Enron, the US energy giant, is considering invoking a letter of credit (L/C) as a means to recover its dues from the Maharashtra state electricity board. The L/C is doubly backed by a state government guarantee and a sovereign government counter guarantee

Officials at the electricity board say it simply does not have the money to pay its arrears, which by mid-January had exceeded US$90 million. It has not paid Enron's bills since October 2000.

The electricity board does however enjoy the support of the state government and local unions unhappy about the high cost of power. Local unions are organizing a 300km protest march to arrive at the Enron-operated Dabhol plant on 26 January 2001, India's Republic Day. These protests may also garner support from pressure groups and non-governmental organisations that have opposed the project from the start and maintain the project's terms favour Enron.

The multi-billion dollar Dabhol power project is located in the western Indian state of Maharashtra and is the largest single investment in the country to date. Enron's critics say it charges twice the price asked by local producers for power. Enron argues it must recoup its huge investments and that current charges reflect stronger prices for oil and naphtha.

Meanwhile in New York, the project's financiers are arranging to meet to decide whether to cash the doubly-guaranteed L/C. Their decision could precipitate crises at state and national levels.

Under the L/C terms, Enron could call upon the sovereign guarantees. If Enron is paid from central funds, the Reserve Bank of India would be requested to debit funds from the Mahashtra state government's account. If these funds fail to meet the amount paid to Enron, the balance would be recouped by a withholding of scheduled payments due from central to state funds.

If the overdue power bill is not met by central funds, then it seems Enron and its financiers could auction off state assets to recover its dues. It could even sell the Indian parliament building to the highest bidder.

The showdown is not a happy experience for Enron or the Indian stakeholders. Apparently the only parties likely to emerge unscathed are the financiers who all but eliminated their credit risk by insisting on the double-guaranteed L/C. But even for this constituency, forcing the bankruptcy of an Indian state or the sale of government assets could be a public-relations disaster on a very large scale.

The views in this article are those of the author and not necessarily those of ICC or the other partners in DC-PRO.