VZCZCXRO2076
RR RUEHBI RUEHCI
DE RUEHCG #2564/01 3211135
ZNR UUUUU ZZH
R 171135Z NOV 06
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 0438
INFO RUEHNE/AMEMBASSY NEW DELHI 2080
RUEHBI/AMCONSUL MUMBAI 4904
RUEHCI/AMCONSUL CALCUTTA 0644
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 CHENNAI 002564 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EB/IEC AND SCA/INS 
DOE FOR DAS, DAVID PUMPHREY, TOM CUTLER 
DOE FOR MIRIAM SALERNO 
USDOC FOR MAC/ANESA/OSA/STERN/LDROKER 
USDOC FOR USFCS/OIO/ANESA/JMATHESON/BORRE 
USDOC FOR TD/AS/AC/BLOPP 
 
E.O. 12958: N/A 
TAGS: EINV ENRG ECON EFIN PREL PGOV IN
SUBJECT: UPDATE ON U.S. POWER PRODUCERS' DISPUTES IN TAMIL NADU 
 
REF: (A) CHENNAI 2554 (B) CHENNAI 1200 (C) 05 CHENNAI 02705 AND 
 
PREVIOUS (ALL NOTAL) 
 
¶1. (SBU) Summary: This message provides an update on the 
long-standing disputes, often called "legacy issues," between three 
U.S. independent powers producers (IPPs) and the Government of Tamil 
Nadu (GoTN).  In a letter to post received November 8, the GoTN 
asserted that it is awaiting a directive from the central 
government's Ministry of Power (MoP) before finalizing capital 
costs, and it terms the decision of Michigan-based CMS Energy to 
approach the International Court of Arbitration at London as 
premature.  Local representatives of ST-CMS remain hopeful the costs 
issue can be resolved without formal arbitration.  Separately, New 
Jersey-based Covanta Energy awaits a Ministry of Finance decision on 
excise duties levied on fuel.  Also, both ST-CMS and Covanta seek an 
early resolution of the issue of Minimum Alternate Income Tax 
(MAIT), which the state power utility Tamil Nadu Electricity Board 
(TNEB) has thus far disallowed. The third IPP, New Jersey-based PSEG 
Global, has not responded to post's inquiries about its current 
situation. End Summary 
 
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Tamil Nadu government sees no need for arbitration 
--------------------------------------------- ----- 
 
¶2. (SBU) Responding to a July 14 non-paper provided by post, Tamil 
Nadu Energy Secretary R. Satapathy wrote in a letter delivered to us 
on November 8 that the GoTN is awaiting directives from MoP on 
finalization of capital costs.  TNEB Chairman, Hans Raj Verma, 
termed Michigan-based CMS Energy's decision to take its capital 
costs dispute to international arbitration as premature (Refs A and 
B).  In its letter to post, the GoTN asserted that 99 percent of the 
admitted claims of U.S. power companies have been paid and that no 
significant payments remain pending. 
 
--------------------------------------------- ---- 
CMS Energy's hopes for an out of court settlement 
--------------------------------------------- ---- 
 
¶3. (SBU) Chennai-based representatives of CMS Energy tell us they 
remain hopeful of an informal settlement with TNEB on finalization 
of capital costs.  At a November 7 meeting with post, ST-CMS's 
Lakshminarayanan told us that TNEB's Verma had indicated that TNEB 
is willing to settle the capital costs issue if it receives a 
go-ahead from Tamil Nadu Power Minister Arcot Veerasamy. 
Lakshminarayanan said a CMS board meeting including representatives 
from the U.S. is scheduled for early December in Chennai, and the 
board is keen to meet with the Minister Veerasamy to settle the 
dispute.  Post has agreed to facilitate a meeting. 
 
--------------------------------------------- ----- 
Covanta Energy awaits exemption from excise duties 
--------------------------------------------- ----- 
 
¶4. (SBU) The principal concern for New Jersey-based Covanta Energy 
remains exemption from paying excise duties imposed on low sulfur 
high speed oil used to operate its Tamil Nadu facilities.  These 
duties were imposed by the central government's Ministry of Finance 
in the Union Budget for 2004, which the tax authorities applied with 
retrospective effect due of the ambiguous wording of the line item. 
Embassy New Delhi has taken up the issue with the authorities, and 
the issue currently awaits clearance from Union Finance Minister Mr. 
¶P. Chidambaram.  Meanwhile Covanta's negotiations with TNEB on 
capital costs have moved ahead, with the cost of an air-conditioning 
unit installed at the company facility being resolved (Ref C). 
However, new questions on computation of foreign exchange and 
development costs valued about $3 million have been raised by TNEB 
and are currently being negotiated.  In early November, 
Balakrishnan, Covanta Energy's Chief Financial Officer, told us he 
remains confident of resolving these disputes. 
 
-------------------------------- 
TNEB disallows income tax claims 
-------------------------------- 
 
¶5. (SBU) Contrary to the assertion in the GoTN's letter to post that 
all issues have been resolved, local representatives of both ST-CMS 
and Covanta Energy maintain that TNEB continues to disallow payment 
of Minimum Alternative Income Tax (MAIT) incurred by the companies. 
The Power Purchase Agreements between the companies and TNEB 
 
CHENNAI 00002564  002 OF 002 
 
 
specifically treat all tax claims as "a pass through."  Covanta's 
Balakrishnan told us TNEB expects the power companies to lobby the 
Union Ministry of Finance for a MAIT exemption, as that Ministry has 
most to lose over the issue.  But with the issues of finalization of 
capital costs and securing excise exemption on fuel in play, the 
companies feel in no position to take up MAIT, Balakrishnan told us. 
 He added that MAIT constitutes to be one percent of the amount his 
company bills to TNEB. 
 
---------------------------------------- 
PSEG Global Energy remains incommunicado 
---------------------------------------- 
 
¶6. (U) Post's efforts to contact representatives of the third 
American IPP, New Jersey-based PSEG Global Energy, have gone 
unanswered.  In an annexure to its reply to post, the GoTN asserts 
that PSEG Global Energy's stake in Pillaiperumnallur power project 
is 20% and that PSEG's efforts to take TNEB to arbitration were 
stayed by the Indian Supreme Court in 2005, and that the stay 
continues in force. 
 
--------------------------------------------- ---- 
Tamil Nadu remains confident of settling disputes 
--------------------------------------------- ---- 
 
¶7. (SBU) Comment: The increasing frustration of the U.S. power 
companies with the slow pace of negotiations on the outstanding 
issues is at odds with the GoTN's confidence of resolving them.  The 
GoTN's confidence stems from the close ties that the state 
government has with the ruling coalition in New Delhi.  In a recent 
contact with post, Minister Veerasamy said he had proposals for 
projects totaling 35,000 MW pending on his desk, including several 
from other U.S. promoters.  With Tamil Nadu confident of meeting 
existing and future demand and with the IPPs' ongoing difficulties 
having little chilling effect on other would-be developers, the 
IPPs' leverage appears limited.  Patience and flexibility appear to 
be the IPPs' best allies. End Comment. 
 
¶8. (U) This message was coordinated with Embassy New Delhi. 
 
HOPPER