When the $100 million Bhote Kosi hydropower project went on stream in 2000, it was touted as a successful test case of Nepal's policy of allowing private joint-ventures in energy.

Today, the government seems to be wishing it had never signed the contract. The power plant near the Chinese border was supposed to have a capacity of 36 MW, but ended up generating 52 MW by the time it was built. However, the power purchase agreement between Bhote Kosi and the Nepal Electricity Authority (NEA) is to buy only 36 MW at Rs 5.5 per unit.

The NEA says Bhote Kosi has started billing nearly $100,000 per month more than stipulated in the agreement for 16 MW of extra power. There wouldn't be anything wrong with that had the NEA not already got excess capacity during the monsoon. It would therefore end up paying more than originally agreed for power it won't be able to sell to consumers.

The NEA is now coming under pressure from the American shareholders of the Texas-based Panda Energy, one of the two US investors in the scheme, who threatened to use their clout with the George W Bush administration to arm-twist Nepal. "They intimidated us saying that they would make their senators in Washington scrap the US textile quota for Nepal," a senior NEA official who was present at the meeting told us. "They also threatened to stop World Bank aid to Nepal."

Another option Panda offered was to force Nepal to buy the project for $100 million plus interest owed to financiers with a 30 percent premium.

The offer was made last month when Nepali officials were in Washington to sign a power development deal with the World Bank. Another senior government official who was present during the meeting refused to confirm or deny Panda's threat. "This involves bilateral relations, and it could have a big impact," that official said.
Siddartha Rana of Himal International Power Corporation, the Nepali partner in Bhote Kosi, told us he had heard about the threats made at the meeting in Washington, but such disputes were common in projects like this and they could be settled amicably. Rana said turbines meant for 36MW can sometimes generate more power depending on the hydrology of the river, and there was nothing wrong with that.

The NEA says it has not paid Bhote Kosi for the extra power. "Anything added outside the contract is being deducted," an NEA official said. With an installed capacity of nearly 500 MW in the national grid, the NEA has a surplus of about 30 percent of its power during the monsoon. According to an auditor general report, the NEA incurred a loss of over Rs 1 billion in fiscal 2000-01 buying power from Bhote Kosi and the other private join-venture project at Khimti. The NEA pays nearly half its entire revenue to buy power from just these two private sector producers. It shells out nearly double per unit to Khimti and Bhote Kosi what it pays Butwal Power Corporation, which was recently privatised.