Case Study-Bus.Neg-DPC-TERI

8/8/2019 Case Study-Bus.Neg-DPC-TERI

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Assignment Case Study

This is an Assignment and carries 10 marks and willinvolve:

Audio Session (Teamwise)Assignment(Teamwise) Report Submissions)

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Instructions

This is a team assignment with the class divided into five teams 1, 2, 3, 4, and 5. The teams will be rated groupwise i.e.

the marks will be same for all members of the same team.

Each group is required to submit a written reportin regard to its study forevaluation within 7 days before the audio session. Please mark the Names,Roll Nos., and Group No. on the report.

Read carefullythe attached write-up The Unfinished Story of the EnronProject and answer the questions at the end of the summary (page 3).Whilst the participants will be required to know the complete case study,for the purpose of assignment, the class will be divided into five groups,each group presenting a write-up on the area assigned in the questions.

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Team Formation

The participants are required to form 5 teams, viz:

Team 1 4 Participants Questions 1 and 2 (p. 3).Team 2 4 Participants Questions 3 and 4 (p. 3).Team 3 4 Participants Questions 5 and 6 (p. 3).Team 4 5 Participants Questions 7 and 8 (p. 3).Team 5 5 Participants Questions 9 and 10(p. 3).

The Names and roll numbers of participants in each team must be circulatedto the class and facilitator7 days before the audio session by email.

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Pre Work-Session 6-Bus.Neg


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The Dabhol Power Project A Summary

Enrons Dabhol Power Project was the single largest foreign directinvestment project in India at the time costing nearly U.S.Dollars 3 billion. Itwas a two-phased project by Dabhol Power Corporation (DPC) for building,

owning and operating a 2184 MW super thermal power plant using importedliquefied natural gas (LNG) as fuel. The Dabhol Power Company and theMaharashtra State Electricity Board (MSEB) had signed a twenty-year power

purchase agreement (PPA) for offtake of power by MSEB.

The project had been contentious right from inception due to techno-economic and commercial considerations unfavourable to MSEB as well asallegation that bribery and corruption have played a part in getting thecontract signed. In January-June 2001, there were several exchangesbetween MSEB and DPC that had generated quite many sparks with threatsto terminate the ongoing contract. It was said that the entire negotiations

with Enron were an illustration ofhow not to negotiate, how not to take aweak position in negotiations and how not to leave the initiative to the otherside. It was also an example of the perils of signing a contract in haste, acomplete lack of transparency in negotiations in making a contract and ofnot properly analysing the implications of the deal.

Dabhol Plants Phase-I (740 MW) began operating on naphtha in May 1999,since Dabhols LNG Terminal was not ready. Due to post-contractcontroversies between MSEB and DPC, the plant was shut down in May 2001after MSEB refused to buy expensive power whose rates had tripled since

the contract was signed. The plants Phase-II remained incomplete.

After a prolonged shutdown due to controversies between foreign andIndian lenders, plant equity owners and electricity users as well as Enronsbankruptcy, the matter was finally settled in July 2005, and the project wastaken over by Ratnagiri Gas and Power Private Limited (RGPPL) a jointventure among NTPC, GAIL, MSEB and IDBI led Indian banks.

The plant is being restored and Phase-II was expected to be completed by

December 2007 (2814 MW). The plant was partially restarted up on naphthain May 2005. The LNG Terminal is expected to be complete by 2010. Till then,the regassified LNG will be supplied from Petronets LNG Terminal at Dahejthrough the Dahej-Uran-Dabhol pipeline made ready in July 2007 for the

purpose.



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Read the attached paper and answer the followingquestions:

1. What was the negotiating style used by Enron? (Win-Win,Win-Lose, Lose-Win, Lose-Lose or a Compromise). Citeexamples.

2. What were the strategies used by Enron to get what itwanted? Give examples.

3. How did Enron try to el iminate contract r isks?

4. How did Enron use construction stoppage to their advantage?

5. How was the confidential ly clause used to Enron'sadvantage? (Example - Data not given to PRYAS, an NGO).

6. What was the capital cost of equivalent plant at otherlocations?

7. How did Enron perform in other countr ies?

8. What were the strong points of Enron?

9. How did MSEB (GoM/GoI) get into a weak negotiatingposition?

10. What are the main learnings from the Enron Project?



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THE UNFINISHED STORY OF THE ENRON PROJECT

D.C. Singhal

Part 1

Enrons Dabhol project was the single largest foreign direct investmentproject in India at the time costing nearly U.S.Dollars 3 billion. It was a two-phasedproject by Dabhol Power Corporation (DPC) for building, owning and operating a2184 MW super thermal power plant using imported liquefied natural gas (LNG) asfuel. The Dabhol Power Company and the Maharashtra State Electricity Board(MSEB) had signed a twenty-year power purchase agreement (PPA) for offtake of

power by MSEB.

The project had been contentious right from inception due to techno-economic and commercial considerations unfavourable to MSEB as well asallegation that bribery and corruption have played a part in getting the contractsigned. In January-June 2001, there were several exchanges between MSEB andDPC that have generated quite many sparks with threats to terminate the ongoingcontract. It was said that the entire negotiations with Enron were an illustration ofhow not to negotiate, how not to take a weak position in negotiations and how notto leave the initiative to the other side. It was also an example of the perils ofsigning a contract in haste, a complete lack of transparency in negotiations in

making a contract and of not properly analysing the implications of the deal.

The subsequent sections present an analysis of this mega-project with aview to deriving lessons in negotiating and contracting for projects in future

particularly in the global scenario.



