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Voice of Electricity Workers Letter from NATIONAL
CO-ORDINATION COMMITTEE OF ELECTRICITY EMPLOYEES & ENGINEERS,
NEW DELHI – 110 001 NCCOEEE/05/2001 Date: 28.2.2001 Sub: Review of the Dabhol Power Company’s Power Purchase Agreement with Maharashtra State Electricity Board Dear Sir, On behalf of the engineers and employees of the State Electricity Boards, we would like to place before your committee our views of the Power Purchase Agreement between Maharashtra State Electricity Board and Dabhol Power Corporation, in which M/s Enron of the USA are the majority share holders. We are giving below our point wise submissions on the above. 1. The Enron case is turning rapidly into a disaster that will sink not only the Maharashtra State Electricity Board (MSEB) but also the Maharashtra Government. At the time the Enron deal was originally agreed upon, Enron and its defenders claimed a tariff of Rs.2.40 per unit. The current figure, Rs.7.20, given by the Maharashtra power minister, Padamsinh Patil in the State Assembly makes clear that this was deliberate dis-information. Enron’s power at more than Rs.7.00 per unit may be contrasted with the average cost of power of Rs.2.00 generated by MSEB and the cost of purchased power varying from Rs.0.80 to Rs.3.00 from NTPC, BSES, or Tata Electric. 2. For buying Enron power, MSEB is suffering a loss of more than Rs.700 crore per year: it is paying Enron 15% of its revenue for adding a mere 5% to its installed capacity. And this is for the first phase of 748 MW only – the second stage will follow with even graver consequences. 2. There were a series of violations of law in the Dabhol contract. The Central Electricity Authority (CEA), gave it only a technical clearance and side stepped the issue of the cost of power. Under the Electricity Act, the CEA is required to provide a techno-economic clearance and not just a technical clearance. We understand that the second stage was never formally cleared by CEA. Further, CEA also stipulated that the second stage should only be proceeded with if there was enough demand to meet first stage off-take requirement of the PPA. It is now clear that both these conditions have not been met. 3. Once the second stage of Enron comes on-stream next year, MSEB will have to pay Enron 52% of its current revenue for adding less than 20% to its installed capacity. This means a net loss of more than Rs.3,000 crore per year. This huge outflow will lead to the collapse of MSEB. Guarantee by the State government and counter guarantee by the Central Government that were provided to Enron are not in consonance with any commercial principle. If off-take and profits are guaranteed, then the Dabhol Project should be seen in effect as government one and taking a loan at an astronomical interest rates and not as a foreign investment. 4. If tariffs are increased to meet the required outflows, this will lead to a doubling or trebling of the tariffs. Such sharp increase in tariffs cannot be implemented without large-scale unrest. It is unlikely that revenue increases of the order required can be realised in practice. If Maharashtra is to foot its Enron bill, the only way to do it will be to hand over, in bits and pieces, MSEB’s assets to Enron. This is what UPSEB is doing to settle NTPC’s outstanding dues. In other words, to pay for power from a 2,192 MW power station, Maharashtra will have to hand over its 10,000 MW generating assets in the next five years. 5. The argument for inviting in foreign capital in the power sector is that it provides much needed resources in building critical infrastructure. Let us examine the foreign exchange inflows and outflows from the Dabhol project. The total cost of the project – including Stage II – is not likely to exceed Rs.10,000 crore. We understand that a major part of these resources have been raised from Indian sources such as IDBI. If we assume that 60% of the total capital is in the form of foreign exchange inflow, we have received a foreign exchange inflow of approximately Rs.6,000 crore for Dabhol. Against this, if we assume no change in the value of the rupee and the price of oil, the outflow, is of the order of Rs. 100,000 crore. If we assume a depreciation of the rupee of 6% per annum and a marginal 4% rise in the cost of oil, the outflow is more than Rs.200,000 crore over the 20 year life of the contract. This means the foreign exchange outflow is 15 to 30 times the inflow. 6. According to Enron, the cost of Dabhol power is high only because the MSEB's off-take is low; if the MSEB draws 90 per cent of Dabhol power, its cost would come down to Rs.4.02. In Enron's view, this compares favourably with the cost of power produced at the NTPC's Kayamkulam plant, which is currently Rs.4.50. 7. This is not the first time that Enron has tried to obfuscate issues. Initially, when critics pointed out that Enron power was likely to cost more than Rs.4.00 Enron had claimed that its power would cost only Rs.2.40 and compared this to various other plants, where the cost was of the same order. The catch then was that the other plants, unlike Dabhol, had their costs denominated in rupees and were based on indigenous fuel. The comparison with Kayamkulam has a similar catch: it compares the Kayamkulam costs at a lower off-take while pegging Dabhol's off-take at 90 per cent. If we take the current price of naphtha of about Rs.3 a unit as fuel cost and compute the cost of power for Dabhol and Kayamkulam on the basis of similar off-takes, the true picture emerges (see table). On a similar off-take of 90 per cent, the cost per unit for Kayamkulam works out to Rs.3.94 as against Rs.4.87 for Dabhol; it is cheaper by 93 paise. This is because the capital cost for Dabhol is of the order of Rs.5.02 crore per MW as against the capital cost of Rs.3.18 crore for Kayamkulam. The fixed charges for Enron are, therefore, about Rs.1.87 a unit as against Re.0.94 a unit for Kayamkulam. Had MSEB negotiated the same rate as is being applied for in Kayamkulam, it would have saved Rs.547 crore of the Rs.1000 crore loss it is incurring now for Dabhol power. Cost of Dabhol and Kayamulam Power at 90% PLF
