Distribution Franchisee Evolution, experience and outlook he distribution franchisee model is a public-private partnership (PPP) Inftiative that has emerged as a solution to the problems affecting the power distribution segment — high technical and commercial losses, poor Infrastructure, weak financial position and lack of customer orientation. The model has evolved as a means to break the vicious circle of low realisation, low investments, low consumer satisfaction and, in turn, low realisation. The first input- and investment-based distribu- tion franchisee model has been imple- mented in the Bhiwandi circle in Maharashtra with exemplary success. Asa result, utilities, private sector play- ‘ers and state governments are pursuing, this model aggressively and trying to replicate itin several areas, ‘This article captures the learnings on the path of conception, development and. plementation of a successful PPP model in power distribution, and the related possibilities and challenges, ‘Mnesh Sacheova, Head, M&A & Pv. Sector Solutions, and Sasrann Kamfar, Team Leatet, M&A & PUL Sector Solutions, CRISIL lnrastuctue The need for vstfbullon franchisees A distribution franchisee acts as an imtermediary between the distribution licensee and its consumers. The licensee provides exclusive sale rights to an Fig. 1: Key motivations for ai (ies TAD bossa te national Lvelis 20-35 pex cent ‘© Some pockeis have ATRC losses ashigh as 60-70 percent ey franchisee 1+ The relaticly smal aze of the datritution amastiras the ete coserto fe consumers, lacing tolransparency and eoceuntabilly jintment of distribution franchisee agency, which is solely responsible managing the power distribution by ness in a specified geographical ‘The Electricity Act, 2003 provides for @ appointment of a distribution franc © Low investmentin Ra and upgadation of natwerks owing peor fnancial stats © Large slates need investnerts as hth as Fs 100-Rs 180 blion ‘¢ The poakng power soft inthe country is nsary 1Spar cent, The franchisee can arrange fr soures of paver to overome Ica sheng Gem eens POWER LINE © September 2009Ability to mako investments rom periormance turnaround A Contribution from Consumers Licensee Franchisee Revenve potential Established distribution infrastructure Distribution business management expertise Gronth in consumption Supply of power Employee susport Benefits for Consumers Licensee Franchisee Improved services Reduction in losses Financial returns Better availabilty and quality of power Increased satisfaction in a specified area within the region of supply of the licensee, for which no sep- arate licence or approval is required from the regulator. Initially the utilities outsourced functions such as billing, collection and repair! ‘maintenance of transformers, Over time, incentive-based arrangements evolved for the private companies to operate the metering-billing-collection cycle. The current input- and investment-based franchisee model encompesses the entire power distribution business including supply of power to consumers, collection, of revenue, network management, e&- pansion and upgradation, The licensees responsibilities are restricted to supply of power at the input points and mainte- nance ofa regulatory interface, The Key issues that led to the develop- ‘ment of the input- and investment based franchisee model are (Fig. 1): © High and uncontrollable losses * Low collection efficiencies + Mounting power deficits * Poor state of distribution infrastructure: * Inability of the state utilities to make investments. © Poor customer services ‘The distribution franchisee model ‘emerged asa means of tying up with pri- vate sector players to bring in consumer management expertise, invest ia i structure (thereby curtailing losses) and share the financial benefits of the Higher recovery of cost Inprovement'ncollestionefcancy Access to censumerbasein the fanchisesreafor 10-15 years Parameter December 2006 End-2008.09 (peters randoverto ranese) : ATC loss 58 percent 24 percent “Transl: flne ra 40 por cons 75 por cont ‘Status of consumer meteang Poor, wth fw $5 per cont accurate rotors eters Systom aicrago iteruption Foquency iow (SAIF) 47.60% ‘System average interuption durationindsx SAID) 23.6 ‘Consumer average insrupton daraton nex (CAI) + February 2007;* January 2008 ‘Source: Mahavitaren improvements with the licensee. As the ‘aecompanying matrix (Table 1) shows, the amalgamation of the contributions cf various stakeholders entails benefits for all through the distribution fran- chisee mode First success Maharashtra was the first state to imple ment the input: and investment-hased With wide acceptance of the franchisee concept and fi success in Bhiwandi, more and more private Players are responding to franchisee bids. oat distribution franchisee mode! = ni, a suburb of Mumbai kn cotton textile mills, with a ‘met demand of nearly 675 \ annual energy requirement than 2,400 MUs. Power I for about 60 per cent of BI tricity consumption. The distribution circle suffers distribution losses (44 per ‘ment failure and poor ciency (62 per cent). Following the execution agreement, Bhiwandi by Mahavitaran to January 2007. Their franchisee model was initial hiccups, but over the past twe BOWER LINE + September 2000‘extiemely