The Contract Killer

Has the Dabhol Calamity that anti-Enron activists have been warning about for five years now finally struck? Yes, claim some observers, and it'll hit the electricity consumer in Maharashtra hard. In June this year, the Maharashtra State Electricity Board (mseb) bought 236 million units of power from Enron's Dabhol Power Company (dpc) at the rate of Rs 4.96 per unit. A bill of Rs 117 crore awaits payment after the first bill of Rs 230 crore for pre-and post-commissioning charges until May 31, 1999.

Mseb bought this power because its own plant was shut for maintenance and repairs. The board bought it even though it could have gone in for cheaper power that was readily available. The Tata Electric Companies (tec) claim they have a surplus of 200 MW to 400 MW which they can supply at Rs 2 per unit. Maharashtra also has a share of 1,750 MW from the National Thermal Power Corporation (ntpc), the central power generation company, which it could have bought. This power is available at about Rs 1.30 per unit. But according to the terms of their contract, mseb has to buy power from dpc whether it needs it or not, and even if there's a cheaper alternative.

mseb claims that some ntpc units were shut for maintenance at the same time, so it could not have bought from there. Says Asoke Basak, chairman, mseb: "There's no question of buying from tec because we have no such buying agreement. It is important for mseb to buy power from a stable, consistent source rather than from a slippery one. A cheaper supplier who cannot assure regular supplies is of no use."

Basak further tries to allay fears of sky-rocketing prices. He says the rate for June was high because less power was consumed. In most power-buying arrangements, the rate falls as the amount bought gets closer to the maximum a plant can generate (the plant load factor or plf) as the plant gets increasingly efficient. The rate goes up as the purchased amount drops away from the plf. But some industry experts feel mseb's need can rarely exceed 65 to 70 per cent of the plf, given the state's requirements. So, it'll continue to pay a rate close to Rs 5 whenever it buys from dpc. Basak argues that panic is spreading only because of the two above-mentioned bills. There will be quarterly and annual settlements when mseb would have paid Rs 3 to Rs 3.10 per unit on an average.

But isn't even this rate a far cry from the Rs 1.86 per unit that was much-touted by the mseb and the government initially? mseb owns a 30 per cent stake in dpc. So, isn't there a conflict of interest here where it is both the seller and the buyer? The power purchase agreement (ppa) with dpc is a double-edged sword. It has been negotiated on a 90 per cent load factor. Which means mseb will continue to pay a "capacity charge" of about Rs 1.40 per unit on how much the plant can produce, irrespective of how much it actually buys from time to time. So, even if mseb shops for cheaper power elsewhere, it'll continue to pay this amount on the plant's capacity. If mseb can't pay, the central government, which has given a counter guarantee to dpc, will have to pay up.

Increasing power costs have started taking a heavy toll in Maharashtra. Expensive electricity is a principal contributing factor to the shutting down of nearly 40 per cent of small-scale industry units in the state. Says Madhusudan Khambete, president, Chamber of Small-Scale Industries Association: "We see this percentage increasing if the power rates aren't optimised as industry in Maharashtra pays heavily for subsidies doled out to agriculture."

The irony is that Maharashtra could well turn into a power surplus state, yet one with the highest cost of power in the country, something that seems to defy the fundamental laws of economics. The state has a peak demand of about 10,500 MW. It has an installed capacity of 11,300 MW including dpc's Phase I. There was an increase of about 5 per cent in demand against the projected increase of 7 per cent per year. This leaves the state with a surplus. Despite this, projects with capacities over 4,000 MW, including dpc Phase II, mseb's Kaperkheda extension and Nippon Denro's plant, have been sanctioned. To add to this glut, another seven smaller projects of 150-200 MW capacity, totalling 1,200 MW, were approved two months ago at Sinnar, Waluj, Kagal and other places. Including the ntpc share, the state's capacity can go up to about 18,000 MW. Even at a steady 7 per cent growth rate, Maharashtra could end up with both excess and expensive power.

The seven smaller projects had been languishing with the government for long, even before Enron came on to the scene. Now they have been suddenly cleared although they are based on the more expensive liquid fuel, naphtha. Basak says most of these projects, besides his own Kaperkheda extension and dpc II, are still on paper. "It is important for us to have taken future demand into consideration," he says. Also, these seven projects will work out cheaper because the world prices of generators are down, he says. If they were operative today, according to him, they would have supplied power at about Rs 2.50 to Rs 2.70 a unit. Even dpc II, he claims, will supply power at this rate. But Basak admits that the first dpc deal was more expensive because it was the first the state government had cut. He assures that current deals have been better negotiated and competition will make them supply power at the best rates.

But there are a few other strange aspects to the capacity-expansion spree. For Mumbai, which accounts for about 10 per cent of total consumption in the state, the government is poised to clear 500 MW of new capacity for Bombay Suburban Electricity Supply (bses). This would violate the Electricity (Supply) Act. tec is the only bulk power generation licencee for Mumbai and its suburbs. The power it generates is distributed till Mahim in Mumbai by Bombay Electric and Suburban Transport (best) and in the suburbs, further ahead, by bses. As per section 19 of the Act, even the mseb cannot bring in power in tec's licensed area as long as the company fulfills its obligations. Says a tec spokesperson: "We have been fulfilling our obligations to ensure reliable power supply in Mumbai and have sufficient capacity to meet additional demand in peak hours at economical rates."

tec can be in trouble if its capacities lie idle or under-utilised because it has taken loans from the World Bank and other financial institutions to invest in infrastructure. If it doesn't use its capacities to the optimum, its ability to clear these loans reduces. This action on the part of the government is also a gross violation of the understanding that both central and state governments have with the World Bank whereby "no action would be taken which would affect tec's ability to repay the World Bank loans." Already, the 500 MW that bses put up during 1996-98 was brought into the suburbs, affecting tec's sales adversely, leaving a surplus of nearly 1,600 million units.

tec feels its arm is being twisted. It has a standby power supply agreement with mseb when its own facility is shut down for maintenance. mseb provides an equivalent of 500 MW capacity for a month for the same. For this, tec paid mseb a monthly charge of Rs 10.5 crore till October '96. This increased to Rs 24.75 crore in October '96 and was further hiked to Rs 30.25 crore from December '98. Which means tec paid Rs 297 crore to mseb in '98 and will pay Rs 363 crore in '99. mseb's argument is that tec reduced its purchase since '96 after it upgraded its own facility. bses has a similar arrangement with tec for 250 MW capacity. For this, it should accordingly pay close to Rs 15 crore a month. It pays just Rs 3.5 crore. tec laments that there's no regulatory action in this case.

An industry observer says such actions are desperate attempts to fill the coffers of mseb, which will be further steadily emptied due to huge payments on the one side and its inability, due to political compulsions, to collect outstandings from certain politically powerful consumer bodies like sugar cooperatives (See Darkness Over Industry, Outlook, April 2, 1997) on the other.

How long can it continue to rob Peter to pay Paul?

The Opposition is ready to make the Enron deal in specific and the power situation in general the biggest issues to pull down the Shiv Sena-bjp government in the ensuing assembly polls. Says Vasant Chavan, spokesperson for Sharad Pawar's Nationalist Congress Party: "We'll expose the government and have already prepared a detailed brief on the power issues." Strange how sides change in politics. It was the Pawar government which negotiated the first Enron deal and the bjp-Shiv Sena combine used that to win the last assembly polls. Only to rework the deal to make it, some allege, even more expensive.