VZCZCXRO5377
PP RUEHAST RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0195/01 1351204
ZNR UUUUU ZZH
P 151204Z MAY 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7199
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCG/AMCONSUL CHENNAI PRIORITY 2052
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8428
RUEHCI/AMCONSUL KOLKATA PRIORITY 1843
RUEHBI/AMCONSUL MUMBAI PRIORITY 2397
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 MUMBAI 000195 
 
SENSITIVE 
SIPDIS 
 
DEPT PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV ENRG EPET PGOV IN
SUBJECT: BHARAT BALLOT 09:  WILL POWER SECTOR POLITICS IN MAHARASHTRA 
HURT CONGRESS-NCP CHANCES IN NATIONAL AND STATE ELECTIONS 
 
REF: 05 MUMBAI 1155 
 
MUMBAI 00000195  001.2 OF 004 
 
 
Summary:  (SBU)  Maharashtra's struggle to bridge the energy 
supply gap symbolizes India's energy crisis, where politics and 
poor planning have left many states chronically short of power. 
Maharashtra is India's leading industrialized state.  However, 
all districts in Maharashtra, excluding Mumbai, suffer from four 
to twelve hours of daily, scheduled power outages.  Innovative 
models where the residents of a district pay more for the 
expediency of uninterrupted power have failed.  Maharashtra's 
power woes were exacerbated by the collapse of the Dabhol power 
project and the state government's populist election promise to 
provide free power to farmers, which was retracted after one 
year following the unprecedented surge in demand.  In office 
since 1999, the Congress-Nationalist Congress Party coalition 
government is largely responsible for the widespread failure to 
build new power plants in the state, a big factor in 
Maharashtra's deteriorating business and investment environment. 
 However, it is unclear whether voters in the national and 
upcoming state elections will make this an issue, given most 
voters' low expectations for governance.  As past experience 
indicates, election victories are driven not by good or bad 
policies (especially since all political parties are guilty of 
both), but by a mix of caste factors, and the marketability and 
appeal of future populist deliverables.  End Summary. 
 
 
 
Energy Shortage in Maharashtra Forces Rationing of Power Through 
Scheduled Power Outages 
 
----------------------------------------- 
 
 
 
¶2.  (U)  According to the Central Electricity Authority (CEA), 
Maharashtra, India's largest industrialized state with the 
second highest population, leads almost all of the states in 
India in terms of energy shortages.  In 2008-09, the state faced 
a 21 percent energy shortage and a peak demand deficit of 24 
percent or 4,283 MW, as compared to the all-India power deficit 
of 11 percent and peak demand deficit of 12 percent.  The 
anticipated energy shortage in Maharashtra is expected to 
increase to 31 percent or 42.3 billion kilowatt hours in 
2009-10.  This shortage is caused both by increasing demand by 
residents, businesses, and industrial units, but also because 
the state's Congress-Nationalist Congress Party (NCP) coalition 
government has added so few units of power generating capacity 
since it came to office in 1999. 
 
 
 
¶3. (U)  In India, the federal and state governments both have 
jurisdiction over building and operating power generation 
plants.  This dual responsibility for power generation has made 
it very difficult to co-ordinate, launch, and implement reforms 
needed to attract private, especially foreign, investment to 
build power plants in Maharashtra and most other Indian states. 
The federal government also owns and operates several power 
plants which allocate power to the different states in India. 
However, the task of purchasing and supplying power to the 
residents of India is entrusted to the state governments who 
manage these operations either through state government-owned 
companies or through licensed private domestic or foreign 
companies.  Most electricity generation distribution companies 
in India are state government-owned with a few exceptions like 
the Tata and Reliance groups in Mumbai and the Torrent 
group-owned Ahmedabad Electricity Company in Gujarat.  Each 
state can also frame policies to encourage foreign investors to 
participate in power generation and distribution. 
 