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TABLE 1 THE SALIENT FEATURES OF THE PROJECT

The Project Combined cycle gas turbine project comprising :

Phase I 740 MW Start-up May 13, 1999Fuel Naphtha initially, imported LNGafter completion of Phase II

Phase II

Unit I

Unit II

740 MW

704 MW

Start-up scheduled June 7, 2001Fuel Naphtha initially, imported LNGafter completion of Phase IIStart-up Scheduled December, 2001

Fuel Imported LNG2184 MW

LNG facilities: To receive, regassify and supply to the power plant 5 MTPA-LNG (only 2.1 MPA LNG required for Phase I & II)

The Equipment

Phase I comprises one power block including

-- One GE STAG 9FA Combined Cycle unit withTwo 9FA gas turbines (each of 226.5 MW)Two heat recovery steam generators (HRSGs)One steam turbine generatorTwo stacks (98 meter each) to exhaust gases

-- One GE 6B combustion turbine (35 MW) for start-up and peaking

Phase II comprises two more power blocks similar to Phase I

The Investment

Phase I US Dollars 1.078 billion

Phase II US Dollars 1.420 billion

LNG Terminal US Dollars 0.250 billion

Other Costs US Dollars 0.202 billion

Total US Dollars 2.950 billion



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DEBT EQUITY RATIO 70 : 30

Equity Holding in DPC PercentagePhase I Phase II

1) Enron 50 65

2) MSEB 30 15*

3) GE 10 10

4) Bechtel 10 10

* MSEB was unable to fund more than 15% stake at this stage

The Power Tariff

Basis : 20 year contract (PPA) between DPC and MSEB

Price Fixed tariff US Dollars 1.3 billion per year (US Dollars 26 billion in 20years) covering DPCs cost of plant, operation and other expenses and balancewould be profits.

-- PLUS escalation for fuel costs, electricity transmission and maintenance.

Denomination of tariff US Dollars

Payment guaranteed by State Government and counter-guaranteed by CentralGovernment (for Phase I)

All disputes to be settled in England under English law.

PPA based on guaranteed purchase of power at 90% plant load factor (PLF)



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ENRON

MAURITIUS GE

Dabhol Power Company

MSEB

IDBI led

Indian

Lenders

CEA

MERC

GOM

Oman

LNG

Fuel

Supply

ContractForeign

Loan

Guarantee

PPA

Payment

Guarantee

PPA

Power PurchaseAgreement

PPA Payment

Counter Guarantee

65% 10%

10%

15%

DABHOL POWERLINKAGES WITHSTAKEHOLDERS

D.C.Singhal

OverseasLenders

MSEB

GOI

ENRON

CORP.

Bechtel

dsc-dpc-linkages

Fig.1. The Stakeholder Map of the Dabhol Power Project.

THE PROJECT BACKGROUND

In 1992, pursuing a policy of economic liberalization, the Congress (I)Government opened up the power and energy sector to foreign investment.

In May-June 1992, on a three-week trip abroad, a senior GoI delegation metEnron officials who expressed interest in building a power plant in India.

On June 15, 1992, Enron and GE representatives came to India and discussedwith GoI officials. On June 17, 1992, the Enron team went to Maharashtra,surveyed the sites, met Maharashtra government officials and signed an MoUon June 20, 1992 to build Dabhol Power Project.



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Thus in less than three days, the MoU was signed between Enron and MSEBfor a power project involving US Dollars 3.1 billion using entirely imported fuel(LNG) and with largely imported equipment which no one in the governmenthad any experience or expertise and with a party whose history, business or

accomplishments were not known. The Secretary, Energy, Government ofMaharashtra (GoM) instructed the MSEB to finalise certain points so that aproper PPA could be signed in sixty days.

Although the MoU is not a legally binding document, the deal making processwas criticized for its haste, its lack of transparency and the absence ofcompetitive bidding.

THE WORLD BANKS ASSESSMENT

After the agreement was signed, the Maharashtra Government requested theWorld Bank to review the project. Initially, Enron was convinced that the WorldBank has full and scientific knowledge of the working of the Power Sector inIndia. This is despite the fact that the then Finance Secretary felt that Enronwould pre-empt the financing of other projects (and hence was not in favour).

The World Bank found many irregularities in the agreement. The governmenthad not provided an overall justification for the project and the MoU was onesided in favour of Enron. It encouraged the government to verify Enronsexperience as an electricity generating company before proceeding with theproject.

Later in its report, the World Bank advised that the Enron Project

i) is unviableii) does not satisfy the test of least cost power

iii) is too large andiv) is not justified by the power demands of Maharashtra.

It clearly mentioned on April 30, 1993, that the project was not a least costchoice for base load power generation compared with Indian coal and localgas. Even imported coal is a better option as against imported LNG with thecurrent environmental standards.

Hence the World Bank emphatically vetoed the Project. It subsequentlyrefused to finance the project.

Enrons reaction was that the World Banks opinion can be changed and thatthey would engage a public relations firm to manage the media.



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The MSEB and GoM addressed the concerns of the World Bank byemphasising the environmental benefits of using natural gas, slightly reducingthe plant size and assuring the GoI that there would be power sector reforms toadjust electricity tariffs.

In retrospect, the concerns of the World Bank proved well founded. Reformsdid not occur, the tariff was too high and the system was not able to absorb thecapacity, even of Phase I which was operational since May 1999. In hindsight,it is easy to argue that the decisions made at the time were not justified, but inthis case these issues were raised and dismissed at the time the originaldecision was made.

THE CENTRAL ELECTRICITY AUTHORITYS ANALYSIS

The MoU did not provide specific details about the costs of the project that wererequired under the Indian Law. When CEA asked DPC for the detailed projectcosts to justify the rate of return, DPC replied that the tariff was guaranteedregardless of the capital costs and hence the request was irrelevant and did notfurnish any information beyond the capital cost summary already provided (1).

The MoU did not specify when the 20-year contract and its associatedpayments would begin, when power would be available or when the contractwas signed.

The structure of payments was a departure from the existing norms.

The price of power was high.

There was no provision to audit the project over time to ensure that the priceMSEB paid to DPC was commensurate to the actual cost of electricity.

The MSEB had agreed to a guaranteed minimum fuel purchase but the fuelsupplier was not bound for the minimum fuel supply.

The MSEB had not verified whether the price of fuel was economical.

Hence the CEA concluded that the entire MoU was one sided in favour ofEnron.



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Who is selling the country? North Block?

