Negotiations with Enron
International power developers did not respond immediately to the new opportunities in the
electricity sector in the early 1990s because India had suffered recent balance-of-payments
problems and banks had cut back their credit facilities. As a result, the government had to
seek out developers. Delegates from the Ministry of Power visited various IPPs to solicit their
interest. When they reached Houston, Texas, they found Enron to be particularly committed
and focused. Their discussions would lead to agreement on the first of eight fast-track inde-
pendent power projects.
Maharastra, on India’s west coast, was appealing to Enron for at least two reasons. First,
the state and Mumbai, its capital, were enjoying a period of political stability and economic
growth as industry relocated from the traditional industrial heartlands in eastern India sur-
rounding Calcutta, whose economy had declined under successive communist administra-
tions. Second, Maharastra was just across the Arabian Sea from the Persian Gulf states, which
Enron saw as a source of natural gas. The Indian government had discussed the possibility of
natural-gas pipelines under the Arabian Sea with the governments of Oman and Iran. Most of
India’s power plants at the time were fuelled by coal. Although natural gas was more expen-
sive, it was cleaner and more efficient. Further, coal would have to be transported from east-
ern India. It was subject to theft and delivery was unreliable, putting a power plant’s
contractual output commitments at risk.^3
Enron, formed in 1985 through a merger between a natural gas company and a pipeline
company, had achieved close to 30 per cent compound annual earnings growth during the past
several years, and was looking for projects outside the United States to sustain that growth.
Responsibility for negotiating the Dabhol project was entrusted to Rebecca Mark, the CEO
of an Enron subsidiary, Enron Development Corporation.
In June 1992, after preliminary negotiations, Enron signed a memorandum of under-
standing with the Congress Party’s chief minister in Maharastra. Enron and the State of
Maharastra agreed to a project that was considered highly ambitious: a 2,105 MW, gas-fired
power plant with an estimated cost of more than US$2 billion. At a time when international
bankers were not lending to India on terms longer than one year, US$1.75 billion of that cost
would have to be raised in the debt markets.^4
Enron’s first six months of negotiations after signing the memorandum were at the fed-
eral level in Delhi, primarily with the Foreign Investment Promotion Board, which coordi-
nates approvals and clearances for foreign investment projects. In early 1993 Enron began to
negotiate a PPA with the Maharastra State Government and the MSEB.
When the Indian government developed its cost-plus approach to tariff formulation in
1992, it set guidelines that allowed power developers to earn 16 per cent ROE if the plants
they built operated at 68.5 per cent of capacity. Above that level state electricity boards could
grant incentive payments up to an additional 0.7 per cent ROE for every percentage point
increase in output achieved. Because gas-fired plants are very efficient, Enron was willing to
commit itself to a high level of generation in the PPA, and in return the MSEB committed
itself to purchasing 90 per cent of the plant’s capacity. Some interpreted these terms as guar-
anteeing Dabhol a minimum 31 per cent ROE. That was not exactly the case, because the PPA
also required Dabhol to assume some risks that were not envisaged in the government’s ROE
guidelines: the company would incur big penalties if it missed its construction deadlines or
failed to build or operate at the specified capacity.
DABHOL POWER COMPANY, INDIA