India Orders Plug Pulled on U.S.-Run Power Project : Energy: Local officials call $2.8-billion deal with Houston firm one-sided. Move could rock trade relations.

In a decision that could have widespread consequences for U.S.-Indian trade ties, officials in Bombay on Thursday ordered a halt to the largest foreign investment venture in India, a $2.8-billion power plant project spearheaded by Enron Corp. of Houston.

After reviewing the pioneering but controversial deal, the government of Maharashtra state ordered the immediate stop of construction on the first phase and the outright cancellation of the second phase of the wholly U.S. venture.

“The project is against the interests of Maharashtra and its people,” Chief Minister Manohar Joshi told his state’s Parliament. “The negotiations were one-sided, and whatever Enron asked for was granted.”

The ground-breaking deal with the U.S. energy company to build a 2,015-megawatt plant 100 miles south of Bombay was signed by the state’s previous government. It had come under attack because it was approved without competitive bidding, and critics said an excessive price was set for the electricity to be generated.

The decision by the leaders of India’s wealthiest state immediately sent out tremors certain to be felt in the boardrooms of many U.S. corporations. Indian officials and business leaders had said repeatedly that they considered the fate of the Dabhol project the acid test of the country’s recent, foreign-capital-friendly economic reforms.

“It will send wrong signals to the investors, and they will now think twice about putting their money here,” said a worried Rattan Singhania, vice president of the New Delhi Stock Exchange.

Though some Indian business groups and leaders were more sanguine, many agreed that the voiding of an existing contract by Maharhastra’s government would have a chilling effect on direct foreign investment, which the government of Prime Minister P.V. Narasimha Rao has been courting since 1991. Maharashtra is the nation’s commercial and industrial powerhouse.

Joshi, tacitly recognizing that his government’s actions could repel U.S. and other foreign investment, made a point of saying that “the decision is limited to Enron and the Dabhol Power Co., but [is] not against the government of the United States.”

Opposition political parties hailed the scuttling of the deal as the vindication of India’s national interest.

The government ordered legal steps to immediately halt construction of the project’s first phase, a 695-megawatt battery of turbines that were supposed to begin supplying power to electricity-hungry Bombay and its environs by December, 1997.

Some influential Indians held out hope that renegotiations for a new contract between the parties might still be possible. But a member of Joshi’s coalition was quoted in Indian news reports as saying that the decision “left no scope for review.”

In a two-paragraph statement, Enron-controlled Dabhol Power Co. said it had broken no Indian or U.S. laws, and it threatened legal action.

Rebecca Mark, chairwoman and chief executive of Enron Development Corp., a unit of parent Enron Corp., which owns 80% of Dabhol, had already predicted that if the contract were canceled, her company could recover the entire first-phase cost--$920 million.

Indian news agencies said Mark, who was in Houston when Joshi made his bombshell announcement, was flying to Bombay on Thursday night to meet with him and other high-ranking Maharashtra officials. Joshi said he is serene about the possibility of a multimillion-dollar court battle with Enron. “We’re prepared to pay the price to protect the interests of the state and its consumers,” he said.

The Dabhol consortium combines Enron with two other Fortune 500 corporations, General Electric Co. and Bechtel Group Inc., both of which own a 10% share. Many Clinton Administration officials had been unabashed cheerleaders for the deal, with Energy Secretary Hazel O’Leary warning in June that canceling the Dabhol contract would endanger other private power projects being financed from outside India.

Evidently caught by surprise by Thursday’s decision, the U.S. Embassy in New Delhi said in a statement that it will take the matter up with the Indian government.

The Maharashtra Council of Ministers reached its decision in an hourlong meeting Thursday morning, after reviewing the report of a four-member government commission that raked the Dabhol deal over the coals for its ethics, potential environmental impact and alleged high cost to the state government and consumers.

As one of seven “fast-track” power plant projects designed to close the yawning gap between electricity supply and demand in India, the venture was allowed by authorities to go ahead without the customary soliciting of competitive bids. Joshi said that meant the memorandum of understanding signed by Enron and the state’s former government on June 20, 1992, was blatantly one-sided.

“Enron came, it saw and it won,” he said.

Suspicions had been rife among Indians that the former government had lined its pockets in exchange for favors granted to Enron, accusations Enron and Dabhol denied.

In June, a report from the Political and Economic Risk Consultancy Ltd. of Hong Kong rated India the highest investment risk of 11 Asian nations and territories, despite the former British colony’s parliamentary and democratic form of government and cheap but talented labor force.