The MSEB had entered into a one sided contract with Enron. This becamepossible because the Finance Secretary, sitting in North Block, gave economicclearance to the project though he was not authorized to do the same. As per law,the Central Electricity Authority (CEA) has t give a technical as well as economic

clearance to such projects. The story as narrated by the Godbole Committee is asfollows: The Power Secretary told the CEA that the Finance Secretary hasobserved that the question of cost of power has been looked into and it has beenfound that it was more or less in line with other projects in Maharashtra. Northblock gave the economic clearance to a patently one-sided project leading to theMaharashtra Government becoming bankrupt. Bharat Jhunjhunwala, THE

AVENUE MAIL, Friday, October 25, 2002

CLEARANCE OF THE POWER PURCHASE AGREEMENT

On August 29, 1992, Enron submitted its detailed application to GoIs ForeignInvestment Promotion Board (FIBP).

On December 12, 1992, the foreign Investment Promotion Board notified Enronto split the project into two phases, scale it down and reduce the costaccordingly to which Enron agreed.

On February 3, 1993, the GoI notified Enron that its project was approved andthat the GoI would apply for financing to the World Bank and other institutions.

On April 30, 1993, the World Bank turned down the request for financing (forreasons given earlier)

On November 20, 1993, the CEA gave a provisional clearance to the project tofinalise financing.. This provisional clearance was used by MaharashtraGovernment for signing the PPA between MSEB and DPC on December 8,1993. This was treated as highly confidential document.

PROJECT IMPLEMENTATION

As approved, the project was to be implemented in two phases. Phase Icomprising one unit of 740 MW and Phase II comprising two similar unitstotaling to 1440 MW. Phase II was optional.

In March 1995, following the state elections, the Congress (I) governmentunder which the original PPA was signed gave way to Siv Sena led governmentin Maharashtra. Whilst Phase I was under implementation, the new government



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scrapped the project on the grounds of alleged corruption and high costs. Itappointed a committee led by Deputy Chief Minister, Gopinath Munde on May3, 1995 to review the project.

In November 1995, the project was re-negotiated by the new government.

The 1993 PPA covered only Phase I whilst Phase II was optional for future.The re-negotiated PPA of Siv SenaBJP government committed Phase II also,claiming some savings. Hence the project that was suspended for eightmonths was allowed to continue the construction.

The renegotiated deal was severely criticized in Indian press. It was still onesided in favour of Enron and open to all the core objections of the original deal.It further committed the government to almost three times the original capacity.The renegotiated deal was perceived as eyewash to save face and push theproject through.

Phase I was completed on May 13, 1999. Phase II is scheduled for completionby end 2001.

In the meantime, the rupee-dollar exchange rate went up from Rs 32 when thecontract was signed to Rs. 46 in December, 2000 and the price of oil went upfrom US$15 per barrel at the time of signing the contract to US$28 per barrel inDecember, 2000.

Since the power tariff was in US dollars and escalation was accepted in fuelprices, the tariff increased from Rs.2.4 per unit to Rs 7.8 per unit whilst cost ofgenerating power from coal stood at Rs 1.25 per unit of Tata Electric

Companies and Rs 2 per unit of Bombay Suburban Electric Supply (BSES) inDecember 2000.

The higher power tariff increased the burden on MSEB resulting in delays anddefaults in its payments to DPC in December 2000 and January 2001 whichwere under arbitration. The DPC had invoked the counter guarantees for thepayment defaults (but to no avail).

In December 2000, on uproar in Maharashtra Assembly for the high cost ofpower, led to the announcement by the state Government to review the project.The State Government set-up a committee led by Madhav Godbole for the

purpose.



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Fig. 2. Exchange Rate Variation in Rupees per US $

(Annual Averages) from 199697 to 200102.


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Fig. 3. Crude Oil Price Changes in US $ 2004

during the period 1992 to 2004.(www.wtrg.com/oil_graphs/oilprice)


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In April 2001, the Godbole Committee submitted its report with following mainrecommendations.

i) Reduction in tariff and cancelling the present tariff structureii) Separation of DPCs LNG facility and shipping and renegotiating the

fuel supply contractiii) Removal of dollar denomination at least for the fixed tariff.iv) Restructuring the debtv) Setting up a committee to renegotiate the PPA.

The report also suggested judicial probe in signing of the PPA.

The Mahatrashtra government accepted the Godbole Committee Report andauthorised the Godbole panel to renegotiate the PPA with DPC. Enron did notaccept the suggestions of Godbole Report.

On May 19, 2001, the DPC issued a pre-termination notice (PTN) to MSEB dueto payment defaults.

On May 24, 2001, the MSEB rescinded the PPA on grounds that the powerplant did not conform to the PPA and is not capable of meeting the contractualterms regarding operating characteristics and dynamic parameters. This wasevinced as DPC failed to deliver the base load of 657 MW within 180 minuteson three occasions Jan. 28, Feb.13 and Mar. 29. DPC failed and neglected

to adjust the rebate in the billing statement. This issue of rebate payment wasbefore an arbitration panel.

The DPC had admitted in a letter to MSEB after January 28 that their powerplant did not conform to the PPA and is not capable of meeting the contractualterms in respect of operating characteristics and dynamic parameters. TheMSEB thus justified the termination of the PPA.

On May 28, 2001, the MSEB stopped taking power from DPC since DPCobjected to MSEBs notice with the argument that MSEB cannot keepextracting electricity and rescind the PPA.

MSEB had slapped a penalty of Rs.401 crores for the default in power supply ofJanuary 28. This was followed by another penalty of Rs.400 crores for defaultof February 13.

Frustrated by defaults in payments by DPC on their ongoing contract, Bechtel,the EPC contractor and 10% stakeholder in DPC, threatened to quit Phase IIwork by June 16, 2001 if its dues were not paid. (EPC = Engineering,



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Procurement and Construction). After the expiry of this deadline, the EPCcontractors have pulled out.

Due to project controversies, the lenders held back about US Dollars 250million of committed debt. About 10 to 15 percent work was still to be done on

Unit I of Phase II that was to be operational in June 7, 2001.

DPC had experienced a cost overrun of about US $400 million taking up theproject cost from $2.9 billion to $3.3 billion. This was due to increase inequipment cost. The financial institutions had refused further exposure to theproject. This would delay the Phase II completion due in end 2001.

