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We Need to Make Electricity Distribution Franchisee Scheme Work, Shri R V Shahi, Former Power Secretary,, Ministry of Power

It has been emphasised, time and again, that electricity distribution has been, and continues to be, the bane of Indian power sector. Many power professionals have gone to the extent of saying that whatever investments we make in fuel sector, in generation, in transmission and in distribution, finally it is the distribution business which has to support and service all these investments and unfortunately in last many years distribution has emerged as a bottomless pit in which whatever you pour it disappears. The entire power sector policy structured at different stages of time, in different shapes and forms, with very attractive incentives and going to the extent of providing even Government guarantees as a powerful instrument of payment security, failed to deliver. It did not inspire the developers nor the lenders. The only reason was the mischievous track record of electricity supply and distribution, which had been financially bankrupt.

After almost ten years of struggle with Private Power Policy, when it became evident that unless electricity distribution was set right, no other Scheme in generation sector would be able to elicit any meaningful response and no Policy, however, incentivised it might be would take off, the orientation of power sector reform was realigned with distribution as the focal point. It was generally believed that privatisation of distribution could be one of the options to set right the distribution sector. The first State, which took a bold and courageous step in this direction, was Orissa. It restructured its power industry, reorganised the erstwhile State Electricity Board into power generation, transmission and distribution companies. Much before the Electricity Bill was conceived, Orissa enacted its own landmark legislation viz. Orissa Electricity Reform Act in 1996. On the distribution side, they created four distribution companies in different geographical regions. The first initiative to revisit the organisation of distribution, after restructuring of the distribution into four regions, was to put the distribution business in one of the regions on contract. I was personally associated in this historic exercise. BSES was handed over, in the year 1998, the management contract of the central region which included, apart from rural areas, cities like Bhubaneshwar, Cuttack and Puri. I happened to be the Chairman of BSES then. This model of distribution management was structured on the basis of recommendation of Consultants appointed by the World Bank and was based on the following assumptions:

  1. If distribution has to be managed through private intervention the entire area - urban as well as rural - will have to be handled together. Any cherry picking would not be desirable. I contested this assumption on the ground that if we had to reform distribution it did not have to be an exercise to test the ability of private sector and prove their inability if it did not succeed. My logic was that in India no private sector had any experience of managing rural area distribution. Another logic was that, in any case, the Electricity Boards had been unable even to run the City Distribution Systems on commercial lines - in fact, losses in absolute terms in these areas were many times more than in rural areas. We needed to create a win-win situation. In view of World Bank insistence, and the complete acceptance of their suggestion by the Orissa Administration, the exercise happened in the manner they wanted. However, inevitable consequences followed more or less the way I had predicted. Employees treated the Managers of contracting agency as a Contractor, their accountability to the new Management Team was in question and all these had direct impact on the working and hence on the outcome. It was good that both the World Bank Consultants and the Orissa Administration soon recognised the folly of their previous approach and discontinued the arrangement.

  2. Even though the Orissa Government decided to discontinue the management contract system and take up the exercise of privatisation of distribution, they did not agree to undertake this exercise in phases. We were of the view that the exercise in all the distribution companies should start with towns and cities to be taken up in the first phase. In a predetermined time frame of 2-3 years we could extend the coverage to other areas. This suggestion was based on the fact that none of the private distribution companies in the country had previous experience of handling rural electricity distribution. Had the Orissa Government agreed to this suggestion, the outcome of the Orissa privatisation exercise would have been significantly different.

  3. Subsequently power distribution was privatised in Delhi in the year 2002. The selection of agency was done on the basis of competitive bidding. The parameter on which the bids were to be evaluated was primarily based on the extent of reduction of Technical and Commercial Losses (AT&C Losses), in a given time frame of five years. Gratifyingly the distribution companies in Delhi have been able to demonstrate the performance as targeted in the Bid conditions. Though there have been substantial changes in the quality of power supply, the exercise has not been perceived very positively by a large cross section of consumers.

