Pitfalls of franchisee in power distribution

Power sector reforms
Pitfalls of franchisee in power distribution

Power Ministry has launched an action plan.to provide a reform-linked interest subsidy to utilities and promote distribution franchises on receipt of Shunglu panel report.
The reform process in power sector of country started with unbundling of state electricity boards in to different companies centered on generation, transmission and distribution. The next part was privatisation of these companies in due course of time. The assets of electricity boards were sold to private companies at throw away prices in name of improving efficiency and competition in power sector.
Now another experiment with power sector with name of “Franchisee system in power distribution’ is going to be started. Shunglu Panel in its report has suggested restructuring of power distribution companies, franchisee system for power distribution, and annual tariff rise before taking over their losses by a special purpose vehicle.
The panel in its report has suggested franchisee in 255 towns including peripheral areas of country with criteria of population of city over 3 lac or annual energy supply of over 100 million units. The introduction of the franchisee model in16 towns of Punjab and 15 towns of Haryana which consumes 40 % of power has been recommended by the Shunglu panel.to bring down commercial losses to level of 18 %.
Shunglu Committee has proposed handing over of state electricity board’s assets worth hundreds of crore town wise to franchisee completely free for a period of 20 to 25 years. This is even worse than the failed privatization experiment.
The Panel should have suggested those areas with high commercial and technical losses and given a time frame to reduce these losses to an acceptable figure. Panel have suggested maximum earning industrialised areas like Ludhiana, Gurgaon ,Panipat and Khanna/Gobindgarh for start of privatization.
A franchisee cannot purchase power as he is not licensee it is the duty of Discoms to supply power to franchisee at pre- determined cost irrespective of power purchase cost. The report maintains that if any assist made by franchisee, he will be at liberty to take away assets after the expiry of fixed period.
The Government never tried to diagnose the problems faced by power sector but only tried to treat the symptoms. The experimentation in power sector continues only to benefit the private players at the cost of tax payer’s money. The subsidies which were denied to state electricity boards are now generously being given to private companies. It is simply privatizing the profits and nationalizing the losses.
Franchisee system in power distribution means beginning of end of role of state Discoms. The recommendations of committee to bring distribution utilities out of financial distress would not solve the problem. It will only defer the burden of debt as the tenure of loan would be raised.
Political interference in SERCs and reluctance by political leaderships of states to raise tariffs to meet actual expenses are the areas where the reform process is bound to fail because implementation of report would still be with State governments.

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2 Responses

  1. V K Gupta says:

    REPLY to comment
    In distribution franchise the entire assets of the discom are indeed handed over to the franchisee without any payment. The franchisee therefore gets operational assets without investing any capital cost, for the period of franchise which may be 20 or 25 years. In the award of franchise the base level of losses is inflated to give extra profit margin. In case of Agra franchise it is a fact that discom was purchasing high cost power at Rs 5 to 6 per unit and supplying it to franchise at about 50% of that cost. This is indeed a proven case of plunder of public finances . Even the NGO Prayas has commented that in award of franchise through competitive bidding the terms andconditions need to be made more stringent to safeguard public funds.

  2. shivanshtyagi says:

    The original author of the article is Mr V.K Gupta himself, and indianpowersector,com is grateful to him for sharing his experience with us.

    Shivansh Tyagi,
    admin: indianpowesector.com

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