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Business Commentary/ R C Murthy

Maharashtra govt, Enron in a bind

The Maharashtra government plunged into a crisis after the newly-established state power regulator refused to approve a hefty power tariff hike and frowned, albeit indirectly, upon the favours doled out to Dabhol Power Company, or DPC, sponsored by the multinational Enron Corporation.

The regulator, Maharashtra Electricity Regulatory Commission, froze the tariffs in real terms and formulated a reform package for nursing the ailing the power utility back to health.

The package, if not contested and overturned, will prevent the Maharashtra State Electricity Board, or MSEB, from extending the most-favoured treatment to DPC. Coming as it did from a former top bureaucrat, who is now the chairman of the quasi-judicial MERC, the package caught the state administration napping.

The dilemma is whether to go ahead with the reforms and ask DPC to fend for itself or to derail the reforms and incur the wrath of the World Bank, with whom Maharashtra is negotiating for a mega power sector loan.

The special treatment to DPC so far has been in the form of MSEB accessing its costliest power out-of -turn. Thanks to MSEB's largesse, the state grid lifted from Dabhol last fiscal 3,700 million units constituting 24.6 per cent of total MSEB purchases from outside sources. But MSEB paid to DPC Rs15.31 billion, or 45 per cent of its total power bill.

Quite often, the MSEB accessed Dabhol power at the expense of its own generating facilities -- leave alone other independent power producers. When the local grid had occasional surpluses, it resold that power to Karnataka at a loss: a rupee lower than Rs 4.13 per unit paid to DPC.

Dabhol has had a special place in the state power scenario. But for Sharad Pawar championing Enron's cause during his stint as Maharashtra Chief Minister in the early '90s, DPC would not have been a reality. Later, Enron managed to have Shiv Sena chief Bal Thackeray's blessings for DPC's phase-II with a rider. The price is to be cut, on current reckoning, by 28 paise per unit once both the plants are gas-fired and fully operational. At present, DPC-I runs on naphtha.

But the price MSEB will pay to DPC then is anybody's guess. For, it's dollar-denominated and will have to reckon with rupee depreciation. Certainly, it'll be higher than the present one.

The Shiv Sena-BJP coalition is no longer in power. But Enron's interests are apparently well protected: MSEB continues to patronise DPC despite a change of guard at the helm of state affairs late last year. The new ruling coalition includes Nationalist Congress Party, whose head is Sharad Pawar, and the energy portfolio in the state cabinet is overseen now by Padam Sinh Patil, a Pawar protege.

But the difference is Thackeray called the shots then, while Sharad Pawar's NCP plays a second fiddle in the present set-up. The majority coalition partner, the Congress is at best neutral on the issue.

Two important ingredients of the MERC package are rankling the ruling coalition. One is the merit order despatch, or MOD, system, which envisages power purchase from the cheapest source first while accessing independent power producers and go up in an ascending order, the costliest source becoming the last resort.

It's not that the MOD, which the commission wants to enforce, is something new. The MSEB has for several years all the infrastructure, including the software for hourly monitoring demand for and supply of power. But compulsions other than economic obviously drove the MSEB to give a go-by to MOD.

Consumer activist Pradyumna Kaul, who fought before the commission against any power tariff increase in the state, said, "Our stand is vindicated. It's a landmark order." The increase allowed is six per cent against 18.6 per cent the MSEB asked for.

The philosophy behind the MERC package is that the six per cent hike should merely neutralise inflation since the last tariff hike a year ago and MSEB's deficit, if any, is to be cut through belt-tightening and reforms.

The other important measure is time-of-day, or TOD, metering for HT (high-tension) consumers. By December all HT consumers are to have TOD meters, which will enable MSEB to monitor the pattern of power use during peak and non-peak hours.

Through a reward-and-punishment policy, HT consumers will be forced to rationalise their power use. The carrot is a rebate of one per cent of their energy bill for a shift to base load from the peak hours and the stick is to penalise those contributing to peak demand. The TOD can play a crucial role because of an yawning 2,500mw gap between the base load and the peak hour demand of 11,500 mw.

Over the next six months, when the hydel system can maximise generation, the MOD if enforced will keep many IPPs standby. The prospects of Dabhol humming to full capacity even in the new year are not bright. The TOD would be operational by then. Any fall in peak demand would mean correspondingly less dependence on IPPs.

Other far-reaching features of the MERC package are introduction over the next five years of a two-part tariff -- recover fixed costs fully and variable costs through variable charges, elimination of cross-subsidisation in five years for all categories of consumers, instal meters for all consumers in three years, and cut transmission and distribution losses by at least five percentage points to 26 per cent this year.

The immediate reaction of the state government to the package is to suspend the acquisition of 30 per cent equity at DPC as per the agreement hammered out by Thackeray when DPC phase-II was sanctioned.

On its part, DPC is scouting for customers outside the state. Also, it is planning to sponsor a power exchange, where buyers and sellers can trade in power.

Any power sales by DPC to neighbouring states cannot be effected without MSEB's consent. The power purchase agreement envisages the MSEB to pay fixed charges of Rs 9.4 billion for which DPC binds itself to be ready at all times to supply up to 90 per cent PLF (plant load factor). Kaul said, "We will force the MSEB to reopen the PPA (by petitioning the regulator) and lower the fixed charges in case DPC plans to sell its surplus power outside (outside the state)."

An option open to the state government is to ask MSEB to appeal against the MERC order , the outcome of which will determine the course of future action. If the Congress is in the driving seat, the state government may go in for a soft option. It may not litigate over the tariff hike, rub on the wrong side of the World Bank and jeopardise its chances of getting the mega loan.

R C Murthy

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