Power Lines Tangled by Red Tape

India needs more power - megawatts of it. But you wouldn't know it by the way eager foreign investors are treated.

A year after the Maharashtra state government stopped construction on one electric project involving Houston-based Enron Corp., work still hasn't restarted. Enron and fellow investors in the Dabhol Power Company - General Electric Company and International Generating Company - await a judgment from the Mumbai High Court dismissing public-interest petitions that seek to scuttle the mammoth project.

It isn't just foreign companies that are dissatisfied with India's electricity market. One reason for such delays, in fact, is complaints that consumers are being gouged.

"If governments had awarded the first power projects using competitive bidding, it may have led to some delays. Yet it could have prevented the constant criticism that the power policy and projects have been subjected to," says M.P. Abraham, Secretary of India's Ministry of Power.

For Enron and other shareholders in the $2.5 billion Dabhol Power plant, this criticism has resulted in having to fight 13 court cases against the project.

That's on top of the 2,015 megawatt project's outright cancelation a year ago by the newly elected government in Maharashtra state. Its Hindu fundamentalist leaders alleged the contract was too costly and involved government corruption.

By January, the state had negotiated a fresh contract with the company, lowering the project's cost. The government now admits it has no evidence of corruption.

"The cancelation was just political posturing. When the new government realized that it would have to pay huge damages if it violated Dabhol's contract, it changed tack," says one banker here.

But critics still view the plan with suspicion. "The power from the plant, at 7.4 cents per kilowatt hour, is too expensive. The international average is only 4 cents," says Pradyumna Kaul, a management consultant and one of several petitioners who say the project is illegal.

The controversy comes despite efforts by India's central government to lure foreign investment and expand basic infrastructure - moves seen as keys to economic growth. A new power policy in 1992 urged foreign companies to invest in India.

US power developers, including Cogentrix., CMS Generation, and AES Corp., have been trying to do just that. CMS is a shareholder in a project in Andhra Pradesh state that recently became the first foreign-owned power plant to open in India.

Others are still working through a maze of government regulations. Amoco Corp. in August scrapped plans to invest $1 billion in a project, complaining of mired negotiations.

Moreover, developers find it hard to finance their projects, because they will sell all the power they generate to impoverished state-owned utilities, called state electricity boards or departments. Politicians force these utilities to supply subsidized power.

In a pioneering move watched by peers, Orissa state, aided by the World Bank, is trying to reduce the possibility of political interference. It has split the state electricity board into separate generation and distribution companies. It has set up an independent regulatory body, increased tariffs, and plans to privatize distribution by 2000.