DPC had requested the Indian Financial institutions led by IDBI to reduce theirlending rates. Acceding to DPC request, the lending rates were reduced from21 per cent to 16.5 percent. This downward revision was not conditional toDPCs passing the benefit to MSEB. The IDBI CMD said that such

concessions are made to several (Indian) clients and the concession is notunprecedented.

By July 8, 2001, the project was in limbo as Godbole panel prepared torenegotiate the PPA with the aim to bring down the power tariff to affordablelevels.

THE POST SHUTDOWN SCENARIO

Much before Dabhol Plants shutdown, Enrons corporate strategy worldwidehad changed. Kenneth Lay, Enrons CEO had announced that the companywas no more interested in making long term investments in infrastructureprojects. Enron wanted to invest in trading related activities.

Change of strategy coupled with DPCs feud with MSEB led to the decision byEnron to pull out of DPC. Hence a suitable buyer had to be found for the

project.

The Indian financial institutions led by IDBI had lent money to DPC as well asstood security for the loans of foreign financial institutions to DPC. Hence theIndian financial institutions had every reason to be concerned about DPCshutdown and to find a solution.



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The financial institutions (FIs) had pegged a loss of $0.5 million per day due tostoppage of power from Phase-I and delays in completion of Phase-II that was90% complete. Indian FIs exposure to the project was about Rs.5170 Croresplus guarantees.

Earlier, the FIs had proposed NTPC taking over the project. However, thegovernment did not allow such backdoor nationalization of independent powerproducers (IPPs).

After the shutdown, the interested buyers for DPCs power plant are TataPower Company (TPC) and the Bombay Suburban Electricity Supply Company(BSEB). The interested buyers for LNG facilities are GAIL, Shell, Total Fina Elfand Gaz de France (GdF). These companies were to carry out open, fair and

transparent due diligence.

The sale formula proposed by lenders for DPC was as follows:

1. The bidders would appoint their consultants for due diligence.

2. A non-refundable earnest money of $100,000 would be required from eachbidder. A confidentiality agreement needed to be signed by each bidder.

3. The lenders would also advertise for inviting expression of interest (EoI)from other possible bidders.

4. On Jan 25, 2002, the financial advisers would be appointed.

5. On Jan 31, 2002, the due diligence would begin in London for examiningbooks and documents. The bidders would be given four days to completethis exercise.

6. This would probably be followed by a two-day site visit to the plant by eachbidder.

7. Subsequently there would be two pre-bid conferences, one in mid Feb.2002 and the other in end Feb 2002.

8. Financial bids would be invited by March 14 and opened onMarch 15.

9. Two companies would be short listed by March 31 for final bid.



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10. The final bid would take place by April 15, 2002. This was expected to endthe uncertainty of the project.

Whilst Enron had expected $ 1 billion for its stake in DPC, the bidders expect to

pay about half after due diligence. Consideration was also to be given to theamount required to re-start Phase-I generation and for completion and start-upof Phase-II.

The DPC in the meantime shifted some critical plant components (e-chips,coded CDs etc) and confidential documents to a safe place (Enronsheadquarters at Houston). The Customs have held DPC prima facieresponsible for violating the Customs Act. The Indian lenders have asked DPCto return these items.

MSEB and DPC were continuing to fight various cases in different courts.

DPC subsequently laid-off all its workforce (some 12,000 plant employees)except just a few security.

On June 20, 2001, Bechtel (the engineering and construction contractor) andGE (the equipment supplier) had demobilised their workforce and equipmentfrom the project site.

The project was facing a cost overrun of US $400 million.

On Sept. 29, 2001, GoM has decided to set up a judicial commission to

probe into the Dabhol deal. The Godbole Committee had pointed toadministrative failures and lapses of judgment at all stages of projectnegotiation, approval and implementation. If these were deliberate, the guiltyshould be prosecuted and punished.

THE DEBACLE AT HOUSTON

While the Dabhol crisis was simmering, back at the head quarters of EnronCorp. in Houston, Texas, serious problems began to unfold which turned themeteoric rise of Enron to an even more dramatic fall. This section enumeratesthe factors that led to the rise and crash of Enron.



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Soaring Towards the Sky

In 1985, Enron was formed by merger of Houston Natural Gas and Inter Northof Omaha, Nebraska. In the early days, the companys main business wasoperation of natural gas pipelines. There was not much money from naturalgas whose prices were then regulated.

In February 1986, Kenneth Lay became the Chairman of Enron. He took thecompany to its dizzy heights till his resignation on January 24, 2002 just afterthe crash of Enron.

In 1990, the federal government deregulated the energy industry. Previously,the large regulated utilities in the U.S. were vertically integrated with controlfrom wellhead to consumer. Deregulation split the production, transmissionand distribution leaving each function to different players and giving theconsumer a choice of suppliers.

Enron seized the opportunity presented by deregulation and positioned itself asan intermediary for trading between gas suppliers and gas consumers. Itdeveloped the spot and derivative market in energy. It could buy and sellcontracts specifying quantities, prices and delivery dates. It could enter a fixedprice contract and absorb the future price variation. This enabled the energyusers to stabilise costs far into the future. Enron developed the information sothat it could project into the future. Thus it bought and sold risk positions. Italso developed the legal expertise to negotiate and formulate contracts.

Subsequently, Enron diversified itself from energy trading of gas, oil, coal andelectricity to trading in various other areas such as telecom bandwidths,commodities, fibre optics, water, weather derivatives, newsprint and real estate.In 1999, it created Enron Online, an internet based trading system.

To generate capital for the increasing business, Enron adopted off-the-balance-sheet transactions exploiting a loophole in the U.S. regulations thatentities can be kept off the parent companys books if it does not own morethan 50% of the entity. Thus using subsidiaries, it need not make transparenteither the nature of investment or the relationship between the parent and thesubsidiary. Enrons stock was offered collateral for the off-balance-sheetborrowings.



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Enrons aggressive and innovative method made it the largest and fastestgrowing company from a $8 billion company in 1986 to the seventh largestcorporation in Fortune 500 list with sales over $100 billion by 2000 with its stocktrading of $90. Between 1996 and 2001, Enron was six times on Fortunes listof Americas most innovative companies.

