Background on Enron's Dabhol Power Project

22 Feb, 2002


    FACTOIDS

  1. Enron entered India as an investor in the Indian power sector in 1992, through the operating entity Dabhol Power Company. The project was a natural gas-fired power plant estimated to generate 2,184 megawatts.

  2. The Dabhol project was easily Enron’s most significant overseas endeavour in its size, cost, and political visibility, and was also intended to be a major customer for liquefied natural gas supplies from Enron-backed projects in West Asia. The survival of the project was critical for Enron's larger international interests and the company invested in massive lobbying and public relations exercises to garner support.

  3. In 1993, the Word Bank said that the project was not economically viable, and that power produced from liquefied natural gas would cost much more than power from local coal sources. The Bank also warned that the plant would displace lower-cost power and impose a financial burden on the Maharashtra State Electricity Board.

  4. Indian officials had concerns about the economic impact of importing large quantities of liquefied natural gas. The Independent Power Report of January 1993 said that the plant’s yearly requirement of gas “would drain at least $250 million from India’s foreign exchange reserves.”

  5. The combined opposition parties, the Bharatiya Janata Party and the Shiv Sena, won the state elections in 1995 on a platform of dismantling the project. The new government’s Munde Committee, appointed to review the project, confirmed the World Bank’s concerns about the project’s non-viability and the state decided to halt construction and cancel the project. In response, Enron sought $300 million as compensation from Maharashtra, while attempting to convince the Indian government to reverse its decision.

  6. In November 1995, negotiations resumed between Enron and Maharashtra, which led to a revised agreement. Critics argued that the agreement inherited the problems of economic unviability and actually exacerbated these issues. However, the terms of the revised agreement were finalised on February 23, 1996.

  7. In 1995, the newly installed state government approved in 12 days the building of a plant three times larger than the original project. In 1997, the Indian government approved Enron’s request to expand a portion of the project, the Dabhol liquefied natural gas terminal, to allow it to process 5 million metric tonnes annually.

  8. The project would displace 2,000 people, pollute fresh water and adversely affect local fishing communities. According to a report by Human Rights Watch in 1999, the local communities did suffer from sharply reduced quantities of fresh water available for consumption and agriculture as the water was diverted for use by the plant.

  9. The price of power from Dabhol did turn out to be well above what consumers or the state could afford. These financial problems began to surface in the winter of 2000. The state, contracted to buy the full output of the plant, was purchasing only 10-20 per cent, but was obligated to pay the plant’s full fixed costs, which further increased the power rates.

  10. In 2001, power from Dabhol was estimated to be four times more expensive than that from domestic producers. The payments due for the power from Dabhol alone would be more than Maharashtra’s entire budget for primary and secondary education.

  11. These financial problems were expected to dramatically worsen after Phase II came on line, as it would add an additional 1,444 megawatts of power and the fuel to run the project was getting expensive. Maharashtra had already stopped paying for Dabhol and the December 2000 payment for $22 million was overdue. The state subsequently sought to cancel the power purchase agreement.

  12. Enron began arbitration proceedings in April 2001, ceased operation of the Phase I portion of the plant in May 2001, and halted construction on the 90 per cent completed Phase II portion of the plant in June 2001. Enron claims that Maharashtra owes it $64 million in unpaid bills.    


FOCUS

This report covers the inception, development and eventual closure of Enron’s Dabhol gas-fired power plant project in Maharashtra. During most of the project development period, Enron owned 80 per cent of the project, while General Electric and Bechtel (all American companies) each owned 10 per cent. In late 1998, the Maharashtra State Electricity Board purchased a part of Enron’s equity stake, which dropped Enron’s share to 65 per cent.

Since its inception in 1992, the project was controversial due to its high working costs, political lobbying, losses incurred by the state of Maharashtra, and the potential adverse impact on local communities and natural ecosystem. The Dabhol Power Company began generating power in May 1999, then ceased operation of its first phase, and halted the construction of its second phase in May-June 2001.

This report contains a timeline of these events and the associated economic and political issues. It also provides an overview of the financial losses incurred by Maharashtra, which eventually caused the plant to shut down. The report explains in detail how Enron enlisted supporters in the Indian and U.S. government to lobby for the project after the state initiated the closure of the power plant.


AUTHOR

Minority Staff
Committee on Government Reform
U.S. House of Representatives