The document discusses distribution franchise models in India. It provides an overview of distribution franchising as defined in the Electricity Act of 2003. Several pilot franchise projects have been implemented, with the Bhiwandi franchise awarded to Torrent Power being the most successful to date. The document argues that future franchise models should incorporate features of existing successful models while ensuring risks and rewards are balanced between distribution companies and private players through structures like 51% private ownership. Combining franchise projects with the government's R-APDRP program for grid modernization could help finance infrastructure improvements.

1. 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 advanced electronic meters
outside the premise and in a sealed box.

2. 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.
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 heterogeneous 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 fronts( i.e. modern 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.

3. 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.
References:
(i) Electricity Act 2003
(ii) Electricity Reforms and Regulations-A critical review of last 10 years experience
by IIM A.
(iii) www.Apdrp.gov.in