The shambolic performance of state-owned distribution companies had prompted industry experts to call for privatisation of the sector, but despite attempts made at this, privatisation has proved difficult in the past due to political vested interest. However, the emerging trend of states outsourcing a part of their distribution business while retaining the ownership of assets has proved successful in reducing losses and infusing much-needed capital in reviving ageing infrastructure.
This electricity distribution franchisee (DF) model is structured such that the DF receives power supply from the state discom at designated input points, and pays an annual rate for this energy input. The DF has to achieve a minimum reduction in transmission & distribution (T&D) losses and increase collection efficiency. It is then permitted to keep the revenue collected from consumers.
The structure is such that the entire business risk, after agreeing to the baseline information, is vested with the DF. At the same time, DF is insulated from the regulatory risk of retail tariff revision through a tariff indexation ratio so that its cost recovery is not affected.
The DF model was first experimented with in Maharashtra’s Bhiwandi where Torrent Power was chosen to execute the arrangement in 2006. Currently, several other tier-2 and tier-3 towns in the country are opting for the model. Nagpur and Aurangabad in Maharashtra, Gwalior, Ujjain and Sagar in Madhya Pradesh, Agra Kanpur and Noida in UP have opted for this model. Cities like Jamshedpur, Patna and Ranchi have floated tenders to adopt the DF model.
The VK Shunglu committee report on the financial state of distribution companies had identified 255 towns in need to be put under the DF model. While there are only a handful of cities under DF, the successful implementation there has attracted other states to the model. A most successful examples of the model is Nagpur, where Essel Utilities arm SDNL made a turnaround in power distribution.
The company reduced T&D losses to 14% in 2013-14 from 32% three years ago. The reduction in losses account for nearly 10% of the total units consumed by Nagpur in a year.
“Our success has primarily been driven by a focus on adequate investment and loss reduction on better customer service”, Siddharth Mehta, CEO, Power Distribution business, Essel Infra & Utilities, told FE, and added that the support of administration, including the state discom, is vital in executing the plans. Essel Utilities, which also provides DF services in Ujjain and Sagar, will soon take over the operations of Gwalior.
The DF model hinges largely on upgradation of infrastructure and extensive use of technology to reduce losses. For instance, in Nagpur, the capex employed by SDNL has grown nearly three times from R35 crore in 2012-13 to R104 crore in 2013-14. The company also estimates than in 2014-15, the investment would rise by 25% to R125 crore.
“The states are bogged down by so much debt that its difficult for them to make investment in upgradation. The state discoms are only too happy to hand over an area to us where they won’t be losing any money”, Mehta said. States, he said, are looking at this model with increasing interest and Rajasthan could be moving towards putting at least 10 cities on this model.
The accumulated losses for state distribution companies account for more than R2 lakh crore.
Even though the DF arrangement was given a formal recognition through the Electricity Act 2003, the scheme is only now being taken up by states in both rural and urban areas. Till recently, input-based franchising did not gain much acceptance since states were concerned with the adverse socio-political repercussions in the event of its failure, and the private sector was reluctant to take on risks in the absence of a well structured offer.
With this franchising showing positive results, input-based DFs are being attempted in several other places, including those where power can evoke extreme political reaction such as UP and Bihar.
The success of any company attempting the DF model rests on smart and adequate investment where the returns are only possible after a period of four-five years. But greater integration achieved through technology is helping firms achieve a positive return on investment quicker than expected.
“The DF business requires four-five years of consistent investment before any gains materialise. But our aim is to become an integrated consumer service provider in not just power distribution but also in water distribution, waste management and city gas distribution. Our success in the DF business provides us with a head start in achieving that goal,” Mehta said.