encouraging (Table 2) A phenomeral reduction in losses and improvement of the distribution net: work was brought about at Bhiwandi through amulti-pronged strategy of aug- menting system infrastructure. This involved obiainingan appropriate HT:LT imix, deploying IT solutions for better control of the metering-billing-collec- tion cycle; higher vigilance; and a focus con consumer service. ‘The Bhiwandi franchisee model aims to evolvea workable framework of sharing ities and risks, for a mutual- improvement in opera- tions. Apart from the financial gains and the advantage of shared risks, the model provides lessons in best prac- tices in distribution to the utility, that can be put to use in other areas to improve operations. Current status Encouraged by the success of Bhiwan: there are attempts t0 implement the input- and investment-based franchisee model in several states. Uttar Pradesh has already appointed Torrent Power as a distribution franchisee for its Agra and Kanpur distribution circles. Its current- Jy in the process of appointing distribu- tion franchisees for seven more urban areas. Maharashtra has conducted a bid process for the eppointment of distribu- tion franchisees at Nagpur. The process for the appointment of franchisees in four large urban areasin Bihar including Patna is under way. Madhya Pradesh and Rajasthan have also invited expres- sions of interest for appointment of dis- tribution franchisees in vacious urban areas of the states With wide acceptance of the franchisee concept and its success in Bhiwandi, more and more private players are responding to franchisee bids. The cur- rentround of bids is eliciting interest and participation from many bi prises, namely, large power players, power equipment manufacturers and ‘engineering, procurement and construc tion firms, and infrestructure companies. A model under which the franchisee is required to achieve 100 per cent supply levels in the medium term will find favour with the franchising utility as well as the consumers. Challenges Despite Bhiwand’s exemplary success, the progress in distribution franchisingis stil slow. The following are the two major factors that are hampering progress, and the solutions that can be implemented to ‘overcome the challenges. Inatleguate power supnly Although the distribution franchisee ‘model aims to cut distribution losses and improve customer service, the franchisee is dependent on the utility for electricity supply. The licensee usually guarantees 10 provide the same volume of energy that ‘was supplied in the previous year, thus ending an element of certainty to the franchise's business model. Most states in India face electricity shortages. Despite the guaranteed quan- tum of electricity supply, there are short- falls and the distribution franchisees have to resort to load shedding. Thus. the objective of improvement in cus- tomer service is only partially achieved. Going forward, a key driver will be the ability of the distribution franchisee to ional power supply. A the franchisee is required to achieve 100 per cent supply levels (by sourcing additional power) in the medium term (two to three years) wil ind favor withthe franchising uti- as well as the consumers. Thus, it can bea preferred model and provide impe- tus to distribution franchising. ‘This revised model would open up new opportunities for players that are back- ‘ward integrated into generation and/or have the ability 10 source additional power. The power generated/sourced by them will find a captive market ang thus de-tisk the business models in the long term. Rehabittation of the axisting employees of the witty Another major impediment is rehabili- tation of the licensee's existing employ es in the area to be franchised. While the franchisee model in the current form addresses the concerns of the con- sumers, the licensees and the fran- chisee, the concerns of the existing employees are not addressed effective: Iy. Since it is not obligatory for the fran= chisee to take on the existing employees of the utility, most of the staff has to be transferred to the other distribution ‘areas under the utility. ‘The utility and the franchisee need to ‘work together to ensure that the majori- ty of the existing employees cari be absorbedtin thesame area through train- ing and reskilling, Farther, the utility should work out a compassionate trans- fer provess for the employees who are to be transferred to other areas. This will ensure acceptance amongst the utility’s employees and a smooth transition. Conclusion ‘The distribution franchisee framework has provided an effective means to re- energise the power distribution busi- ness. A strong and creditworthy power distribution industry will enable faster generation capacity addition. The early success in the Bhiwandi circle has proved the efficacy of the model. Going forward, the key driver of fran- chising, for utilities as well as con- amers, will be the ability of the distrib- tition franchisee to source additional power and provide uninterrupted supply in the franchise area, ‘The utility and the franchisee would he further required to work together ta ‘address the concerns of the existing ‘employees by providing effective reha- bilitation and absorption. = POWER LINE @§ eptember 2009