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Power Drain

Surging Coal Prices Sour Energy Investment in China

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, May 3, 2005; Page E01

BEIJING -- Robert Anderson thought he and his energy company had everything covered.

He had cultivated relationships with local Communist Party officials at boozy banquets where he regularly ate things he had not previously considered food. Once, with the local power board in Henan province, he swallowed live scorpions doused in baijiu, a potent Chinese liquor. During karaoke sessions, he chose Frank Sinatra's "My Way."

Most Chinese power plants, like this one in Daqing, burn coal, and most lose money. (Doug Kanter -- Bloomberg News)

Using skills honed at Wharton School of business and in the U.S. energy industry, he had purchased power plants at seemingly good prices, backed by capital from the American Midwest. He saw the breathtaking pace of development remaking the world's most populous country and felt sure it translated into plenty of demand for electricity. He seemed to have found a lucrative niche in a land embracing capitalism.

But when the price of coal skyrocketed last year, significantly increasing the costs of generating power, Anderson got an unwanted lesson in the vagaries of business in China, where a contract is often more guideline than rule and an ongoing transition from communism to free enterprise is far from complete.

His company, Peak Pacific (China) Investment Ltd., tried to raise its prices for electricity to recover its extra costs. But while coal prices float freely now in China, electricity prices remain controlled by the state. When the company invoked a clause in its contracts giving it the right to appeal for higher prices, local officials -- not only his business partners, but also his customers -- repeatedly said no.

"Maybe we were naive," said Anderson, the company's chairman and chief executive. "The one thing we've learned is we shouldn't rely on these contracts."

Last week, the Chinese government finally gave its assent to a small increase in electrical rates, but Anderson said the change was insignificant. "Our only real hope in the short term is to see coal prices come down," he said.

China now exerts a magnetic pull on foreign money, absorbing more than $100 billion in capital from abroad over the past two years alone. From brand-name manufacturers to Wall Street banks, multinational firms are rushing in to capture a slice of what is potentially the world's largest market for everything.

Some have enjoyed conspicuous success, such as Volkswagen, which now sells more cars in China than in the United States, and Kentucky Fried Chicken, whose restaurants have become ubiquitous. But the experience of Peak Pacific, a venture backed by the U.S. utility Alliant Energy Corp., attests to the continued pitfalls of doing business here -- the fickleness of seemingly critical relationships, the difficulty of forecasting change in a huge economy developing at a breakneck pace.

Anderson arrived in China by way of the last Asian investment boom, the exuberant flood of capital that preceded the crisis of the late 1990s. He had worked in Charlotte with an energy company focused on cogeneration projects, which produce heat and electricity at the same time, before launching his own company in Singapore in 1994. He planned to match buyers and sellers of power plants, but the venture failed when his clients ran off together, cutting out the matchmaker.

In 1996, he took his first trip to China, visiting a power plant he considered buying in the city of Nanjing. He didn't buy it, but the experience convinced him that China was where the action was.

In the following years, Anderson concentrated on small cogeneration projects in three lesser-developed central provinces, Hebei, Shandong and Henan. He courted officials by touting the prospect of cleaner skies through efficient use of coal. He offered $20 million to $30 million per power plant.

"We were a friend of the government," Anderson said. "We gave them cash."

By late 1997, he had lined up deals to take over six power plants, running an office in the Friendship Hotel in Beijing. But he had no money. His previous investors in Thailand and Indonesia had been wiped out in the financial crisis. He hadn't paid his local staff in three months. "We were running on fumes," he said.

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