  4. In fact, when we evaluated the Orissa Distribution Privatisation Initiative of 1999 and Delhi Initiative of 2002 during the middle of the 10th Plan around 2004-05, there were mixed assessments and perceptions. In the beginning we expected that shortcomings of Orissa Model were, to a great extent, addressed in the Delhi Model. There being no rural distribution involved, it was felt that Delhi Model Privatisation could through up better outcomes. It was felt that this would lead to greater degree of acceptance and satisfaction so much so that there would be demands in many parts of the country on the respective governments that Delhi Model with further modifications, if required, could be adapted to provide quality services to consumers. As mentioned, in spite of improvements, perceptions were different. These two exercises did not establish credible arguments in favour of large scale privatisation of distribution of electricity in the country. In any case, Electricity Boards and new incarnations of Electricity Boards in States, where they had been restructured, were not at all in favour of initiating privatisation exercises. Public pressure did not build up, nor the media support was visible anywhere. Therefore, while expectation in the beginning of 10th plan, when I joined Ministry of Power, was that many more examples of Delhi type of initiative would emerge in the country, no such things happened anywhere.

  5. Through instruments like Tripartite Agreement, which was meant to ensure that generating companies and other organisations were fully paid by the electricity distribution utilities for the power supplier to them, APDRP and other Central Government benefits, which were linked to various reform actions, it was realized that unless electricity distribution was made commercially sustainable, power sector growth would be impossible to secure. Most of the Electricity Boards were, and continue to be slow on brining about radical commercial improvements. The genuine concern has been that such a state of affairs would be totally unable to cope up with massive expansions of power sector. Privatisation of distribution was not getting the type of acceptance and support which was needed as mentioned above. Therefore, another instrument was considered necessary to partially meet the requirement even though it may not be the best option. In any case, during the UPA regime, which substantially depended on support of the Left Group, privatisation of distribution, though clearly supported in the Common Minimum Programme document, was not even being talked about. It was therefore, thought that perhaps an instrument like Franchisee System which does not require disinvestment of ownership but may fetch the private sector management skills, maybe the second best and perhaps most workable solution under the circumstances.

  6. The Central Government was concerned that 56% of rural India was without even electricity connectivity let alone regular supply of power. Rural electrification, therefore, assumed the required priority on the Government agenda. But, simultaneously the other concern, which was upper most in our minds, was that if massive extension of rural electrification was achieved, it would require large amount of additional power and also commensurate arrangement for collection of revenue for the electricity that was supplied. Track record of Electricity Boards on collection of bills, more particularly in rural areas, could hardly justify such massive extension requiring huge capital investments. Revenue sustainability emerged as the most important concern and also constraint during the consideration of the Rajeev Gandhi Grameen Vidyutikaran Yojana (RGGVY). It was the general consensus that unless structural changes were effected in how electricity was distributed, billed and collected in villages, large scale rural electrification might cause even more serious financial burdens and increase the already unsustainable losses of Electricity Boards. The Scheme of Franchisee in rural electrification was, therefore, consciously introduced as an important ingredient and condition of the Scheme. It was expected that if larger amount of electricity was allowed to flow into the system to provide better electricity to almost all villages of the country, accountability for entire electricity must be established. The existing organisational frame work in most of the State Electricity Boards had proved to be unable to discharge this obligation. It was, therefore, concluded as a strategy, that short of privatisation, which was fraught with serious resistances, Franchisee Arrangement could be expected to meet this requirement.

