December 16, 2005

A sneaking admiration

Some mention of Enron in the discussion over at Mall Road, so I thought I'd do a brief recap of that strange saga.

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.


Gaurav said...

My point exactly. When I said on Shivam's blog that Enron committed graver sins, what I meant to imply that the enron-in-india hurt the Indian consumer a lot more than the enron-in-usa hurt the American consumer. And Enron could get away with it because, as you rightly point out - there was no competitive market, and everything would be purchased by just one customer.

Which is the point I was making. A private company's actions in a statist economy can not and should not be considered representative of the free market philosophy. The Enron imbroglio amply demonstrated what is wrong with the Indian state.

What is wrong is we have outsourced the job of looking after our own interests and to take responsibility for our actions, to a huge set-up which has no personal stake, nor accountability in it.

What is very sad for me is that the power reforms, which looked within grabbing distance in the days of Suresh Prabhu(before Thackeray fired him for taking his job as Power Minister too seriously, instead of working for the party), now almost seem like Utopian ideas.

Dilip D'Souza said...

Yes. But Gaurav, don't forget the first point I made, that told its own story: Enron wanted to evade Indian laws altogether.

Left to itself -- just as governments (the "huge setup" you mention) have no interest in doing "the right thing" -- companies like Enron have no such interest either.

Which is the point I think Mridula and Shivam were making there, that just as much as a full statist economy is dangerous, an unrestricted free market (or unrestricted private enterprise if you prefer) is dangerous. You need a judicious mix of both.

Anonymous said...


Your formulation is problematic. What is this "judicious mix of both"? How does one go about determining it? By interpreting "judicious" appropriately, this phrase can be used to theoretically support any position from communism to libertarianism.

Yes, I suppose, Enron wanted to avoid Indian laws altogether. A lot of *Indian* corporations want to do so as well - and in fact, do so. At least, Enron was honest about it. I am not supporting Enron, but really, the fault for letting such a deal go through, lies in ourselves - in particular, our political system with its lack of transparency and enormous discretionary powers. This, I think, is exactly what Mr. Mehta said.


Dilip D'Souza said...

But Suresh, I'm saying just what you are! The problem does indeed lie with us. OF course Enron wanted to evade the company laws, which company would not want to, given the chance? It was up to our bureaucrats to enforce those laws and regulations, which they failed to do. I share Mehta's "sneaking admiration" for Enron too. They made no bones about what they wanted. It was us who chose to give it to them, even though we didn't have to.

Yes, "judicious mix" could go all the way from X to Y. But that's why "judicious" -- we pick and choose the way, the things to do, the policies to follow.

Umesh Patil said...

I am not sure that Enron did not cost that much to American consumers. Just come to California and talk about black outs of 2000. The stare electricity (PG & E and Southern Cal Electricity - both private distribution companies who bought from Enron) lost more than $13 Billion, that was one reason for State going into red, the Governor was sacked by people in the end. California could get back only $3 to $4 Billion only. Some patients on life saving system had life threatening situations due to black outs. So people did suffer here too. This is besides all those Enron employees who paid dearly for their life saving, job and health insurance. Theirs was worse situation than consumers. The only part is, to a large extent Enron was brought to justice in USA. Such a prominent symbol that it would have been hard not to do anything for politicians. Chairman Lay is still at large however.

The other point I want to make is it is hard to read anything from Enron about Free Market system. You have corrupt actors in any system. It can be strongly argued that precisely because there was no competition and subversion of legality by Indian State itself; there was no free competition and that caused more problems. If there were many other companies apart from Tata Power who had vested interest, those companies would have made the noise and complained about the non-competitive practices. Courts need to be active too for all this to work. In absence of such strong legal structure, it is difficult for the free market system to function properly.

Umesh Patil said...

I just read update about former Enron Chairman Lay’s speech in Houston (New York Times). His criminal trial is slated for the next month and the life is not expected to be easy for him. He still denies that he or the company did anything wrong; but is expected to face the reality in the trial. Surely, more skeletons will tumble during the trial.

Anonymous said...

I guess Indian perspectives on Enron are shaped mainly by the Dabhol experience, even though it is not clear that Enron was at fault there. Certainly, Enron drove what appears to be a hard bargain but the onus for accepting what now appears to be an unfair bargain in retrospect is squarely on the shoulders of our politicians and bureaucrats.

One thing to note: What appears to be an unfair bargain in retrospect may not have been so at the time of negotiations. It is perfectly possible that our negotiators thought that they were getting a good deal and signed on to the deal in right earnest. Remember this was at a time (1991-92) when not many companies from abroad were willing to enter the power sector. From Enron's perspective, entering India was risky and they drove a hard bargain. Perhaps our negotiators thought it essential to sign on to an unfair deal so that it would send a signal that India was welcoming investment in the power sector. The idea being that we will sacrifice something on one deal but will make it up through higher FDI levels in the power sector in the future.

I don't know if this was the reasoning of our negotiators. Unfortunately, given our system's penchant for secrecy and it's reputation for corruption, we tend to believe the worst. I am not discounting the corruption and incompetence by any means - the point here is simply to note that the circumstances in 1991 were very different than they are now and we need to evaluate the Enron deal keeping in mind those circumstances.

Also, the subsequent collapse of Enron in the US - which confirmed our worst fears about the Dabhol deal - is not merely a consequence of its unethical and illegal practices. For an account of Enron's collapse from an economic perspective, please see Preston McAfee's article "The Real Lessons of Enron's Implosion: Market Makers are in the Trust Business" available at his website at Caltech: