VZCZCXRO3496
RR RUEHBI RUEHCI
DE RUEHCG #1200/01 1601136
ZNR UUUUU ZZH
R 091136Z JUN 06
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 8628
INFO RUEHNE/AMEMBASSY NEW DELHI 1738
RUEHBI/AMCONSUL MUMBAI 4785
RUEHCI/AMCONSUL CALCUTTA 0532
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 CHENNAI 001200 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EB/CIP 
USDOE FOR DAS DAVID PUMPHREY, TOM CUTLER 
USDOC FOR MAC/ANESA/OSA/ASTERN/LDROKER 
USDOC FOR USFCS/OIO/ANESA/JMATHESON/BORRE 
USDOC FOR TD/AS/AC/BLOPP 
DEPARTMENT OF ENERGY FOR TOM CUTLER, MIRIAM SALERNO 
 
E.O. 12958: N/A 
TAGS: EINV ENRG ECON PGOV IN
SUBJECT: ST-CMS ENERGY PLANS TO PURSUE ARBITRATION IN ITS 
DISPUTE WITH TAMIL NADU ELECTRICITY BOARD 
 
REF: 05 CHENNAI 02705 AND PREVIOUS 
 
¶1. (SBU) SUMMARY: U.S. company ST-CMS Energy plans to 
immediately begin arbitration proceedings to seek to resolve 
its dispute with the Tamil Nadu Electricity Board (TNEB) 
over the final capital costs of its 250 megawatt power plant 
in Neyaveli, Tamil Nadu.  This case is an unresolved legacy 
issue, which Embassy and Consulate General Chennai have 
raised many times with the GOI and the Tamil Nadu state 
government.  ST-CMS's decision to resort to arbitration will 
not help the GOI's recent efforts to attract new foreign 
investment in its power generation sector.  END SUMMARY 
 
------------------------------------------ 
TNEB AND CEA CALCULATE LOWER CAPITAL COSTS 
------------------------------------------ 
 
¶2. (SBU) Mr. C.K. Lakshminarayanan, CEO of ST-CMS Energy, 
and Mr. K.M. Manoj, Director of Business Development for the 
company, met with Post's Pol/Econ officer on June 2, 2006 to 
discuss the company's planned next steps in its dispute with 
the Tamil Nadu Electricity Board (TNEB).  They began by 
expressing their disappointment with the calculation of 
final capital costs made by TNEB and also with the 
calculation of final costs made by the Central Electricity 
Authority (CEA).  The CEA, a Government of India agency, had 
been asked to review the TNEB calculation and provide their 
independent recommendation on final capital costs.  Final 
capital cost as calculated by both TNEB and CEA were not 
only significantly lower -- by $28.9 million and $31.2 
million respectively, or about 10% -- than ST-CMS' 
calculations, they were also lower than the provisional 
capital cost that TNEB and ST-CMS had agreed upon in 
November 2005.  The provisional and final capital costs as 
calculated by the three parties are as follows: 
 
TNEB/ST-CMS Agreed Provisional - $281.6 million 
TNEB Final Capital Costs - $268 million 
CMS Final Capital Costs - $296.9 million 
CEA Final Capital Costs - $265.7 million 
 
--------------------------------------------- ---------- 
ST-CMS MOVES THE COURT TO PREVENT A REDUCTION IN TARIFF 
--------------------------------------------- ---------- 
 
¶3. (SBU) Because the agreement on provisional capital costs 
achieved in November 2005 had hiked tariffs paid by TNEB for 
power supplied by ST-CMS from 0.05 cents to 0.07 cents per 
kilowatt-hour unit, an immediate concern to ST-CMS was that 
TNEB would seek to lower tariffs based on the new, lower, 
final capital cost figure.  Accordingly, on May 19, ST-CMS 
filed with the Madras High Court to enjoin TNEB from 
lowering tariff rates for power supplied by ST-CMS.  ST-CMS' 
presentation to the court was heard on May 23.  TNEB has yet 
to present to the High Court on the issue. 
 
