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Assignment – Case Study

This is an Assignment and carries 10 marks and will

Audio Session (Teamwise)

Assignment (Teamwise) Report Submissions)

This is a team assignment with the class divided into
five teams – 1, 2, 3, 4, and 5. The teams will be rated groupwise i.e.
the marks will be same for all members of the same team.

• Each group is required to submit a written report in regard to its study for
evaluation within 7 days before the audio session. Please mark the Names,
Roll Nos., and Group No. on the report.

Read carefully the attached write-up “The Unfinished Story of the Enron
Project” and answer the questions at the end of the summary (page 3).
Whilst the participants will be required to know the complete case study,
for the purpose of assignment, the class will be divided into five groups,
each group presenting a write-up on the area assigned in the questions.

Team Formation
The participants are required to form 5 teams, viz:

Team 1 – 4 Participants – Questions 1 and 2 (p. 3).

Team 2 – 4 Participants – Questions 3 and 4 (p. 3).
Team 3 – 4 Participants – Questions 5 and 6 (p. 3).
Team 4 – 5 Participants – Questions 7 and 8 (p. 3).
Team 5 – 5 Participants – Questions 9 and 10(p. 3).

The Names and roll numbers of participants in each team must be circulated
to the class and facilitator 7 days before the audio session by email.

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The Dabhol Power Project – A Summary

Enron’s Dabhol Power Project was the single largest foreign direct
investment project in India at the time costing nearly U.S.Dollars 3 billion. It
was a two-phased project by Dabhol Power Corporation (DPC) for building,
owning and operating a 2184 MW super thermal power plant using imported
liquefied natural gas (LNG) as fuel. The Dabhol Power Company and the
Maharashtra State Electricity Board (MSEB) had signed a twenty-year power
purchase agreement (PPA) for offtake of power by MSEB.

The project had been contentious right from inception due to techno-
economic and commercial considerations unfavourable to MSEB as well as
allegation that bribery and corruption have played a part in getting the
contract signed. In January-June 2001, there were several exchanges
between MSEB and DPC that had generated quite many sparks with threats
to terminate the ongoing contract. It was said that the entire negotiations
with Enron were an illustration of how not to negotiate, how not to take a
weak position in negotiations and how not to leave the initiative to the other
side. It was also an example of the perils of signing a contract in haste, a
complete lack of transparency in negotiations in making a contract and of
not properly analysing the implications of the deal.

Dabhol Plant’s Phase-I (740 MW) began operating on naphtha in May 1999,
since Dabhol’s LNG Terminal was not ready. Due to post-contract
controversies between MSEB and DPC, the plant was shut down in May 2001
after MSEB refused to buy expensive power whose rates had tripled since
the contract was signed. The plant’s Phase-II remained incomplete.

After a prolonged shutdown due to controversies between foreign and

Indian lenders, plant equity owners and electricity users as well as Enron’s
bankruptcy, the matter was finally settled in July 2005, and the project was
taken over by Ratnagiri Gas and Power Private Limited (“RGPPL”) – a joint
venture among NTPC, GAIL, MSEB and IDBI led Indian banks.

The plant is being restored and Phase-II was expected to be completed by

December 2007 (2814 MW). The plant was partially restarted up on naphtha
in May 2005. The LNG Terminal is expected to be complete by 2010. Till then,
the regassified LNG will be supplied from Petronet’s LNG Terminal at Dahej
through the Dahej-Uran-Dabhol pipeline made ready in July 2007 for the

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Read the attached paper and answer the following


1. What was the negotiating style used by Enron? (Win-Win,

Win-Lose, Lose-Win, Lose-Lose or a Compromise). Cite

2. What were the strategies used by Enron to get what it

wanted? Give examples.

3. How did Enron try to eliminate contract risks?

4. How did Enron use construction stoppage to their


5. How was the confidentially clause used to Enron's

advantage? (Example - Data not given to PRYAS, an NGO).

6. What was the capital cost of equivalent plant at other


7. How did Enron perform in other countries?

8. What were the strong points of Enron?

9. How did MSEB (GoM/GoI) get into a weak negotiating


10. What are the main learnings from the Enron Project?

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– D.C. Singhal

Part 1

Enron’s Dabhol project was the single largest foreign direct investment
project in India at the time costing nearly U.S.Dollars 3 billion. It was a two-phased
project by Dabhol Power Corporation (DPC) for building, owning and operating a
2184 MW super thermal power plant using imported liquefied natural gas (LNG) as
fuel. The Dabhol Power Company and the Maharashtra State Electricity Board
(MSEB) had signed a twenty-year power purchase agreement (PPA) for offtake of
power by MSEB.

The project had been contentious right from inception due to techno-
economic and commercial considerations unfavourable to MSEB as well as
allegation that bribery and corruption have played a part in getting the contract
signed. In January-June 2001, there were several exchanges between MSEB and
DPC that have generated quite many sparks with threats to terminate the ongoing
contract. It was said that the entire negotiations with Enron were an illustration of
how not to negotiate, how not to take a weak position in negotiations and how not
to leave the initiative to the other side. It was also an example of the perils of
signing a contract in haste, a complete lack of transparency in negotiations in
making a contract and of not properly analysing the implications of the deal.

The subsequent sections present an analysis of this mega-project with a

view to deriving lessons in negotiating and contracting for projects in future
particularly in the global scenario.

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The Project – Combined cycle gas turbine project comprising :

• Phase I 740 MW Start-up – May 13, 1999

Fuel – Naphtha initially, imported LNG
after completion of Phase II

• Phase II –

Unit I 740 MW Start-up – scheduled June 7, 2001

Fuel – Naphtha initially, imported LNG
after completion of Phase II
Unit II 704 MW Start-up – Scheduled December, 2001
Fuel – Imported LNG
2184 MW

• LNG facilities: To receive, regassify and supply to the power plant 5 MTPA-
LNG (only 2.1 MPA LNG required for Phase I & II)

The Equipment

• Phase I comprises one power block including

-- One GE STAG 9FA Combined Cycle unit with
Two 9FA gas turbines (each of 226.5 MW)
Two heat recovery steam generators (HRSGs)
One steam turbine generator
Two stacks (98 meter each) to exhaust gases
-- One GE 6B combustion turbine (35 MW) for start-up and peaking

• Phase II comprises two more power blocks similar to Phase I

The Investment

• Phase I US Dollars 1.078 billion

• Phase II US Dollars 1.420 billion
• LNG Terminal US Dollars 0.250 billion
• Other Costs US Dollars 0.202 billion

Total US Dollars 2.950 billion

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Equity Holding in DPC Percentage

Phase I Phase II
1) Enron 50 65
2) MSEB 30 15*
3) GE 10 10
4) Bechtel 10 10

* MSEB was unable to fund more than 15% stake at this stage

The Power Tariff

• Basis : 20 year contract (PPA) between DPC and MSEB

• Price – Fixed tariff US Dollars 1.3 billion per year (US Dollars 26 billion in 20
years) covering DPC’s cost of plant, operation and other expenses and balance
would be profits.

