Views on 'Future of Power Distribution Franchisee Model in India' by Dr. Murhari Kele, CE (Mumbai), MSEDCL

Dr. Murhari S. Kele,
Chief Engineer,
MSEDCL, Mumbai.

Power Distribution Franchisee (PDF) model in India saw mixed results across various operating areas so far. While the model saw good momentum after Bhiwandi success story with various states opting for the same, but there is no second success story to further boost the growth of the model.  

pManifold team recently spoke with Dr. Murhari Kele, an industry expert in Power Distribution Franchisee to understand his viewpoints on Future scenario of model. (The views here are personal views, and not to be associated with any company in any forms)

1. Power Distribution Franchisee (PDF), one of the reforms in power distribution utilities has seen ups and downs since its inception in 2007? What is your opinion on privatization of Indian Power Distribution Utilities, and opting Franchisee model as a possible precursor for same (compared with other private models like Delhi PPP model, PPP concessionaire, etc.)?

After inception of The Electricity Act-2003, SEB’s were unbundled in various activities. Power distribution reforms through National Tariff policy & National Electricity policy speaks about the private sector participation in public utilities through various models, like PPP model, franchisee model or full privatisation. These types of operating models are used for turnaround of loss making utilities. Each model is having its own characteristics with risks & challenges. But based on performance of various models for last five years, it shows that private ownership was superior both for PPP & to public ownership. With private ownership there were two models namely Privatisation & second Franchisee. In terms of reduction of system losses the performance of both PPP model in Delhi  & Franchisee model in Bhiwandi, the results were dramatic & comparable. These were obtained not only by better management practices, better surveillance etc but also by providing superior services to customers. 

IT Services & Capacity Building from Cronos group for Utilities in India

Dr. Ralf Bauermann, Chairman,
Cronos Group

pManifold team recently had an interview with Dr. Ralf Bauermann, Chairman, Cronos Group of Companies to understand about their IT and Capacity Building solutions for Utilities in India. (The below shared are author's personal views and not to be associated with any of their company's association)

1. Please elaborate Cronos IT solution for Utilities? (phase wise modules, current deployment stage (if any PPP / Franchisee), key features, hardware requirements, team size for setup and regular running, business engagement model (Capex vs. Opex based), next planned add-ons, etc.)
• As a utility IT solution provider, Cronos believes in engaging the customer for successful implementation of the project and with this implementation strategy Cronos has developed template solutions for utility specific business processes like Billing (Go), CRM (Go), AMI (Go) and migration tools for reducing the implementation time by 70%. Implementation of the SAP End to End Solution in phased manner as per the Utility needs which is a key for successful implementation and continual engagement. 
• Consulting services are adapting new approaches in reducing in time and cost of implementation to meet the urgent business requirements of utilities to increase their revenue, improve customer satisfaction and operational efficiency.Our express implementations with standard customized templates will help the consulting services team to bring utilities the best (cost and time) in mission-critical software for far less than they might have anticipated.
• A standard set of customized templates for critical business processes for specific utility types (electric, gas, water, waste management):
• Pre-configured software solution
• Use pre-defined tools and approaches for integration with other client solutions
• Out-of-the-box training materials specific to our pre-configured solutions
• Use Change management approaches

Views on Managed IT services for Distribution Franchisees by Mr. Ananth Chandramouli, Head - Energy and Utilities, Infosys

Mr. Ananth Chandramouli, Head - 
Energy and Utilities, Infosys 

Indian Power market has fast changed and further evolving post unbundling reforms. There is rapid emergence of various private/PPP models across Power Distribution. There is high attractiveness of the end B2C Power Distribution business, as it brings cash for all other businesses in the value chain. The recent surgence of Franchisee models in Distribution has raised the end-service delivery & price value expectations of the end-customers, which is putting more and more pressure on utilities to bring efficiencies and streamline their operations and overall IT.

pManifold team recently spoke to Mr. Ananth Chandramouli, Head - Energy & Utilities, Infosys to understand about their IT solutions Utility-in-a-box (UIB), an innovative cloud-based platform for Utilities. The below shared are author's personal views and not to be associated with any of their company's association.