----------------------- 
NEXT STEP - ARBITRATION 
----------------------- 
 
¶4. (SBU) Lakshminarayanan and Manoj shared with Post their 
pessimism about achieving any positive results through 
continued negotiation with TNEB.  Lakshminarayanan said that 
the project's sponsors had made the decision to pursue the 
arbitration provisions that are included in the Power 
Purchase Agreement (PPA).  Lakshminarayanan described to 
Post the arbitration procedures outlined in the PPA which 
include two stages of arbitration.  In the first phase, the 
parties engage in an informal dispute resolution process. 
Each party selects an official representative and the two 
try to reach a voluntary agreement.  If this informal phase 
fails to produce an agreement, the process moves to binding 
arbitration overseen by the International Chamber of 
Commerce in London.  There each party chooses a 
representative and they jointly choose a third.  The results 
of this arbitration are binding.  Enforcement of the result 
is accomplished through a motion to the Madras High Court in 
Chennai. 
 
 
CHENNAI 00001200  002 OF 002 
 
 
------------------------------------ 
ST-CMS FEELS THEY HAVE A STRONG CASE 
------------------------------------ 
 
¶5. (SBU) Lakshminarayanan and Manoj told Post that ST-CMS 
feels it has a very strong case and that it will prevail in 
arbitration.  They base that confidence on their belief that 
both the TNEB and CEA calculations of final capital costs 
were completed in direct violation of Clause 4 of Addendum 
#3 of the PPA.  That clause permits a more favorable 
treatment of currency valuation fluctuations occurring 
during construction of the project than the treatment TNEB 
and CEA used in their calculations. 
 
---------------------- 
BACKGROUND AND COMMENT 
---------------------- 
 
¶6. (U) BACKGROUND: ST-CMS operates a 250 megawatt lignite- 
fired power plant at Neyveli located 220 kilometers south of 
Chennai, the capital of Tamil Nadu state in southern India. 
The facility was built with an investment of US$ 300 
million, with $100 million being held by the Michigan-based 
CMS Energy and New Jersey based ABB Equity ventures.  The 
facility started operations in December 2002 supplying all 
of its power ouput to Tamil Nadu Electricity Board (TNEB), a 
state-run power utility with whom the investors entered into 
a power purchase agreement.  Differences with TNEB over the 
computation of capital costs resulted in a backlog of 
payments.  After considerable advocacy by Consulate General 
Chennai and Embassy in New Delhi, the payments dispute was 
sorted out in September 2005, with agreement on Provisional 
Capital Cost and with determination of Final Capital Costs 
left pending. 
 
¶7. (SBU) EMBASSY COMMENT: The USG has raised several times 
with the GOI CMS's difficulties in its ST-CMS project and 
its potential decision to seek arbitration, including most 
recently: 
-- Commerce Assistant Secretary Bohigian with India's 
Ministry of Power Secretary Shahi in New Delhi, January 10- 
12; 
-- Embassy Economic Ministry Counselor Lee Brudvig Secretary 
Shahi, March 26; 
-- Energy Secretary Samuel Bodman with Power Ministry Shinde 
(April 22); and 
-- Ambassador Mulford with Planning Commission Deputy 
Chairman Montek Ahluwalia (May 12). 
 
¶8. (SBU)  This case is one of the remaining "legacy issues" 
that, as we have told the GOI, needs resolution in order to 
improve foreign investors' perceptions of India's investment 
climate, particularly in the electrical power sector, where 
India's Ministry of Power has been conducting road shows to 
promote its "Mega-Project" capacity construction plans. The 
GOI Power Minister and Secretary have limited formal 
jurisdiction in this matter and could only influence the 
Tamil Nadu government and Central Electricity Authority. 
END EMBASSY COMMENT. 
 
HOPPER