-- PLUS escalation for fuel costs, electricity transmission and maintenance.

• Denomination of tariff – US Dollars

• Payment guaranteed by State Government and counter-guaranteed by Central

Government (for Phase I)

• All disputes to be settled in England under English law.

• PPA based on guaranteed purchase of power at 90% plant load factor (PLF)

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Oman …D.C.Singhal
Overseas LNG
Foreign Contract
65% 10% Bechtel
Dabhol Power Company 10%
Indian PPA
Lenders Payment “PPA”
Guarantee Power Purchase
PPA Payment MSEB
Counter Guarantee


Fig.1. The Stakeholder Map of the Dabhol Power Project.


• In 1992, pursuing a policy of economic liberalization, the Congress (I)

Government opened up the power and energy sector to foreign investment.

• In May-June 1992, on a three-week trip abroad, a senior GoI delegation met

Enron officials who expressed interest in building a power plant in India.

• On June 15, 1992, Enron and GE representatives came to India and discussed
with GoI officials. On June 17, 1992, the Enron team went to Maharashtra,
surveyed the sites, met Maharashtra government officials and signed an MoU
on June 20, 1992 to build Dabhol Power Project.

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• Thus in less than three days, the MoU was signed between Enron and MSEB
for a power project involving US Dollars 3.1 billion using entirely imported fuel
(LNG) and with largely imported equipment which no one in the government
had any experience or expertise and with a party whose history, business or
accomplishments were not known. The Secretary, Energy, Government of
Maharashtra (GoM) instructed the MSEB to finalise certain points so that a
proper PPA could be signed “in sixty days”.

• Although the MoU is not a legally binding document, the deal making process
was criticized for its haste, its lack of transparency and the absence of
competitive bidding.


• After the agreement was signed, the Maharashtra Government requested the
World Bank to review the project. Initially, Enron was “convinced that the World
Bank has full and scientific knowledge of the working of the Power Sector in
India”. This is despite the fact that the then Finance Secretary felt that Enron
would pre-empt the financing of other projects (and hence was not in favour).

• The World Bank found many irregularities in the agreement. The government
had not provided an “overall justification for the project” and the MoU was “one
sided” in favour of Enron. It encouraged the government to “verify Enron’s
experience” as an electricity generating company before proceeding with the

• Later in its report, the World Bank advised that the Enron Project –

i) is unviable
ii) does not satisfy the test of least cost power
iii) is too large and
iv) is not justified by the power demands of Maharashtra.

It clearly mentioned on April 30, 1993, that the project was not a least cost
choice for base load power generation compared with Indian coal and local
gas. Even imported coal is a better option as against imported LNG with the
current environmental standards.

• Hence the World Bank emphatically vetoed the Project. It subsequently

refused to finance the project.

• Enron’s reaction was that the “World Bank’s opinion can be changed” and that
they would engage a “public relations firm to manage the media”.

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• The MSEB and GoM addressed the concerns of the World Bank by
emphasising the environmental benefits of using natural gas, slightly reducing
the plant size and assuring the GoI that there would be power sector reforms to
adjust electricity tariffs.

• In retrospect, the concerns of the World Bank proved well founded. Reforms
did not occur, the tariff was too high and the system was not able to absorb the
capacity, even of Phase I which was operational since May 1999. In hindsight,
it is easy to argue that the decisions made at the time were not justified, but in
this case these issues were raised and dismissed at the time the original
decision was made.


• The MoU did not provide specific details about the costs of the project that were
required under the Indian Law. When CEA asked DPC for the detailed project
costs to justify the rate of return, DPC replied that the tariff was guaranteed
regardless of the capital costs and hence the request was irrelevant and did not
furnish any information beyond the capital cost summary already provided (1).

• The MoU did not specify when the 20-year contract and its associated
payments would begin, when power would be available or when the contract
was signed.

• The structure of payments was a “departure from the existing norms”.

• The price of power was high.

• There was no provision to audit the project over time to ensure that the price
MSEB paid to DPC was commensurate to the actual cost of electricity.

• The MSEB had agreed to a guaranteed minimum fuel purchase but the fuel
supplier was not bound for the minimum fuel supply.

• The MSEB had not verified whether the price of fuel was economical.

• Hence the CEA concluded that the entire MoU was one sided in favour of

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Who is selling the country? North Block? –

“The MSEB had entered into a one sided contract with Enron. This became
possible because the Finance Secretary, sitting in North Block, gave economic
clearance to the project though he was not authorized to do the same. As per law,
the Central Electricity Authority (CEA) has t give a technical as well as economic
clearance to such projects. The story as narrated by the Godbole Committee is as
follows: The Power Secretary told the CEA that the ‘Finance Secretary has
observed that the question of cost of power has been looked into and it has been
found that it was more or less in line with other projects in Maharashtra’. North
block gave the economic clearance to a patently one-sided project leading to the
Maharashtra Government becoming bankrupt.” – Bharat Jhunjhunwala, THE
AVENUE MAIL, Friday, October 25, 2002


• On August 29, 1992, Enron submitted its detailed application to GoI’s Foreign
Investment Promotion Board (FIBP).

• On December 12, 1992, the foreign Investment Promotion Board notified Enron
to split the project into two phases, scale it down and reduce the cost
accordingly to which Enron agreed.

• On February 3, 1993, the GoI notified Enron that its project was approved and
that the GoI would apply for financing to the World Bank and other institutions.

