National Training Programme For Rural Electricity Distribution Franchisees

10-12 October,2011 Venue: JKPDD.JAMMU

Distribution Franchising in Indian Power Sector

Er. A.K. Bhagat REC New Delhi

Guiding Philosophy
Distribution Franchising in India is still evolving, both in urban and rural areas. Can neither be branded a failure or a success.
Rural distribution franchisee has been operational across the country on various co-operatives/collection based models; graduation to input based model is still a challenge.

Urban distribution franchisee has seen a few beginnings

Attempt to make stakeholders aware of the elements required to make this concept a success rather than follow already successful models.

Key Objective of the Course

Demarcation of roles and responsibilities of each of the stakeholder Designing transaction structure NIT/RFQ/RFP Agreement Handholding of franchisee Understanding various options/ models for Franchisee Scope of work under various options Business viability for floating franchisee arrangement Applicability to the sector

Setting out road map for institutionalization of franchisee

Understanding various option and select the best suited model for floating the franchisee

Understanding Franchisee and need for Franchisee

Understanding Franchisee Objective Rationale Applicability to the sector

Contents

Background Franchising

Background
High Demand Supply Gap Power Supply position during 2009-10
Requirement ALL INDIA Peak Demand (MW) 119186 104009 (15157) -12.7 Availability Deficit Deficit(%)

Energy (MU)
JandK Peak Demand (MW)

830594
2247

746644
1487

(83980)
(760)

-10.1
-33.8

Energy (MU)
Source: www.cea.nic.in

13200

9933

(3267)

-24.8

Contd.
High T&D losses across the country
Less than 20% Goa Tamil Nadu Between 20-30% Andhra Pradesh Gujarat West Bengal Himachal Pradesh Maharashtra Tripura Punjab Uttaranchal Between 30-40% Karnataka Kerala Assam Meghalaya Chattisgarh Mizoram Sikkim Above 40% Delhi Uttar Pradesh Bihar Jharkhand Madhya Pradesh Arunachal Pradesh Rajasthan Haryana Manipur Nagaland Jammu & Kashmir

Source: State Power Sector Performance Ratings Report-CRISIL & ICRA-June 2006

Contd.
Distribution infrastructure must be adequate to deliver reliable, uninterrupted power supply on demand both in urban and rural areas.

In urban areas power distribution infrastructure exists, and the challenge is to upgrade it so as to make it fit to deliver increasing requirements of energy, Rural sector requires creation of new infrastructure and large scale augmentation of existing infrastructure.
The quality of power in terms of deviation from declared voltage and frequency has to be maintained not only in urban areas but in rural areas as well.

Revenue Sustainability & Need for Reforms

The existing model of electricity distribution has proved deficient in many respects, chiefly on account of the unacceptably high aggregate technical and commercial (ATC) losses and declining man power.

These results in incapacity of distribution utilities to make the much-needed investments required to meet load growth, and proper maintenance of the networks is also not carried out.
There are only three ways to bridge the gap between revenue and expenditure

To raise the tariff, meaning the consumer pays more than he should, or
The government subsidises, which means the tax payer pays again not acceptable, or

The company goes on taking the losses till it no longer can, and it folds up.
None of the three approaches provide a solution hence the need to bring about major changes in the electricity delivery system one of them being distribution franchising

Franchising
What is Franchising ? What is Electricity Distribution Franchisee (DF) ?

How does Franchising in Electricity Distribution differ from Franchising in other sectors ?
Rationale for Distribution Franchisee Who can be a Distribution Franchisee ?
It is very important to know the answers to the above questions in order to understand and successfully implement franchising.

What is Franchising?

Franchising is an authorisation granted by a company to someone to carry out selling or distribution of goods and services in a certain area.

What is Distribution Franchisee?

Electricity Distribution Franchisee

Franchisee means a person authorised by a
distribution licensee to distribute electricity on its behalf in a particular area within the area of supply of the licensee. [Electricity Act 2003: Clause 2 (Definitions): Subclause 27]

The franchisee has the obligation to perform better than the franchiser in a pre-defined area with limited consumer base.

Contd.
DISTRIBUTION
CONSUMER

LICENSEE 1

Area 1

FRANCHISEE

LICENSEE 1

Area 2

LICENSEE 1

Area n

Franchising in other sectors

Franchising in retail business has been around for a long time. Franchising in retail business is an option for a large company having ambitions to expand its business but finding it difficult in terms of profitability, market knowledge, reach, etc to set up its own branches.