Accordingly, in many States, along with implementation of the rural electrification programmes under the RGGVY scheme, Ministry of Power started monitoring the introduction of the Franchisee System. A comprehensive guideline was prepared by Rural Electrification Corporation for implementation in various States. During the early stages of monitoring by the Ministry during 2005-06 it emerged that it would be difficult to attract the required number of Franchisees because certain practices had got deep rooted and the Franchisees were apprehensive whether they would at all succeed. It was therefore, suggested that some degree of flexibility could be allowed in introduction of this Scheme. For example, if right from the beginning Franchisees were reluctant to be accountable on the basis of electricity input based accounting and pay for the entire amount of electricity received minus losses allowed; it may be difficult to get response. Therefore, in the first few months, to enable them to gain confidence, it might be necessary that they start with the responsibility only of revenue collection rather than the total task from the measurement of input power to the collection of bills. It was however, made clear that the ultimate requirement of the Franchisee Scheme is not merely bill collection, because input based Franchisee Scheme alone could be useful. The scheme has been introduced in a number of States. However, input based franchisee systems are prevalent in very few places and, as a result, full advantage of the scheme has not been derived.

Infraline Energy and IDFC organised a Round Table on 5th of November, 2008. I coordinated the discussion and we had comprehensive presentations by former CMD of Rural Electrification Corporation Sh. Anil Lakhina, former Chairman of Uttrakhand Power Corporation Sh. B. M. Verma, former Member of Delhi Regulatory Commission and present Member of CERC Mr. R. Krishnamurty and former Member of Orissa Electricity Regulatory Commission Sh. B. C. Jena. Each of the distinguished panelists had direct or indirect experiences of dealing with the issue of electricity Distribution Franchisee. Important points that emerged during the presentations followed by deliberations in the Round Table are outlined below:

  • In Uttrakhand, Self Help Groups organized by women were very effective in handling the electricity distribution in a number of rural areas. They were trained in some of the basic technical aspects of switches, fuses and meters. Their ability in taking care of consumer complaints and collection of bills was found to be significantly better. Acceptance by consumer groups of this arrangement was extensive and, as a result, there was all round improvement.

  • In the Uttrakhand arrangement, however, the Franchisee Scheme has remained limited to collection of bills, apart from a few issues connected with consumer complaints. The collection efficiency, no doubt, improved substantially, but the input based Scheme not being there, the gap between the electricity supplied and paid for remained to be an issue of concern for total accountability. As mentioned earlier, though commercial arrangements with Self Help Groups to tie up accountability from the point of input of power to the point of collection of bills maybe difficult to start with, ultimately this needs to be ensured.

  • In Orissa, Western Company and Southern Company involved Panchayat institutions and local bodies. I myself directly associated in structuring the Scheme, in the year 2000-01, and the exercise covered, the consumer complaints about improving quality of supply and collection of bills. The next phase was Input Based Franchisee Scheme. Though it has not been widely practised and remained limited in a few areas, an attempt was made to engage firms which could take such responsibilities. There were a few cases of modest success.

  • Prior to privatisation of distribution in Delhi, the Delhi Vidyut Board had, in a number of areas particularly in slum areas, the system of contracts for collection of bills. This led to in a number of cases, serious issues of harassment of consumers and the system led to much larger leakages than was the case with even departmental handling of the matter.

  • The most powerful of the initiatives taken in the recent years is the one that Maharashtra Electricity Distribution Company took by introducing Franchisee arrangement in Bhiwandi.

Torrent took charge from Mahavitaran, and commenced power distribution in Bhiwandi area from January 26, 2007; after it was leased out to the company in August 2006.

As per the franchisee contract, Torrent has to bring down the T&D Losses from 44 to 14 percent and step up bill recovery to 98 percent from the 25 percent (2006 level). Bhiwandi is a textile hub of western India and a major load center with approx 750 MVA demand with a Geographical area of 721 sq kms. It has a population of more than 10 lacs and the number of consumer is more than 1.6 lacs. Annual consumption of electricity is 2500 MUs in Bhiwandi.

Soon after Torrent took over the charge, there were problems due to the increased load shedding of 8-12 hours by Mahavitaran. This happened due to non availability of power leading to distress load shedding of 733 hours on different feeders in Bhiwandi accounting for 19% of total outages in Bhiwandi.

During the financial year 2007-08, the sales in Bhiwandi area amounted to 1908 MUs to about 1.6 lakh consumers. The system peak demand for Bhiwandi distribution area was 571 MW which was met through purchase of 2620 MUs from Mahavitaran. However, it must be noted that this system peak demand is restricted due to load shedding of around 200 MW which is in effect round the clock at Bhiwandi.

