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MSEB must honour contracts in Enron row: Banker

Maharashtra State Electricity Board, which is feuding with US energy giant Enron Corp over a $2.9 billion power project, must honour all future contracts to avoid such disputes, a senior banker said on Wednesday.

The utility, whose failure to honour its agreement with Enron earlier this year led to the US giant announcing its exit from the country, must not repeat this behaviour with any company which replaces Enron in the project, the banker added.

The banker is one of the officials trying to hammer out a solution to the dispute and he refused to be identified.

"We want the Maharashtra government to guarantee that when a solution comes up in future, the MSEB will honour the future power purchase agreement," the official from one of the domestic lenders told Reuters.

He said the dispute has affected India's image among foreign investors and that it must not happen again.

"We want to save the project, after all this episode is bringing in a lot of negative publicity to India. We can do without this," the banker said.

The demand is significant in the context of the ongoing row between MSEB and Enron's Indian subsidiary, Dabhol Power Company, over the fate of the 2,184 MW power project on India's western coast.

The utility, which agreed in 1995 to buy the plant's entire output, reneged on its commitment earlier this year. It told DPC that the power from the plant was too costly and that it could not buy the 1,444 MW of power to be produced by the plant's second phase.

The giant power plant is being set up in two phases. The first phase of 740 MW is operational, while the second phase of 1,444 MW is 97 per cent complete. MSEB is the plant's sole customer.

The utility's refusal to buy output from the second phase and the delays in payment for the power purchased from the project's first phase sparked off a major dispute with Enron earlier this year.

It came to head in May this year when DPC issued a preliminary notice to terminate the PPA with MSEB and followed that last month by saying that it wants to exit the project.

MSEB, which retaliated in May by issuing a similar termination notice, has demanded that DPC pay Rs 4.0 billion in penalties for not fulfilling contractual obligations.

NEGATIVE IMAGE

The dispute has already wrecked India's chances of attracting more foreign investment in the power sector, with three foreign companies pulling out of the country so far. The high-profile dispute over Dabhol may cause others to follow suit, analysts fear.

Indian lenders are taking a lead in solving the dispute as they have the largest exposure of around $1.4 billion to the project. They are currently looking for a buyer for the plant.

"The entire Enron issue is a complex one and the company has made up its mind to get out," the banker said.

"But there is also little doubt that Maharashtra and the country needs power, and for that, the second phase has to be completed and tariff has to be brought down. Only after that is completed can we find a suitable buyer."

Analysts estimate that India needs to set up around 100,000 MW over the next decade to meet growing demand from its billion-plus population.

These investments will spur growth in allied sectors and help loss of productivity due to erratic power supplies.

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