1. Please elaborate Infosys’s Utility-in-Box (UIB) IT solution? (phase wise Modules implemented, current deployment stage (whether LIVE), key features, hardware requirements, team size for setup and regular running, business engagement model (Capex vs. Opex based), next planned add-ons, etc.)
• Infosys UIB is a cloud based solution suitable for Utilities and Distribution Franchisees (DFs). The complete platform including hardware, software, data centre etc. is hosted and managed by Infosys and available on “pay as you go” (opex) model to the Utilities/DFs. Only network connectivity at site and office infrastructure (PCs, printers etc.) has to be procured by the Utility/DF. Infosys has already done capital investment in the state of the art centralized IT infrastructure, which can be shared by multiple DFs/Utilities. This helps DFs in two ways. 
• First, the CAPEX cost for IT is converted into recurring OPEX cost; this not only provides cash outflow predictability but also reduces the debt/equity investment by DFs.
• Second, this common infrastructure is designed to be used by multiple DFs hence the cost of hardware, software and services cost are apportioned amongst multiple users. This allows DFs to use this infrastructure at the fraction of the cost that they would have to shell out if they buy such systems at their own.
• UIB has pre-configured, field tested and optimized processes complying with Indian regulatory requirements so it is fast to implement and can be made up and running in about 3 months either in a big bang or phased manner depending on the readiness of the Utility/DF. This allows DFs to save substantial cost and time. It covers all key utility processes such as Connection Management (New Connection, Change of Name, Meter Shifting, Reconnection, Load Enhancement), Meter to Cash (Meter Reading, Tariff Administration, Billing, Collection), Revenue Assurance and Recovery (Disconnection and Dismantling, Vigilance), Meter Data Acquisition and Energy Audit (Meter Data Acquisition, Meter Data Management, Validation, Estimation and Energy Audit), Customer Care, Work Asset Management and Maintenance Management. 
• UIB is Smart Grid ready and the next avatar of UIB will have even more features to help Utilities/DFs realize the vision of Smart Grid without making huge investments in IT. Few of these features are - AMI based centralized prepayment, Remote connect/disconnect, Demand Response etc.

Interview with Col. Gowardhan - HR Director, OCW on the key challenges and future plans for 24 x 7 water supply project at Nagpur

The interview showcases the key challenges and future plans of the 24x7 water supply operator for the city of Nagpur, as told to Mohammad.Sufiyan@pManifold.com

Nagpur 24x7 water supply project is the first urban water supply project in India. Could you, at the outset, help us understand the current status of the Project?

Nagpur comes along as the first big urban water supply project on Public-Private-Partnership (PPP) model. In this Project, Orange City Water Pvt. Ltd. (OCW) is to upgrade city water distribution network through rehabilitation of the existing network and laying new network to achieve 24x7 uninterrupted water supply to city of Nagpur.The work is in progress under JnNRUM scheme. The plan agreed and approved for 5 years and in last 18 months OCW has been able to lay about 250 km of pipe line and done more than 26000 new service connections. One zone is already operating on 24x7 basis and few areas will be shortly added to 24x7 list as work in 3 areas is nearing completion.  Further to that, OCW is currently working in almost 30% of the city to improve the water mains network.

Mr. Ajoy Mehta shared his vision on Power Distribution Franchisee models in India

Mr. Ajoy Mehta, MD,
MSEDCL

Mr. Ajoy Mehta, MD, MSEDCL, in a recent Business Technology Conclave of IUKAN extended strong support to Power Distribution Franchisee model, for country to build sustainable power utilities. He shared his experience and vision for further strengthening of the Power DF model. A brief excerpt in form of Q&As from his Vision session at IUKAN is shared below. (The views here are personal views, and not to be associated with any company in any forms)

Q: What role of privatization you see in Indian Discoms?

A: Electricity Act, 2003 made Generation de-licensed, opening to private participation, but in T&D continued to require Licensing, opening it to part-privatization, but not allowing complete private ownership of assets.

• A Discom performs following core functions 1) sourcing of power 2) tariff filing and reporting to Regulators 3) various customer services like MBC etc. 4) distribution and fault management 5) and HR management.
• Out of above, sourcing of power & tariff filling and reporting are broadly considered as prerogative of Licensee only, and hence not kept in scope of Franchisee.
• The strength of private company is to handle customer relationship and bring operational efficiency, and hence remaining above activities including like MBC, IT, and Customer services, O&M, HRM etc. were made in scope of DF.

As Discoms are reeling under the high distribution loss and revenue deficit, the one way of improving the Distribution of electricity is to rightly involve private companies in the sector.     

Leveraging EE programmatic financing for expediting AT&C loss reduction

While Indian Discoms continue to focus on AT&C loss reduction, which in many cases stands to the order of greater than 60%, and lot of private efforts is getting attracted in, it is clear that this is a massive Energy Efficiency (EE) drive. There are various talked instruments for EE financing, but not much has been realised by Indian Discoms. With this Rahul Bagdia from pManifold team spoke to Mr. Vinod Kala, Founder & MD, Emergent Ventures India. He has over 25 years of industry experience, centered on Clean Energy, Strategic Management and Finance. Over the years, he has helped launch a number of new businesses in Clean Technologies including Renewable Energy Aggregators in wind, hydro and bio-mass energy, LED Appliances, Sustainable Farming etc.


This interview focuses upon 'If and how Indian Discoms could leverage & possibly expedite their AT&C loss reduction drive through potential financing from EE programmatic interventions'. The below shared are the author's personal views and not to be associated with any of their company's association.

