Commentary/Dilip D'Souza

How To Pay More For Power And Like It Too

Join me on a little fantasy, won't you? Imagine that I'm a maker of wingdings, and I'm based in the US of A. I come to India and offer to build you, an Indian vendor of wingdings, a factory to produce the little things. We sign a contract which specifies that you will pay me for my services in those nice, green notes with George Washington on them: say, one for each wingding the factory will produce. Since wingdings sell in India for substantially more than the rupee equivalent of one greenback each, you can still make a profit after paying me. You are ecstatic, and you use that ecstasy to good purpose in selling the entire project to your shareholders.

Ah, but let's suppose that, for some inexplicable reason, you and I just assume quietly that dollars are available at Rs 32 each. Not just that, we also assume quietly that that exchange rate will remain constant through the 20-year life of our contract. We use that to convince your shareholders that wingdings are and will always be cheap. In turn, they wholeheartedly approve the contract and we're in business, you and I.

It's only years later, when the factory is up and producing, that your shareholders realise that they're actually paying much more for wingdings. Because, by then, far more than 32 rupees are required to buy that same George Washington note. And it's too late to do anything about it. For one thing, the factory is complete and churning out wingdings. For another, and more important, our contract also has a smart little clause that says you will buy wingdings only from me, ignoring other producers who are cheaper than I am.

I suspect that when your shareholders wake up to all this, they will kick you in the you-know-where, me in the you-know-where-else, and throw us both in the Arabian Sea. If they do that, it's better than either of us will deserve for selling them the line we have.

Now make some modifications in this tale. Instead of being a vendor of wingdings, you're the Maharashtra State Electricity Board. It's not wing-dings you and I are signing a contract about, but power. Your shareholders are the state's consumers of power. And, instead of being a maker of wingdings, I'm an ambitious gas and power company called Enron. I'm building the Dabhol Power Corporation plant in Guhagar taluka, south of Bombay.

With just these changes, this little parable is a pretty close facsimile to the deal that Enron has, in reality, signed in Maharashtra. Yes indeed, in calculating the cost of Enron power, the government has assumed that the rupee-dollar exchange rate will remain fixed for the next 20 years -- at 32 rupees to the dollar. Just to satisfy my curiosity, I'll stop here, pick up today's paper and check what dollars cost... I'm back, they are selling at Rs 35.86 each.

The government claims power from DPC in the so-called second phase of the project (the first phase, half the size of the second, is a whole different bag of smelly pomfret that I won't tackle here) will cost Rs 2.22 a kilowatt-hour (kwh) in the year 2000. It also says this cost will rise to just Rs 2.32/kwh in 2019. These figures compare well with the price of power from other gas-based plants, such as the National Thermal Power Corporation's Kawas plant in Gujarat. So, what's wrong with buying power from DPC?

Nothing, you think. Except that these prices are based on that fixed Rs 32 exchange rate assumption. It wasn't the only strange assumption that was made. Try just two more. One: that the prices of oil, liquefied natural gas and naphtha, all to be used in the plant, will not change at all over the 20 years. Two: that the US will experience no inflation in those 20 years.

Why were all these assumptions made? That's simple: to convince a sceptical public that power from DPC will be cheap. Nothing could be further from the truth.

Prayas, an independent research organization in Pune, made a few more realistic assumptions, such as: the rupee will lose value against the dollar as it has been doing for years; there will be inflation in the US as there has been for years; the prices of oil, LNG and naphtha will increase as they have done for years. With these assumptions, Prayas's estimates of the actual price of DPC power range from a "conservative" Rs 3.32 per kwh in 2000 to a "more likely" Rs 19.99 per kwh in 2019.

This is what electricity consumers in Maharashtra will pay for power from Enron. Nearly twice what they pay now to begin with; steep increases lie ahead.

If that pill is not quite bitter enough, consider this angle on it. Because DPC will use naphtha and imported natural gas to generate power, it will be the state's priciest supplier of electricity. Given that, DPC should have been what's called a "peaking" power station. It should be a power source for MSEB to tap when the demand is the highest, as during daytime hours on weekdays. To ensure uninterrupted power to its customers at those times, MSEB would need power from every available source, even the most expensive ones. When demand falls, as at night and on weekends, MSEB should rely on the cheaper suppliers -- the "baseload" stations.

But DPC, despite being pricey, will be a baseload station. MSEB has contracted to paying DPC for just the availability of power, even if it is not used. This means MSEB will use power from DPC in preference to other, cheaper suppliers.

End result: MSEB power costs more. We pay.

There are two reasons Enron and the government have got away with this bizarre deal. One is that most of it has been kept extremely secret. The only thing that has been made public is the report of the renegotiating committee, set up by the Sena-BJP government to renegotiate the original deal that Sharad Pawar's Congress government struck with Enron. The second reason is that even the parts that have been made public are complex and difficult to follow. Both Enron and the government are confident that this, along with the obsessive secrecy, is all the protection they need against uncomfortable questions.

The Sena-BJP alliance ran for election in 1995 in Maharashtra on various eye-catching promises, one of which I examined here a few weeks ago. Another, voiced particularly and repeatedly by the BJP's Gopinath Munde, was that Enron would be "thrown into the Arabian Sea." That was not quite what happened when Munde and his pals came to power. The alliance simply signed a new deal with Enron. Instead of Enron, all the objections the parties had raised during the election, including allegations of vast corruption, vanished into the Arabian Sea.

Why did this happen? There was the infamous "education" Enron says it had to disburse to Indian politicians to move the deal along: 20 million greenbacks worth. In the February 24, 1997, issue of Business Week, Enron CEO Rebecca Mark hints at this: "[T]hink of the massive bureaucracy we had to move. How do you move a bureaucracy that has done things one way its entire collective life? You have to be pushy and aggressive."

Will we ever know, considering the amounts involved, exactly how well Enron educated the great men of Maharashtra?

There are innumerable problems with the Enron project: from the brutal treatment of people in Guhagar taluka protesting the plant's presence, to displacement issues not addressed, to the environmental costs. There are questions about why we need such a project at all, given the huge power savings that efficiency measures alone can bring. There's the total lack of transparency, the signs of enormous corruption.

But in the end, there is one simple, illuminating way to look at Enron. Its power will cost far, far more than MSEB's customers have paid till now.

Why should they pay? Except that they have no choice?

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