Subject: Dhabol

Jeff,  We shall forward to you shortly a copy of the message from Sandeep with the  numbers you have  requested.
What follows below are the extracts from two recent articles on  the power situation in India published by The Financial Times.
The first article describes recent power outage in northern India affecting  millions of people.
One possible line of defense is pointing out to the value of  output lost due  to  power shortages.
It is obvious that the value of lost production exceeds the cost  of power produced by the Dhabol plant (expensive as it may be).
The power cut affected 230  million people.
The second article is Enron specific.
Vince                                            ASIA-PACIFIC: Power failure hits north India                       Financial Times; Jan 3, 2001                      By ANGUS DONALD                       Tens of millions of people were left without electricity  in northern India                      yesterday after a power grid breakdown.
Electricity was gradually switched on in some areas and  most parts of the                      capital New Delhi, with 60 to 70 per cent of supply  expected to be restored                      by the end of the day, according to power grid  officials.
The Associated Chambers of Commerce and Industry  (Assocham), a                      leading business organisation, expressed "deep concern"  and called for a                      mechanism to prevent future disruption that could  "cripple the economy".
The power failure across eight Indian states, including  New Delhi, disrupted                      train services, water supplies and the telephone network  and forced                      hospitals to switch to emergency generators.
The fault occurred on the Northern Grid, which provides  electricity for 226m                      people, and affected the states of Delhi, Haryana,  Punjab, Uttar Pradesh,                      Himachal Pradesh, Madhya Pradesh, Rajasthan and Jammu  and Kashmir.
A breakdown at a sub-station in Kanpur in Uttar Pradesh,  India's most                      populous state, caused an overload of power on other  lines, which then                      failed as well.
Trains stopped running for most of the day and signals  systems were                      damaged.
New Delhi international airport was also  slightly affected before                      its own power supply could be engaged.
"We will probe into the reasons for the failure.
It is  most likely to be a                      technical failure, but we will investigate why it  happened," Suresh Prabhu,                      the power minister, was quoted as saying by Press Trust  of India.
India suffers regularly from power problems because of  lack of funding to                      upgrade infrastructure.
Theft of supplies is also a big  problem.
Thirty per                      cent of the country's electricity is stolen, according  to analysts.
In New                      Delhi as much as 50 per cent is stolen.
Two years ago, a power failure blacked out Uttar Pradesh  and Delhi for                      hours.
Assocham issued a statement, saying that increasing  industrial demand                      would exacerbate the problems already faced by India's  inefficient power                      sector.
"The slow progress, particularly in  strengthening the transmission                      and distribution system, and ever increasing theft will  contribute to                      worsening the power supply situation further."
Copyright: The Financial Times Limited                                                                 , Copyright The Financial Times Limited 2000.
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****************************************************************************** *************************************                                          ASIA-PACIFIC: Energy group launches image offensive:  Enron has a                      plan to reverse its reputation as a profiteering  multinational                      operating in India, writes Khozem Merchant                        Financial Times; Jan 3, 2001                      By KHOZEM MERCHANT                       Enron, the US energy producer and a constant target of  criticism in India, is                      hitting back with a campaign to reverse its image as a  profiteering                      multinational.
Its "myth and reality" offensive in local newspapers  follows the west Indian                      state of Maharashtra's decision to review the tariff it  pays the Texas-based                      company, whose Dollars 2.2bn electricity generating  plant at Dabhol is                      India's biggest single foreign investment.
Maharashtra's tariff has more than doubled since 1993  and is three times                      greater than that charged by other independent power  producers (IPPs).
The tariff has risen because of the depreciation of the  rupee against the                      dollar and the high but now falling price of naphtha  fuel.
The state also pays                      a fixed capacity charge of Rs970m (Dollars 21m) a month,  reflecting the                      huge project cost and, controversially, irrespective of  consumption.
A showdown looks inevitable, reminiscent of a clash six  years ago that                      damaged India's appeal to foreign investors.
A former  official of the World                      Bank, which has criticised the deal, says Enron is  emerging "as the East                      India Company of the 21st century" - a reference to the  British trader that                      colonised key areas of the Indian economy in the 19th  century.
The stand-off is the latest blot on India's power  sector.
The UK's PowerGen                      and Cogentrix of the US have quit India recently,  frustrated by long approval                      procedures, inadequate payments mechanisms or because of  higher                      returns elsewhere.