• On April 30, 1993, the World Bank turned down the request for financing (for
reasons given earlier)

• On November 20, 1993, the CEA gave a provisional clearance to the project to
finalise financing.. This provisional clearance was used by Maharashtra
Government for signing the PPA between MSEB and DPC on December 8,
1993. This was treated as highly confidential document.


• As approved, the project was to be implemented in two phases. Phase I

comprising one unit of 740 MW and Phase II comprising two similar units
totaling to 1440 MW. Phase II was optional.

• In March 1995, following the state elections, the Congress (I) government
under which the original PPA was signed gave way to Siv Sena led government
in Maharashtra. Whilst Phase I was under implementation, the new government

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scrapped the project on the grounds of alleged corruption and high costs. It
appointed a committee led by Deputy Chief Minister, Gopinath Munde on May
3, 1995 to review the project.

• In November 1995, the project was “re-negotiated” by the new government.

The 1993 PPA covered only Phase I whilst Phase II was optional for future.
The re-negotiated PPA of Siv Sena–BJP government committed Phase II also,
claiming some savings. Hence the project that was suspended for eight
months was allowed to continue the construction.

• The renegotiated deal was severely criticized in Indian press. It was still one
sided in favour of Enron and open to all the core objections of the original deal.
It further committed the government to almost three times the original capacity.
The renegotiated deal was perceived as eyewash to save face and push the
project through.

• Phase I was completed on May 13, 1999. Phase II is scheduled for completion
by end 2001.

• In the meantime, the rupee-dollar exchange rate went up from Rs 32 when the
contract was signed to Rs. 46 in December, 2000 and the price of oil went up
from US$15 per barrel at the time of signing the contract to US$28 per barrel in
December, 2000.

• Since the power tariff was in US dollars and escalation was accepted in fuel
prices, the tariff increased from Rs.2.4 per unit to Rs 7.8 per unit whilst cost of
generating power from coal stood at Rs 1.25 per unit of Tata Electric
Companies and Rs 2 per unit of Bombay Suburban Electric Supply (BSES) in
December 2000.

• The higher power tariff increased the burden on MSEB resulting in delays and
defaults in its payments to DPC in December 2000 and January 2001 which
were under arbitration. The DPC had invoked the counter guarantees for the
payment defaults (but to no avail).

• In December 2000, on uproar in Maharashtra Assembly for the high cost of

power, led to the announcement by the state Government to review the project.
The State Government set-up a committee led by Madhav Godbole for the

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Fig. 2. Exchange Rate Variation in Rupees per US $

(Annual Averages) from 1996–97 to 2001–02.

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Fig. 3. Crude Oil Price Changes in US $ 2004

during the period 1992 to 2004.

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• In April 2001, the Godbole Committee submitted its report with following main

i) Reduction in tariff and cancelling the present tariff structure

ii) Separation of DPC’s LNG facility and shipping and renegotiating the
fuel supply contract
iii) Removal of dollar denomination at least for the fixed tariff.
iv) Restructuring the debt
v) Setting up a committee to renegotiate the PPA.

The report also suggested judicial probe in signing of the PPA.

• The Mahatrashtra government accepted the Godbole Committee Report and

authorised the Godbole panel to renegotiate the PPA with DPC. Enron did not
accept the suggestions of Godbole Report.

• On May 19, 2001, the DPC issued a pre-termination notice (PTN) to MSEB due
to payment defaults.

• On May 24, 2001, the MSEB rescinded the PPA on grounds that the power
plant did not conform to the PPA and is not capable of meeting the contractual
terms regarding operating characteristics and dynamic parameters. This was
evinced as DPC failed to deliver the base load of 657 MW within 180 minutes
on three occasions – Jan. 28, Feb.13 and Mar. 29. DPC failed and neglected
to adjust the rebate in the billing statement. This issue of rebate payment was
before an arbitration panel.

• The DPC had admitted in a letter to MSEB after January 28 that their power
plant did not conform to the PPA and is not capable of meeting the contractual
terms in respect of operating characteristics and dynamic parameters. The
MSEB thus justified the termination of the PPA.

• On May 28, 2001, the MSEB stopped taking power from DPC since DPC
objected to MSEB’s notice with the argument that MSEB cannot keep
extracting electricity and rescind the PPA.

• MSEB had slapped a penalty of Rs.401 crores for the default in power supply of
January 28. This was followed by another penalty of Rs.400 crores for default
of February 13.

• Frustrated by defaults in payments by DPC on their ongoing contract, Bechtel,

the EPC contractor and 10% stakeholder in DPC, threatened to quit Phase II
work by June 16, 2001 if its dues were not paid. (EPC = Engineering,

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Procurement and Construction). After the expiry of this deadline, the EPC
contractors have pulled out.

• Due to project controversies, the lenders held back about US Dollars 250
million of committed debt. About 10 to 15 percent work was still to be done on
Unit I of Phase II that was to be operational in June 7, 2001.

• DPC had experienced a cost overrun of about US $400 million taking up the
project cost from $2.9 billion to $3.3 billion. This was due to increase in
equipment cost. The financial institutions had refused further exposure to the
project. This would delay the Phase II completion due in end 2001.

• DPC had requested the Indian Financial institutions led by IDBI to reduce their
lending rates. Acceding to DPC request, the lending rates were reduced from
21 per cent to 16.5 percent. This downward revision was not conditional to
DPC’s passing the benefit to MSEB. The IDBI CMD said that such
concessions are made to several (Indian) clients and the concession is not

• By July 8, 2001, the project was in limbo as Godbole panel prepared to

renegotiate the PPA with the aim to bring down the power tariff to “affordable


• Much before Dabhol Plant’s shutdown, Enron’s corporate strategy worldwide

had changed. Kenneth Lay, Enron’s CEO had announced that the company
was no more interested in making long term investments in infrastructure
projects. Enron wanted to invest in trading related activities.

• Change of strategy coupled with DPC’s feud with MSEB led to the decision by
Enron to pull out of DPC. Hence a suitable buyer had to be found for the

• The Indian financial institutions led by IDBI had lent money to DPC as well as
stood security for the loans of foreign financial institutions to DPC. Hence the
Indian financial institutions had every reason to be concerned about DPC
shutdown and to find a solution.

