Isn't it nice? Maharashtra actually has something in common with the state of California. Both states have governments which have messed up and bankrupted power utilities under the guise of liberalisation/deregulation. Both are resorting to load shedding to mitigate high purchase costs and the people of both states have fortunately been protected from the full brunt of the tariff hike so far. In both cases, the power generators had expected to benefit from the mess.
The similarities end there. Californians expected power prices to crash with the partial deregulation of distribution. In fact, the distribution companies were so certain that prices would fall that they sought regulation which did not need them to pass on wholesale prices to the consumers. However, California went through an unexpected economic boom after a recession in the early 1990s, this lead to a huge surge in the demand for electricity.
The resulting shortages, combined with the deregulation in wholesale power, allowed generating companies to hike prices enormously and sell power to the highest bidding utilities. Today, Californians from the full impact of soaring whole sale prices being reflected in their electricity bills but utilities that are buying the expensive power are filing for bankruptcy. The state is reeling from power cuts and people are demanding a re-regulation of electricity.
The Indian story has more in common with Independent Power Projects in the developing countries which were born out of the liberalisation process. Enron Corporation's project in Maharashtra -- the Dabhol Power Company -- was the first of these IPPs in India and arguably the messiest.
It was controversial from the word go, was charged with corruption, brought down a government and re-emerged with thrice the original capacity. But Enron's problems have resurfaced because; though it protected itself on the payment front it was dreadfully wrong on other counts.
When Enron chose to do business with Maharashtra, it picked a rich and well administered state – one with a rare profitable distribution utility. What it failed to anticipate was that both Maharashtra and the Maharashtra State Electricity Board would degenerate so rapidly and turn bankrupt within a few short years. Or, that the liberalisation process itself would slow down and the surge in demand for power would fail to materialise.
Last week, almost in tandem with the escalation in the Californian crisis, MSEB stopped buying power from Dabhol and failed to pay it for over three months. The state government has now agreed to pay for power purchased, but the problem is far from resolved.
A November 2000 research study by Kate Bayliss and David Hall at the University of Greenwich has now issued some detailed findings and conclusions about the entire range of IPPs sold to East European and Asian countries which were trying to liberalise their State-controlled power sector.
Initially, these IPPs were sold by multinationals as the answer to the infrastructure needs of their respective countries where bankrupt public sector/government had no more money for investment.
Bayliss and Hall have found that contrary to the claims of IFC Washington, power generation by the private sector does not free government funds for other social infrastructure. The fiscal effect of IPPs, through high prices and restrictive terms, of the Power Purchase Agreements ended up absorbing large amounts of government funds and were by no means the cheaper option.
The agreements in fact stifled competition by insulating companies from commercial risk and ended up creating in the private sector, the same environment as a public sector ownership. Also the inflexible nature of the IPPs tied governments to several decades of fixed cost power purchase (denominated in foreign exchange) regardless of changed markets or technology. Often, even the equity investments of MNCs were insulated from currency risk.
The researchers quote a World Bank study which specifically says that IPPs stifle competition and 'hamper efficiency in system operations and sector liberalisation.' The World Bank study says 'even if all the output can be freely dispatched, PPA prices deviate from those provided by a competitive pool -- prices that are the same for all generators, a capacity charge smaller than that of a base load IPP and time-varying energy charges. The potential for inefficiencies is substantial if the IPPs meet a large share of the load; for example, PPA prices provide no incentive to maximise the availability of base load IPPs in the period when supply costs are highest.'
Here are Bayliss and Hall's findings about specific countries and their IPP experiences.
In India, the escrow cover for phase II is 25 per cent more than the amount payable to the Dabhol Power Company. Similar problems exist in Gujarat.
In the Philippines the electricity utility, Napocor, has amassed liabilities of $ 15 billion of which $ 9 billion are obligations to as many as 42 IPPs signed under the Aquino and Ramos administrations. There is serious excess capacity due to the economic and the take-or-pay agreements have saddled government with huge debts and increased electricity prices. These debts too are ultimately assigned to the Philippines government.
In Kenya, the security package for the forthcoming IPP at Kipevu has a 140 % escrow cover plus a letter of credit covering another three months payment. If that were not enough, this too is augmented by a letter of understanding from the Kenyan government insulating the sponsors from force majeure risk.
They find several countries often paid more for IPPs than if they had set up the power projects themselves. Costa Rica and the Dominican Republic are examples. In the Dominican Republic consumers simply refused to pay 'abusive rates' charged by power companies and ultimately forced the government to absorb most of the tariff increase. This subsidy is costing the government around $ 5 million every month leading to an accumulated a debt of more than US $135 million with private generation companies. The mounting debts in turn have forced further power blackouts, sometimes lasting as much as 24 hours.
In Indonesia state electricity company PT Perusahaan Listrik Negara announced a 12-fold increase in losses after the appreciation in the dollar sent the cost of power from IPPs shooting up.
Bayliss and Hall have also analysed the corruption charges against IPPs around the world. In Indonesia, corruption in signing IPPs brought down a government; in Croatia too the secret power purchase terms recorded with Enron were to secure the then president a trip to the White House and other goodies. Pakistan's Hubco deal, which has not been cancelled, also faced continuous charges of corruption under various governments.
The question is, what are all these countries doing about the expensive IPP deals signed by them? The study finds that many simply do no have the money to pay, some have refused to pay even after losing international arbitration awards, others such as Costa Rica have declared that the 15 IPP contracts signed by them have no legal status or are bad in law. More specifically:
The Hungarian parliament in July 1999 declared that a PPA signed with multinational RWE was unconstitutional and void ( RWE has threatened a law suit).
In August 2000 the Croatian government insisted on tearing up a PPA signed by Enron with a previous government. The contract was considered to be unaffordable, had been signed in politically dubious circumstances – it successfully forced Enron to abandon the original agreement.
In the Philippines, in September 2000, to avert the financial burden caused by the IPP deals, Energy Secretary Mario Tiaoqui said the government will not renew these contracts.
Clearly, the benefits of IPPs are exaggerated and there are several ways out of the contract. The question is does the Indian government seriously want a solution? -- Sucheta Dalal