The Enron Saga


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Case Details:

Case Code : BECG001
Case Length : 11 Pages
Period : 1992 - 2001
Pub. Date : 2001
Teaching Note : Available
Organization : Enron, Dabhol Power, MSEB, Government of Maharashtra (GoM)
Industry : Power
Countries : India

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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

The Power Factor

The MoU between Enron and MSEB was signed prior to the examination of the terms and conditions and implication of the project. Among the parameters that should have been examined were the capital cost of the plant (on which the price of electricity depends), the type of fuel to be used, the location of the plant etc.

An autonomous organization, the Central Electricity Authority (CEA) was supposed to examine these aspects. In July 1992, the CEA examined the MoU and pointed out that the price agreed on was a "departure from the existing norms and parameters notified by the Government." It also pointed out that “denominating the price in US dollars was also a departure from the existing norms." According to the CEA, the price that had been agreed upon was "considered high."

In July 1992, the Government of India asked Enron to submit a break-up of the project costs and the return on equity that was assumed. Enron wrote back stating, “…We advice you against auditing project costs and predetermining return on equity.”...

The Peak Load

The project generated much controversy in Maharashtra. Of the two main opposition parties (the BJP and Shiv Sena) , the BJP was in the forefront of the opposition to the project on a number of grounds. Their primary contention was that the deal indicated corruption at the highest level. In January 1995, elections to the Maharashtra state assembly were announced. Enron was made a key issue in the elections. Gopinath Munde, leader of the BJP, visited the Enron site and promised to throw "the project in the Arabian Sea". Business Line and Frontline carried long and detailed articles on the PPA, which had been kept secret up till then...

A Tripp

The MSEB's inability to pay DPC was rapidly emerging as a threat to the viability of phase II of the project which involved a generating capacity of 1, 400 MW and an LNG terminal of 5 million tons.

There was an increasing possibility that the dispute over phase I might end up in international arbitration, if MSEB failed to pay up and the state government refused to bail out the ailing MSEB. The PPA had provisions for arbitration in case a dispute could not be resolved through negotiations.

The DPC and the MSEB would have to work out alternative options as the project was unviable in its present form. Said Kirith Parikh, former director, Indira Gandhi Institute of Development Research (IGIDR), "Yes, the power from Enron is currently expensive, but a solution needs to be worked. Throwing the Enron project into the sea is not an option."...

Exhibits

Exhibit I: Chronology of Events
Exhibit II: Cogentrix Power Project


 

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