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• The financial institutions (FIs) had pegged a loss of $0.5 million per day due to
stoppage of power from Phase-I and delays in completion of Phase-II that was
90% complete. Indian FIs exposure to the project was about Rs.5170 Crores
plus guarantees.

• Earlier, the FIs had proposed NTPC taking over the project. However, the
government did not allow such backdoor nationalization of independent power
producers (IPPs).

• After the shutdown, the interested buyers for DPC’s power plant are Tata
Power Company (TPC) and the Bombay Suburban Electricity Supply Company
(BSEB). The interested buyers for LNG facilities are GAIL, Shell, Total Fina Elf
and Gaz de France (GdF). These companies were to carry out open, fair and
transparent due diligence.

• The sale formula proposed by lenders for DPC was as follows:

1. The bidders would appoint their consultants for due diligence.

2. A non-refundable earnest money of $100,000 would be required from each

bidder. A confidentiality agreement needed to be signed by each bidder.

3. The lenders would also advertise for inviting expression of interest (EoI)
from other possible bidders.

4. On Jan 25, 2002, the financial advisers would be appointed.

5. On Jan 31, 2002, the due diligence would begin in London for examining
books and documents. The bidders would be given four days to complete
this exercise.

6. This would probably be followed by a two-day site visit to the plant by each

7. Subsequently there would be two pre-bid conferences, one in mid Feb.

2002 and the other in end Feb 2002.

8. Financial bids would be invited by March 14 and opened on

March 15.

9. Two companies would be short listed by March 31 for final bid.

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10. The final bid would take place by April 15, 2002. This was expected to end
the uncertainty of the project.

• Whilst Enron had expected $ 1 billion for its stake in DPC, the bidders expect to
pay about half after due diligence. Consideration was also to be given to the
amount required to re-start Phase-I generation and for completion and start-up
of Phase-II.

• The DPC in the meantime shifted some critical plant components (e-chips,
coded CDs etc) and confidential documents to a “safe place” (Enron’s
headquarters at Houston). The Customs have held DPC prima facie
responsible for violating the Customs Act. The Indian lenders have asked DPC
to return these items.

• MSEB and DPC were continuing to fight various cases in different courts.

• DPC subsequently laid-off all its workforce (some 12,000 plant employees)
except just a few security.

• On June 20, 2001, Bechtel (the engineering and construction contractor) and
GE (the equipment supplier) had demobilised their workforce and equipment
from the project site.

• The project was facing a cost overrun of US $400 million.

• On Sept. 29, 2001, GoM has decided to set up a judicial commission to

probe into the Dabhol deal. The Godbole Committee had pointed to
administrative failures and lapses of judgment at all stages of project
negotiation, approval and implementation. If these were deliberate, the guilty
should be prosecuted and punished.


• While the Dabhol crisis was simmering, back at the head quarters of Enron
Corp. in Houston, Texas, serious problems began to unfold which turned the
meteoric rise of Enron to an even more dramatic fall. This section enumerates
the factors that led to the rise and crash of Enron.

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Soaring Towards the Sky

• In 1985, Enron was formed by merger of Houston Natural Gas and Inter North
of Omaha, Nebraska. In the early days, the company’s main business was
operation of natural gas pipelines. There was not much money from natural
gas whose prices were then regulated.

• In February 1986, Kenneth Lay became the Chairman of Enron. He took the
company to its dizzy heights till his resignation on January 24, 2002 just after
the crash of Enron.

• In 1990, the federal government deregulated the energy industry. Previously,

the large regulated utilities in the U.S. were vertically integrated with control
from wellhead to consumer. Deregulation split the production, transmission
and distribution leaving each function to different players and giving the
consumer a choice of suppliers.

• Enron seized the opportunity presented by deregulation and positioned itself as

an intermediary for trading between gas suppliers and gas consumers. It
developed the spot and derivative market in energy. It could buy and sell
contracts specifying quantities, prices and delivery dates. It could enter a fixed
price contract and absorb the future price variation. This enabled the energy
users to stabilise costs far into the future. Enron developed the information so
that it could project into the future. Thus it bought and sold “risk positions”. It
also developed the legal expertise to negotiate and formulate contracts.

• Subsequently, Enron diversified itself from energy trading of gas, oil, coal and
electricity to trading in various other areas such as telecom bandwidths,
commodities, fibre optics, water, weather derivatives, newsprint and real estate.
In 1999, it created “Enron Online”, an internet based trading system.

• To generate capital for the increasing business, Enron adopted “off-the-

balance-sheet” transactions exploiting a loophole in the U.S. regulations that
“entities” can be kept off the parent company’s books if it does not own more
than 50% of the entity. Thus using subsidiaries, it need not make transparent
either the nature of investment or the relationship between the parent and the
subsidiary. Enron’s stock was offered collateral for the off-balance-sheet

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• Enron’s aggressive and innovative method made it the largest and fastest
growing company from a $8 billion company in 1986 to the seventh largest
corporation in Fortune 500 list with sales over $100 billion by 2000 with its stock
trading of $90. Between 1996 and 2001, Enron was six times on Fortune’s list
of “America’s most innovative companies”.

• Intense pressure to keep Enron stock on an ever-rising curve induced top

executives to take greater and greater risks with investments and accounting
practices. This resulted in inflation of revenues and submergence of growing
debts creating a “house of cards”. Just one-quarter loss could cause a collapse
and it did.

• In 2000, Enron reported a revenue of $101 billion (Rs.480.000 Crores)

Fig. 4. The
Pre Work-Session key events and stock price movements
in the growth and bankruptcy of Enron.
D.C.Singhal 20 of 37

The Countdown to a Stunning Crash

• On October 16, 2001, Enron reported poor third quarter results. In many of the
new areas there were significant losses. Many of the losses were due to bad
bets Enron had made through highly leveraged derivatives. This shattered the
investor and customer confidence.

• On October 24, 2001, the crash started. The Chief Financial Officer, Andrew
Festow, was forced to resign.

• In Oct-Nov 2001, Enron revised its reports of four years from 1997 to 2000 and
showed $600 million less profit than reported earlier and a debt of $628 million.

