The Enron-led Dabhol Power Co., for the first straight month, is invoking a federal government guarantee of the state's payments to Dabhol after its cash-strapped customer, the Maharashtra State Electricity Board, failed to remit $22 million. Last month, India promptly paid the board's November arrears. This time Enron may be in for a fight.

New Delhi has been reluctant to extend similar guarantees to other power plants, even though it has ways to get the money back form the states. If the Dabhol guarantee shows any sings of weakening, power investors may get even more skittish than they already are.

"After what is happening to Enron, I don't believe a single power project will get financed in international markets," says Anil Ambani, managing director of Reliance Industries Ltd., which has bid successfully to build four power plants, including one with Southern Co of the US.

Correcting the bill: In an interview, Vinay Bansal, chairman of Maharashtra's electricity board, said the board would ask the federal government not to pay the latest arrears because "the December bill requires correction". The board is trying to impose a claim of about $86 million on Dabhol for taking five hours to restart the 740 megawatt plant after a brief shutdown. Mr Bansal said the contract calls for the plant to be restarted within three hours.

Enron disputes the claim, and a spokesman said the timing suggests the state electricity board is "looking for ways to absolve themselves from payments that are contractually due." He added that the company is confident the federal government will honour the guarantee. Still, if Enron and state officials can't reach an agreement on the claim, the issue will go to international arbitration. Dabhol is threatening, in response, to pursue payment deadlines more closely "rather than the generous concessions we have been making" to the electricity board.

For their part, state officials are speeding up their attempts to renegotiate the tariffs for the second phase of the Dabhol, project, expected to go into operation starting in July and add another 1,444 megawatts of capacity. A six-person state appointed a committee that the held hearings on the project will now have the power to negotiate directly with Dabhol partners, and committee members say they will present a report by the end of the month suggesting how to proceed.

The $3 billion Dabhol project, which includes Bechtel Corp., General Electric Co., and the state electricity board as junior equity holders, was the first major foreign investment in India after a 1991 financial crisis led to economic reforms. It was initially hailed as a badly needed facility for Maharashtra, which like much of India suffers frequent power outages.

But state officials have been trying to disown Dabhol lately because of criticism that the prices charged to the state are exorbitant. enron blames high oil prices for the recent rise in tariffs but says the electricity charges, averaging about 10 cents a kilowatt-hour since Dabhol opened two years ago, are in line with those at comparable plants.

The turmoil also means Enron could end up keeping more of Dabhol project than it wants to. The company has had no luck finding a buyer for an extra 15% stake, which Enron took when the Maharashtra government declined an option to take it. Selling the stake "will take its time", acknowledges Enron, which meanwhile holds 65% of the combined project. Enron is also trying to sell an oil exploration venture with Maharashtra to build a broadband fibre optic network. Maharashtra officials are unlikely to try to cancel the second phase of Dabhol, since the state would pay a heavy financial penalty. And it is possible negotiations will resolve the dispute, as happened in 1996 when a Hindu nationalist state government that had threatened throw Enron into the sea instead expanded the project. The Congress Party, which helped approve the original Dabhol deal, is now back in power in Maharashtra, and Enron has said it is willing to discuss ways to make the project's electricity less expensive.

Enron has suggested that the electricity board, which is Dabhol's only customer, sell power it can't use to other states or federal power companies. But because the Dabhol plant is designed to run all day, not just during peak periods, Maharashtra would essentially be asking buyers to replace their existing off-peak electricity with Dabhol's. "This is expensive electricity," says Mr Bansal of the state electricity board.

Meanwhile the political heat is rising. In a speech two months ago in Mumbai, US ambassador Richard Celeste said that the Enron project was "tottering on the edge of disappointment" and that political accusations against Enron, and the efforts to renegotiate the contract, "add fuel to those who argue that their dollars are safer in China or Malaysia than they are in India."

Last month, a group of Indians living in the US published an advertisement in an Indian newspaper warning that if the state continues with the power project, "it will have no money for roads, drinking water projects, irrigation projects , education or primary health care or even (to) pay for police and teachers." Lately, Dabhol's backers themselves have been running full-page ads headlined "The Power of Propaganda Has a New Tariff," with a model posing as a fiery-faced anti-Dabhol activist. The ad notes that the rate per kilowatt-hour wouldn't be high if the electricity board were using anywhere near the full capacity. Regardless of how much electricity it takes, the state electricity board has to pay for Dabhol's capital costs.

Still, regulators have encouraged the electricity board to purchase power from other sources, to avoid some of the rising costs for Dabhol's naphtha fuel. Soon, Dabhol will switch to liquefied natural gas, which Enron says, will reduce the bills. But critics question that, pointing out that Enron has entered "take-or-pay" contracts with Persian Gulf suppliers that won't let Dabhol reduce, by much, the amount of natural gas it buys. Monthly bills could top $100 million when Dabhol's second phase begins, Enron acknowledges.

Disputes lie ahead: Maharashtra's financial woes seem, at least, to be spurring the state toward power reforms, though there, too, disputes lie ahead. Maharashtra's electricity board wants to narrow a rate gap that now has some industrial customers paying than 10 times the rates some residential companies pay. Many companies have set up their own power plants to escape the high rates. But regulators want the board first to agree to reduce theft and transmission losses of as much as 40%. "I have told many industrialists, `We will not put up your rates, but for some time you need to bear this,'" says P Subrahmanyam, chairman of the Maharashtra Electricity Regulatory Commission. "We can't set it right overnight-the public will go up in arms."

(The Asian Wall Street Journal)