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Distribution franchisee an overview of df in india


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Distribution franchisee an overview of df in india

  1. 1. DISTRIBUTION FRANCHISEE: An Overview of DF in IndiaAs per Definition of The Electricity Act, 2003:A “franchisee” means a person authorised by a distribution licensee to distribute electricityon 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 acase where a distribution licensee proposes to undertake distribution of electricity for aspecified area within his area of supply through another person, that person shall not berequired to obtain any separate licence from the concerned State CommissionIndian Power Distribution Reform has taken the a lot of approaches. Many efforts have beenmade by the various Government & Government Owned Enterprises and have come up with different models of privatization [Orissa Model, Delhi Model, Revenue Based DistributionFranchise (RBDF), Input Based Distribution Franchise (IBDF)]. Though there have beenmixed results for the PPP model, as Orrisa model is said to have failed, Delhi has rather beena success due to the support of the government but it has had its constraints. The mostsuccessful form of private participation has been the Franchisee model. Several pilot projectshave been taken up by various companies in different states. Let us review some of them. Thefirst and the most successful as of now, being the Bhiwandi Franchisee.In 2006, Maharashtra’s distribution utility (MSEDCL) decided to experiment with franchiseeapproach as permitted by the Electricity Act. MSEDCL chose Bhiwandi, a power loom townclose to Mumbai with a population of 1 million, for appointing franchisee. The town hadestimated T&D losses of 45% and collection efficiency of 68% with 55% power being usedby the power loom sector. The franchisee was to be appointed for 10 years and was requiredto make minimum investments for system and network improvement in the town and toperform all functions of distribution licensee using assets of the licensee and to take theemployees of the licensee at its discretion. The franchise was awarded to TorrentPower on the basis of highest levellized price it quoted for the power to be supplied byMSEDCL. As a franchisee, it could only charge the consumers the tariffs set by the MERCfor MSEDCL. Any assets created by the franchisee were to be taken back by the MSEDCL attheir depreciated value the end of the contract. This model became operational in January2007 but ran initially into rough weather due to power shortages in the state and extensiveload-shedding by MSEDCL affecting Bhiwandi as well. After initial hiccups, includingresistance by the employees of state utilities, the performance of Torrent in Bhiwandi hasbeen impressive. It has been able to reduce losses by about 30% , has invested more thanminimum required and has replaced old mechanical meters with advanced electronic metersoutside the premise and in a sealed box.
  2. 2. More importantly the nature of the contract needs recognition. In Bhiwandi the contractwith the private party was in money terms for the revenue (that the private party wouldgive to the MSEDCL) per unit of input given the mix of consumers, their paymentprofiles, the tariffs and their demands. The bidder was internalising risk associated withdemand, and collections.Based on the experience, MSEDCL has used the same model for some of it high-loss urbancentres of the city of Nagpur and Aurangabad.Also, DVVNL (Dakshinanchal Vidyut Vitran Nigam Limited) ,one of the four distributioncompanies under UPPCL (Uttar Pradesh Power Corporation Limited), in 2009 awardedTorrent 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 itsoperation in the Agra area and initially facing a lot of problems as they did in Bhiwandi, butadding tho that a very high consumer resistance and a heterogeneous consumer mix plus ithas to put in a huge CAPEX at the start for strengthening and renovation of the alreadydeteriorating network. Coming years will decide whether Torrent Power Ltd. again convertsAgra into a success story.Now a day, many states are diving into the franchisee pool to save their SEBs from hugelosses. Recently, Nagpur & Aurangabad in Maharashtra have been awarded to M/s SPANCOand M/s GTL respectively.As well as three cities in M.P., Gwalior ,Ujjain and Sagar havebeen awarded to SMART Wireless Limited, JSEB (Jharkhand) has also invited bids fordistribution franchisee and Torrent Power Ltd. is soon going to start its operation inKanpur,U.P.So far we have seen that even though the DF business is flourishing and helping thediscoms/SEBs as well as the consumer in a many fronts( i.e. modern infra, better servicesetc), 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 DFagreement norms and consumer expectations and acceptance as well as to improve thedistribution infrastructure initially.With all the recent developments in the Distribution Franchisee sector, there is a need of arobust 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 ofMaharashtra, the risks and rewards are higher in the former for the private player and arelower in the latter due to lack of investment in buying the equity if the performanceguarantees taken from the private player are not very suffocating. Also, franchisee on thelines of MSEDCL’s Bhiwandi model has much potential, especially if the DISCOM can alsolay 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 thebrilliant efforts so far, borrow from each model and create a new and different model forbringing rapid Private Participation in the Distribution Sector.
  3. 3. The new DF model should be in line with PPP model, where a franchisee gets a initialsupport from the utility/SEB.A Distribution Franchise (DF) having 51% Private Player and 49% State Discom [likethat 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 andalso sharing the upside.The Private Player would deploy capital in order to build efficiencies. Such efficiency drivenprogram would substantially reduce the perennial subsidy burden on govt. In fact, theGovernment can allocate more capital for the targeted-community thereby rightly performingits social & political role.Also the discom employees will be deputed with the private company and may afforded dualbenefits: one of continuing their State Employment Status as also being incentivized for “lossreduction” causing the conversion of special funds into grants(as in Delhi Model). Thisreduces 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 newtechnologies [SCADA, AMI/AMR, Softwares, Networking,etc] for reducing T&Dlosses.Central Govt. has launched R-APDRP to improve the distribution utility condition andalso IT implementation in major towns to reduce the AT&C losses to 15% everywhere, so asto 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 privateplayer. 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 itneeds for the system improvement , secondly, if the loss targets are not met in R-APDRP, theprivate player in shall also bear the burden of repayment instead of the existing burden onState Governments like in the quadripartite agreements signed under R-APDRP.References: (i) Electricity Act 2003 (ii) Electricity Reforms and Regulations-A critical review of last 10 years experience by IIM A. (iii)