• In Nov 28, 2001, Enron’s rival, Dynegy, withdrew $8 billion take over bid.
Enron’s stock plummeted to 26 cents from a high of $80 in Jan 2001. Standard
and Poor downgraded Enron’s brands to junk status.

• In Dec 2, 2001, Enron filed for Chapter 11 bankruptcy, the largest in US history
till the time. Enron also sued Dynegy for breach of contract.

• On Jan 10, 2002, a federal criminal investigation began against Enron.

• Enron’s collapse also entangled the firm’s auditor, Arthur Anderson, and the
Bush Administration with which Enron had close proximity. Enron and Arthur
Anderson had also shredded and destroyed many confidential documents.

• On Jan 23, 2002, Kenneth Lay resigned as Enron’s Chairman and Chief
Executive Officer.

• The swift downfall of Enron left countless investors burned-up, most employees
(more than 20,000) out of work with lost retirement savings invested in Enron
stock (US companies commonly use their managed retirement funds to boost
their own stock). The creditors of Enron filed lawsuits to try and retrieve at least
some of the money they loaned, the main creditor being JP Morgan with $2.1
billion credit.

• The insiders, board members and senior executives who were in the know
exited in time. At one stage, the privileged executives were selling Enron stock
and the unprivileged employees were being encouraged to buy. But the top
key employees got away with the cream!

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The Aftermath

• For corruption, fraud and conspiracy that led to the bankruptcy of Enron, the
U.S. government prosecuted the top executives responsible for it. The results
of the main prosecutions are given below (2).

• On January 14, 2004, Andrew Fastow, the former Chief Financial Officer of
Enron pleaded guilty to the criminal charges of money laundering and
conspiracy to commit fraud and agreed to a ten year prison term. He asked for
leniency and agreed to cooperate with the shareholders’ suit. His sentence was
reduced to six years.

• On February 19, 2004, Jeffrey Skilling, the former Chief Executive of Enron
was indicted for conspiracy, fraud and insider trading. On October 23, 2006,
Skilling was sentenced to more than 24 years in prison.

• On July 8, 2004, Kenneth Lay, Enron’s founder and chairman was indicted
and charged with 11 criminal counts including securities and bank fraud and
faced up to 45 years in prison. On May 2006, Lay was convicted on six counts
of fraud and conspiracy and four counts of bank fraud. Lay died of heart attack
on July 6, 2006.

• On December 28, 2005, Richard Causey, the former Enron Chief

Accountant, pleaded guilty to securities fraud in exchange for a seven year

Reference: (2) Hindustan Times (Ranchi), October 25, 2006, p.13.


• No competitive bidding. Hence Enron could force its terms.

• Details of Enron not known as regards history, business or accomplishment.

The World Bank encouraged the government to “verify Enron’s experience” as
electricity generating company before proceeding with the project.

• High project costs and power tariffs. Enron had completed a similar sized plant
in Teeside, UK, for less than half the price. The power tariff for Jan 2001 of

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D.C.Singhal 22 of 37

DPC is Rs 7.8 per unit as against Rs 1.25 per unit of Tata Electric Cos. and Rs
2 per unit of BSES.

• Payment to DPC by MSEB were guaranteed by the State Government and

counter guaranteed Central Government. This was a special consideration to

• The tariff was denominated in US dollars insulating Enron from rupee-dollar


• All disputes were to be settled under English Law in England.

• Enron was offered a guaranteed PLF-linked return on equity plus escalation in

fuel, transmission and maintenance. This “cost-plus” structure is a “departure
from existing norms”.

• The PPA and dealings were initially kept secret leading to the regrettable lack
of transparency in public transactions. Even in the US, Government
agreements are public under “Freedom of Information Act”.

• Enron paid US$20 million as “education gifts”. Critics consider these as bribes
to clear the project. It may be mentioned that a contract made through
fraudulent means is void.

• No environmental impact assessment was carried out by the project authorities.

• The CEA in 1993 did not clear DPC’s project because its tariff formula violated
the stipulated two-part structure. It gave only a “provincial clearance” to
arrange finance. This issue remains unopened in the subsequent dealings.

• Enron’s contract with MSEB was for supply of power and for fuel management.
The latter part could have been separated to impact less on the tariff.

• The World Bank had vetoed the project and did not finance it. Yet Enron was
undeterred and went ahead with the project. It is said that several unseen
factors and forces seemed to have worked to get Enron what it wanted.

• Enron had a clout with top US politicians and the US Government. It could
count on their support.

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D.C.Singhal 23 of 37

• It was perceived that if Enron pulled out of Dabhol project, the foreign direct
investment (FDI) in power projects in India may dry up. This aside, the Indo-US
relations may also suffer a setback.


• Contracts should not be signed too hastily. The party must be known as
regards its ability and past records.

• Multiple party bids must be invited not only for more competitive terms but also
for greater transparency.

• Proper analysis must be done as regards costs and benefits as well as terms
and conditions. This should include sensitivity analysis as would have been
required in the Enron contract such as:

i) Effect of rupee-dollar exchange rate variation

ii) Impact of oil price variation
iii) Effect of power demand not growing as projected

• Recommendations of expert party such as the World Bank should not have
been ignored. In retrospect, all the concerns of the World Bank about Enron
Project proved well founded. The power costs were high. The system was
unable to absorb the capacity even of Phase-1 and power sector reforms did
not occur. Such issues were raised but dismissed at the time the original
decision was made.

• Dealing should be transparent particularly in public transactions. It was alleged

that the contract clearances were obtained through bribes to corrupt officials. A
contract procured through bribery of a public official is a fraudulent transaction
and void under the law.

• Contract terms should have been properly negotiated in the case of Enron

i) There should have been a proper justification for the cost of power.

ii) Legal proceedings should have been agreed to in India and under Indian
Law (and not in England under English Law).

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D.C.Singhal 24 of 37

iii) The payments should have been denominated in rupees and not in U.S

A foreign investor who negotiates a deal that extracts a fabulous price but

bankrupts the customer gets in fact a bad deal fraught with commercial and

political risk.

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D.C.Singhal 25 of 37


– D.C. Singhal

Part 2

The Post-Shutdown Scenario

• DPC Plant had been shut down since May 29, 2001. The FIs had lost over Rs.
2000 crores in interest income alone for about three years till May 2004. This is
aside from the deterioration and upkeep costs of the assets. The losses would
continue to mount till the project was restarted which may take more time.

