Friday, April 22, 2011

Lack of good baseline data & reporting leads to irrational Power Franchisee bidding

The reported success of Bhiwandi Power Franchisee model has attracted more private players and has increased competition for good of the sector (see our earlier blog on 'Many new corporates entering into emerging Power Distribution Franchisee race'). However the very basis of the Power Distribution Franchisee (DF) contract, the baseline data ('information') provided as part of the RFP (Request for Proposal) is not trusted by the bidders driving  irrationality in the bidding. 

Impact on Bidders:
  1. High business risk for the DF due to non-trust worthiness of the baseline data provided by the utility: Crompton Greaves Ltd. (CGL) backed from awarded Nagpur DF tender and in the process wasted 2 years. Company quoted that the base line data provided to them was not correct and its not viable for them to service at their quoted input rates.
  2. Repeated efforts by all bidders to gain confidence on baseline data: Since utility does not take responsibility of the data it provides in the RFP, it is left to the bidders to figure out this information and speculate their bid with little confidence on their business plan and projected returns.
Impact on Utility:
  1. Poor design of the contract resulting into marginal revenue increase share for the utility and high profits for the DF: In Bhiwandi case, the utility faced 3% decrease of revenue in its first year of franchisee followed with marginal 7% increase in the 2nd year. The DF on the other hand booked revenue of Rs. 160 Cr. and Rs. 344 Cr.  in first two years of operations with a capex investment of roughly Rs. 200 Cr. in the first year. Thus the utility tend to loose money in long runs for its inability to measurement, analysis and right design of contract.
  2. No incentivization for DF to take Demand Side Management (DSM): As revenue for the DF is based upon number of units sold, it has no incentive to promote DSM activities in its area. Infact, the viability of the model is driven by load growth. Also currently discussed regulations to allow charging premium tariffs (as reliability surcharge) for no-load shedding through additional externally purchased costly power further disincentivize DF for undertaking DSM activities.
Impact on End-consumers:
  1. In lack of good life cycle contractual management for DF starting with poor RFP design, the end consumers faces risk of DF abandonment of contract, high bills due to wrong incentivization of DF and often compromised service quality due to conflicts between utility and DF.

So though Power Distribution Franchisee remains a good PPP model to be developed for efficient delivery of power in a decentralized structure, the lack of measurement and appropriate system level analysis is not leading to optimum contract design for all involved stake holders.

The DF franchisee model as it stands now by virtue of its design is treated as an island, still to see synergy and overall improvement of the Generation + Transmission + Distribution supply chain. The positive realization of better controlled and managed distribution by DF through DSM and optimal sourcing is yet to be realized. 

We at pManifold look forward to become part of team for designing RFP with our Distribution Franchisee Transaction Advisory to utilities to bring system thinking. 

Post by: Rahul Bagdia @ pManifold

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