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Renegotiating Enron cost $175 million, says CAG

The annual report prepared by the Comptroller and Auditor General of India has severely criticised the ruling Shiv Sena-Bharatiya Janata Party alliance in Maharashtra for scrapping and renegotiating the Enron power deal in its report for the year 1997-98.

By scrapping the power purchase agreement on assuming government in March 1995 and then reinstating the deal, the Sena-BJP government cost the exchequer a whopping $175 million, over and above the Rs 4.47 per kilowatt per hour cost of power that will have to paid to the Dabhol Power Corporation, Enron's company.

According to the memorandum of understanding signed between the Maharashtra State Electricity Board and Enron in 1992 and the subsequent PPA agreement signed in 1993, the capacity of the first phase was fixed at 695 mw and the second phase at 2015 mw. The CAG report states that the ruling Sena-BJP alliance could have renegotiated with the Dabhol Power Corporation to reduce the tariff per unit of power by leveraging the profits accruing to DPC due to the increased additional capacity.

However, Enron wanted a guarantee cover the second phase of the project, thereby increasing the cost per kilowatt per hour of power produced to Rs 1.58. The same cost per unit of power for the first phase was fixed at Rs 1.32, the report points out

The CAG report states that the politically stable state government of Maharashtra should have negotiated the PPA to reduce the tariff structure instead of scrapping it altogether and then renegotiating it.

Even if the state government had succeeded in reducing the tariff per unit of power of the second phase during renegotiations from Rs 1.58 to Rs 1.38, using the levelised method of estimation, the cost of power per unit for the second phase from 2001 would have been Rs 4.57. The levelised mechanism assumes rupee devaluation against the dollar.

According to the earlier agreement, the second phase was to become operational in January 1998, but the state government's decision to scrap the PPA and then renegotiate it delayed the project and causing a shortage of 2,423 mw of power in 1998-99, 2,185 mw in 1999-2000, and 1066 mw in 2000-2001. Had the project been completed as per the earlier schedule, this shortage would have been reduced only to 1,444 mw in 1998-99. The CAG report notes that the result of this shortage has led to the poor industrial performance of Maharashtra.

The new power purchase agreement signed by the alliance government states that the cost of delay in implementation of the second phase amounting to $1.75 million will be included in the books of DPC. However, according to the CAG report, the Maharashtra State Electricity Board will not benefit by this gesture. In fact, this goes on to prove that Enron has inflated (gold plated, as some analysts say) the original cost of the project. The tariff per unit of power would have been reduced had the alliance government renegotiated the earlier agreement instead of scrapping the project and then renegotiating it.

In another instance of loss to the exchequer, the CAG report points out that MSEB went out of its way to provide power supply to the Dabhol Power Corporation during the construction phase for a measly Rs 3 million. MSEB could have easily collected Rs 46.4 million from the DPC had it supplied power at its regular rates instead of concessional rates.

The CAG further reported that the DPC had agreed to spend Rs 780 million for the construction of two centres for the measurement and control of pollution. This figure is grossly inflated, the CAG stated.

Compiled and translated from the Marathi press by Prasanna D Zore