• Despite early attempts for revival of the Dabhol Plant, the efforts were not
successful due to differences between the Indian and foreign lenders as well as
the foreign equity holders viz. Enron, GE and Bechtel.

• The price of power (and the load factor) acceptable to MSEB was also a matter
to be settled. This was coupled with the price of imported fuel that was loaded
with import duty and sales tax. A price of Rs. 2.8 per unit of power was finally
agreed in November 2002.

• In April 2003, the IDBI appointed N.M.Rothchild as financial consultant to sell

the Dabhol Plant. Rothchild subsequently also appionted Tractabel of Belgium
as co-consultants for the technical aspects.

• To speed-up the process for plant revival, the GoI formed the Naresh Chandra
Committee. Their recommendations essentially were:

(1) The Indian lenders were to form a Special Purpose Vehicle (“SPV”) to take
over the offshore debt.

(2) The US government promoted Overseas Private Investment Corporation

(“Opic”) is an agency that offers political risk insurance to US firms. Opic
had an option agreement to buy out the bankrupt Enron’s 65 % equity in
DPC. Opic had to float tenders for equity sale of the stake of Enron
Corporation (held through Enron Mauritius) in the DPC and select a new

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D.C.Singhal 26 of 37

(3) The new sponsor would buy out the $ 120 million equity each of GE and
Bechtel as well as settle their contractual claims and take over the MSEB
stake to achieve 100% control.
(4) GE and Bechtel would recommission Phase I and complete Phase II (which
stood 93 % complete).

• On April 8, 2004, in a new development, the US bankruptcy court in New York

enabled GE and Bechtel to buy out Enron Corporation’s 65 % equity in DPC
(originally costing $ 608 million) for just $ 20 million. This gave GE-Bechtel 85%
equity in DPC, the balance 15 % being with MSEB.

• Enron’s equity of 65 % in DPC would be transferred in two stages to GE-

Bechtel. Stage 1, comprising 32 %, would be transferred immediately. In Stage
2, the balance 33 % would be transferred after the dispute over Phase I of the
project would be sorted out.

• Earlier, Opic had inked an option agreement to buy out its 65 % equity in the
DPC. Opic had already paid $ 57 million as damages to GE-Bechtel over their
DPC exposure. Whilst MSEB did not push its claim to buy Enron’s equity and
backed out in the last moment under GoI instructions based on legal advice
since it would have affected other court cases between MSEB and Enron.

• Reliance, the only Indian firm to bid, had offered $ 25 million for the Enron
equity in DPC. The US bankruptcy court turned this down, as it did not have the
support of the GOI. GE-Bechtel being the equity holders had the first rights.

• It may be mentioned here that there was no bidding process as such for the
Enron stake. The US court was only approving an agreement of February-
March 2004 between Opic, GE, Bechtel and Enron. The agreement was not
only for DPC but also involved the settlement of other claims. However, Opic’s
backing of GE-Bechtel could perhaps have been a deciding factor for the
transfer of Enron’s stake to them.

• Also in April 2004, Frank Wisner, the former US Ambassador to India and
subsequently the Chairman of AIG, had meetings in Delhi on the subject.
(AIG stands for the American International Group Inc., the world’s no. 2
insurer by market value). The GoI sought assurances that in case of change of
ownership of DPC, the US companies would not claim damages on the
sovereign guarantees given to Phase I of DPC. In September 2003, GE-
Bechtel had filed an arbitration action against the GoI claiming $ 1.2 billion as

• After the acquisition of the Enron stake, GE-Bechtel offered to GoI their stake in
DPC for $ 400 million. This comprised:

(1) The original investment of 20 % in DPC …$ 240 million

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D.C.Singhal 27 of 37

(2) Acquisition of Enron’s 65 % stake …$ 20 million

(3) Unpaid dues from DPC …$ 140 million
(4) Total price for 85 % stake in DPC …$ 400 million
(5) Original total equity of DPC … $ 1200 million

• Enron had pledged their DPC shares with the Indian lenders and the position
continued to remains so. Hence whilst GE-Bechtel’s takeover of Enron’s equity
consolidated their negotiating position, the transfer of ownership required the
lender’s approval.

• As per loan agreements, DPC’s equity has been pledged to Indian lenders who
could either enforce it or go in for a negotiated settlement with the defaulting
borrower. This is also provided for under the Securitisation Act 2002.

• For enforcing the pledge, the Indian lenders need to classify the DPC assets as
non-performing assets (NPAs) and provide for them. Sources said that whilst
ICICI Bank, SBI and Canara Bank had provided for their exposures, IDBI had
yet to do so. This had prevented the Indian lenders from enforcing the pledge
under which they could take over DPC’s shares. IDBI had been in talk with the
RBI for permission to treat DPC as a special case otherwise the assets would
become NPAs. Subsequently, in April 2004, the IDBI also provided for its Rs.
2121 crore exposure to DPC (Phases I & II) thus pulling down its net profits for

• GE-Bechtel’s increased stake in DPC being 85 %, they had better bargaining

power for their assets. The Indian lenders held that the DPC shares being
pledged with them cannot be transferred without their consent and they could
use this as a negotiating point.

• The Indian lenders had been trying to take over the foreign debt at
40 % of its value. That was not acceptable the foreign lenders. The
Indian lenders subsequently revised the amount to 70 % of the value
so that it could be acceptable to the foreign lenders. This needed to
be negotiated.

• The SPV to be floated by the Indian lenders to take over the foreign debt and
the export credit guarantees would comprise the issue of bonds that will be
guaranteed by the GoI. These bonds were expected to have a maturity period
of five years and an interest rate in line with the other similar GoI securities.

• The total foreign exposure of Indian lenders comprised Rs. 900 crores ($ 640
million) debt and Rs. 2000 crore of export credit guarantees.

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D.C.Singhal 28 of 37


– D.C. Singhal

Part 3


• The Central Government appointed a Group of Ministers (“GoM”) headed by

the Defense Minister, Mr. Pranab Mukherjee to settle the Dabhol imbroglio and
start the power plant expeditiously. The objective was to acquire the foreign
equity and foreign debt, as these were impediments to the settlement.