Intense pressure to keep Enron stock on an ever-rising curve induced topexecutives to take greater and greater risks with investments and accountingpractices. This resulted in inflation of revenues and submergence of growingdebts creating a house of cards. Just one-quarter loss could cause a collapseand it did.

In 2000, Enron reported a revenue of $101 billion (Rs.480.000 Crores)


Fig. 4. The key events and stock price movements

in the growth and bankruptcy of Enron.


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The Countdown to a Stunning Crash

On October 16, 2001, Enron reported poor third quarter results. In many of thenew areas there were significant losses. Many of the losses were due to badbets Enron had made through highly leveraged derivatives. This shattered the

investor and customer confidence.

On October 24, 2001, the crash started. The Chief Financial Officer, AndrewFestow, was forced to resign.

In Oct-Nov 2001, Enron revised its reports of four years from 1997 to 2000 andshowed $600 million less profit than reported earlier and a debt of $628 million.

In Nov 28, 2001, Enrons rival, Dynegy, withdrew $8 billion take over bid.Enrons stock plummeted to 26 cents from a high of $80 in Jan 2001. Standardand Poor downgraded Enrons brands to junk status.

In Dec 2, 2001, Enron filed for Chapter 11 bankruptcy, the largest in US historytill the time. Enron also sued Dynegy for breach of contract.

On Jan 10, 2002, a federal criminal investigation began against Enron.

Enrons collapse also entangled the firms auditor, Arthur Anderson, and theBush Administration with which Enron had close proximity. Enron and ArthurAnderson had also shredded and destroyed many confidential documents.

On Jan 23, 2002, Kenneth Lay resigned as Enrons Chairman and ChiefExecutive Officer.

The swift downfall of Enron left countless investors burned-up, most employees(more than 20,000) out of work with lost retirement savings invested in Enronstock (US companies commonly use their managed retirement funds to boosttheir own stock). The creditors of Enron filed lawsuits to try and retrieve at leastsome of the money they loaned, the main creditor being JP Morgan with $2.1billion credit.

The insiders, board members and senior executives who were in the know

exited in time. At one stage, the privileged executives were selling Enron stockand the unprivileged employees were being encouraged to buy. But the topkey employees got away with the cream!



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The Aftermath

For corruption, fraud and conspiracy that led to the bankruptcy of Enron, the

U.S. government prosecuted the top executives responsible for it. The resultsof the main prosecutions are given below (2).

On January 14, 2004, Andrew Fastow, the former Chief Financial Officer ofEnron pleaded guilty to the criminal charges of money laundering andconspiracy to commit fraud and agreed to a ten year prison term. He asked forleniency and agreed to cooperate with the shareholders suit. His sentence wasreduced to six years.

On February 19, 2004, Jeffrey Skilling, the former Chief Executive of Enronwas indicted for conspiracy, fraud and insider trading. On October 23, 2006,

Skilling was sentenced to more than 24 years in prison.

On July 8, 2004, Kenneth Lay, Enrons founder and chairman was indictedand charged with 11 criminal counts including securities and bank fraud andfaced up to 45 years in prison. On May 2006, Lay was convicted on six countsof fraud and conspiracy and four counts of bank fraud. Lay died of heart attackon July 6, 2006.

On December 28, 2005, Richard Causey, the former Enron ChiefAccountant, pleaded guilty to securities fraud in exchange for a seven yearsentence.

Reference: (2) Hindustan Times (Ranchi), October 25, 2006, p.13.

THE MAIN CONCERNS OF THE ENRON CONTRACT

No competitive bidding. Hence Enron could force its terms.

Details of Enron not known as regards history, business or accomplishment.The World Bank encouraged the government to verify Enrons experience aselectricity generating company before proceeding with the project.

High project costs and power tariffs. Enron had completed a similar sized plantin Teeside, UK, for less than half the price. The power tariff for Jan 2001 of



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DPC is Rs 7.8 per unit as against Rs 1.25 per unit of Tata Electric Cos. and Rs2 per unit of BSES.

Payment to DPC by MSEB were guaranteed by the State Government andcounter guaranteed Central Government. This was a special consideration to

Enron.

The tariff was denominated in US dollars insulating Enron from rupee-dollarfluctuations.

All disputes were to be settled under English Law in England.

Enron was offered a guaranteed PLF-linked return on equity plus escalation infuel, transmission and maintenance. This cost-plus structure is a departurefrom existing norms.

The PPA and dealings were initially kept secret leading to the regrettable lackof transparency in public transactions. Even in the US, Governmentagreements are public under Freedom of Information Act.

Enron paid US$20 million as education gifts. Critics consider these as bribesto clear the project. It may be mentioned that a contract made throughfraudulent means is void.

No environmental impact assessment was carried out by the project authorities.

The CEA in 1993 did not clear DPCs project because its tariff formula violatedthe stipulated two-part structure. It gave only a provincial clearance toarrange finance. This issue remains unopened in the subsequent dealings.

Enrons contract with MSEB was for supply of power and for fuel management.The latter part could have been separated to impact less on the tariff.

The World Bank had vetoed the project and did not finance it. Yet Enron wasundeterred and went ahead with the project. It is said that several unseenfactors and forces seemed to have worked to get Enron what it wanted.

Enron had a clout with top US politicians and the US Government. It couldcount on their support.



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It was perceived that if Enron pulled out of Dabhol project, the foreign directinvestment (FDI) in power projects in India may dry up. This aside, the Indo-USrelations may also suffer a setback.

LEARNING FROM THE ENRON CONTRACT

Contracts should not be signed too hastily. The party must be known asregards its ability and past records.

Multiple party bids must be invited not only for more competitive terms but alsofor greater transparency.

Proper analysis must be done as regards costs and benefits as well as termsand conditions. This should include sensitivity analysis as would have beenrequired in the Enron contract such as:

i) Effect of rupee-dollar exchange rate variationii) Impact of oil price variationiii) Effect of power demand not growing as projected

Recommendations of expert party such as the World Bank should not havebeen ignored. In retrospect, all the concerns of the World Bank about EnronProject proved well founded. The power costs were high. The system wasunable to absorb the capacity even of Phase-1 and power sector reforms didnot occur. Such issues were raised but dismissed at the time the originaldecision was made.

