ENRON AND THE DABHOL POWER COMPANY

In 2001, enron embroiled in long running dispute with various levels of govt in India. Dabhol Power Project, a 2184 mw power project in Maharashtra. In 2001, Enron had five main businesses including. Enron wholesale services Enron energy services Enron transportation services By 2001, Enron was involved in energy infrastructure projects across the globe. Most of its Energy related businesses were in developing countries Revenues were tied with US $ Incentive payments were tied to the NPV of the projects

Market Reforms in India

Indias population over one billion(2nd largest), Area wise 7th largest country in the world and 5th largest economy. Economic policy of self-sufficiency Till 1990, High tariffs kept out imports and govt policies discouraged foreign investment Govt was on the verge of bankruptcy and reserves were insufficient In 1991, Raos govt introduced free market reforms to liberalize the economy and encourage foreign investment. Free Market Reforms resulted into: From 1994-98 GDP grew at 7% annually & Inflation remained under 10% FDI reached US$ 2.4 billion in 1998 Foreign reserves rose to $41.1 billion in2001 from $ 1 billion in 1991 Produced $100 billion in new entrepreneurial projects

Demand for Electricity

Scarcity of electric power & most industries operated at half capacity In 1990, Indian production capacity was 100,000 MW and govt targeted capacity Increases of 111,500 MW by 2007. Power was generated and managed by SEBs, and its power plants operated at 50% capacity Indian power rates were lowest in the world Central govt decided to turn to private sector The Electricity Act was amended in October 1991 & March 1992 By July 1995, 130 MOUs had been signed with IPPs for foreign investment in the power sector.

The Dabhol Project

1. Enron' submitted a proposal to build a 2015 MW gas fired power plant at Dabhol an investment of US $ 2.8 Billion 2. In June 1992, Enron signed MOU with MSEB 3. DPC (Dabhol Power Company) was formed by Enron 80%, GE 10% and International Generation Co. 10% 4. WB/Central Electricity Authority(CEA) reviewed the project and termed it as one sided in favor of Enron 5. In November 1993 CEA cleared Dabhol project & in December 1993 MSEB signed PPA greement with DPC 6. Maharashtra govt signed financial guarantee in Feb 94 7. Central govt signed a guarantee in September 94, before Guarantee Policy was announced publically making it controvercial

Structure of the Dabhol Project

Maharashtra govt decided to break the project into two phases. Phase 1 - 695 MW plant using distillate fuel instead of natural gas, (Capital cost $920 million) Phase 2 - 1320 MW gas fired plant, (Capital cost $ 1.9 billion) Fixed ROR was adopted with 16% ROR on net worth of plant load upto 68.5% & 0.7% for each 1% rise beyond 68.5%% Estimated tariff of Rs.2.40 per unit (kilowatt/hour) included Rs1.2 based on capital cost & Rs1.2 for the price of fuel. The energy charge was based on estimated fuel cost & could rise or fall. MSEB was required to bear the exchange risk. IRR on the project was 26.5% before tax & was granted five year tax holiday & initial purchase agreement was for 20 years.

Central/State Politics and the 1995 Maharashtra Election

In 1991 Congress(I) won elections and P.V. Narsimha Rao became PM Introduced free market reforms in July 1991 and opened power industry to private FDI Ruling party in Maharashtra was Congress (I) with Sharad Pawar as CM (1990-95) In 1995, Maharashtra state election campaign BJP pledged masses to review the Dabhol project BJP and its won elections in the state and formed Govt with Manohar Joshi as CM and formed Munde committe In 1996, Rao resigned as party president after being charged with bribery In 1998, BJP formed a 13 party coalition govt with A. B. Vajpayee BJP govt this time took a moderate stance towards freemarket liberalization

Construction Begins
On march 2, 1995, Enron completed the financing for phase-1 Construction started soon New state govt decided to put the project under review

The Munde Committee

Committee headed by Munde (known critic of Dabhol) formed to review the project & scheduled to submit its report by july 1. On August 3, CM Joshi announced to Maharashtra legislature that cabinet agreed to suspend Phase 1 & scrap Phase 2. At that time it was nearly one-third complete

Renegotiation
On cancellation of project, Enron filed for arbitration and claimed $300 millions in damages In September, Rebecca offered renegotiations Renegotiations resulted into settlement of the issue and costs were reduced New contract was signed in April and construction was resumed in December 96

Completion of phase one

In may 1999, phase 1 was completed and became operational. Enron secured financing for 1.87 billion phase 2

New problem
In Maharashtra state election campaign in 1999, Congress party promised if elected to halt DPCs second phase and renegotiate power tariff In 2000, MSEB sold 50% stake in DPC to Enron MSEB was purchasing 33% -60% output

Enrons Response
Enron invoked central govt guarantee to recover $17 million owed by MSEB Construction on phase 2, 95% completed was stopped. In September, CEO of Enron proposed selling the DPC equity for approximately &1.2 billion & the purchase of offshore lenders debt for $1.1 billion, for a total cost of 2.3 billion.

Conclusions