• 85 % equity was with GE and Bechtel (the balance 15 % being with MSEB). GE
and Bechtel who at the start of the project had 10 % equity each, had post-
shutdown acquired the Enron stake of 65 % in a settlement in the U.S. and
strengthened their negotiating position on their claims.

• The foreign debt was from the Export Credit Agency (“ECA”), a consortium of
foreign lenders headed by JIBC of Japan.

• A Special Purpose Vehicle (“SPV”) named Ratnagiri Gas and Power Private
Limited (“RGPPL”) was set-up to revive the power plant. GAIL and NTPC would
invest Rs. 500 crore each in RGPPL. MSEB would also be a partner in RGPPL
with a preferential equity of Rs. 265 crores (at zero coupon rate for five years).

• GE - Bechtel had initiated an arbitration case against the Central Government

at the London Arbitration Tribunal on GoI’s counter guarantees on the Dabhol
Project. It was thought that GE – Bechtel had a strong case as against the GoI.
This was viewed as a pressurising tactic whilst negotiations for settlement were
in progress.

• Finally in July 12, 2005, a settlement for $ 160 million was reached with Bechtel
on its claims. Earlier, a similar settlement for $ 145 million was separately
reached with GE on its claims. Hence, with total equity in Indian hands, a way
was paved for Dabhol start-up.

• It was agreed that GE – Bechtel would withdraw all cases against the Indian
side and vice versa i.e. GoI would withdraw the Dabhol related arbitration cases

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D.C.Singhal 29 of 37

in the Supreme Court. The GE – Bechtel had taken an indemnification from the
Union Government against future claims of LNG suppliers and carriers, which
the GoI considered as not holding much ground.

•The power plant, lying idle since 2001, would be first transferred to
an SPV floated by GE – Bechtel named the New Age Power
Company and then to RGPPL.

•Once the asset transfer is complete, RGPPL would undertake the construction
and commissioning activities of the power plant and the LNG terminal. The
plant is expected to start in the second half of 2006.

•One settlement was still to be made. This was with the foreign lenders. The
RGPPL would need to go for a commercial borrowing to repay $ 380 million
due to ECA. The RGPPL may float bonds to raise the requisite funds to pay
back ECA.


• The RGPPL would acquire the Dabhol Project at the following

estimated cost :
Power Plant Rs. 7,538 crores
LNG Terminal Rs. 3,500 crores
Total Cost Rs. 10,000 crores
(The plant revival cost is estimated at Rs. 870 crores.)

• The power tariff of Rs. 2.3 per unit comprises :

Fixed Cost Rs. 0.93
Regassifying Cost Rs. 0.17
Fuel Cost Rs. 1.20*
Total Cost Rs. 2.30 per Unit
(*The fuel cost of Rs. 1.20 is based on LNG price of
$ 3.65 per mmbtu. The fuel cost is linked to the raw
material prices.)

• To make Dabhol more viable :

(1) NTPC – GAIL may need to sell power outside the state if MSEB
cannot afford it.

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D.C.Singhal 30 of 37

(2) Dabhol should switch over to LNG from restart rather than use a
costly fuel like naphtha.

(3) LNG terminal may be operated as a profit center supplying gas to

other commercial consumers as well. The LNG terminal has a
capacity of 5 mtpy whilst only 2.1 mtpy is required for full power
generation of 2,184 MW.

(4) The plant needs to be run as a base load station aiming at a plant
load factor of over 90 %.

(5) RGPPL should consider a capacity expansion to say 5000 MW to

lower the fixed costs per unit.

• Some important factors for project viability are :

(1) Dabhol’s new tariff should be frozen at Rs. 2.3 per unit. The power
ministry has sought a special waiver from the cabinet for this. In the
absence of this special waiver, the regulator will be required to approve
the project cost.

(2) The lenders will have to foot the extra bill if the revival cost exceeds the
original estimate of Rs. 870 crores.

• On August 12, 2005, the Cabinet Committee on Economic Affairs (CCEA)

approved a package of concessions for RGPPL

(1) Granting RGPPL the mega-power status, contingent upon the

company selling 5 % of the power generated to outside Maharashtra.

(2)Tax concessions under section 80-IA of the Income Tax Act i.e.
deductions from gross total income of a specified percentage of
profits and gains by enterprises engaged in infrastructure development.

(3) An exemption from capital gains tax.

(4) A 5 % customs duty waiver for LNG imports.

(6) Approval for the negotiated tariff of Rs. 2.30 per unit of electricity
produced for a period of five years.

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D.C.Singhal 31 of 37


– D.C. Singhal

Part 4

Status as of September 2006 of Dabhol Power Project

• Project Ownership (3) – Dabhol Power Project now a state owned enterprise
with name changed to Ratnagiri Gas and Power Private (“RGPPL”). It is a
joint venture of NTPC and GAIL. Its ownership pattern is as follows:

(1) NTPC 28.33 %

(2) GAIL 28.33 %
(3) MSEB 15 %
(4) FIs 28.33 % (IDBI, SBI,ICICI and Canara Bank)

• Start-up Schedule (1) (2) of the three unit multi fuel power plant :

(1)Unit 1 (740 Mw) – To start in December 2006*.

Under extensive repairs.
(2)Unit 2 (740 Mw) – To restart in October 2006. Unit complete.
(Operated in May-June (2 months).
Restart to be only if GoM agrees to buy
costly power at over Rs. 6/unit produced
with naphtha as fuel.
(3)Unit 3 (740 Mw) – To start in December 2006*.
Under completion.

*The commissioning of Units 1 and 3 to be delayed to

March 2007 to match with arrival of LNG.

• LNG Terminal (1)

Capacity – 5 MTPA of LNG

Requirement for 2184 Mw – 2.1 MTPA of LNG.
Balance for sale.

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D.C.Singhal 32 of 37

• LNG Supply (1)

GAIL has not been able to obtain supplies from Oman or Qatar to be
delivered at Dabhol. The same suppliers agreed to supply LNG at Daheg
(Gujarat) at the Petronet Terminal.

GAIL is laying 187 km pipeline to Dabhol. Contract is awarded to Punj

Lloyd. GAIL wants to recover this cost from NTPC at $ 1 per mBtu which
NTPC is not willing to pay.

