Enron Switches Signals In India

After a power-plant debacle, it turns to trading electricity

In 1992, Enron Corp. agreed to build a $3 billion power plant at Dabhol, in India's Maharashtra state. The facility was to be Enron's triumphant Indian debut. Not only would the plant, fueled by natural gas and naptha, bring electricity to India's industrial heartland, it also would position Enron as the foremost power company on the subcontinent. Enron spoke of spending a further $10 billion on Indian power generation.

But Dabhol was controversial from the start--partly because of Enron's cowboy operating style and the antics of local politicians. Critics slammed the company for everything from corruption to cultural insensitivity. And when the plant opened last year, its energy--which is sold to local utilities--cost four times the going rate. Maharashtra officials agreed early on to pay partly in U.S. dollars for the power and didn't foresee the decline of the rupee or a surge in oil prices. Now those factors plus Enron's estimated 30% return on investment threaten to bankrupt the local power authority, and officials plan to review the contract. Enron insists the deal is fair and ironclad, but the company's reputation in India remains in tatters.

It is no surprise, then, that Enron has decided not to build more plants in India. It is not, however, abandoning the country. In recent years, Enron has been moving out of generating power and into selling and trading it as a commodity. Today the Houston-based giant derives a third of its $90 billion in revenues from power trading. In the U.S. and Europe, Enron has successfully lobbied for the kind of deregulation that makes trading megawatts legal. Now it is doing the same in India, which plans to open up its electricity market.

CHAOTIC GRID. Power trading would keep Enron's India play in motion, and it could also bring relief to a chronically power-short nation. Sanjay Bhatnagar, chairman of Enron India, says establishing an electricity market would add up to 3,000 megawatts to India's generating capacity in the first two years alone--by bringing power from regions where it is abundant to places where it is not. If India overhauls its chaotic electricity grid, the benefits of power trading presumably would grow. Bhatnagar says once Enron receives official approval it would be able to start trading power in three to six months.

A power boost can't come soon enough. To keep the economy growing at its current 6% to 8%, India needs 10,000 Mw of new generating capacity each year. And while the nation has 90,000 Mw of installed capacity, much of that is stolen by individuals and small business or practically given away to farmers. As a result, state-owned utilities lose some $4.25 billion a year and provide power to just two-thirds of the population--and then only intermittently. Even Bangalore, India's high-tech hub, endures daily brownouts.

Deregulation would go far toward sorting out the mess. And Enron, it turns out, is one of the key players helping the government redraft the 1910 Electricity Act. Why would New Delhi take advice from a company that is so reviled in India? Because Enron's power-trading expertise is unrivaled, and India is desperate for juice. The bill is due to become law in January. But even if passage is delayed, there are plans to ram through an amendment to the existing act to allow private power trading--all Enron needs to get started.

Success is by no means assured--at least in the short term. Deregulation will take five years to put in place. India must unify its power grid so electricity can be moved around--an expensive and complicated process. Moreover, the government must appease unions fearful of layoffs, convince utilities to privatize, and cut agricultural subsidies.

With no real competitors in India, Enron can afford to bide its time. And as it waits, it's pursuing its trading business in bandwidth by building a broadband telecom network--15,000 kilometers of fiber-optic cable connecting four cities. If the power legislation goes through, Enron will be the first into a newly deregulated market. And if the company brings affordable electricity to Indian homes, offices, and factories, who knows, it may even improve its image.

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