Dealing should be transparent particularly in public transactions. It was allegedthat the contract clearances were obtained through bribes to corrupt officials. Acontract procured through bribery of a public official is a fraudulent transactionand void under the law.

Contract terms should have been properly negotiated in the case of Enroncontract

i) There should have been a proper justification for the cost of power.

ii) Legal proceedings should have been agreed to in India and under IndianLaw (and not in England under English Law).



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iii) The payments should have been denominated in rupees and not in U.Sdollars.

A foreign investor who negotiates a deal that extracts a fabulous price but

bankrupts the customer gets in fact a bad deal fraught with commercial and

political risk.



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D.C. Singhal

Part 2

The Post-Shutdown Scenario

DPC Plant had been shut down since May 29, 2001. The FIs had lost over Rs.2000 crores in interest income alone for about three years till May 2004. This isaside from the deterioration and upkeep costs of the assets. The losses wouldcontinue to mount till the project was restarted which may take more time.

Despite early attempts for revival of the Dabhol Plant, the efforts were notsuccessful due to differences between the Indian and foreign lenders as well asthe foreign equity holders viz. Enron, GE and Bechtel.

The price of power (and the load factor) acceptable to MSEB was also a matterto be settled. This was coupled with the price of imported fuel that was loadedwith import duty and sales tax. A price of Rs. 2.8 per unit of power was finallyagreed in November 2002.

In April 2003, the IDBI appointed N.M.Rothchild as financial consultant to sellthe Dabhol Plant. Rothchild subsequently also appionted Tractabel of Belgiumas co-consultants for the technical aspects.

To speed-up the process for plant revival, the GoI formed the Naresh ChandraCommittee. Their recommendations essentially were:

(1) The Indian lenders were to form a Special Purpose Vehicle (SPV) to takeover the offshore debt.

(2) The US government promoted Overseas Private Investment Corporation(Opic) is an agency that offers political risk insurance to US firms. Opichad an option agreement to buy out the bankrupt Enrons 65 % equity inDPC. Opic had to float tenders for equity sale of the stake of EnronCorporation (held through Enron Mauritius) in the DPC and select a newsponsor.



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(3) The new sponsor would buy out the $ 120 million equity each of GE andBechtel as well as settle their contractual claims and take over the MSEBstake to achieve 100% control.

(4) GE and Bechtel would recommission Phase I and complete Phase II (whichstood 93 % complete).

On April 8, 2004, in a new development, the US bankruptcy court in New Yorkenabled GE and Bechtel to buy out Enron Corporations 65 % equity in DPC(originally costing $ 608 million) for just $ 20 million. This gave GE-Bechtel 85%equity in DPC, the balance 15 % being with MSEB.

Enrons equity of 65 % in DPC would be transferred in two stages to GE-Bechtel. Stage 1, comprising 32 %, would be transferred immediately. In Stage2, the balance 33 % would be transferred after the dispute over Phase I of theproject would be sorted out.

Earlier, Opic had inked an option agreement to buy out its 65 % equity in theDPC. Opic had already paid $ 57 million as damages to GE-Bechtel over theirDPC exposure. Whilst MSEB did not push its claim to buy Enrons equity andbacked out in the last moment under GoI instructions based on legal advicesince it would have affected other court cases between MSEB and Enron.

Reliance, the only Indian firm to bid, had offered $ 25 million for the Enronequity in DPC. The US bankruptcy court turned this down, as it did not have thesupport of the GOI. GE-Bechtel being the equity holders had the first rights.

It may be mentioned here that there was no bidding process as such for the

Enron stake. The US court was only approving an agreement of February-March 2004 between Opic, GE, Bechtel and Enron. The agreement was notonly for DPC but also involved the settlement of other claims. However, Opicsbacking of GE-Bechtel could perhaps have been a deciding factor for thetransfer of Enrons stake to them.

Also in April 2004, Frank Wisner, the former US Ambassador to India andsubsequently the Chairman of AIG, had meetings in Delhi on the subject.

(AIG stands for the American International Group Inc., the worlds no. 2insurer by market value). The GoI sought assurances that in case of change ofownership of DPC, the US companies would not claim damages on the

sovereign guarantees given to Phase I of DPC. In September 2003, GE-Bechtel had filed an arbitration action against the GoI claiming $ 1.2 billion asdamages.

After the acquisition of the Enron stake, GE-Bechtel offered to GoI their stake inDPC for $ 400 million. This comprised:

(1) The original investment of 20 % in DPC $ 240 million



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D.C. Singhal

Part 3

THE SETTLEMENT

The Central Government appointed a Group of Ministers (GoM) headed bythe Defense Minister, Mr. Pranab Mukherjee to settle the Dabhol imbroglio andstart the power plant expeditiously. The objective was to acquire the foreignequity and foreign debt, as these were impediments to the settlement.

85 % equity was with GE and Bechtel (the balance 15 % being with MSEB). GEand Bechtel who at the start of the project had 10 % equity each, had post-shutdown acquired the Enron stake of 65 % in a settlement in the U.S. andstrengthened their negotiating position on their claims.

The foreign debt was from the Export Credit Agency (ECA), a consortium offoreign lenders headed by JIBC of Japan.

A Special Purpose Vehicle (SPV) named Ratnagiri Gas and Power PrivateLimited (RGPPL) was set-up to revive the power plant. GAIL and NTPC wouldinvest Rs. 500 crore each in RGPPL. MSEB would also be a partner in RGPPLwith a preferential equity of Rs. 265 crores (at zero coupon rate for five years).

GE - Bechtel had initiated an arbitration case against the Central Governmentat the London Arbitration Tribunal on GoIs counter guarantees on the DabholProject. It was thought that GE Bechtel had a strong case as against the GoI.This was viewed as a pressurising tactic whilst negotiations for settlement werein progress.

Finally in July 12, 2005, a settlement for $ 160 million was reached with Bechtelon its claims. Earlier, a similar settlement for $ 145 million was separatelyreached with GE on its claims. Hence, with total equity in Indian hands, a waywas paved for Dabhol start-up.

