Part 2 of 2: Interview at Reuters on future of Power Distribution Franchisee model in India

This is sequel to "Part 1 of 2: Interview at Reuters on future of Power Distribution Franchisee model in India".

Question: WHY BIDDING PROCESS TAKES SO LONG AND WHY DOES IT ATTRACT SO FEW BIDDERS? WHAT IS FURTHER NEEDED TO STRENGTHEN DF MODEL?

pManifold: Some suggestions on the same are as follows:

Gaps	Impact	Needed Intervention
Inadequate and mis-represented Baseline information for bidding	· Irrational bidding · Delayed bid decision, because of revisions, and litigation's · Financial and Non performance risk from DF operator	· DISCOM to invest in right Technical and Commercial due-diligence for forming the RFP baseline and have it audited by an independent agency · DISCOM taking responsibility of wrong baseline
Poor stakeholder engagement during the bid process	· Poor final bid participation · Risk of re-tendering to mitigate poorer competition · Non-optimal DF terms and conditions, leading to later contractual conflicts, and non performance	· Engage State Govt., DISCOM, Regulator, Bidders and Utility employees well into the DF conceptualization · Increase transparency of processes and decisions
Constrictive, open ended and non-optimal contract design	· Minimum benchmark bid prices, disallow financing creativity from Bidders · Constrictive elements like improper Escrow design, unclear asset ownership etc. creates difficulty for financing · Constrictive qualification criterion (like asking for end-to-end distribution experience, not allowing consortium bidding) brings poorer participation and hence poorer bid price discovery · No clearer SLAs led to poorer performance monitoring	· There is need for clearer Exit options, to make the model attractive for private Developers and PE investors · Better design of Escrow mechanism to be favourable for bank financing · Strong SLAs commitment from both DISCOM & DF: o Discom: Committed power supply and quality o DF: Meeting AT&C loss reduction targets; making power purchase payments regularly; meeting customer satisfaction and other SLAs.
Week Governance of the Bid process & final bid evaluation	· Multiple revisions of RFP and DFA · Delayed bid closing · Poorer bid participation · Multiple extensions · Litigations · Delayed Start	· Increasing transparency of bid process and evaluation · Discom taking responsibility of wrong baseline, and delayed decision making · Invest in proper stakeholder engagement and online bid room/portal
Poorer access to finance to Operationalizing DF (both high Working Capital requirements and Capex for first 3 years)	· Delayed start of the project · Hiccups and non-performance in first year, which further exaggerates opposition against DF model	· Making Bankers and broader Finance community understand DF model better, and distinguish it from debt burden utility · Forming DF initial viability funding from nodal agencies like PFC, REC etc. · Allowing right consortium partnership with competent partners on Technical, Operational, Management and Financial side. · Improving constrictive clauses in contract design, to allow DF to procure easy bank financing
Weak SLAs to Monitor Performance of DF	· Increase opposition to DF model, without any quantified performance assessment	· Have clearer milestone, with right incentive/penalty mechanism to encourage performance · Have independent customer satisfaction assessment, to establish true metrics for end quality impact from DF model · Have transparent reporting mandatory for DF to Regulators
Weak Regulatory purview of DF model	· Weak Performance monitoring	· DF to stand alone report performance from baseline to ERC (together with Utility) · If DF is able to meet its target AT&C reductions, then its customers should benefit with tangible returns (like either reduced tariff rates as compared to state level Tariff, or reduced load shedding, etc.)
Weak integration between different reform schemes (like R-APDRP, National Electricity Fund, DF, RGGVY,etc)	· Poorer end performance i.e. not much AT&C loss reduction, poorer PQR, and dissatisfied customers	· Ensure well integration of R-APDRP and DF projects, to guarantee DF operators with full amount and timely completion of R-APDRP project · Ensure interest subsidy from National Electricity Fund · No Service tax liability on DF model · Allow Electricity duty collected from customers to be used towards Working capital loan

Question: WHAT’S THE FUTURE OF INPUT-BASED FRANCHISE MODEL IN INDIA?

pManifold:

At pManifold, we tend to believe the future of DF model is very strong, and infact only way to really bring more accountability and decentralization to the power distribution business, which otherwise is the weakling in the overall power value chain. The model of course needs to be strengthened, and some key improvements are shared above.
All our decentralized & alternative Generation efforts will not scale, until we have a strong distribution mechanism, and DF has that potential. So we are looking forward to right regulatory changes to bring integration of these models for better ‘Open Market’ with stronger Private participation:

Distributed Generation
Distribution Franchisee
Open Access (with net metering provisions for smaller generators as well)
Energy Efficiency and DSM

A much bigger rural market for DF is still awaiting innovation. (See our blog Rural Franchisees - Could they become pilot ground to raise next level of Distribution services?
India’s Telecom sector has proved how open market mechanism with supporting Regulations and increased private participation has helped increase mobile penetration, reduce tariff rates, and increase customer services. Same is now looked upon in the Power sector, and I feel we are closer now.
The future is bright, if all stakeholders can really work together. CUSTOMERS are the most important link for success of a DF model. The operator that can give more choices to Customers, and meet their PERCEPTION, while manage its Business PERFORMANCE, will succeed. That is the whole reason, that pManifold has developed EUCOPS (Electric Utility Customer Opinion Preferences and Satisfaction) to capture customers voice, and help DF and utility operators track their end performance, as seen by customers. We are glad that more and more DF operators have started using our customer engagement services, and we have worked at Nagpur, Gwalior, Ujjain, Sagar and Dhenkanal, interacting with 7000+ customers from urban and rural.
Customers cooperation is must for DF success, and there is not much in current models to incentivize customer support, as Tariff rates are set at State level. So DF customers will continue to pay higher for inefficiencies in other circles. A tangible and good incentive model within regulatory purview to DF customers (like reduced tariff rates, higher power availability, no reliability charges, reduced Electricity duty or Demand charges etc.), can further expedite DF operationalization. This will also create pressure on local civic bodies to compete and support DF models in their regions, and faster penetration of DF model including in rural areas as envisioned by Planning Commission.

Question: WHAT ARE OTHER FRANCHISE MODELS IN INDIA AND HOW SUCCESSFUL THEY ARE?

pManifold:

One is Revenue Based Franchisee, which primarily started for villages, characterized by low loads, spread distances, and problems in collection. However the model has failed considerably. See Rural Franchisees - Could they become pilot ground to raise next level of Distribution services?
Orissa is experimenting with a light capex Input Based DF model, wherein the private operator has to invest only on LT side (secondary of Distribution Transformers), primarily on Metering and LT side, to bring improvements. The applicability of this model is very regional, and contingent upon Discom working hand in hand with DF operator.
Another short tenure model of 5+2 years with revenue sharing (and not input based) model is recently getting experimented in Orissa (see our blog for details: Orissa Government invites EOI for 'Smart Grid' Solutions - A new variant of Distribution Franchisee)