Bright Lights, Big Bill

In

India, power is power. Whoever can provide precious kilowatts to householders or industrialists scores huge political points. Politicians allow slum dwellers to tap into the grid for free in return for votes, and policemen do the same for bribes. The government even subsidizes electricity bills for farmers, the majority of the population. The country simply doesn't have enough juice. And its underdeveloped and antiquated power grid is making life miserable for virtually everyone.

The exception should be the Indian state of Maharashtra, which has electricity galore, thanks to a major power complex set up by Dabhol Power Co., a consortium of foreign companies led by Enron Corp. of Houston, Texas. But before Maharashtrans fire up their irrigation pumps or coiled-wire tea kettles, there's one small snag: the electricity is so expensive no one can afford it. "More than 600 small manufacturers have already closed down because of high electricity bills," says Ashwin Treasurer, owner of an electronic component factory. "What sort of development is this?"

In a phrase: totally insane. To bring steady electricity to one of its most industrialized states, India twice negotiated and signed a deal in the 1990s with Enron to build a major power plant. It's now obvious the deal was far too sweet for the Americans, and India wasn't ready to distribute the juice rationally anyway. The result: consumers in Maharashtra like Treasurer can't afford the electricity bills anymore. (He's considering closing his 36-year-old business.) And since consumers aren't paying up, the state-owned electricity company has also been stiffing Enron since November. Last month, Maharashtra, which guaranteed the deal, defaulted on a $30 million bill, and that bounced the debt to the national treasury. The one certainty is that Enron is going to get paid: the national government pledged as collateral all government resources apart from military and diplomatic assets. "This," says Abhay Mehta, a columnist and author of the book Power Play, a critique of the deal, "is a financial earthquake."

Lack of electricity, along with crummy roads, ports and railroads, have gone a long way toward keeping India poor and backward. Compared with almost any other country in the world, India does a terrible job of delivering power to its people. On paper, national capacity is 84,000 megawatts but, because of lousy maintenance, the actual output is 45,000 mega-watts. A single black-out last December plunged some 200 million people into simultaneous darkness—and no one was surprised.

The Enron deal was meant to be the solution—at $2.83 billion it was the largest single foreign investment in India ever—and an important litmus test for the country. Did the backward giant want to plug its gaping infrastructure gaps? The Maharashtra State Electricity Board agreed to buy all the power produced by Dabhol, and the pricing formula was shrewd: in the event of oil price increases or devaluation of the Indian rupee, the Electricity Board pays more. Well, oil has gone up and the rupee has gone down since Dabhol's 740 megawatt plant went operational two years ago—and that's why consumers like Treasurer have such high electricity bills.

No matter the rates, Maharashtra wasn't prepared for the electricity itself when it came down the wires. Because of institutionalized subsidies, only 10% of the power consumers in the state pay a market rate. Add in the higher cost of Dabhol's electricity, produced from gas rather than the cheap, local coal usually used by Indian power stations, and it was a formula for bankruptcy. "Since this power is so expensive," says Vinay Bansal, chairman of the Electricity Board, "the more we buy, the more we lose."

India can't afford to renege on its largest and highest profile foreign investment—and the Enron deal isn't even completed yet. The second phase of the project, with three times the capacity of the first, will be in operation later this year. Last week, Maharashtra set up a review committee to find a way to rework the deal but under the terms of the current agreement, India has to continue buying the electricity for the next 20 years—or pay $35 billion to get Enron out of the country. That is, if Enron doesn't already own the country by then.