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Enron revisited - Views on News from Equitymaster
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  • Feb 22, 2001

    Enron revisited

    Enron just doesnít go away. When the controversy first came to the fore, we had re-iterated that finally both Enron and the state government would sit across the table, compromise and come to a workable solution, considering the stakes involved for both. It has come to exactly that in the past few months. Here we make an effort to understand the crux of this controversy.

    The Maharashtra State Electricity Board (MSEB) signed a final power purchase agreement (PPA) with Enron promoted Dabhol Power Corporation in 1995. Under the terms of this agreement, DPC was to build and operate a 2184 MW power plant at Dabhol, Maharashtra in two phases. In return for this MSEB had to make some recurring payments to DPC over a 20-year period.

    The payments were made of two components: fixed payments and variable payments. It is the fixed payments that are the bane of the current controversy.

    As per the terms, the amount of fixed payments is determined by a formula in the agreement and is in no way connected to the amount of power purchased by the MSEB. Under the phase I (740 MW or 6,482 million units), which is already operational, the fixed payment accounts for a significant Rs 10.2 bn per year. The variable payment on the other hand is the actual cost of power purchased from DPC.

    For example, the variable cost per unit (the cost of actual power purchased) stood at Rs 3.72 per unit in November 2000. This doesnít look too high, however, if we add up the average fixed cost per month (Rs 4.08 per unit approximately) and the variable cost (Rs 3.72 per unit), the average cost per MW paid escalates to Rs 7.80.

    But if Phase I is shocking, then letís just take a look at the phase II agreement, which is likely to knock the wind out of the State Governmentís finances. The fixed cost post phase II are likely to triple to Rs 30 bn.

    On the variable cost front, atleast in the phase I, the MSEB is not bound to buy power from Dabhol, subject to certain penalties. MSEB atleast has the option (utilized in January 2001) of purchasing none of it, limiting its losses to a mere Rs 850 m a month on capacity charges.

    But as per the agreement for the phase II (1444 MW or 12650 million units), MSEB is bound to purchase a minimum 90% of the power generated in phase II. Even if MSEB doesnít require so much power, it will have to pay for the 90% power generated anyway. The net payment (at 90% capacity purchase) by MSEB after phase II becomes operational is estimated to be around Rs 96.5 bn ((6482 MU*3.72)+(12650 MU x 90% x 3.72)+ 30 bn) in the very first year. That works out to be roughly Rs 5.40 per unit of power purchased. At todayís prices it is 2.5 times higher than Tata Power Company, which is sitting on excess capacity. BSES power is cheaper by atleast Rs 1.5 per unit that DPCís price. Letís keep in mind that this costing is based on current environment and does not take into account the inflationary pressures and oil price hikes in future.

    Letís forget the costing for a minute and concentrate on the supply needs of Maharashtra State. The demand for power in Maharashtra varies seasonally. Power demand peaks in summers, and over a few hours every morning and evening. On February 15, 2001, the peak demand for power was 10391 MW. On that particular day power supply was sufficient to meet even this peak demand. During the summer, on the other hand, the peak demand is often as high as 11,600 MW. Supply is then insufficient at peak hours, and MSEB resorts to load shedding.

    Thus Maharashtra does suffer from power shortages, but only during certain seasons, and only for a few hours a day. These shortages are best met by peak load plant (one that can be switched on and off at short notice and thus used during peak hours alone). The DPC plant on the other hand is a base load plant; one which needs to be operated continuously over twenty four hours. Further MSEB has guaranteed 90 percent purchase (of Phase II) throughout the year. So, in order to tide over shortages for a few hours a day in some seasons, MSEB is forced to purchase DPC power, at an exorbhitant rate, for 22 hours a day, all around the year.

    From the above statistics it does look like that the state government and the central government did not apply enough thought to study the viability of the DPC project. Incidentally, the World Bank had refused to fund the same project stating that the project was not financially viable. From the current situation it does look like Enron has the state government hook, line and sinker, but from here on it will not be easy for Enron to get to the Phase II easily.



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