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Enron Does India, Part 3: The Operation of the Dabhol Power Plant
January 28, 2002
by Jack Rabbit

Part One
Part Two

Today, we conclude a three-part series on the Enron Corporation's power plant in Dabhol, India. In the first part, we saw how Enron secured an agreement with the government of the Indian state of Maharashtra to build the plant with no competitive bidding and on terms that were completely one-sided. In the second part, we saw how police state tactics were employed to suppress popular opposition to the project. We shall now examine the history of Enron's Indian subsidiary, the Dabhol Power Company and its plant from the time the plant went on-line in June 1999 until the last plant employees were laid off in December 2001. Given the ruthless manner in which Enron got its own way in the agreement, the history of the plant's operation is what one might expect: a disaster that came as the logical consequence of greed.

The Dabhol plant came on line on May 13, 1999. Two days later, the Maharashtra State Electricity Board (MSEB) canceled its agreement for the purchase of electricity from Tata Electric Companies (TEC). TEC, a locally-owned Indian company, was forced to scale back production while it found new customers. This arrangement also had an effect on power consumers in Maharashtra. While TEC sold electricity to MSEB at between Rs 1.8 and Rs 2 per unit, the price of power purchased from the Dabhol Power Company (DPC) was about Rs 4.25 per unit. MSEB took this action because under the agreement with Enron, it was obligated to buy power from DPC at full capacity charges, while it had no obligation to buy power from TEC. Thus, the only way MSEB could offset the cost of buying the more expensive power from DPC was to stop buying from TEC altogether. In November 1999, the voters of Maharashtra turned out the BJP government in favor of the Democratic Front, a center-left coalition led by Vilasrao Deshmukh. Deshmukh said in an interview with Rediff shortly after the election:

"My immediate job as I see it is to win back the confidence of the people, specifically, the farmers, the labourers, the minorities, the scheduled castes and the scheduled tribes, the VJNT. We want to send them a clear message: This is your government. They have been feeling neglected for years."

Although Deshmukh did not specifically mention the problems with the DPC in his post-election interview with Rediff, the fact that he mentioned some groups that opposed the project from the start could have sent some shivers up spines at the DPC and even at Enron headquarters in Houston. No doubt Enron was hoping that this was just populist rhetoric from a politician leading a center-left governing coalition. Perhaps Enron had some reason to think Deshmukh's words were just hot air. Deshmukh had been part of the Congress-led state government of Sharad Pawar that approved Phase I of the Dabhol project in 1993, but as Chief Minister of the new government, he now had to deal with the consequences of the one-sided agreement. Moreover, Deshmukh's left-wing partners would have to be placated in any action he took, and their concerns were that the power consumers of Maharashtra should get power at reasonable rates, not at Enron's bottom line.

By mid-November, about a week after the Deshmukh interview, voices for reform were being heard. The chairman of the Maharashtra State Electricity Regulatory Commission (MSERC) called for more transparency (accountability) in the tariff-determination process and open discussion on a proposed increase in the power tariff. However, the building of the plant that was to bring power to Maharashtra was draining its resources. The fact remained that MSEB was obligated to buy power from DPC at up to three times the cost of power it could purchase elsewhere. MSEB and the state government were going broke on the deal.

By June 2000, MSEB owed DPC $50 million. In October, the state Minister of Energy, Dr. Padmasinh Patil, admitted that the combination of the high cost of power from DPC and foreign exchange liabilities were making the solvency of MSEB look grim. By this time, with the adverse exchange rate, the cost of a unit of energy from the Dabhol plant was Rs 7.80. Chief Minister Deshmukh was openly toying with the idea of canceling the second phase of the project. This was in itself an expensive proposition. Enron, of course, was threatening to walk away from the project if it was not paid. In a column in the Indian Express published on December 3, journalist Sucheta Dalal concluded that if Enron walked away, it might be the best thing that could happen. Meanwhile, the left-wing parties in Deshmukh's Democratic Front coalition were threatening to walk out of the government if the status quo persisted with Enron. The state and Enron finally decided to re-negotiate the second phase of the project.

Nevertheless, the stage was set for confrontation in the coming months. In early 2001, shutdown of the power plant was looming as a very real possibility. Further pressure was put on the Democratic Front government when labor unions began a march from Mumbai to Dabhol to protest high electricity costs. By January 14, the state government decided to pay Dabhol Power for MSEB's bills that were in arrears. Journalist Sucheta Dalal, a leading critic in the press of the state's dealings with Enron by this time, surmised that the situation could not continue indefinitely and that the state could not afford to buckle to Enron's will.

On January 19, the state announced that it would take Enron to court to challenge the PPA. In early February, with MSEB back in arrears for $17 million for power bought in November 2000, Enron called in the counter-guarantee signed by the government of India; Enron also threatened to cash a further counter-guarantee for the $33 million outstanding from MSEB for December. This marked the first time a foreign power had invoked a central government guarantee to clear outstanding bills. Deshmukh admitted that it was beyond the capability of the Maharashtra to pay Enron.

