India may step in as state ends Enron deal

In this story: A chilling effect "Obscure and improper" reasoning Talks resume May 29 RELATED STORIES, SITES

By CNN's Alex Frew McMillan in Hong Kong

MUMBAI, India -- The Indian state feuding with Enron Corp. has slapped the company with a termination notice of its own.

The tit-for-tat action ups the ante that Enron will scrap its 65 percent stake in the $3 billion Dabhol Power Co. project.

But the Indian government may now be ready to propose a settlement when talks resume May 29. It had refused to step in until the state backed out.

A cyclone that threatened to land near the Dabhol plant this week has now moved up the coast to Gujarat state. Similarly, India's participation could calm a tempestuous relationship that threatens the plant's future.

A chilling effect

Houston-based Enron's investment is the largest in India by an overseas company. Experts fear its long-running problems with its partner, Maharashtra state, will have a chilling effect on investment in the country.

Enron's Dabhol subsidiary issued a preliminary termination notice last Saturday, May 19 -- the first step in scrapping its deal with Maharashtra. The westerly state includes India's business capital, Mumbai.

The Maharashtra State Electricity Board (MSEB) owes $48 million in unpaid electricity bills. It says Enron is charging too much for power and claims the state cannot absorb it all, as it has agreed to do.

Critics claim Enron is a profiteering multinational, locking in unreasonable profits at a cost to the Indian people.

Neither side is keen to pursue the project as it now stands. Maharashtra's notice, which it filed Thursday, cancels its power-purchase agreement with Dabhol.

"Obscure and improper" reasoning

The state claimed Enron had not lived up to contractual obligations. It said it is canceling the agreement under India's contract law because the power plant cannot hit 100 percent load capacity in 180 minutes from a cold start.

Dabhol is confident the state does not have the right to cancel the contract. It criticized its partner for an "obscure and improper" justification.

"We see this only as a delaying tactic, to delay the whole process and avoid making the payments due to us," spokesman Jimmy Mogal said.

Dabhol plans to continue its legal fight with MSEB, which owns 15 percent of the project. The capacity issue has been under arbitration since April, at Dabhol's request, Mogal said.

Talks resume May 29

If Enron continues with a final termination notice, it could claim a $300 million termination fee. Missed electricity payments and other damages could see the dollar tally run into the billions.

Maharashtra state had appointed a committee to recast its deal with Enron. But the electricity board's move would nullify the contract and free the state from those fees.

The Indian government has so far refused to step in to resolve the dispute. But a source suggests India's representative, retired telecom secretary A.V. Gokak, is ready to propose a solution when talks resume on May 29.

Both sides want the Indian government to help sell Dabhol power to other states.

Gokak and Enron executives were en route to those discussions when they were scrapped on May 22. The chairman of the renegotiation committee, India's former home secretary, Madhav Godbole, resigned amid political bickering, then retracted his resignation.

The second phase of the 2,200 megawatt Dabhol plant, India's largest, is due next month. But that deadline is now in doubt.

India faces an acute power shortage over the next decade. But with its local power boards basically bankrupt, it has a huge need for overseas companies to help build plants.

Companies have been put off by Enron's debacle and the large amount of red tape involved.

India refuses to step into Enron dispute
Enron mulls India damages, talks collapse
Enron threatens to end India project
Enron starts Dabhol talks

Enron
Maharashatra State Electricity Board

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