Embedding Financier's & Lenders perspective in design of Power Distribution Franchisee

One recent success for Distribution Franchisee model in the country was first debt funding to Essel DF project at Nagpur. SBI Caps was involved in Debt Syndication partner role. Rahul Bagdia from pManifold Team recently spoke to Mr. Sudarshan Mohotta, VP Project Advisory & Structured Finance Division, SBI Capital Markets. Mr. Mohotta and his team were instrumental in closing this deal. He has around 17 years of experience in project & corporate finance and banking including financing of infrastructure projects. At SBI Caps, he has been actively involved in structuring and evaluating infrastructure projects and arranging funds with focus on power, port and road sector.

This interview focuses upon 'What will bring confidence amongst investors to invest in Power Distribution Franchisee models?' The below shared are the author's personal views and not to be associated with any of his company's and other associations.

Part 2 of 2 - Suggested amendments in National Tariff Policy

This is sequel to "Part 1 of 2: Suggested amendments in National Tariff Policy". 

Part 1 of 2 - Suggested amendments in National Tariff Policy

Rahul Bagdia is Co-Founder and Director
of pManifold. The co. specialize in Utilities and
Emerging Markets Research and Advisory,
and is focusing upon operationalisation and improvement in
Service Delivery of Power Distribution models.

Ministry of Power (MoP) is reviewing the Electricity Act 2003 and the National Tariff Policy 2006. 

Federation of Indian Chambers of Commerce of Industry (FICCI) recently had a small group meeting to discuss amendments in these Acts and invited suggestions. 

Mr. Rahul Bagdia, Director, pManifold Business Solutions, shared below suggestions to FICCI team on potential amendments to further create more Market governed healthy power sector in India. These are independent and individual views of the author and not to be associated with any of his affiliation with any company or whatsoever.  

Our existing Policy framework is strong; however its enforcement has been weak. The new amendments in addition to driving more market led changes, should act as better facilitator for measuring performance and enhancing governance in our utilities. Below suggestions are directed in Power Distribution space only.

Interview with Mr. Ajai Nirula, COO at TP-DDL on PPP models for Power Utilities in India

Mr. Ajai Nirula, Chief Operating Officer (COO) at Tata Power - Delhi Distribution Limited (TP-DDL) was one of the sessions moderator in recently concluded IUKAN 2013. As a veteran in the Power industry, he shared his inputs on various distribution reforms and the challenges associated with it.

1. What are the current trends in PPP models for Power Utilities in India? 
• Presently, three business models are in existence i.e. Privatization, Franchisee Based (Unit Based Input Model) & Concession Based (Now recommended by Planning Commission)
• Franchisee Based Model: Operates in designated areas, responsible for network maintenance, for a fixed period (generally 15 Yrs.), Bidding is done on price you pay for per unit power purchased
• Concession Based Model: Fix tenure for 25 Yrs., Bidding party gets a license to operate in the area, bidding is done on viability gap funding concept
• Privatization Model (Delhi/Orissa): Responsible for AT&C Reduction & maintaining reliability of network, licenses to operate in designated areas, asset valuation at a notional value, incentivization on overachievement of targets, Governed through a regulator

'Financial Institutions with outstanding debt to Discoms should take Equity position under planned restructuring to bring effective Performance Management' says Amulya Charan

Mr. Amulya Charan, Chief Mentor, Power Trading and Advocacy at Tata Power has 22+ years of experience in the Indian Power Sector, spanning Generation, Transmission, Distribution and Trading. With senior Mgmt. roles at NTPC, Power Grid, Tata Power Ltd., he was ex- MD at Tata Power Trading Company Ltd for four years. Mr. Charan shared following views in recent meet with pManifold.

Question 1: What are the Key Issues with our Discoms?

• SEB Financial Health – another sub-prime crisis in the making
• The cash losses of SEBs have increased 40x FY05-09 to a colossal Rs 284 bn and AT&C losses continue to scare at 28% (All India)
• These losses along with theft of electricity and insufficient increase in tariffs have been the reason for staggering financial losses and curtailing their ability to service their customers
• The investment by discoms in upgrading the distribution infra is much lower than required due to unavailability or limited availability of cash

• High Debt exposure of lenders to the Power Sector
• Outstanding debt of state power utilities have grown to a staggering Rs 6 lakh crore or 6% of the GDP. Roughly a third of these are loans taken to fund past losses which cannot be serviced through tariff hikes and, hence, are being considered for a benign restructuring by the Centre. Unless big reforms are undertaken to stem losses and spur revenue streams, these liabilities would grow further to Rs 7.3 lakh crore by March 2013. This looks like a reasonable estimate, given that annual losses (after receipt of subsidy) of discoms in the country were Rs 42,415 crore in 2009-10, up 18% over the previous year.

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)

Posted by: Kunjan Bagdia @ pManifold