"India has lost time and opportunity and has driven  returns down by six                      percentage points," says Gerry Grove-White, former India  general manager                      of PowerGen, which has sold its 655MW plant in Gujarat  to China Light &                      Power of Hong Kong.
India's national plan for the five years to 2002 says  generating capacity                      must rise by 40,000MW to about 120,000MW.
But since  1992, IPPs have                      added only 3,000MW and 2,500MW remains under  construction.
This is                      insufficient to support official projections of 6 to 8  per cent economic                      growth.
Enron was a bellwether of India's liberalisation,  winning fast-track project                      approval in the early 1990s.
Phase 1, a 740MW plant  fuelled by expensive                      naphtha came on stream in May 1999, and phase 2, a  Dollars 1.87bn plant                      of 1,624MW capacity that will run on cheaper liquefied  natural gas (LNG),                      will be completed this year.
Only two of seven other  fast-track proposals                      have achieved financial closure.
From the outset Enron encountered attacks, culminating  in Maharashtra's                      then nationalist government cancelling the project  before renegotiating                      terms no less onerous.
Vilasrao Deshmukh, chief minister  of the successor                      government, says the power purchase agreement is  unaffordable.
Enron, whose attackers also include cultural  chauvinists, wants to maintain                      good political relations in a hostile but lucrative  environment.
Enron views                      India as a testing ground for its evolution from a  traditional manager of                      power plants to a broad-based trader of commodities,  such as energy, gas                      and bandwidth.
To support these ambitions Enron hopes to trade energy  between power                      surplus and deficit states, once legislation is passed  this year.
It is building                      an LNG terminal and pipelines to trade imported natural  gas.
And it is                      laying a 15,000km fibre-optic network to trade bandwidth  space in a country                      desperately short of this new economy commodity.
In any event, Enron believes it has a watertight  contract.
It is supported by                      many that believe any subversion of the contract would  confirm investor                      perception of Maharashtra, India's financial and  industrial hub, as an                      unreliable destination for investment.
Mr Deshmukh - who has avoided the language of his  predecessor, which                      threatened to "dump Dabhol into the Arabian Sea" - is  under pressure from                      radical members of his wobbly coalition.
But his options  are limited.
Scrapping the project would be ruinous for an  economically troubled state                      that would have to compensate shareholders.
Maharashtra State Electricity Board, the local utility  and Enron's main                      client, is obliged to dispatch or "off-take" 90 per cent  of Dabhol's output.
Yet                      MSEB has never honoured these guarantees.
Its off-take  has averaged 60                      per cent since the plant opened and, in effect, MSEB has  been paying a lot                      more while consuming a lot less power.
One reason off-take is low is because the state's tough  new regulator has                      told MSEB to buy from cheaper sources.
Enron says the  tariff would be                      Rs4.02/kWh if MSEB's off-take averaged 90 per cent.
But  with off-take a                      third lower, the average tariff is Rs4.94 per unit, and  often higher.
In                      October, the tariff was Rs6.91 per unit, when off-take  was about 49 per                      cent.
Enron says tariffs should come down when phase 2,  run on cheaper                      LNG, starts.
These cost pressures have forced MSEB to take up only  half of a 30 per                      cent equity option in phase 2.
Enron has acquired the  balance and                      mandated bankers to find a buyer.
Enron's difficulties have undermined the appeal of IPPs,  which have failed to                      deliver the flood of investments.
Potential IPPs feared  they would never be                      paid by state generating boards that have become a  byword for corrupt                      management of power.
Reform of state electricity boards, whose uneconomic  pricing means                      industrial users subsidise poor farmers, as well as  transmission and                      distribution (T&D) services to check huge theft and  technical losses, is                      overdue.
"Given the limited resources, money would be  better spent on T&D                      rather than on new plant," says Oliver Blackaby,  managing director of N M                      Rothschild in India, which is advising Karnataka on the  privatisation of its                      distribution network.
For the moment, attention is fixed on Enron's ability to  satisfy the                      competing interests of investors and clients.
As Sanjay  Bhatnagar, chief                      executive officer of Enron India, said in a recent trade  magazine, one of the                      key lessons learned from phase 2 is "having flexibility  to deal with                      externalities".
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"FT" and "Financial Times"  are trademarks of The Financial Times.
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