UPDATE ON U.S. POWER PRODUCERS' DISPUTES IN TAMIL NADU

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 -------------- -------------- 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