8. Enron is arguing that the MSEB is not drawing enough Dabhol power, thus affecting Enron's per unit price to MSEB. The truth is that based on a merit order despatch, cheaper power sources have to be exhausted before more expensive ones can be drawn, Dabhol power can be taken only when the MSEB has availed itself of all other power sources. With the current costs of naphtha, just the fuel cost per unit of Dabhol power is more than the cost per unit, both fuel and capital servicing cost, from any other source. The MSEB can draw more Enron power only by lowering its off-take from cheaper power available to it from the NTPC, the BSES and from its own power stations. This will lower the cost of Dabhol power but increase the MSEB's total outflow for the same quantum of power it supplies to its consumers. 9. The Maharashtra government has pleaded with the Centre to take over a part of its Enron liabilities. If the Centre responds by lifting this overpriced power, it will have to sell it to other States at a subsidised rate. Not one of the other States can buy power at Enron's prices. So Enron's argument that it should be allowed to trade power with other States and the Maharashtra government's argument that the Centre should lift Enron power are both unworkable unless the either the centre or all the states jointly subsidise Enron. Will the centre, which has refused in the past to subsidise electricity to agriculture from the central kitty, now start subsidising Enron instead? 10. It is also being argued that NTPC or Power grid should take over distribution of Enron power. If NTPC takes over distribution of Enron power, presumably this will be not be a large amount of power compared to NTPC’s 20,000 MW. This is the logic which was considered originally by MSEB while signing the Dabhol PPA. If NTPC agrees or is coerced by the Central Government to lift Dabhol power, this will completely bankrupt NTPC and be a disaster for the entire country. If Power Grid takes over distribution of Enron power, it will have to sell this power to the states at a lower rate. There is no way Power Grid can survive such a course. 11. When the second stage of Dabhol comes on-stream, the cost per unit of electricity may drop marginally as LNG is a cheaper fuel than naphtha that has been in use now. However, LNG contracts are take-or-pay contracts. Irrespective of whether LNG is lifted or not, MSEB will have to pay for it. At present, given the high cost of Enron power, the MSEB has been paying fixed costs to Enron, and not drawing more than 40 per cent of its power. This option will not be available for the second stage. The MSEB will have to pay both fixed costs and fuel charges up to 82 per cent of Enron's capacity. In the first year alone, Enron's annual power bill will be a whopping Rs.6,500 crore against the MSEB's current revenue base of Rs.12,500 crore. 12. In any electrical system, there are new sources of power - new power stations - and older stations. With time, the capital costs of the older stations get written off and the costs of their power become cheaper than those of the new stations. If we add new, expensive power capacity far above our requirement, we increase the pooled costs substantially. In the Enron case, all of a sudden a new expensive source -- generating more than 2,000 MW with a minimum guaranteed off-take of 82 per cent -- is being dumped into the existing pool. This will result in a huge surplus of generating capacity. As the MSEB has given off-take guarantees (in any case LNG contracts are take-or-pay contracts), they will have to back down their cheaper units. It may be noted that the induction of Enron was based on highly exaggerated demand figures. A panic was created about huge impending shortages. It is clear today that above scenario was created only in order to facilitate the entry of Enron with its high cost power. 13. Studies of the MSEB's economics shows that after the second stage starts to produce full power (scheduled for 2001-end), the average tariff for domestic and agricultural consumers will more than double -- from the present rate of Rs.1.45 to Rs.3.60. These tariff rates are not sustainable and any attempt to realise such tariffs will lead to a complete anarchy in the power sector of Maharashtra. 14. What can now be done? The only course is to cancel this disastrous Power Purchase Agreement. The Committee should examine the modalities of such a cancellation so that the adverse impact on Maharashtra and the country is the least. There will be those who argue that a contract is sacrosanct and therefore this contract should not be cancelled. They may benefit from a quick second look at the telecom case. When the private telecom companies argued that their contracts for license fees were unworkable, the government of India changed the terms of the contract to bail them out. Were those contracts any less sacrosanct than the contract the people of Maharashtra need to be delivered from? It is worthwhile also to look at the California example where the State Governor is threatening to take over private generators for selling high-cost power to the State. 15. India is not the only country with Independent Power Producer (IPP) contracts to have run into similar trouble. Sucheta Dalal, in her column in The Indian Express (January 14, 2001) has quoted a study by Kate Bayliss and David Hall, University of Greenwich, which shows that a number of countries -- Pakistan, Indonesia, Hungary among others -- have cancelled or re-negotiated such expensive IPP contracts. We will be happy to meet with the committee and explain our views further, if you so desire. With regards, Yours Sincerely,
(B.S. MEEL) On Behalf of NCCOEEE
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