Monday, April 21, 2014

Evolving Distribution Franchisee Model across states

The Ministry of Power’s financial restructuring plan has made the introduction of private participation in distribution as one of the mandatory conditions for availing the benefits of scheme (as a result of high AT&C losses, low IT involvement and huge financial losses). Whilst State Governments’ (except Delhi and Odisha) have not undertaken privatisation of Discoms, Distribution Franchisee (DF) model has emerged as one of the attractive options to involve private players for enhancing distribution operations. The success of Torrent Power as a DF player in Bhiwandi in Maharashtra has fuelled the other states to adopt this model. Other operational areas include Agra (UP), Nagpur (Maharashtra), Aurangabad (Maharashtra), Jalgaon (Maharashtra) and Sagar (MP).

Currently, utilities are going for Input and Investment-based Franchise Model, under which Franchise takes the responsibilities for power supply to customers, collection of revenue, management, upgradation and expansion of distribution infrastructure. The licensees’ functions are limited to power supply at input points and keeping a check of regulatory interface. Lately new DF models are emerging like Input-based Franchise with Incremental Revenue sharing (IBF-IRS). Generally, zones with high consumption and transmission and distribution (T&D) losses are given to the franchise.

A brief outline on different types of DF model based on 3 states Odisha, Jharkhand and Bihar are mentioned below:

Odisha DF

The Central Electricity Supply Utility of Odisha (CESU) has adopted the IBF-IRS model for franchising areas. Under this model, the incremental revenue realized beyond the baseline revenue per unit (RPU) is shared between the DF and CESU at a pre-defined ratio. Penalty is imposed for not realizing the base RPU on the DF and it is revised every year based on the tariff indexation formula.  In IBF-IRS, the input energy is free of cost in order to alleviate the demand and price fluctuation-related risks. The IBF-IRS is only for five years and all assets below the distribution transformer (DT) are too maintained by the IBF-IRS DF. Also, the IBF-IRS DF mandates the installation of smart meters and partial Capex on the meters is to be recovered by 40 months through monthly meter rent.

CESU allotted 15 divisions with 1.3 million customers accounting for 77% of utility’s customer base with AT&C losses ranging from 51% to 72%. These franchises are awarded to Enzen Global Solutions Private Ltd., Feedback Electricity Distribution Company Ltd (FEDCO), River Side Utilities Pvt. Ltd. And Sea Side Utilities Pvt. Ltd. with the responsibilities of distribution-related activities and the task of reducing AT&C losses by 15% over a period of 5 years.

In Feb 2013, FEDCO commenced operations as a franchisee in Puri, Khorda, Balugaon and Nayagad divisions in Odisha across an area of 9,000 sq. km. (covering 4,00,000 consumers). The company has taken several steps to improve distribution operation and minimise AT&C losses, like setting up customer care center, spot collection, developing ERP for billing, etc. These steps resulted in increasing the billing coverage to 88% from 75%, collection coverage improved to 70% from 56%, AT&C losses reduced to 54% from 61%.

Jharkhand DF

Jharkhand State Electricity Board (JSEB) adopted Input-based DF model in Jamshedpur and Ranchi and were awarded to TATA Power and CESC LTD respectively. Ranchi circle covered 257,000 consumers, AT&C losses stood at 42% required to be reduced to 9% over the next 15 years.  The key feature of Ranchi DF agreement is the provision of an independent audit for baseline, which is important as often the asset and loss figures stated by state electricity boards are not accurate. E&Y is about to complete such an audit in Ranchi.

Bihar DF

The recently unbundled distribution utilities in Bihar have taken steps to improve operations through appointment of franchisees. While North Bihar Power Distribution Company Limited (NBPDCL) has appointed Essel Vidyut Vitaran Ltd. as a DF operator for Muzaffapur, South Bihar Power Distribution Company Limited (SBPDCL) has appointed India Power Corporation Ltd. (formerly DPSC limited) for Gaya and SMPL Infra Ltd. for Bhagalpur.

India Power will serve over 1,00,000 consumers. The franchise area had registered energy sales of 125 MUs and T&D losses of 62% during the base year. The company has planned to invest 330 million in the first five years to improve distribution operations by investing in meter replacement, consumer indexing, installation of billing systems etc.

The Way Forward

To ensure success of the franchise model between licensee and franchisee, it is important to implement an effective monitoring process. Some modifications are required in the franchisee framework, especially in provisions related to regulatory monitoring, loss reduction and consumer benefits, Capex investment and supply guarantees by the licensee.

Please note: Above is the summary of the recent article on Power Distribution Franchisee model published in PowerLine magazine, Feb 2014.

Posted by Kunjan Bagdia @ pManifold

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