Oct. 13 (Bloomberg) -- India has idled $4.4 billion of power capacity because utilities can't pay international prices for natural gas to fire the turbines that were built to overcome blackouts, a government official said.

About 5,000 megawatts of gas-fired electricity generation capacity built at a cost of 200 billion rupees ($4.4 billion), is unused, said R.V. Shahi, secretary to India's power ministry.

Most of India's government-owned utilities run at a loss because the state caps power prices. Successive governments have been voted to power by promising free or subsidized power to poor people. Selling power below cost has made it unaffordable for utilities to import gas.

``This is a very serious issue,'' Shahi said in an interview in Mumbai yesterday. India is slowing down plans for more gas-fired plants ``as a lot of companies have suffered,'' Shahi said.

Shares of Indian utility companies fell on the Bombay Stock Exchange today when the benchmark Sensex index rose 1.6 percent to a record high of 12,736.42 points. Tata Power Ltd. fell 0.7 percent to 534.8 rupees, Reliance Energy Ltd. declined 0.3 percent to 462.4 rupees and NTPC Ltd. dropped 0.3 percent to 130.05 rupees.

India's socialist policies adopted since independence from Britain in 1947 prevented free markets and handed control over power prices to bureaucrats. More than a third of India's population of 1.08 billion survives on less than a dollar, according to estimates of the World Bank.

Blackouts in India

Electricity shortages cause blackouts in most of India, forcing manufacturers such as Bajaj Auto Ltd., the nation's second-biggest motorcycle maker, to have their own power plants. Households in cities such as New Delhi depend on battery packs or home generator sets to run lights and equipment during the frequent power failures.

The controlled tariffs make it unaffordable for companies such as state-owned NTPC Ltd., the nation's largest power generator, to pay more than $4 for a million British thermal units of gas.

``According to us $3 to $4 a million British thermal unit is reasonable,'' Shahi said. ``We cannot build power plants assuming the cost of gas at $7 or $8.''

Gas for November delivery fell 36.8 cents to $5.782 per million British thermal units on the New York Mercantile Exchange yesterday. The price has slipped 11 percent the past two days. Gas prices touched a record $15.78 in December.

Sales Below Cost

Oil & Natural Gas Corp., India's largest producer of the fuel, sells nearly 90 percent of its gas output to GAIL (India) Ltd., the biggest distributor, at $1.7 per million British thermal units.

Gas that is not covered under the volumes earmarked for sale at below-market prices is sold by Oil & Natural Gas at $4.75 per million British thermal unit.

India's gas-fired power plants are getting 30 million cubic meters of gas a day compared with 48 million cubic meters that would be consumed should the capacity be fully utilized.

A power plant construction program initiated before the boom in gas prices will increase capacity in the next six months to 14,500 megawatts from 12,000 megawatts. Generating capacity capable of burning 28 million cubic meters a day will remain idle after the expansion, he said.

Pursuing the Ministry

``We are pursuing with the petroleum ministry to see how supplies can be augmented,'' said Shahi. ``We are also asking our state-run companies to secure fuel on their own.''

NTPC is in talks with gas producers in Qatar and Nigeria for the supply of gas, the New Delhi-based company's chairman T. Sankaralingam said in Mumbai yesterday.

Power industry officials, including Sankaralingam and Shahi, were attending a conference organized by India-Tech Foundation, an industry association.

The power ministry, in its five year development plan, starting April, has set a target of building 2,000 megawatt of gas-based plants against a target of 5,000 megawatts in the previous plan, Shahi said.

India doesn't want to add generation capacity based on gas to avoid repeating a scenario where investments go bad because customers are unwilling to pay market prices for the power.

Failed Project

A plant founded by Enron Corp. has been lying idle since 2001 as the project's sole customer, a state-run utility, refused to pay its bills saying the electricity tariff was too high, leaving lenders with bad debts of $1.4 billion.

The government will make a second attempt at re-starting the plant from Nov. 1 by buying naphtha at a fixed price from Indian Oil Corp., the nation's largest refiner, said Shahi.

``On gas we are going to be cautious this time,'' Shahi said. ``We will not proceed unless there is better availability and a better predictability of pricing.''

India has set a target of expanding generation capacity by 65,000 megawatts in the so-called 11th Five-Year Plan that starts in April. Of the total, 43,000 megawatts will be based on coal, 17,000 megawatts on hydropower, 3,000 megawatts on nuclear and 2,000 megawatts on gas, Shahi said.

To contact the reporters on this story: Manash Goswami in Mumbai at mgoswami@bloomberg.net; Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.

Last Updated: October 13, 2006 07:41 EDT