Since 1910, Tata Power has been generating electricity and now claims to be the largest independent power producer in India. It is also one of the bidders for the troubled Dabhol Power company, promoted by Enron Corp. In contrast to other investors who are stampeding to leave India’s power sector, Tata Power actually makes money generating, transmitting and distributing electricity -- a healthy 11.6 per cent margin on sales of Rs 3,361 crore last year.
Adi Engineer, managing director, Tata Power, spoke to ET’s Abheek Barman and Soma Banerjee about the company’s plans and the rationale behind the Enron bid. Excerpts from the interview:
Does Enron Corp, which is bankrupt, have the right to push for a selling price for DPC or do these claims lie solely with lenders to the project who have first charge?
We’ve signed a confidentiality agreement and so we can’t talk about a lot of issues pertaining to negotiations. But as far as DPC is concerned Tata Power sees it as an opportunity. Today, we’re the largest private power company in India: our capacity of 2,300 MW is higher even than DPC’s 2,100 MW. We have no conflict with Dabhol as such because they are generators of power and we are an integrated power company. That’s why we’re interested in DPC.
DPC is more or less ready for operations. It’s in Maharashtra, where we do a lot of business, it’s a very good asset and it’s for sale. But ultimately, DPC’s feasibility will depend on the quality of the contracts it is based on. The prevailing ones weren’t good, we thought so initially and our hunch has been borne out. DPC didn’t get bogged down on technical issues, it was done in because of the way the contracts were structured. Therefore we want to see the contracts set right, we want to correct the problem at the origin and to do that we have to redo the contracts. Ultimately, you have to ask: is this affordable for people? If yes, the project works.
What contracts need to be reworked? The PPA with MSEB...
Yes, that’s one of the contracts that needs to be changed. The original PPA won’t work. We need a new PPA which has a two-part tariff -- something like what other IPPs are working on. DPC’s tariff has to be benchmarked with that of similar projects. Then, there are other contracts on which the PPA is based, for gas purchase and operation and maintenance. These too have to be reworked. At the end of it, the gas purchase contract, the O&M contract have to all add to a price to make the power affordable.
If Tata Power could help in doing that then we would be quite happy to take up the project. But do you think this is really doable because a large part of the work has already been completed and this has been done based on certain assured conditions. Say, for instance, the O&M operator may not agree to the new terms or the gas supplier may not like to continue supplies on reworked conditions... The crux lies therefore in renegotiating these contracts. Either these guys come round to a price that is more competitive or we invite fresh bids and we sign new contracts. We can’t leave an asset as large as Dabhol stranded.
So you’re open to calling fresh contracts?
Exactly. However, its quite possible that the existing contractors are willing to review existing positions and decide that it’s worth renegotiating. Ultimately, there’s no point if everybody takes a hard and fast position: that way it just becomes a legal dispute where you go to court and hope you win, but finally, what do you do with just a court decree? What everybody wants is a running project and power that consumers can afford. The project has to run at a benchmarked price.
Today, everybody is talking of a cut, aren’t they? Everybody realises that there has to be a cut to make the power affordable. The capital cost of the project cannot support this tariff, it should be lower. Otherwise, you simply have a costly project that is not generating power because nobody’s willing to buy it.
But isn’t the capital cost very high?
We have not done the due diligence of the project yet and so we do not have definite answers on that. But from the published figures you can see that there’s a substantial difference between comparable components of DPC and other projects. For example, the DPC liquid natural gas terminals are considerably dearer than what has been bid for a similar terminal at Dahej.
Who is doing all the negotiations with potential buyers like you? The lenders? The equity holders? MSEB?
MSEB is one of the equity holders of Dabhol. MSEB is also the buyer of DPC power so they’re on both sides. The gas contracts are often signed bilaterally between governments. Then there are a large number of lenders. So, there are a number of entities on the seller’s side which have to first come to an arrangement among themselves. The project is already in distress, debt has to be restructured because the rates of interest that have been contracted earlier -- 16 to 21 per cent --- are very high compared to prevailing rates.
So times have changed and we have to restructure the project accordingly. If somebody can do it, it has to be a seasoned power player and a seasoned gas player. Its not as if DPC can be broken up into two separate gas and electricity projects. It’s a highly integrated plant. Remember, of the 3 million tonnes of gas that the terminal can handle, 2.1 million tonne will be required for the power plant.
Are you tying up with GAIL to form a consortium to bid for DPC?
We have a good relationship with GAIL because it supplies gas to Trombay and we’ve worked together on some other possibilities. But unless there’s some more clarity on the future of DPC, it’s too early to comment on a consortium. We haven’t tied up formally. Of course, there’s a synergy: GAIL is India’s biggest gas distributor and we’re in the power business. And DPC is essentially a gas-in power-out project.
Have you decided how you will bid?
Actually, well before that the lenders and equity holders have to work out a lot of things. For instance, they have to decide on the structure of the project, rework contracts, get a reasonable business plan with possible tariff structures in place and then call for bids. There’s no hurry. The Dabhol project isn’t running but it’s not that all of Maharashtra is getting blacked out.
What little shortage Maharashtra faces at peak hours, it buys from other states. We sell power to MSEB at Rs 2.50 per unit whereas MSEB bought power from DPC at Rs 5 to Rs 7 per unit. So there’s quite a bit of rationalisation to be done and the sellers have to work out most of this.
How do you justify bidding for a large project like DPC when almost every state electricity board is bankrupt?
Well, DPC is there on the ground and if all the contracts are renegotiated so as to make the tariffs affordable, then it is a good buy.
But will SEBs suddenly turn around and start paying up?
That is an altogether a different matter. The answer lies in an integrated approach where a generator takes up distribution and has full powers to collect the dues from consumers. It’s like the business model I operate on in Mumbai. I give power from the plant to the doorstep and if the consumer doesn’t pay, I cut him off. The future lies in developing integrated projects with generation, transmission and distribution rights with the same company.