Electricity Distribution Franchisee – Newest Investment Ground of Coming Decade

2012-01-17

The Indian generation segment characterised by the huge underway of green-field investments is for sure to strain the nation’s T&D infrastructure, unless commensurate investments are made at the right time. Even if the investments are of right quantum are carried out at the right time, efficient project management is the next big hindering factor and is an unlearned subject in the distribution segment. By and large, the last link of the electricity value chain would remain overloaded and stressed in the coming decade. Therefore, the policy level interventions like R-APDRP and other state government schemes initiated so far would just sustain the AT&C loss levels rather than aim for reducing it.

The Indian State Electricity Boards (SEBs), well known for their consolidated cum vertical organisational structure, were the first ones to transmit the urban electricity commodity to the rural parts of the country. The structure which was highly commendable for its obligatory social services and single point governance has gradually turned to be loss making entities because of subsidy issues and operational malperformance.

The unbundling strategy, as a result, was opted for all the SEBs and in actual beneficed at least the successor state generating and transmission companies in terms of annual net profits. The further unbundling of the single distribution utility to three to five distribution companies (as in the case of Karnataka, UP, MP and AP) has further resulted in better control over targets and performance. Now the next question before the electricity stakeholders is that – “Would it require additional disintegration or unbundling in distribution segment, i.e. fairly analogous to the concept of profit-centric approach i.e. SBU type circle-centric approach?”

And when the regulators and utility top management start thinking in this direction, there comes franchisee concept which deals with a selected circle which adds losses to the whole utility.

While most of the discoms have just started to device a managerial solution to develop the above ideology, discoms in MH, MP and UP have progressed towards this better solution.

Bhiwandi, the first franchisee model was declared success in the last year and now with the handover of Agra circle to Torrent, the stakeholders in the distribution segment have gained more confidence. However, the majorities of the other discoms are passive or, are rather apprehensive in franchising their areas. The reasons behind this mindset are:

  • Bhiwandi pre-franchisee loss levels were quite high to the extent of 50 percent (collection losses accounting more than half of the total losses), where the private franchisee found it feasible and attractive enough to participate, operate and control losses. MSEDCL too added profits out of avoided losses and premium bulk supply prices. These preconditions would not be same throughout the geographies and there lies a good risk when someone replicates the Bhiwandi contract arrangement.
  • Though the attitude of the discoms’ top management has commendably changed in the recent past, the bureaucrats responsible for approving the privatisation proposal at the state ministry level and the associated red-tapism are still impeding the progress of this private-participatory reform.
  • Still some discoms are confident of controlling their physical performance by their own interventions to be taken from R-APDRP, NEF, NMEEE, and RGGVY funds.

However, to combat the loss levels, R-APDRP could be suggested as a potential solution. The surety of reducing the losses close to 15 percent is something what the nation’s best awarded private discom – BRPL couldn’t achieve in seven years time. Hence, in reality, reducing the losses close to 15 percent in five-year time period (as per R-APDRP guidelines) would not be as good as presented in Part-B DPRs, unless the private efficiency comes into the picture.

So, states like UP, MP, Maharashtra and Bihar have already formulated their plans to tie-up both R-APDRP funds and Private Franchisee’s efficiency to bring down the losses to the international benchmarks. A strategy like the above where sourcing funds at right time and utilising them with private’s efficiency is what would be the savior of our distribution segment’s future.

A private player eyeing the opportunities in electricity distribution could identify every loss making discom as their prospective target market. However, the following would also hold a good market for the private participants in the coming years.

1.     Private Township Developers (like Mahindra World City, Shipra Sun City, DLF Cyber City)

2.     Public Sector Townships (like NLC, BHEL, Bhillai and Bokaro Steel Plant)

3.     Large sized SEZs, IT Parks

4.     Municipal Corporations and Metropolitan Development Authorities[1], Urban Development Corporations[2].

5.     Other Deemed/ Granted Licensees (like State Government Undertaking, Industrial Development Corporation, Estate Developers)

To conclude the distribution franchisee concept or a much more improved mechanism (Smart grid based franchisee, DDG based franchisee, DSM linked franchisee) of brining in private efficiency is unquestionably going to be the prospect for India’s electricity value chain. Private players indeed have to strategically diversify their expertise, build their capacities and equip themselves to seize these future opportunities in Indian power supply chain.

— The views expressed in this article are strictly those of the author and do not necessarily represent any professional body.

 


[1] Like Chennai Metropolitan Development Authority

[2] Gujarat International Finance Tech-City or GIFT is an under-construction city in the Indian state of Gujarat. Its main purpose is to provide high quality physical infrastructure (electricity, water, gas, district cooling, roads, telecoms and broadband), so that finance and tech firms can relocate their operations there from Mumbai, Bangalore, Gurgaon etc. where infrastructure is either very bad or very expensive. It will have a special economic zone (SEZ), international education zone, integrated townships, an entertainment zone, hotels, a convention centre, an international techno park, Software Technology Parks of India (STPI) units, shopping malls, stock exchanges and service units.

 

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