It was agreed that GE Bechtel would withdraw all cases against the Indianside and vice versa i.e. GoI would withdraw the Dabhol related arbitration cases



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in the Supreme Court. The GE Bechtel had taken an indemnification from theUnion Government against future claims of LNG suppliers and carriers, whichthe GoI considered as not holding much ground.

The power plant, lying idle since 2001, would be first transferred to

an SPV floated by GE Bechtel named the New Age PowerCompany and then to RGPPL.

Once the asset transfer is complete, RGPPL would undertake the constructionand commissioning activities of the power plant and the LNG terminal. Theplant is expected to start in the second half of 2006.

One settlement was still to be made. This was with the foreign lenders. TheRGPPL would need to go for a commercial borrowing to repay $ 380 milliondue to ECA. The RGPPL may float bonds to raise the requisite funds to payback ECA.

THE PROGNOSIS OF RGPPL

The RGPPL would acquire the Dabhol Project at the followingestimated cost :

Power Plant Rs. 7,538 croresLNG Terminal Rs. 3,500 crores

Total Cost Rs. 10,000 crores(The plant revival cost is estimated at Rs. 870 crores.)

The power tariff of Rs. 2.3 per unit comprises :

Fixed Cost Rs. 0.93Regassifying Cost Rs. 0.17Fuel Cost Rs. 1.20*Total Cost Rs. 2.30 per Unit(*The fuel cost of Rs. 1.20 is based on LNG price of$ 3.65 per mmbtu. The fuel cost is linked to the raw

material prices.)

To make Dabhol more viable :

(1) NTPC GAIL may need to sell power outside the state if MSEBcannot afford it.



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(2) Dabhol should switch over to LNG from restart rather than use acostly fuel like naphtha.

(3) LNG terminal may be operated as a profit center supplying gas to

other commercial consumers as well. The LNG terminal has acapacity of 5 mtpy whilst only 2.1 mtpy is required for full powergeneration of 2,184 MW.

(4) The plant needs to be run as a base load station aiming at a plantload factor of over 90 %.

(5) RGPPL should consider a capacity expansion to say 5000 MW tolower the fixed costs per unit.

Some important factors for project viability are :

(1) Dabhols new tariff should be frozen at Rs. 2.3 per unit. The powerministry has sought a special waiver from the cabinet for this. In theabsence of this special waiver, the regulator will be required to approvethe project cost.

(2) The lenders will have to foot the extra bill if the revival cost exceeds theoriginal estimate of Rs. 870 crores.

On August 12, 2005, the Cabinet Committee on Economic Affairs (CCEA)approved a package of concessions for RGPPLcomprising:

(1) Granting RGPPL the mega-power status, contingent upon thecompany selling 5 % of the power generated to outside Maharashtra.

(2)Tax concessions under section 80-IA of the Income Tax Act i.e.deductions from gross total income of a specified percentage ofprofits and gains by enterprises engaged in infrastructure development.

(3) An exemption from capital gains tax.

(4) A 5 % customs duty waiver for LNG imports.

(6) Approval for the negotiated tariff of Rs. 2.30 per unit of electricityproduced for a period of five years.



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D.C. Singhal

Part 4

Status as of September 2006 of Dabhol Power Project

Project Ownership (3) Dabhol Power Project now a state owned enterprisewith name changed to Ratnagiri Gas and Power Private (RGPPL). It is a

joint venture of NTPC and GAIL. Its ownership pattern is as follows:

(1) NTPC 28.33 %(2) GAIL 28.33 %(3) MSEB 15 %(4) FIs 28.33 % (IDBI, SBI,ICICI and Canara Bank)

Start-up Schedule (1) (2) of the three unit multi fuel power plant :

(1)Unit 1 (740 Mw) To start in December 2006*.Under extensive repairs.

(2)Unit 2 (740 Mw) To restart in October 2006. Unit complete.(Operated in May-June (2 months).Restart to be only if GoM agrees to buycostly power at over Rs. 6/unit producedwith naphtha as fuel.

(3)Unit 3 (740 Mw) To start in December 2006*.Under completion.

*The commissioning of Units 1 and 3 to be delayed toMarch 2007 to match with arrival of LNG.

LNG Terminal (1)

Capacity 5 MTPA of LNGRequirement for 2184 Mw 2.1 MTPA of LNG.Balance for sale.



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LNG Supply (1)

GAIL has not been able to obtain supplies from Oman or Qatar to be

delivered at Dabhol. The same suppliers agreed to supply LNG at Daheg(Gujarat) at the Petronet Terminal.

GAIL is laying 187 km pipeline to Dabhol. Contract is awarded to PunjLloyd. GAIL wants to recover this cost from NTPC at $ 1 per mBtu whichNTPC is not willing to pay.

Increased cost of completion (3) (4).

(1) Originally for completing the balance 15 % workleft by Enron Rs. 710 crores was required.

(2) This work will require an additional Rs 1000 crores.(The completion cost of Rs. 1710 crores together with the transfer costof Rs. 1790 crores works out to a total cost of Rs. 3500 crores for LNGterminal alone.

Progress of completion work (3)

RGPPL is going ahead with the completion of the project.The Power Finance Corporation is financing the entiredebt of Rs. 1400 crores to RGPPL. Phase II comprisingthe 1440 Mw capacity and LNG Terminal is expected to be

functional by April 2007.

Cost of power(3)

With the current naphtha prices, the power would cost Rs. 7 per unit withthe fuel cost running to Rs 6.07 based on the current naphtha price.

Power shortage (4)

Maharashtra may buy power at over Rs. 6 per unit from RGPPL based on

using naphtha. Mahadiscom (the power distribution arm of the trifurcated

MSEB) has requested approval from the authorities.



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Status Update as of September 2006 of Dabhol Power Project

Additional Equity Infusion Plan (5)

The cost overrun of the LNG Terminal at the Dabhol Plant will be from the

initial estimate of Rs. 2800 crores to Rs. 4000 crores.To meet the cost

overrun, an equity infusion plan has been made comprising:

(a) Rs. 250 crores investment by Maharashtra government through

Maharashtra Power Development Company Limited (MPCL),

which will increase the MPCLs stake in the RGPPL from 15 to

18 per cent.

