Do Electricity Distribution Franchisees Work? It’s High Time for a Reality Check
Relevance: GS Paper III
Why in News?
The "Bhiwandi Model" in the late 2000s led to the popularity of franchisees for electricity distribution reform. Bailout packages like the Financial Restructuring Plan of 2012 and the Revamped Distribution Sector Scheme (RDSS) of 2023 advocate for franchisee implementation to reduce losses. However, practical experience suggests otherwise.
What is a Distribution franchisee?
- A franchisee is an entity appointed by an electricity distribution company (discom) to undertake all distribution operations within a given area, except for power procurement. The discom remains responsible for regulatory and legal compliance.
- It supplies electricity to the area, and the franchise pays a fixed, pre-determined rate per unit of the electricity supplied, known as the "input rate.”
- The franchise aims to make profits by reducing losses lower (and quicker) than the level indicated by the input rate quoted in its bid.
- This arrangement is known as the Input-Based Distribution Franchisee (IBDF) and is the most prevalent model currently adopted by discoms nationwide.
Status of Distribution franchisees:
- To date, 28 franchisees have been implemented across nine states. Of these, only 12 are operational. These include -
- Torrent Power Ltd, which operates three in Maharashtra and one in Uttar Pradesh,
- CESC Ltd, which operates three in Rajasthan and one in Maharashtra,
- FEDCO that runs two in Meghalaya,
- Sai Computers, which runs two in Tripura and
- Tata Power Ltd, which operates Ajmer franchisee in Rajasthan.
Concerns related to Discoms:
Data unavailability:
- Many franchisees claim that they have significantly reduced their losses in their annual reports. However, this data is self-reported; no independently verified third-party audits are available to confirm their performance.
- Despite contractual requirements and regulatory directives, the data lacks transparency.
- Only two franchisees, Bhiwandi until FY 2016 and Agra until FY 2015-16, have publicly available third-party audited data on their distribution losses, which were 24% and 32%, respectively.
- Information on distribution losses for the other franchisees is unavailable in the public domain.
- Additionally, there is a lack of publicly available data concerning the franchisees' capital expenditure plans and actual capitalisation. However, data for the discom is publicly available through the tariff revision process.
- Out of the 12 operational franchisees, the status of two in Meghalaya and two in Tripura could not be assessed due to the unavailability of public data.
Inability to enforce contractual provisions:
- Most state experiences reveal that the discom has failed to enforce contractual terms related to third-party audits and other provisions that would protect its financial interests.
- For instance, the discom's monthly revenue from the franchisee depends on an accurate assessment of the Average Billing Rate (ABR) for the base year, which forms the foundation for its revenue calculation.
- According to the franchisee contract, the base-year ABR audit should be conducted and verified within 90 days of the contract's signing.
- Despite regulatory directives for conducting these audits, which would secure their revenue from the franchisees, the discoms appear reluctant to take any steps in this regard.
- In many cases, the third-party independent audit of the base-year ABR was not conducted on time.
- Annual ABR audits are also pending, and the reports are unavailable in the public domain.
Political support dependency:
- Franchisees operating in areas with high losses due to electricity theft and illegal usage face many challenges. They need to break the entrenched patterns of these illegal activities, which require political support and cooperation from the state administration.
- Even the continuation of franchisee contracts can become difficult after a change in state political leadership, as the Jharkhand example demonstrates.
- Madhya Pradesh's experience shows that setting up and sustaining franchisees is impossible without political will and support.
- Although franchisees are often seen as a benign form of privatisation, they require political support, which puts them at par with privatisation when evaluated from a structural reforms point of view.
Contract termination complexity:
- Terminating a contract can be a complicated and costly process. Currently, four contracts, two in Maharashtra and two in Odisha are undergoing arbitral proceedings.
- The estimated impact of these proceedings is more than Rs 1,000 crore. However, this is not the final figure, as the impact of one franchisee's termination is still unknown.
- It's important to note that the cost of litigation and the liabilities caused by contract termination can be significant.
- Therefore, rather than benefiting from the efficiency gains of appointing franchisees, the discom may end up with unpaid dues and bad debts. As a result, it's essential to exercise caution.
Uncertainty amid energy transition:
- As the world shifts towards renewable energy sources, the role of the distribution companies (discoms) is changing. With the decreasing cost of renewable energy and storage systems, large consumers may choose to move away from discoms to manage their own energy supply.
- The main challenge will be adapting to these changes quickly, flexibly, and cost-effectively.
Way forward:
- With the evolving energy landscape, characterised by renewable energy adoption and shifting consumer behaviour, the discoms of the future may primarily focus on providing electricity infrastructure and services to small, rural, and agricultural consumers.
- For this, a strong framework needs to encourage efficient distribution network development and management while ensuring equal access for all users.
Conclusion:
The analysis of the distribution franchise model raises several critical concerns about its effectiveness and sustainability in improving electricity distribution efficiency. The current franchise model does not provide much confidence in its ability to deliver under such evolving circumstances. Considering these challenges, caution and a reevaluation of the franchise model's suitability in addressing the evolving demands of the electricity distribution sector are warranted.