Franchisee gains by using the brand equity of the franchiser and his own technical and marketing expertise.
Depending on the franchise agreement, the Franchiser gains by receiving: Royalty for the brand name Fees for technical and marketing support Share in profits or turnover

Electricity distribution franchising v/s franchising in other sectors

Point Genesis Electricity Distribution Franchise Need to losses cut Retail Franchise

unsustainable Business growth

Consumer Base

Franchisee gets the consumer No defined consumer base nor base of the franchiser within the franchised area. Franchisee gets franchised area business from consumers drawn by the franchisers brand name
Non performance of the There is no such obligation franchisee tantamounts to non towards consumers or the performance of the franchiser society on the part of the franchiser Has to perform better than the Risk is like any other business franchiser in the franchised area but no pre-defined performance to be able to break even target like electricity distribution

Franchisers risk

Franchisees risk

Rationale for Distribution Franchising

High technical and commercial losses have made existing model of power distribution companies unviable In the existing model, the gap between revenue and cost can be bridged by : Higher tariff, or Government subsidy Neither is sustainable since the first penalises the honest consumer and the second penalises the common taxpayer, both violating the User Pays principle. Shortage of Staff
Look out for a business solution geared to improve revenue collections, cut down distribution losses and enhancing customer satisfaction has led to the concept of distribution franchisee.

Rationale for Distribution Franchising Contd.

Franchisee as a partner helps the franchiser achieve revenue sustainability while enhancing consumer satisfaction
A well thought out and well implemented franchise agreement results in a Win-Win situation for the franchiser, the franchisee, the consumers, and the government

Look out for a business solution geared to improve revenue collections, cut down distribution losses and enhancing customer satisfaction has led to the concept of distribution franchisee.

Franchisee Urban & Rural : Connect & Dis-connect Utility

Rural Area Characterized by : Low revenue Less no. of consumers Low demand Village level politics Low capacity of consumer to pay Likely investment opportunities are less small sized local business man
Small size and less experienced company can take up Co-operation required from local bodies/PRI RFP needs to be as simple and clear as possible Large size and experienced company required Investment planning needs to be strengthen/may be done jointly RFP requires more details and historical data

LOW
Urban Area HIGH
Characterized by : High revenue Large no. of consumers High demand Large infrastructure Dominant political environment High level of theft means High investment opportunities

Who can be a Distribution Franchisee ?

Prospective Franchisee could be any of the following: Large Corporates Mid sized companies Entrepreneurs Local Bodies Panchayati Raj Institutions Self Help Groups NGOs

The class of prospective franchisee shall depend upon the area; Rural or Urban and also upon the size of the franchised area

Contd.
Franchisees in urban areas can be individual entrepreneur, mid-size companies and large corporates owing to the size of operation and associated revenue/risk. Franchisees in rural areas can be individual entrepreneur, NGOs, SelfHelp Group (SHG), Users Association, Co-operatives etc. Franchisees in rural areas, besides opening up new employment opportunities to rural men and women, will also instill a sense of ownership among the rural people. The Panchayati Raj institutions can play an important role of overseeing, in the advisory capacity, the delivery of services by franchisees or can themselves become franchisees.

Framework for Distribution Franchisee

Distribution franchising is being implemented under the following: Electricity Act 2003
Seventh proviso to Section 14 of EA 2003 provides the framework for electricity distribution through another person as follows:
Provided also that in a case where a distribution Licensee proposes to undertake distribution of electricity for a specified area within his area of supply through another person, that person shall not be required to obtain any separate licence from the concerned State Commission and such distribution Licensee shall be responsible for distribution of electricity in his area of supply

Contd.
Rajeev Gandhi Grameen Vidyutikaran Yojna (RGGVY)
Deployment of franchisee is a mandatory condition for funding under RGGVY aimed to ensure sustainable rural electricity supply.
The franchisee arrangement s governed by franchisee guidelines issued by REC which cover models for franchisee development, sample business plan for the franchisee and a model contractual agreement.

State Electricity Regulatory Commissions (SERC)/CEA

Standards of Performance Supply Code / Safety Code Tariff structure

Rural Franchisee- Status

S No.
1
2 3 4 5 6 7 8

Name of the State

Assam
Haryana Karnataka Nagaland Orissa Uttar Pradesh Uttarakhand West Bengal

Model
Single Point supply through User association
Input Based Franchisee Under Implementation Gram Vidyut Pratinidhi Village Electricity Management Board Village contact person approach Collection based Franchisee, graduating to Input based Franchisee SHGs/NGOs SHGs/NGOs/CBOs

Urban Franchisee Status

S No.
1 2 3 4 5

Name of the State

Maharashtra - Bhiwandi Maharashtra - Nagpur Maharashtra - Aurangabad Madhya Pradesh Dewas, Ujjain, Jabalpur Uttar Pradesh

Model
Input Based Input Based Input Based Under Process Input Based Under Process Input Based Cabinet note on identified cities/towns across DISCOMS

Various other states as Karnataka, Rajasthan taking it up.

Thank You