Concept Paper on Power Distribution Franchising

Background

The existing model of urban electricity distribution has proved deficient in many respects, chiefly on
account of the unacceptably high aggregate technical and commercial (ATC) losses, less than satisfactory
quality of supply, customer services and declining man power.

These results in incapacity of distribution companies 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 –

A. To raise the tariff, meaning the consumer pays more than he should, or

B. The government subsidises – again not feasible, or

C. 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.

Legal Framework
In order to improve the performance of the sector, bring in financial and operational independence and
create conditions for the competitive and self-sustainable development of the power sector,
Government of India enacted “Electricity Act 2003 (EA 2003)” with effect from June 2003 which provides
legal framework for setting up distribution franchisee through section 14 stating

“…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 license from the concerned State Commission and such
distribution licensee shall be responsible for distribution of electricity in his area of supply”.

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): Sub-
clause 27]”

The definition is best explained with the help of the following figure:
Objectives
The objective of distribution franchising is achieving greater management flexibility for efficiency
improvement measures and to introduce more effective operational practices. The aim is to design and
implement an institutional arrangement for ensuring sustainability of electricity supply, qualitative
transformation of the electricity distribution system and customer services and facilitation of superior
social and economic outcomes by appointing franchisees in these areas. By this arrangement it is
expected that the Distribution Franchisee would bring about qualitative improvements in quality of
supply, customer service and commercial performance of the franchise area by reducing the present
level of losses on account of technical and commercial losses.

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.

Franchisee as a partner helps the franchiser achieve revenue sustainability while enhancing consumer
satisfaction
General obligations of the Distribution Franchisee
The Distribution Franchisee (DF) performs all the obligations of the Distribution Company as an agent in
the franchise area. It procures power from the utility at the rates quoted at the time of bidding and
distributing the same to consumers in the franchise area at the tariff and charges notified by State
Electricity Regulatory Commission (SERC) from time to time. The utility has to supply a minimum level of
energy plus some annual growth (if additional energy is available with the utility. The DF generally has
the freedom to procure the remaining requirement of power from other sources, through the utility, for
demand exceeding the quantity supplied by the utility. To achieve the committed level of ATC Losses,
the DF is expected to plan and implement a minimum agreed level of investment in the franchise area
for improving and upgrading the system.

Roles and responsibilities of a Distribution Franchisee

Roles and responsibilities of a franchisee are decided by the utility and could vary as follows:
Techno-Commercial Arrangement under Input based Distribution Franchising

1. The Franchisee needs to purchase electricity at a predetermined tariff from the Utility termed as
“Bulk Supply Rate (BST) and distribute in the designated area.
2. The energy is measured at pre-decided input point for example 33KV side of 33/11 KV
transformer.
3. Below the input point all the commercial activities are undertaken by the franchisee including
supply related consumer complaints
4. The income is dependent on the level of billing & collection is the area of prime focus by the
Franchisee
5. Franchisee is extensively involved in loss reduction and collection efficiency improvement since
the franchisee gains are proportionally linked to the AT&C loss improvement.
6. The Franchisee earnings is the gap between the collection (after meeting all his operating
expenses) and the amount to be paid to the Utility for the Energy Input to the Franchisee to the
designated area.
7. The Input rate is dependent on the anticipated cost of Operation and Maintenance of the 11 kV
and LT network in the Franchisee area. These costs can be considered while calculating the BST
by the Franchisee