Inspired by the success of the "Bhiwandi Model” in the late 2000s, franchisees have become a mainstay of the electricity distribution reform toolkit. Bailout packages ranging from the Financial Restructuring Plan of 2012 to the latest Revamped Distribution Sector Scheme (RDSS) in 2023, advocates are implementing franchisees to reduce losses.

While the policy prescription is unequivocal, the ground-level experience suggests a different story.

What is a Distribution Franchisee?

A franchisee is an entity appointed by an electricity distribution company (discom) to undertake all distribution operations within a given area, except for power procurement. The disco remains responsible for regulatory and legal compliance. It supplies electricity to the area, and the franchise pays a fixed, pre-determined rate per unit of the electricity supplied known as the "input rate.”

The franchise aims to make profits by reducing losses lower (and quicker) than the level indicated by the input rate quoted in its bid. This arrangement is known as the Input-Based Distribution Franchisee (IBDF) and is the most prevalent model currently adopted by discoms nationwide.

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Status and Data Unavailability

To date, 28 franchisees have been implemented across nine states. Of these, only 12 are operational. These include Torrent Power Ltd which operates three in Maharashtra and one in Uttar Pradesh, CESC Ltd which operates three in Rajasthan and one in Maharashtra, FEDCO that runs two in Meghalaya, Sai Computers which runs two in Tripura and Tata Power Ltd which operates Ajmer franchisee in Rajasthan.

Out of these 12, the status of the two in Meghalaya and two in Tripura could not be assessed due to the unavailability of public data.

Regarding loss reduction, except in the case of Bhiwandi till FY 2016, when its distribution loss was 24 percent, and in the case of Agra till FY 2015–16 when it was 32 percent, there is no publicly available third-party audited data on distribution losses for any of the operational franchisees.

All franchisees claim significant loss reduction in their annual reports, but this data is self-reported. Despite contractual requirements and regulatory directives, independently verified third-party audits of their performance are either delayed or publicly unavailable.

Data regarding their capital expenditure plans and actual capitalization is also publicly unavailable. However, similar data for the discom is publicly available through the tariff revision process.

Discom’s Inability to Enforce Contractual Provisions

Almost all state experiences highlight the discom’s failure to enforce contractual terms about third-party audits and other provisions that would secure its financial interests.

The discom’s monthly revenue from the franchisee depends on an accurate assessment of the Average Billing Rate (ABR) for the base year, which forms the foundation for its revenue calculation.

As per the franchisee contract, it should be audited and verified within 90 days from the signing of the contract. Despite this, it has been found that the third-party independent audit of the base-year ABR was not conducted on time in many cases.

Annual ABR audits are also similarly pending or at least the reports are unavailable in the public domain. Despite regulatory directives for undertaking these audits which would secure their revenue from the franchisees, the discoms seem almost reluctant to take steps in this regard.

Stable Political Support is Crucial to Franchisee Success

Since franchisees need to operate in chronically high loss-making areas, they need to break entrenched patterns of electricity theft and illegal usage. This needs political support and cooperation from the state administration.

Even the mere continuation of franchisee contract after say, a change in the state political leadership, can become challenging, as the Jharkhand example demonstrates.

The experience of Madhya Pradesh also shows that without political will and support, it is not possible to set up franchisees, let alone sustain them. Franchisees are often seen as a benign form of privatization when the latter seems politically infeasible. However, this need for political support puts them at par with privatization when evaluated from a structural reforms point of view.

Terminating Bad Contracts is Expensive

Terminating a contract is time-consuming and expensive. Presently, there are at least four contracts (two in Maharashtra and two in Odisha) that are under arbitral proceedings and the estimated impact is more than Rs 1,000 crore.

This is not the latest or the final number as the impact in the case of one franchisee is not yet known. The point to note here is that the cost of litigation and the liabilities caused by contract termination are non-trivial.

Thus, instead of receiving benefits from the supposed efficiency gains by appointing franchisees, the discom is likely to end up with dues and bad debts. Hence, there's a need for caution.

As the energy transition unfolds, the role of the discom is transforming. With the reduction in prices of renewable energy sources and storage systems, large and high-paying consumers are likely to move away from the discom and manage their supply. Thus, the discom of the future might be largely a wires company that would also cater to small, rural, and agricultural consumers.

In such a system, there needs to be a robust framework for incentivizing efficient distribution network development and management while ensuring non-discriminatory access to all its users. The key challenge would be to respond to these changes in a timely, nimble, and cost-effective manner. The experience with franchisees so far does not generate confidence that the model can deliver under such evolving circumstances.