Dabhol LNG-Fired Power Plant - Phase I

cancelled

In February 1993, the Dabhol Power Company (DPC), which was 80% owned by Enron Corporation, 10% by General Electric, and 10% owned by Bechtel, negotiated a 20-year Power Purchase Agreement (PPA) with the State Government of Maharashtra for Phase-I of a combined two-phase 2,184 MW gas-fired power plant located near the City of Mumbai. The Dabhol Plant was part of the Federal Government’s IPP (Independent Power Producer) scheme to involve the private sector in meeting a 5-year target (1992-1997) of adding 48,000 MW of new power generation. Phase-I’s capacity was expected to be 695 MW, with Phase II following a few years later. The PPA did not legally bind either Enron or the Maharashtra State Electricity Board (MSEB), who actually purchased the power on behalf of the State, to take up Phase II of the project. When completed, the entire project was expected to cost approximately $2.875 billion, of which the Phase I cost was roughly $930 million. Phase I was funded by $275 million in equity and the remainder through a mix of local and foreign debt. The terms of the agreement, which were directly negotiated between the DPC and the State Government, included government acceptance of dollar denominated power tariff rates to ensure a 16% post tax return on investment. The initial estimate was that DPC would receive a 1997 base price of roughly $0.076 per kWh, while retail customers were paying $0.032 per kWh. There were also two payment guarantees - one from the State Government and a 12-year counter guarantee from the Central Government. The DPC deal immediately came under severe criticism from media and opposition political parties for a lack of transparency. With a change in state government in March 1995, the new government set up a Review Committee which unilaterally recommended termination of the contract. In addition, in August 1995 the government unilaterally refused to honor the PPA and DPC was asked to immediately stop construction on the 23% complete Phase I, on which over $300 million had already been spent. The DPC initiated arbitration proceedings against MSEB in London. Almost immediately, the State Government sued DPC from the Mumbai High Court alleging fraud and misrepresentation of data. After several months of intense negotiations, both sides eventually agreed to a revised PPA agreement by March 1996 that combined Phase-I and Phase-II of the project. In the revised PPA, the combined project capacity of Phase I and II was raised from 2,184 MW to 2,450 MW, annual 4% escalation in power tariffs was disallowed and the proposed tariff was cut from $0.076 per kWh for Phase I to $0.059 for both Phase-I and II at the same dollar rate for 17 years with no inflation adjustment. Phase-I was commissioned in May 1999. Phase-I continued selling power to MSEB, which by early 2000 was facing a revenue shortfall of around $275 million. This shortfall was also projected to increase sharply after Phase II became operational towards the end of 2001, absorbing half of MSEB’s revenue at the existing tariff rates. By early 2001, MSEB stopped paying DPC for its power bill saying that the “power from the plant is unneeded and too expensive” and imposed a $89.9 million penalty on the company for “technical under-performance.” In May 2001, after DPC was served a 6-month pre-termination notice, MSEB unilaterally rescinded the contract and stopped drawing power from the project, forcing the plant shut down. In July 2005 Bechtel and GE settled their dispute with the Indian government over the Dabhol project in exchange for payments of $160 million and $145 million, respectively. None None