Enron threatens to end India project

In this story: Critical of Indian government Maharashtra confident new deal will come A symbolic exit RELATED SITES

By CNN's Alex Frew McMillan in Hong Kong

MUMBAI, India (CNN) -- U.S. power giant Enron Corp. is set to pull out of India.

But its local partner in a controversial power-plant development still hopes to lure Enron to the negotiating table.

On Saturday, Enron's Dabhol Power Co. subsidiary issued a preliminary termination notice to the Maharashtra state government.

It said it "had no choice" but to issue the termination notice given the failure of the Indian government, the state government and the state electricity board to meet their obligations.

The notice is the first step toward ending Dabhol's power-purchase agreement with the Maharashtra State Electricity Board (MSEB).

Critical of Indian government

Enron owns a 65 percent stake in the $3 billion Dabhol project. It is the largest investment in India by an overseas company.

Dabhol noted, in a statement, that months of negotiations with its partners had yielded no progress.

"We are still open to constructive discussion on solutions," Dabhol said. But that can only happen if its partners agree to buy all the power or find other creditworthy buyers, it said.

Dabhol criticized the Indian government for not helping Maharashtra State to sell the plant's excess power.

The parties now have a six-month cooling off period, as required by the power-purchase agreement. Failing that, Dabhol would issue a final termination notice and claim a termination fee, reportedly $300 million.

Maharashtra confident new deal will come

The chief minister of Maharashtra state, which includes India's business capital Mumbai, is still confident it can hash out a new deal.

"We'll try our best to settle this matter," Vilasrao Desmukh told CNN. "They have done it in haste. Once we are there on the negotiation table, they should not necessarily create more problems."

A committee set up by Maharashtra state to come up with a new power-purchase agreement meets again on May 23. The head of Enron India attended the first meeting of the renegotiating committee on May 11, but talks broke up without much progress.

Dabhol noted in its termination-notice statement that it was disappointed the Indian government "did not even bother to send a representative to the initial renegotiation committee meeting."

Deshmukh said the Indian government was "likely" to attend the next meeting. But he said getting a lower price for power was vital.

Dabhol needs more competitive rates to sell to other states, he said, something both Enron and Maharashtra want to see happen.

"All this legal battle will take a lot of time and create an embarrassment for both [sides]," he said.

Dabhol's Indian lenders are urging the federal government to intervene.

Banks such as the Industrial Development Bank of India, ICICI Ltd. and the country's largest commercial bank, State Bank of India, stand to lose if Enron pulls out.

They have lent $1.4 billion out of the project's total cost, with the rest coming from overseas banks such as ABN Amro.

"We want the government to step in and resolve the matter with lenders' interests in mind. We are continuously monitoring the situation," a senior official told Reuters.

A symbolic exit

The nine-year old Dabhol project has been troubled from the start. The Maharashtra State Electricity Board backed out on a deal to buy all the power, complaining it was too expensive.

MSEB, which owns 15 percent of Dabhol, was also slated to buy another 15 percent but pulled out, blaming financial difficulties.

It now owes Dabhol $45 million in unpaid power bills. MSEB refuses to pay until a claim for technical failures by Enron is settled.

The first phase of the 2,184 megawatt plant is up and running. But a second phase is due to start production next month.

Enron says the price of power will drop once the plant switches to liquefied natural gas later this year. But the future of the project is now in doubt. Enron continues to up the ante that it will pull out entirely.

The breakdown would be an embarrassment for the Indian government, which is keen to drum up overseas investment in India. It originally trumpeted the privatization of India's power industry.

Four overseas companies, including the British company PowerGen and the American firm Cogentrix, have already scrapped Indian projects, often blaming bureaucratic delays.

Reuters contributed to this report.

Enron
Maharashtra State
Maharashtra State Electricity Board

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