Dabhol Case

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  • Topic: Enron, Dabhol Power Company, Kenneth Lay
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A SYNOPSIS ON DABHOL CASE: NEGOTIATION BETWEEN ENRON AND THE GOVERNMENT

SUBMITTED BY: GROUP1

ABHIRUP ROY(14121) ASHISH KUMAR DAS(14134) BHAGVATHI VARANASI(14015) DEVI MEENAKSHI(14138) KUSHAGRA GUPTA(14143) TEJAS BHARAT GHARGE(14173)

The Dabhol Power Company (DPC) was established as a joint venture between the Enron Corporation, General Electric and the Bechtel Corporation. A Power Purchasing Agreement (PPA) was signed between the DPC and the state Government of Maharashtra in India to generate a 2,015 MW base load power project at Dabhol in the Ratnagiri district.

This project was created to serve a sector in India that is highly politicized, fraught with corruption and a sector that was expected to provide maximum linkages to other sectors of an economy that was poised for growth.

THE SIGNED MOU WITH ENRON

The project was initially established to generate 2,550 megawatts (MW) at a cost of $3.1 billion. Acting upon the recommendations of the Foreign Investment Promotion Board, the proposed project was later scaled down to 1,920 MW, at a capital expenditure priced at $2.65 billion dollars and most importantly, the project was split into two phases. Phase I would run on imported distillate oil until LNG supply contracts were secured and a LNG regassification plant and storage and harbour facilities were developed as part of Phase II

The World Bank Report

World Bank expressed concerns about the fact that a LNG plant was being promoted instead of a combined cycle production plant with coal, since LNG generation at a variable cost of about 150 k/WH is much higher than coal-based production of 30 k/WH. Coal production would also allow the electricity boards to achieve significant cost advantages by relying on domestic equipment and domestic suppliers, thereby decreasing foreign exchange outgo

The World Bank further argued that the willingness of industrial consumers to pay for Electricity had been estimated at Rs. 2.2 kWH in the western region of Maharashtra, and 2.4 kWH in Bombay, which were amounts substantially lower than the Rs. 4.6 kWH stipulated in the DPC proposal. According to the Bank, consumers had expressed a willingness to pay higher. tariffs only for guaranteed and/or additional supply during peak periods.34 The World Bank further critiqued the viability of the project on the grounds that “the implementation of the project would place a significant long-term claim on India’s foreign exchange resources” with the “capacity payments (starting) at about US $175 million in 1996 and escalating at 5% per annum, reaching $US 400 million in 2015”.

NEGOTIATION OF THE PPA

DPC would build, own and operate a plant of approximately 2,000-2,400 MW capacity, which would be run on liquefied natural gas (LNG). The LNG plant would maintain an average plant load factor of ninety per cent. The Dabhol project would cost Rs. 4.36 crores/megawatt (MW) and the DPC would sell to the MSEB at a rate of Rs. 2.65/kWh in 1997 and the rate would increase after that date

TERMINATION OF THE PPA

The report of the Munde Committee symbolized the first of many events that effectively rendered the agreement void. Based on the Committee’s findings, on July 8, 1995, the new Chief Minster, Manohar Joshi, announced to the Maharashtra State Assembly...
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