• Increased cost of completion (3) (4).

(1) Originally for completing the balance 15 % work

left by Enron Rs. 710 crores was required.
(2) This work will require an additional Rs 1000 crores.
(The completion cost of Rs. 1710 crores together with the transfer cost
of Rs. 1790 crores works out to a total cost of Rs. 3500 crores for LNG
terminal alone.

• Progress of completion work (3)

RGPPL is going ahead with the completion of the project.

The Power Finance Corporation is financing the entire
debt of Rs. 1400 crores to RGPPL. Phase II comprising
the 1440 Mw capacity and LNG Terminal is expected to be
functional by April 2007.

• Cost of power (3)

With the current naphtha prices, the power would cost Rs. 7 per unit with
the fuel cost running to Rs 6.07 based on the current naphtha price.

• Power shortage (4)

Maharashtra may buy power at over Rs. 6 per unit from RGPPL based on
using naphtha. Mahadiscom (the power distribution arm of the trifurcated
MSEB) has requested approval from the authorities.

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D.C.Singhal 33 of 37

Status Update as of September 2006 of Dabhol Power Project

• Additional Equity Infusion Plan (5)

The cost overrun of the LNG Terminal at the Dabhol Plant will be from the
initial estimate of Rs. 2800 crores to Rs. 4000 crores.To meet the cost
overrun, an equity infusion plan has been made comprising:

(a) Rs. 250 crores investment by Maharashtra government through

Maharashtra Power Development Company Limited (MPCL),
which will increase the MPCL’s stake in the RGPPL from 15 to
18 per cent.

(b) Rs. 475 crores investment each by GAIL and NTPC (each
holding 28.5 per cent stake in RGPPL.

Reference: (5) BS Reporter, Mumbai, September 12, 2007.

• Dahej – Dabhol Gas Pipeline (6), (7), (8)

o The Dahej-Uran-Dabhol gas pipeline will transport regassified LNG from

Petronet’s LNG Terminal at Dahej in Gujarat to Dabhol in Maharashtra. It
will supply gas to the power plant pending completion of Dabhol’s LNG
Terminal which is expected to be operational by 2010.

o The pipeline links the Gujarat network having five supply sources to
Maharashtra network with only one supply source (Bombay High which
is now declining).

o The trunk pipeline is a two-way flow pipeline 577 km long with 222 km in
Gujarat and 354 km in Maharashtra and passes over 33 river crossings.
It costs about 3,200 crores. It is a 30-inch diameter pipeline and can
transport 12 million cu.m. of gas per day.

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D.C.Singhal 34 of 37

o The construction started in May 2006 and was completed in June 2007
delivering the first gas supply to the power plant on July 10, 2007.

• Restart Schedule (7)

o RPGGL partly started power generation in May 1, 2006 in one unit

(Block II) from naphtha (since LNG supply was not available) to meet the
power shortage in Maharashtra. Subsequently, the second unit (Block
III) was also started on naphtha with the power plant delivering 1400

o The gas supply will enable the plant to switch over generation from
expensive naphtha to cheaper feedstock of gas. The 740 MW Unit 2
(Block II) is expected to switch to gas in first week of August and Unit 3
(Block III) would come on gas after eight weeks. Unit 1 (Block I) is
scheduled to go on gas from December 15, 2007 enabling the power
plant capacity of 2184 MW fully on gas. (GAIL had withheld gas supplies
after pipeline completion since RGPPL had delayed furnishing an L/C).

… To be continued as the story unfolds.

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D.C.Singhal 35 of 37

• References :

(1) The Times Of India (New Delhi), August 10, 2006, p.15 ,
“Dabhol looks for lifeline”.
(2) The Times Of India (New Delhi), August 24, 2006, p.19 ,
“Ratnagiri Gas to delay units at Dabhol”.
(3) The Economic Times (New Delhi), September 4, 2006, p. 16,
“Ratnagiri Gas has no plans to sell Dabhol Power Plant”.
(4) The Times Of India (New Delhi), September 6, 2006, p.15 ,
“State may buy Dabhol power at over Rs. 6 per unit”.
(5) BS Reporter, Mumbai, September 12, 2007.

(6) The Times of India, New Delhi, July 14, 2007, p.24,
“Dabhol gets first supply of gas from GAIL”
(7) The Times of India, New Delhi, July 24, 2007, p. 14,
“Petronet to start gas supply to Dabhol soon”
(8) The Times of India, New Delhi, May 8, 2007, p.16,
“GAIL’s Dabhol pipeline gets going”

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D.C.Singhal 36 of 37


1. Financing Institutions and the Government of the United States

A) Phase I Financing
B) Phase II Financing

Internet 8-1.htm

& 8-3, htm

2. Selected Recommendations and Conclusions from the Parliamentary

Standing Committee on Energy, May 29, 1995


3. Report of the Cabinet Sub-Committee to Review the Dabhol Power

Project (The Munde Committee Review)

Internet - b.htm

4. The Munde Committee Report

Internet 2-2. htm

5. The “Renegotiated” project

Internet 2-3. htm

6. The CITU Lawsuit

Internet 2-4. htm

7. The Corporate Complicity

Internet 2-0. htm

8. Enron’s eight-year power struggle in India

by Tony Allison, Asia Times – Special Reports, January 18, 2001

9. Enron, Deal Blows a Fuse by Pratap Chatterjee


10. Extracts from the Godbole Committee Report

a) “An inexcusable failure of governance”

Business Standard, May 23, 2001

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D.C.Singhal 37 of 37

b) “The base load question”,

Business Standard, May 24, 2001

c) “CEA’s dubious due diligence”,

Business Standard, May 25, 2001

11. Knowledge at Wharton – Strategic Management

Internet http://knowledgee.wart…/print version.cfm?
Article id = 469 & dated – 11/28/01

12. Summary of Power Purchase Agreement (PPA)


13. Audit Note on PPA by Accountant General dated 19.06.95


14. “Power Play” by Abhay Mehta (Orient Longmans)

Book No. 15207, 1999-2000, 226 pages, Rs. 195.
(About Negotiation and Pre-start-up Phase of the Project)

Pre Work-Session 6-Bus.Neg