- DPC and the MSEB established escrow arrangements to capture revenues from selected
MSEB customers to support the MSEB’s payment obligations under the PPA; - the PPA required the MSEB to open a letter of credit;
- the Government of Maharastra provided an unconditional and irrevocable guarantee; and
- the Government of India provided a limited counter-guarantee.
Contract cancelled
The chief minister of Maharastra, under continued pressure from the BJP, announced on 3
August 1995 that the MSEB was cancelling its PPA with DPC because of padded costs, exces-
sive rates for electricity, environmental hazards and lack of open negotiations. Two days later
Enron served the state government with legal notice that it would pursue arbitration in London.
Under UN jurisdiction three selected international arbiters have the authority to evaluate all
relevant information pertaining to the project before coming to a decision about contract
enforceability and possible compensation, which is legally binding through Indian courts.
On 12 August Little & Co. declined to represent the MSEB after serving as its solicitors
for 20 years. The firm considered the state’s decision indefensible because the MSEB had
been unable to show any corruption or breach of contract by the developers. By the next
month it had become apparent that the Maharastra state government was willing to renegoti-
ate and even had persuaded the BJP to back down because of the huge penalties that the state
could face for cancelling the contract.
By this time the first phase of the project was 20 per cent complete and Bechtel and its
largely Indian subcontractors had 2,300 workers on site. An estimated US$130 million of the
US$150 million loan syndicated by Bank of America and ABN AMRO had been drawn
down, and approximately the same amount of equity had been invested in the project. DPC
had signed about 150 contracts with local suppliers. Meanwhile, arrangements to finance the
other seven fast-track projects were underway, and sponsors and bankers wondered whether
their contracts could be cancelled in a similar manner.
Revised project agreement
In January 1996 the MSEB offered DPC the opportunity to resume construction on the pro-
ject under revised terms:
- the MSEB would become a 30 per cent owner of the project;
- the capital cost would be reduced from US$2.6 billion to US$1.8 billion;
- plant capacity would be increased from 2,015 MW to 2,450 MW, because of upgraded
turbines; - the plant would be converted to accommodate domestically available oil distillate or
naphtha as well as imported LNG; and - the electricity rate would drop from 7 US cents to 5.4 cents per KW hour over the 20-
year PPA period.
In addition, the LNG terminal, which could supply LNG to other customers as well, would
become a stand-alone project.
As a result of the renegotiation Enron had to cancel an agreement to sell a 20 per cent
POWER PLANT