Also during the year, Torrent has put in concentrated efforts to upgrade and strengthen the network in the area as well as improve the metering and billing efficiency (a) to serve the consumers of the Bhiwandi circle better (b) to make the network robust and (c) to bring down the AT&C losses. The company has enhanced the distribution transformation capacity by more than 100 MVA by putting in 889 new 22 kV Distribution transformers as well as by increasing the capacity of existing transformers, 31 km of 22 kV overhead lines and 65 km of underground feeders were also added during the year. More than 92,000 meters were replaced at the customer premises during the period.

It is reported that Bhiwandi experience is proving to be a rewarding one. This initiative has the potential of being adopted in other areas. Maharastra has already taken steps for extension of this scheme to a few other towns including Nagpur. I recall, during reviews, when we were analyzing the overall aggregate technical and commercial losses in various towns of Maharastra, the general consensus emerged that wherever the losses were more than 30% or so, the Government of Maharastra and the Distribution Company should think in terms of franchising the distribution system.

Similar reviews in Ministry of Power, while monitoring the progress of RGGVY, revealed that States like UP and Bihar where the loss levels were very high were not very serious about the whole approach. It appeared that they were trying to somewhat meet the requirement of format rather than attempting to do much in substance. Continued insistence by Ministry of Power, however, did lead to some movement.

The biggest resistance which is faced in introduction of this Scheme is by the personnel of Electricity Boards Distribution Companies. Vested interests don't want this to be introduced and if introduced, all types of difficulties are created so that it does not succeed.

Issues in Franchisee Scheme

While it appears desirable that distribution of electricity through Franchisee System may be introduced to achieve better results, it is important to keep in mind and appropriately address a few important issues, as outlined below.

  1. A clear understanding of operational and financial risks for Franchisees would be necessary. Unless the Distribution Company looks at these in a way that the Franchisees consider that reasonable dispensations are available and the whole structure is evenly balanced, they would not come forward to participate.

  2. Supply risk associated with erratic power supply may create a major hurdle in smooth implementation of the scheme. Consumers should see a distinct difference in quality of supply when they fully cooperate in payment of bills.

  3. If Franchisees are required to invest (like in Bhiwandi Model) the issue relating to demarcation of assets, their financial treatments, returns etc. would become valid issues and would need a balanced and transparent dispensation.

  4. Base line date is important to work out the compensation and incentive package for franchisees. Mostly these details are missing or lack authenticity. Mutually acceptable procedure would be necessary.

  5. Prompt payments by Govt. and Semi Govt. agencies like Municipal bodies, Schools, Hospitals etc. for electricity consumed will inspire confidence in the system and concerned Governments may need to ensure this.

  6. In implementation of Rural Electrification programme through RGGVY, Rural Electrification Corporation and Ministry of Power must ensure that advance actions are taken by the respective State Distribution Companies and the State Government, so that the Franchisees are in place well in time when the electrification work in a particular area is completed.

  7. The Franchisee arrangement has got to be based on input power. At the most about 6 months of initial phase may be provided for collection of bills by the Franchisee only as a learning curve. After that input based condition must automatically get implemented.

  8. In whichever State it is observed that the Distribution Companies and State Governments are not serious about the implementation of Franchisee Scheme, further implementation of RGGVY through grant funding by Government of India, may be suspended to enforce implementation of this requirement.

  9. Government of India has also extended the APDRP scheme in the 11th Plan. The scheme covers towns and cities. In whichever towns and cities the AT&C loss is beyond a level, say 30%, Bhiwandi type of Franchisee arrangement may be insisted upon.

  10. Distribution sector reform and its long term commercial viability is a must. Privatisation process, in true form, would be gradual and slow. Franchisee Model as outlined above need to be implemented with required follow up - through persuasion and through insistence. We cannot afford to give up.