 
 
¶4.  (U)  The crippling power shortage in Maharashtra has forced 
the state's electricity distribution company to ration energy 
supply to residents.  All cities, towns and villages in 
Maharashtra, with the exception of Mumbai, face four to twelve 
hours of scheduled rolling power outages each day.  The 
commercial capital of Mumbai is protected from power shortages 
through a unique islanding system which allows private 
electricity suppliers in the city to isolate themselves from the 
 
MUMBAI 00000195  002.2 OF 004 
 
 
western grid in the event of any system disturbance, thereby 
preventing the collapse of the power system in Mumbai.  (Note: 
Admittedly, consumers in Mumbai pay higher power tariffs to 
enjoy the assurance of continuous, uninterrupted power.  While 
consumers, depending on the type and amount of power consumed, 
pay less than 1 cent-15 cents per kilowatt-hour (kWh) of power 
outside Mumbai, consumers in Mumbai pay between 3 cents to 22 
cents per kWh. End Note). 
 
 
 
Dabhol and Free Power Election Sop Behind Maharashtra's Energy 
Crisis 
 
------------ 
 
 
 
¶5.  (SBU)  Maharashtra's energy woes were greatly exacerbated by 
the ill-fated Dabhol power project.  In 1993, the state 
government-owned Maharashtra State Electricity Board (MSEB) 
signed a power purchase agreement with the Dabhol Power Company, 
jointly owned by three U.S. companies, Enron Corporation, 
Bechtel Corporation and General Electric, to develop a 2,184 MW 
natural-gas fired thermal power plant in the state.  (Note:  The 
MSEB was responsible for the generation, transmission and 
distribution of power to all consumers in Maharashtra, excepting 
Mumbai.  It has subsequently been restructured into three 
separate companies which each separately handle the generation, 
transmission and the power distribution business.  End Note.) 
The collapse of the Dabhol project due to a bitter and 
"politically loaded" payment contract dispute in 2001 caused a 
major contraction in power generation in Maharashtra.  (Note: 
The Dabhol power project has since been taken over by 
government-owned entities but is still not generating at full 
capacity due to fuel shortages of naphtha and natural gas, and 
technical problems with its turbines.  End Note).  Power sector 
industry experts believe that the Maharashtra state government 
expected that the power from the Dabhol project would be 
sufficient to meet the power requirements of the state and, 
therefore, made no attempt to develop or encourage other power 
projects to ramp up generation capacity. 
 
 
 
¶6.  (SBU)  Three years later, in 2004, another Congress-NCP-led 
government in Maharashtra announced free power would be provided 
to all farmers in the state ahead of the Maharashtra assembly 
elections.  The Congress-NCP once again won the state election, 
but the election sop caused a massive surge in the demand for 
power.  (Note:  Power sector experts claim that farmers used to 
keep their pumps running for the whole day and night since they 
got power at zero cost.  End Note).  According to the 
Maharashtra State Electricity Distribution Company, the peak 
demand for power increased by 12 percent in 2004-05, as compared 
to an earlier average increase of around three percent.  This 
resulted in a peak demand deficit of around 3,500 MW in 2004-05 
which was beyond the reach of the state electricity distribution 
company who was left with no choice but to ration power supply 
to residents.  Faced with the huge surge in power demand, the 
Congress-NCP government had to retract its promise of free power 
a year later, in 2005, and to instead provide farmers with power 
at concessional rates (reftel).  However, the peak demand 
deficit has remained above 3,000-4,000 MW, and rationing of 
power continues in the state even though its entitlement to 
power generated by federal government-owned power plants is 
second only to Uttar Pradesh. 
 