Through the spring of 2001 Enron, the state government in Mumbai and the central government in New Delhi were engaged in a three-step dance in which Enron would threaten and occasionally serve the Maharashtra government with an arbitration notice, the state government would refuse to pay and the central government would seek a conciliation process. The arbitration notice served as a precursor to Enron's intent to cash more government guarantees, which was probably the only way it could get the money owed it since the state government and MSEB were out of money.

The central government had no further desire to have Enron cash guarantees, so it sought the conciliation process that would be governed by the United Nations Commission of International Trade Law. The state government also played some hardball with the corporation. MSEB first asserted that DPC failed to deliver power in January and imposed a penalty on DPC for this failure. The state government in Mumbai supported MSEB in this move and requested that the central government not withdraw an amount equivalent to the state's December bill from the Reserve Bank of India until DPC paid the penalty. Meanwhile, the Maharashtra Pollution Control Board charged that DPC had violated provisions of local anti-pollution laws. Many feared the crisis would drive away additional foreign investors needed to develop India's power infrastructure. Chief Minister Deshmukh continued to face a rebellion from his left-wing coalition partners, who threatened to leave the government if the second phase of the project was not canceled. Editorials and articles appeared in the Indian press saying in effect that Enron had fleeced Maharashtra, that Maharashtra could not possibly pay Enron and that if Enron wanted to leave India, that would be perfectly all right with everyone there.

Enron, meanwhile, was threatening to do just that. On May 20, Enron issued a preliminary notice to terminate its contract to sell power to MSEB. On May 25, MSEB canceled its contract to buy power. Enron shut down the Dabhol plant on May 30 and announced again its intent to terminate the contract. The deal was essentially scuttled. The only thing left was for Enron to try to salvage something. At the end of June, Mr. Cheney brought up the Enron matter briefly in a meeting with Sonia Gandhi, the leader of the opposition in the central government; however, plans for Mr. Bush to bring up the matter to Prime Minister Vajpayee shortly afterwards were scrapped.

In July, Enron chairman Kenneth Lay went to India to ask the central government to resolve the deadlock. By this time, MSEB owed nearly $64 million to DPC. Lay met with the central government's Minister of Energy, Suresh Prabhu, in Delhi and Chief Minister Deshmukh in Mumbai. He described the meetings as "productive and constructive" and added, rather cryptically: "There are a lot of international ramifications to the project." Lay said he was hopeful that the Maharashtra government would honor its agreement with DPC.

In August, Lay gave an interview with the Financial Times in which he issued what was construed as a veiled threat to India. Said Lay in the interview: "There are US laws that could prevent the US government from providing any aid or assistance to India going forward if, in fact, they expropriate property of US companies." Lay spent some time repairing damage, but within two weeks the US Ambassador to India, Robert Blackwell, reiterated the threat by saying that the dispute between Enron and Mumbai over Dabhol would give pause to American businesses seeking to invest in India.

However, soon afterwards, Enron's fate would unfold as the corporate greed it now personifies caught up with it. Enron is now seeking a buyer to take the Dabhol plant off its hands.

It is striking how much the Dabhol caper resembles the California energy crisis last year. There are three basic differences. First of all, in Maharashtra there was a genuine need for somebody to develop new infrastucture in a developing nation while California already had an existing and functioning infrastructure that was at worst in need of some expansion and upgrading to meet the demands of a growing population. Second, in California, Enron was one of several co-conspirators whereas in Maharashtra Enron was the principal private corporation involved. Third, nobody's head got cracked in California, while two of the world's leading human rights organizations have documented police state tactics in Maharashtra surrounding the construction of the Dabhol power plant. Otherwise, Enron burst on the scene and manipulated a system that allowed it to charge outrageous rates for power. In Maharashtra, Enron succeeded in bankrupting the state electricity board, from whom consumers directly buy power, and in California, at least one major public utility has filed bankruptcy and another may yet be forced to file, while the state government's budget surplus vanished in a frenzy of power buying by the state to meet the needs of consumers and avoid crippling power blackouts. A good piece of the former California budget surplus is perhaps now lining the pockets of Enron's corporate fathers after their profit taking on the stock market in light of Enron's coming demise. Perhaps this says much of Enron's modus operandi.

We began by noting something of Enron's corporate philosophy: that whatever they may state it to be, Enron believes that the common man was put on earth to either consume its products at whatever outrageous price Enron can get away with charging or to work for Enron and in the end get nothing in return. In many ways, this is like too many other multinational corporations that export manufacturing jobs overseas where workers can be found to work for less-than-subsistence wages. Enron was this, only more so. In the end, Enron also tried to take too much for those who buy their product and ended up killing the golden goose. Let the story of Enron be a morality tale that warns the wealthy against greed and arrogance.

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