentary focused on the electricity problems and the
search for alternative solutions in one Indian state, Karnataka, which is among the poorer of Indias
28 states. It provides footage of actual conditions in rural areas as well as insights into how state
governments and local communities are attempting to surmount critical electricity shortages
according to local conditions.
http://video.google.com/videoplay?docid=-7454691949286757956&hl=en#