The ministry has also laid down the broad contours of the revenue streams and the basic roles and responsibilities of the new franchisees.
The government has drawn up plans to address the issue of lack of competition in the electricity distribution segment by allowing multiple private franchisees in each area, while state-run utilities will continue to own the network.
Though the model falls short of outright privatisation, the power ministry feels that light-handed regulations and partial pricing freedom might make it attractive to private players, while the loss-making government discoms will benefit from upfront guaranteed payment for the power drawn by the franchisees and the use of the distribution infrastructure.
Though the franchisee model has been tried in states like Maharashtra, Odisha and Rajasthan, it hasn’t made much headway; the new model, the government thinks, is more workable given the pricing freedom and various incentives being offered for the operators to meet operational parameters like elimination of pilferage and theft.
According to government documents reviewed by FE, to lure private entities, the power ministry has suggested benign regulations that means the franchisees can offer any incentives to their consumers. The ministry has also laid down the broad contours of the revenue streams and the basic roles and responsibilities of the new franchisees.
According to the proposed mechanism, the franchisees would be mandated to buy 50-75% of their power requirement from discoms. While tariffs paid by consumers would be the revenue stream of the franchisees, their expenditure would include the power purchase and network management costs payable to discoms.
In the new model, franchisees would also have to bear the costs of aggregate technical losses going beyond predefined trajectories in their supply areas. The subsidies to eligible consumer categories would be disbursed through direct benefit transfer, implying that the private suppliers can recover the full cost of power supply from consumer tariffs, removing their dependence of government subsidy payments which are often untimely.
The franchisee would have to bear the fixed costs of the power purchase agreements (PPAs) of discoms in ratio of the energy it will procure. Discoms buy power from generators in a two-part tariff structure, which comprise fixed and energy charges. The same model would be applicable to franchisees when they pay to discoms.
India’s power distribution sector, largely a state preserve, has not been very amenable to reforms. The latest revival package UDAY (launched in FY16) that put a lot of financial burden on the state governments, also appears to flounder, as the operational targets are not being met by most entities. The financial losses of discoms rose 89% year-on-year to Rs 28,369 crore in FY19; also, the discoms’ over-dues to the gencos are now close to Rs 60,000 crore.
According to sources, introducing competition in distribution would separate ‘content and carriage’—a project which has been in the back burner for quite some time—which would segregate the business of operating local power transmission systems from distribution of electricity. It would effectively allow end-consumers to choose who they want to buy electricity from, similar to the way telecom and direct to home (DTH) television operators work.
In the new model, the state-run entities are expected to improve their liquidity conditions as they would receive the power costs upfront — about 80% of the discoms’ expenditure is power purchase cost. However, the state discoms would continue bearing the responsibility of the “obligation to connect”, where it will be a “supplier of the last resort”, requiring them to connect consumers “where capex/netwok expansion” is required.
Cities where the franchisee model is currently operational include Bhiwandi, Nagpur, Agra, Ajmer, Kota, Bikaner, Cuttack, Puri and Khurda.