DISTRIBUTION FRANCHISEE: An Overview of DF in India

As per Definition of The Electricity Act, 2003:

a “franchisee” means a person authorised by a distribution licensee to distribute electricity on its behalf in a particular area within his area of supply;

Also,facilitation of Franchise Model in the Section 14 of the Act ,provided also that in a case where a distribution licensee proposes to undertake distribution of electricity for a specified area within his area of supply through another person, that person shall not be required to obtain any separate licence from the concerned State Commission

Indian Power Distribution Reform has taken the a lot of approaches. Many efforts have been made by the various Government & Government Owned Enterprises and have come up with  different models of privatization [Orissa Model, Delhi Model, Revenue Based Distribution Franchise (RBDF), Input Based Distribution Franchise (IBDF)]. Though there have been mixed results for the PPP model, as Orrisa model is said to have failed, Delhi has rather been a success due to the support of the government but it has had its constraints.The most successful form of private participation has been the Franchisee model.Several pilot projects have been taken up by various companies in different states.Let us review some of them.The first and the most successful as of now, being the Bhiwandi Franchisee.

In 2006, Maharashtra’s distribution utility (MSEDCL) decided to experiment with franchisee approach as permitted by the Electricity Act.MSEDCL chose Bhiwandi, a power loom town close to Mumbai with a population of 1 million, for appointing franchisee. The town had estimated T&D losses of 45% and collection efficiency of 68% with 55% power being used by the power loom sector. The franchisee was to be appointed for 10 years and was required to make minimum investments for system and network improvement in the town and to perform all functions of distribution licensee using assets of the licensee and to take the employees of the licensee at its discretion.The franchise was awarded to Torrent Power on the basis of highest levellized price it quoted for the power to be supplied by MSEDCL. As a franchisee, it could only charge the consumers the tariffs set by the MERC for MSEDCL. Any assets created by the franchisee were to be taken back by the MSEDCL at their depreciated value the end of the contract. This model became operational in January 2007 but ran initially into rough weather due to power shortages in the state and extensive load-shedding by MSEDCL affecting Bhiwandi as well. After initial hiccups, including resistance by the employees of state utilities, the performance of Torrent in Bhiwandi has been impressive. It has been able to reduce losses by about 30% , has invested more than minimum required and has replaced old mechanical meters with electronic meters outside the premise and in a sealed box.

More importantly the nature of the contract needs recognition. In Bhiwandi the contract with the private party was in money terms for the revenue (that the private party would give to the MSEDCL) per unit of input given the mix of consumers, their payment profiles, the tariffs and their demands. The bidder was internalising risk associated with demand, and collections. The contract being of a revenue cap type with the bidder having the mandate to keep collections in excess of revenue bid adjusted for tariff and consumer –mix changes to the MSEDCL, there were high powered incentives to go after thieves, work against connivance and marshal greater flows to paying customers.

Based on the experience, MSEDCL has used the same model for some of it high-loss urban centres of the city of Nagpur and Aurangabad.

Also, DVVNL (Dakshinanchal Vidyut Vitran Nigam Limited) ,one of the four distribution companies under UPPCL (Uttar Pradesh Power Corporation Limited), in 2009 awarded Torrent Power Ltd.the franchisee of two towns Agra and Kanpur.It was again based on      IBDF Model(Input Based Distribution Franchise). Torrent Power has so far begun its operation in the Agra area and initially facing a lot of problems as they did in Bhiwandi, but adding tho that a very high consumer resistance and a heterogenous consumer mix plus it has to put in a huge CAPEX at the start for strengthening and renovation of the already deteriorating network. Coming years will decide whether Torrent Power LTd. again converts Agra into a success story.

Now a day, many states are diving into the franchisee pool to save their SEBs from huge losses. Recently, Nagpur & Aurangabad in Maharashtra  have been awarded to M/s SPANCO and M/s GTL respectively.As well as three cities in M.P., Gwalior ,Ujjain and Sagar have been awarded to SMART Wireless Limited, JSEB (Jharkhand) has also invited bids for distribution franchisee and Torrent Power Ltd. is soon going to start its operation in Kanpur,U.P.

So far we have seen that even though the DF business is flourishing and helping the discoms/SEBs as well as the consumer in a many fornts( i.e. mordern infra, better services etc), it is proving a costly affair for the private DF companies who require a huge amount of  CAPEX at the start of their term and have to face a lot of problems to keep up the DF agreement norms and consumer expectations and acceptance as well as to improve the distribution infrastructure initially.

 

With all the recent developments in the Distribution Franchisee sector, there is a need of a robust DF model, which helps both the discoms and the private player in the process.

Between Delhi model of private control of distribution licensees and franchisee model of Maharashtra, the risks and rewards are higher in the former for the private player and are lower in the latter due to lack of investment in buying the equity if the performance guarantees taken from the private player are not very suffocating.Also, franchisee on the lines of MSEDCL’s Bhiwandi model has much potential, especially if the DISCOM can also lay out a promise to improve and increase the supply as the revenue realization goes up.

Instead of focusing on the shortcomings of individual attempts, we can learn from the brilliant efforts so far, borrow from each model and create a new and different model for bringing rapid Private Participation in the Distribution Sector.

The new DF model should be in line with  PPP model, where a franchisee gets a initial support from the utility/SEB.

A Distribution Franchise (DF)  having 51% Private Player and 49% State Discom [like that of the 51:49 from Orissa or Delhi and the Input Based Distribution Franchise].

“IBDF” will inculcate the features of existing Franchisee Model, e.g. MSEDCL`s Bhiwandi, and to add to that,

“51:49” stake part will ensures that DISCOM will also be an active player in supervising and also sharing the upside.

The Private Player would deploy capital in order to build efficiencies. Such efficiency driven program would substantially reduce the perennial subsidy burden on govt. In fact, the Government can allocate more capital for the targeted-community thereby rightly performing its social & political role.

Also the discom employees will be deputed with the private company and may afforded dual benefits: one of continuing their State Employment Status as also being incentivized for “loss reduction” causing  the conversion of special funds into grants(as in Delhi Model). This reduces the initial resistance from the employees and consumers too.

Aligning R-APDRP & Private Participation in DISCOMS:

Indian Transmission & Distribution sector is embarking on implementation of new technologies [SCADA, AMI/AMR, Softwares, Networking,etc] for reducing T&D losses.Central Govt. has launched R-APDRP to improve the distribution utility condition and also IT implementation in major towns to reduce the AT&C losses to 15% everywhere, so as to move the utilities towards a smarter grid.

If it is ensured that the IT implementation coincides with private participation in Discoms (i.e. combining R-APDRP and Franchisee Company), the implementation of [SCADA, AMI/AMR, Softwares, Networking,etc] becomes an automatic responsibility of private player.The private company can apply for loan on behalf of the DISCOM.

This would solve the dual purpose, firstly the private company will get the initial CAPEX it needs for the system improvement , secondly,if the loss targets are not met in R-APDRP, the private player in shall also bear the burden of repayment instead of the existing burden on State Governments like in the quadripartite agreements signed under R-APDRP.

 


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Chanmeet

Student, MBA Power Management NPTI Faridabad.

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