 
 
¶7. (SBU)  Maharashtra government energy officials and 
representatives of the ruling Congress party in the state were 
unable to explain to Congenoff why the state has not increased 
its own power generation capacity to bridge the excess demand 
gap.  A spokesman for the Congress Party blamed the central 
government for the shortfall, and noted that the Congress 
pledged to prioritize power in its state campaign for the 
ongoing national elections.  When Congenoff pointed out that the 
Congress also controlled the central government, and that power 
production was the responsibility of the state, the Congress 
 
MUMBAI 00000195  003.2 OF 004 
 
 
spokesman admitted that power shortages in the state would 
likely continue for "some more years."  Only two power plants 
with an additional total generating capacity of 500 MW are 
expected to be commissioned to in 2009-10, far short of the 
state's anticipated annual peak demand deficit of 3,881 MW 
predicted by the CEA.  In contrast, four power plants with total 
generating capacity of 2,050 MW are expected to be commissioned 
in the neighboring state of Gujarat in 2009-10.  As a result, 
the CEA has estimated Gujarat's energy shortage at 4 percent, as 
compared to Maharashtra's energy deficit of 31 percent of 
expected demand in 2009-10. 
 
 
 
Short-lived Success of Zero Power Outage Model 
 
------------------------ 
 
 
 
¶8.  (U)  Pune was the first city in Maharashtra to develop an 
innovative model to address the power crisis.  Under the 
initiative of the Confederation of Indian Industries (CII), Pune 
city's residents agreed to pay more to enjoy uninterrupted power 
supply.  The unused power generated by "captive" power plants, 
owned by industries to meet their own in-house power 
requirements, was used to bridge the demand gap and the 
remaining shortfall was met by purchasing power on the energy 
exchange.  As a result, Pune was spared from rolling power 
outages from June 2006 to June 2008. 
 
 
 
¶9.  (SBU)  According to Pradeep Bhargava, the head of CII's 
Maharashtra council and the architect of the zero power outage 
model, consumers had to pay around one cent for each additional 
unit of power consumed in excess of 300 MW per month -- the 
reliability charge for the expediency of continuous power 
supply.  Only a fraction of Pune's 300,000-400,000 paying 
customers (installed meters) had to pay for the benefit of 
uninterrupted power supply, he said, because few customers 
consumer more than 300 MW per month.  The Pune model was also 
adopted by several districts outside Mumbai including Thane, 
Mulund, Bhandup, and Navi Mumbai.  However, this model soon 
broke down and planned power outages resumed in these areas. 
According to Bhargava, the state electricity boards kept 
increasing the amount of power that had to be privately 
purchased to prevent scheduled power outages, which the city's 
consumers could not meet.  The fundamental gap between the 
demand and supply of power and, consequently, scheduled power 
outages, will continue for another four to five years until 
capacity catches up with demand, he admitted. 
 
 
 
¶10.  Comment:  (SBU)  Many Indian states suffer from power 
shortages, but Maharashtra - once an industrial leader - has 
done more to squander its potential than most other states.  The 
main reason for this is the widespread belief that the 
Congress-NCP coalition has given the state almost a decade of 
poor governance, losing traction to other states - such as 
Gujarat - that are able to attract businesses and industries 
through better governance.   This inaction has forced residents 
to go without power for four to twelve hours each day in one of 
the richest states in India, and driven up energy costs for 
industry which is forced to make alternative arrangements for 
regular power supply.  Subsequent state governments after the 
Dabhol debacle have made no attempt to regain foreign investor 
confidence and encourage investment in power generation projects 
in the state.  Indeed, power sector experts often attribute the 
lack of U.S. foreign investment in power project development in 
India to the failure of Dabhol and erratic state governance. 
The failure of Dabhol -- along with shortsighted planning, poor 
governance, and transparency issues -- underscores the 
reluctance of foreign investors to enter the power sector; this 
continuing impasse is a major factor in Maharashtra's -- and 
India's -- lagging power production that falls far short of 
burgeoning demand.  The free power election sop offered by the 
Congress-NCP three years after Dabhol collapsed was seen by many 
as precipitating the power crisis and placing the state in a 
 
MUMBAI 00000195  004.2 OF 004 
 
 
perpetual state of excess demand for power.  While voting 
against the Congress-NCP party in the national elections appears 
to be an obvious choice for the disgruntled Maharashtra voters 
suffering from regular power blackouts, political observers note 
that voting in Maharashtra is often driven more by caste factors 
and campaign promises rather than bad (or good) state or federal 
government decisions and policymaking.  End Comment. 
KAUFFMAN