(b) Rs. 475 crores investment each by GAIL and NTPC (each

holding 28.5 per cent stake in RGPPL.

Reference: (5) BS Reporter, Mumbai, September 12, 2007.

Dahej Dabhol Gas Pipeline (6), (7), (8)

o The Dahej-Uran-Dabhol gas pipeline will transport regassified LNG fromPetronets LNG Terminal at Dahej in Gujarat to Dabhol in Maharashtra. Itwill supply gas to the power plant pending completion of Dabhols LNGTerminal which is expected to be operational by 2010.

o The pipeline links the Gujarat network having five supply sources to

Maharashtra network with only one supply source (Bombay High which

is now declining).

o The trunk pipeline is a two-way flow pipeline 577 km long with 222 km inGujarat and 354 km in Maharashtra and passes over 33 river crossings.It costs about 3,200 crores. It is a 30-inch diameter pipeline and cantransport 12 million cu.m. of gas per day.



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o The construction started in May 2006 and was completed in June 2007delivering the first gas supply to the power plant on July 10, 2007.

Restart Schedule (7)

o RPGGL partly started power generation in May 1, 2006 in one unit

(Block II) from naphtha (since LNG supply was not available) to meet the

power shortage in Maharashtra. Subsequently, the second unit (Block

III) was also started on naphtha with the power plant delivering 1400

MW.

o The gas supply will enable the plant to switch over generation from

expensive naphtha to cheaper feedstock of gas. The 740 MW Unit 2

(Block II) is expected to switch to gas in first week of August and Unit 3

(Block III) would come on gas after eight weeks. Unit 1 (Block I) is

scheduled to go on gas from December 15, 2007 enabling the power

plant capacity of 2184 MW fully on gas. (GAIL had withheld gas supplies

after pipeline completion since RGPPL had delayed furnishing an L/C).

To be continued as the story unfolds.



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References :

(1) The Times Of India (New Delhi), August 10, 2006, p.15 ,

Dabhol looks for lifeline.

(2) The Times Of India (New Delhi), August 24, 2006, p.19 ,

Ratnagiri Gas to delay units at Dabhol.

(3) The Economic Times (New Delhi), September 4, 2006, p. 16,

Ratnagiri Gas has no plans to sell Dabhol Power Plant.

(4) The Times Of India (New Delhi), September 6, 2006, p.15 ,

State may buy Dabhol power at over Rs. 6 per unit.

(5) BS Reporter, Mumbai, September 12, 2007.

(6) The Times of India, New Delhi, July 14, 2007, p.24,

Dabhol gets first supply of gas from GAIL

(7) The Times of India, New Delhi, July 24, 2007, p. 14,

Petronet to start gas supply to Dabhol soon

(8) The Times of India, New Delhi, May 8, 2007, p.16,

GAILs Dabhol pipeline gets going



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GENERALREFERENCES1. Financing Institutions and the Government of the United States

A) Phase I Financing

B) Phase II Financing

Internethttp://www.hrw.org./reports/1999/enron/enron 8-1.htm& http://www.hrw.org/reports/1999/enron/enron 8-3, htm

2. Selected Recommendations and Conclusions from the ParliamentaryStanding Committee on Energy, May 29, 1995

Internethttp://www.hrw.org/reports/1999/enron/enron-c.htm

3. Report of the Cabinet Sub-Committee to Review the Dabhol Power

Project (The Munde Committee Review)

Internethttp://www.hrw.org/reports/1999/enron/enron - b.htm

4. The Munde Committee ReportInternethttp://www.hrw.org/reports/1999/enron/enron 2-2. htm

5. The Renegotiated projectInternethttp://www.hrw.org/reports/1999/enron/enron 2-3. htm

6. The CITU Lawsuit

Internethttp://www.hrw.org/reports/1999/enron/enron 2-4. htm

7. The Corporate ComplicityInternethttp://ww.hrw.org/repots/1999/enron/enron 2-0. htm

8. Enrons eight-year power struggle in Indiaby Tony Allison, Asia Times Special Reports, January 18, 2001Internethttp://www..atimes.com/reports/CA13aAi01.html

9. Enron, Deal Blows a Fuse by Pratap ChatterjeeInternet

http://www.corpwatch.org/trac/feature/india/profiles/enron/enronfusc.html

10. Extracts from the Godbole Committee Report

a) An inexcusable failure of governanceBusiness Standard, May 23, 2001

http://www.hrw.org./reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enron-c.htmhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://ww.hrw.org/repots/1999/enron/enronhttp://ww.corpwatch.org/tre/feature/india/profiles/enron/enronfusc.htmhttp://ww.corpwatch.org/tre/feature/india/profiles/enron/enronfusc.htmhttp://www.hrw.org./reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enron-c.htmhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://www.hrw.org/reports/1999/enronhttp://www.hrw.org/reports/1999/enron/enronhttp://ww.hrw.org/repots/1999/enron/enronhttp://ww.corpwatch.org/tre/feature/india/profiles/enron/enronfusc.htmhttp://ww.corpwatch.org/tre/feature/india/profiles/enron/enronfusc.htm


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b) The base load question,Business Standard, May 24, 2001

c) CEAs dubious due diligence,

Business Standard, May 25, 2001

11. Knowledge at Wharton Strategic ManagementInternethttp://knowledgee.wart/print version.cfm?Article id = 469 & dated 11/28/01

12. Summary of Power Purchase Agreement (PPA)Internet http://altindia.net/enron/Home-files/PPA.htm

13. Audit Note on PPA by Accountant General dated 19.06.95Internet http://altindia.net/eenron/Home-files/doc/gom

suit/Auditnet.html

14. Power Play by Abhay Mehta (Orient Longmans)Book No. 15207, 1999-2000, 226 pages, Rs. 195.(About Negotiation and Pre-start-up Phase of the Project)
http://altindia.net/enron/Home-files/PPA.htmhttp://altindia.net/eenron/Home-files/doc/gom%20suit/Auditnet.htmlhttp://altindia.net/enron/Home-files/PPA.htmhttp://altindia.net/eenron/Home-files/doc/gom%20suit/Auditnet.html

Case Study-Bus.Neg-DPC-TERI

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