Dabhol's prospects

In retrospect, it is obvious that the government lost out on the Dabhol battle when it didn't get a state-owned firm like NTPC to bid for the bankrupt Enron's equity in the Dabhol power company, for this is what allowed GE and Bechtel (who bought the Enron stake) to drive a hard bargain when Dabhol was finally revived.

It is equally obvious that, while the duo thought their case at the London arbitration tribunal was strong, the government realised that its case was weak. Why else would a re-negotiation result in everyone except these two firms taking a huge haircut? Unusually, the equity holders in this case have suffered less than the secured creditors, and this tells the story.

But that belongs to the past. What is important is whether the revival of Dabhol means that Maharashtra's power crisis will soon be ended. It will take a year or thereabouts for the plant to come on stream.

Equally important, given that the plant now costs more than what a new plant would cost to construct, it is almost certain that the cost of power generated by Dabhol will be higher than the Rs 2.30 per unit that has been mentioned (though, of course, this will be linked to the level of raw material prices).

What this means is that the state electricity board will be under pressure to either reduce power theft or find other cost savings, so as to keep tariffs for consumers at current levels. A 50 per cent theft level, for instance, will increase the tariff for this very power from Rs 2.30 to Rs 4.60, without accounting for distribution and other costs; reduce the theft levels to 33 per cent and the tariff will fall to Rs 3.50.

What this shows is that the biggest component of power cost is not that incurred for generation (by Dabhol or any other), it is the level of theft in the system.

Even more important, the government of Maharashtra will have to get its regulator to quickly allow "open access", because this is one of the surest ways to control if not reduce power tariffs in the state.

Once consumers have a choice of power supplier, the market will dictate behaviour and political pricing will become more difficult to sustain. As the Delhi experience with private power distribution has shown, without competition the results are sub-optimal.

Apart from what it does to tariff levels in the state, "open access" will allow NTPC/GAIL (who will run the Dabhol plant) to sell Dabhol power outside the state in case the Maharashtra electricity board can't afford to buy its power. If there had been "open access" at the time Dabhol was first set up, there would not even have been any need for a government counter guarantee since Dabhol would have been able to sell power outside the state as well to customers who could afford to pay for it.

When the state had to cut off power to Mumbai's neon signs, the Maharashtra government had said that major coal shortages were responsible for the shutting down of around 3,000 MW of power in the state.

Indeed, at that time, the state had talked of looking at buying a captive mine overseas. Since the coal supply shortage is certain to get worse as Coal India has consistently fallen short of its targets, the government of Maharashtra needs to vigorously pursue alternative sources of supply.