In July 1999, the Hindustan Times reported that the Maharashtra State Electricity Board (MSEB) asked the Tata Electric Company (TEC) -- then the major supplier of electricity to Bombay -- to "back down its power generation by 200-400 MW." (11-22% of TEC's installed capacity). This happened, said HT,
- despite TEC offering power at a rock bottom rate of Rs 1.80 per kwh. MSEB has stopped buying power from TEC [and is buying instead from] Enron's Dabhol Power Corporation (DPC) [at] anything between Rs 3.01 and Rs 4.25.
HT also said there was
- a question mark on the rationale behind MSEB's decision to source costlier power which is beyond all principles of commercial jurisprudence. ... MSEB seems to have [ignored] the cardinal principle worldwide that cheapest power will be given the first preference in meeting electricity demand.
That is: because MSEB had contracted to buy more expensive electricity from Enron, it had to shut off ("back down") the available supply of cheaper electricity from TEC.
We were turning off the cheap stuff to use the expensive stuff.
Welcome to Maharashtra, twilight zone for the world.
Abhay Mehta's lucid examination of the Enron episode, Power Play, should be required reading for anyone who places faith in either governments or private enterprise and free markets. He shows, among other things, that such faith is easily trumped by greed and pressure.
Some points from his book, below.
From before they actually signed anything, Enron repeatedly expressed one major concern. Here's how MSEB's chairman described it to the Government of India in 1992: "public and judicial scrutiny of business policy and decisions as per the [Companies] Act will not be acceptable by a company like DPC."
Enron wanted to work in India, but Enron did not want to follow Indian law.
Naturally, Indian officials fell over themselves to bring Enron to India.
In March 1993, the finance ministry approached the World Bank for funding for the Enron plant. The Bank was not impressed. One prescient comment was that DPC power would "displace lower cost [power] in the off-peak periods." (Remember the HT report).
But UK Mukhopadhyay, Secretary of Industries, Energy and Labour in the Government of Maharashtra, asked the Government of India to urge the Bank to review its decision. His letter observed:
- [The Bank] does not support the project. It, however, points out very clearly that this project would be a very good project if it was not coming up in India.
Not peculiar enough? He also wrote:
- Conserving [coal] during the off-peak hours will actually enable MSEB to meet the peak demand [a] little more efficiently.
As Abhay Mehta says: "The GoM was seriously advocating conserving coal-based power whose variable cost was 30-40 paise a unit, to justify LNG power [from DPC] whose minimum variable cost would be Rs 1.50."
Then there was the Power Purchase Agreement (PPA), an inordinately complex affair, treated by Enron as secret. When a consumer organization asked for a copy, they wrote back:
- To a country as yet unused to the phenomenon of privatisation this may be difficult to understand, but in a competitive market a PPA is the one document that affords companies an edge over the other players in the field. ... [Therefore] such a document is zealously guarded by all companies.
Thank you, kind sirs, for that lesson in free market mechanics. But there's a small detail Mehta was ungracious enough to mention. There was no competitive market. DPC did not bid for this contract and all the power it produced would be bought by one customer: MSEB.
Twisting and turning, the deal was "scrapped" and then "renegotiated" by 1995. The renegotiation committee claimed that the "starting tariff" of DPC power would be Rs 2.22 a unit. While calculating that figure, it made some bizarre assumptions. Try one: the dollar was worth Rs 32 and would remain there for the next 20 years. (This matters to the calculations because the price of DPC power was tied to the dollar, not to the rupee).
Not only was the dollar already at about Rs 35 when the committee was "renegotiating", it later went up to Rs 48 and is now at about Rs 44.
No wonder HT reported in 1999 that DPC power was between Rs 3.01 and Rs 4.25 a unit. Not Rs 2.22.
There's plenty more that I'll leave you to find in the book. In the end, Mehta says he does not think the "problem is with Enron". In fact, he developed "a sneaking admiration for a remarkable opponent [that] did what most business houses would have done to secure such a deal."
The lesson, Mehta believes, lies with:
- the Indian nation state of India and all that term represents or should represent. At the core ... lies our inability to deal with or look after our own interests and to take responsibility for our actions or the lack thereof.
Worth chewing on, if you ask me.