(FORTUNE Magazine) – India needs power desperately--about 100,000 megawatts of it by 2007. But some of its leaders would rather curse the darkness than pay the full tab for a power plant. That's the controversy behind India's abrupt cancellation of Enron Development's $2.8 billion Dabhol power project in the state of Maharashtra--the largest foreign investment in India since its economy was reopened to outsiders in 1991.

The cancellation stinks of politics. The project, in which Enron has an 80% stake, was stopped by the nationalist Hindu BJP coalition government soon after it won state elections in April. The BJP cited high costs and the lack of competitive bidding, among other accusations, and has since sued to formally reject the contract.

The BJP is right on one count: Unquestionably, the project was not competitively bid. Nor should it have been, says Bob Pender, an independent attorney who specializes in financing energy projects: "That was the opportunity cost of getting a company to come and create an industry. When I first went to India, nobody would ever dream of coming over if negotiated deals weren't offered."

Rebecca Mark, CEO of Enron Development, insists that the dual-phase, 2,015-megawatt undertaking is competitively priced relative to other "fast track" projects.

That's where the real argument starts. Enron's deal locked the Maharashtra State Electricity Board (MSEB) into buying 90% of the power the plant produced, at 7.4 cents a kilowatt-hour. (U.S. prices: 4 to 15 cents). The cost would rise further for the MSEB to distribute that power to the consumer. Problem is that domestic consumers in the state pay about 4 cents, and the prospect of shelling out more sparks nationalist sentiment still inflamed by post-colonial fever.

Enron's decision to use a Liquefied Natural Gas (LNG) plant design rather than a coal model has also proved troublesome. The Houston energy company says it chose LNG over coal because of environmental concerns and worries about coal supply. LNG plants, although cheaper to build, are costlier to operate--thus the rate of 7.4 cents.

That's too much, says economist Kirit Parikh, director of the Indira Gandhi Institute of Development Research in Bombay. He says that the operating cost to generate power from a coal plant is only 2 cents, vs. 4 cents for Enron's LNG facility. "As a consumer, I shouldn't bother about the cost of the plant but the price that I'm being charged," he adds.

Although Enron's contract is probably enforceable, Mark believes a settlement can be reached. "While we can say that we are extremely content with our legal position, we are absolutely willing to renegotiate," she says.

Other competitors are sticking around too. With about a million dollars per MW at stake, there's good reason. Says Dennis Bakke, CEO of AES Corp., which is planning a plant in the state of Orissa: "We are very willing to talk about change. We're going to be there to try and make it work, and until we get kicked out, we ain't leaving."

--Rajiv M. Rao