Centre drafts franchisee model for power supply, urges states to take it up

The Ministry of Power has drafted a model plan for states to have multiple private franchisees as power suppliers, opening up the distribution sector in India. This paves the way for the second round of reforms by the Bharatiya Janata Party (BJP)-led central government to revive the ailing state-owned power distribution companies (discoms).

Power, New and Renewable Energy Minister R K Singh has urged discoms to become wholesalers of electricity and have private power suppliers. But, this is the first time the Centre has officially proposed the idea of having private suppliers through the franchisee model. Officials said this was not yet mandatory for states; they now have the option to take it up to reduce losses.

“The idea is to promote competition, bring in efficiency and, above all, give choice to consumers to select their suppliers. This also opens the possibility of having suppliers based on the type of consumers (domestic, industry, and micro, small and medium enterprises),” said an official.

The plan proposes a “light-handed approach” towards franchisees to incentivise, discount and set tariff (within stipulated range) for electricity supply in an area.  

The criteria for applying as a franchisee is open for contractors who supply billing and metering infrastructure, central public sector utilities (CPSUs), and also any company with “experience of managing consumers through any direct interface”. The minimum net worth of such a company is expected to be equivalent to 35 per cent of the revenue billed by the discom in a base year in the region.

The Electricity Act, 2003, provides for setting up franchisee by the discoms. These also do not need any separate distribution licence. Some states have tried the franchisee model, but success has been limited.

Essel Utilities and Crompton Greaves were unsuccessful franchisees in Maharashtra.

The franchisee model is different from privatisation of discoms, as the latter includes overhaul in infrastructure creation. Franchisees earn revenue through efficient billing and bill collection. Their profit depends on revenue collection.

Delhi and Mumbai have private discoms that are hailed as success. In a contrast, privatisation of discoms failed in Odisha, after Reliance Power backed out.

Despite four different restructuring schemes in the past 15 years, the state-owned discoms continue to make losses.

The latest reform scheme, Ujwal DISCOM Assurance Yojana (UDAY), launched in 2015, aimed at both financial and operational reforms. This had only a minimal impact. After five years, losses of discoms have started going up again. As of March 31, 2019, the cumulative loss was ~28,000 crore (of 21 states).

Singh has been vocal about the second round of UDAY, which will focus only on loss reduction and improving the quality of power supply.

“Discoms can run and own the systems but have suppliers who will buy in bulk after paying upfront to the discom. We can’t increase jobs in the power industry unless we open up the distribution sector and allow more companies to compete with each other,” he said at the recent State Power Ministers’ Conference in Gujarat.

But even before an official launch, it has encountered dissent.

BJP-ruled Uttar Pradesh, which has highest number of loss-making discoms, is not in favour of the idea, said sources that attended deliberations in Gujarat. The state is of the view that they have aggressively created infrastructure and improved power demand and their priority is customers. Hence, they would not want any private company.

The private franchisees as suggested in the model would have to buy bulk power from the discoms and pay in advance. The franchisees are free to procure power from open market and directly from generating stations but they would be mandated to procure 50-70 per cent of their demand from the discoms, the plan suggested.

“The idea is to keep the revenues of discoms intact and is paid in advance. This would entail discoms also paying in advance to the generating stations it has signed power purchase agreement with,” said a senior official.