Paying through one's nose (again) for Dabhol

In 2005, India did something remarkable. The government of Manmohan Singh paid a record price for an abandoned power project that had not been worked for four years.

The disused plant was in pretty bad shape with some of the equipment lying untested and critical parts missing or wrecked.

The price that was paid (about Rs 10,000 crore or Rs 100 billion) was more than the cost of a new project of its size (2,150 Mw) and the government compelled two of its public sector undertakings, one a power generator and the other a gas supplier, to fork out Rs 500 crore (Rs 5 billion) each to become the largest shareholders in the project.

That's how the ill-famed Dabhol Power Company, set up in 1999 by the scandal-ridden Enron Corporation of the US, became in July 2005,  the fully-Indian-owned Ratnagiri Gas and Power Private limited in one of the most complex and secretive settlements of a litigious case.

The rechristened power station was expected to become fully operational towards the end of 2006 although it was pretty clear that the heavy overhang of problems, starting with an unviable tariff and lack of assured supplies of gas to a huge list of repair jobs and unfinished works, most notably the LNG jetty, made it a shaky investment.

Yet, the Dabhol settlement was pushed through as a good deal for the country, brushing aside the questions raised by power experts and former bureaucrats familiar with the project.

Three years down the line, RGPPL has confirmed that it cannot lay the ghosts of the past. It has sucked in another Rs 2,000 crore (Rs 20 billion) in repairs and is operating at just a third of its capacity.

The intermittent functioning of the plant, initially caused by the shortfall in LNG and glitches in restarting it, has given way to a more serious problem: major defects in the state-of the-art gas turbines provided by GE, the original equipment supplier and later part-owner of DPC.

Malfunctioning turbines have resulted in frequent tripping and shutdown of the different blocks of the plant -- there are three in all with six gas turbines -- since the defective turbines had to be sent to GE workshops in London and Singapore for repairs.

The list of problems with the 9FA turbines is long and complex and at least four are said to be out of order. There are no spares to be had either, and according to RGPPL sources repeated pleas to GE have not had any effect.

How have we dealt with a problem that continues to be a ruinous drain on public sector companies and is penalising Maharashtra which is reeling from a 4,000 Mw power shortage?

Starting with a timid whine, the pitch of complaints from the power ministry began to get shrill only after the turbine failures increased.

The ministry of power now insists that design and manufacturing defects are responsible for the repeated malfunctioning of the turbines whereas GE maintains that it is caused by forced outages at the power blocks and poor maintenance during the years the plant was idle.

It claims that 1,000 of its F-class turbines operating across the globe units have notched up over 22 million hours of commercial operation.

Power Secretary Anil Razdan is kept busy dashing off letters to GE, letters that do not appear to have had much effect. Recently, there was the unedifying spectacle of Razdan rushing to the US to meet GE chairman and CEO Jeffrey Immelt to seek a solution to the troublesome issue of turbines.

It is likely that GE, which is eyeing the emerging nuclear market in India, will arrange for the spares and speed up the repairs if the two sides are able to agree on a maintenance contract.

Since this will not provide a long-term solution, the power ministry is opting for the best way out -- scaling down the rated capacity!

This will probably be done to exclude generation from the 670-Mw 'Phase I of the project which RGPPL has been unable to restart. This will be the first time that such a rerating exercise is to be undertaken before a project is fully commissioned.

The most serious implication of such a move is that tariffs will go up willy-nilly, a dismal prospect for the Maharashtra State Electricity Board which is also an equity holder in the project. 

The basic question that needs to be answered is why no performance guarantees were sought from GE.

The original power purchase agreement between Enron and the MSEB imposed tough performance guarantees on GE. Girish Sant of the Pune-based energy research institute Prayas points out that GE had agreed to pay DPC a penalty of $1,892 per Kw of shortfall in capacity under the original power purchase agreement.

At this rate, RGPPL should have received recompense of $1 billion for a shortfall of 600 Mw if it had sought the same guarantees from GE that Enron had, according to Sant who, along with Shantanu Dixit, had carried out a detailed techno-economic analysis of the PPA in 1995.

Instead, losses are mounting at RGPPL, and the Central Electricity Authority puts the blame squarely on GE's malfunctioning turbines and rotors.

Although a senior functionary of RGPPL says it was not possible to secure a performance guarantee for an old plant, opinion is divided on this.

Power analysts point out that only Phase I of DPC had been operating and that, too, for just two years before it shut down.

Besides, Dabhol's history called for abundant caution from the government before it forced the sale on its public sector companies.

In early 2001, the GE turbines had shown they could not meet their performance guarantees when on three occasions the turbines could not ramp up to full capacity in the stipulated time.

That's when MSEB had gone to court against Dabhol.

Who should we blame for the growing mess at RGPPL? Is it the empowered group of ministers led by Pranab Mukherjee who cobbled together the DPC settlement and paid $305 million to GE and Bechtel for their equity?

Or should it be the new shareholders, National Thermal Power Corporation and Gail, each with a 28.3 per cent stake? The two navratnas continue to play a game of musical chairs -- officials from these corporations take turns to head RGPPL for six months each -- and one-upmanship at this ill-starred project with neither assuming responsibility for the outcomes.

While NTPC is the officially designated operator, Gail is charged with supplying around 2 million tonnes of LNG that the power station requires annually. Neither task is being performed with any degree of competence.

The nagging concerns about the quality of the due diligence conducted by NTPC on a plant whose technology it was unfamiliar with have surfaced once again.

Yet, the government is determined to thrown more good money after bad. NTPC and Gail are now being asked to pump in an additional Rs 1,200 crore (Rs 12 billion) as equity, while the government wants to hive off a prize asset from RGPPL -- the 5 million tonne capacity LNG terminal.

As the third restructuring exercise gets underway at RGPPL, it is high time the government fixes responsibility for the way the world's most expensive power project is run.

If consumers in Maharashtra deserve performance guarantees, taxpayers in India need to be told who is accountable. If not, it would be prudent to declare that no power is better than such costly power.