Due to better power supply, the land cost went up and industries began moving towards Bhiwandi, Siddharth Mehta, CEO, Essar Power Distribution, informs R Srinivasan.At a meeting with Siddharth Mehta, CEO, Essar Power Distribution, he spoke about the various facets of franchisee, the learning experience from Bhiwandi, issues that impact the model, its pros and cons, and how it will pan out in the years to come. Excerpts of the interview:Kindly elaborate on franchisee as a contract.Franchisee is an arrangement that is acceptable under the Electricity Act 2003 whereupon a designated circle area based on the input energy bidding is handed over to the selected bidder and the roles and responsibilities of the franchisee are identical to the discom except that the franchisee has no role to play in the tariff increase or regulatory affairs.What is the business model in franchise – based on recoveries or reducing losses?The business model is simple. The prospective private player bids out for the quantum of energy input that is assured by the erstwhile discom to the circle, Capex spending for improvement towards reduction of losses are borne by the franchisee and the depreciated value of the Capex is paid at the end of the franchisee term. The gain due to loss reduction after servicing of debt, O&M and other expenses is basically the model. So the consumer is not burdened with the capex that the franchisee spends in improving the reduction in T&D loss whereas in a licensee case the burden of capex is always passed on to the consumer.What has been your learning experience from Bhiwandi? How will they differentiate your future projects from projects done earlier by you?Bhiwandi was learning not only from an organisation point of view [where I worked with Torrent] but also on a personal basis. The statement that there is rampant theft in Bhiwandi and the consumers are not paying can be easily misunderstood. There was a total lack of customer understanding and care. To give an example, in Bhiwandi, the transformers were repaired after failure after a period of 10-15 days on an average. The customers suffered. After Torrent took over, the transformers were repaired within one or two days and by the time I left, we used to replace the failed transformer within 24 hours. The customer was also not expected to pay for repairing of the transformers. But I was told that they had to pay before, which was a major grouse. Third, they had frequent break-downs over and above the scheduled load-shedding of 6 hours. While they had load shedding for six hours there used to be additional six hours of breakdown. Fifty per cent of the time there was no power due to load-shedding and poor maintenance practices.If you give the customer 18 hours of good supply, he will accept the six hours of load-shedding as the industries will be able to work uninterrupted for 18 hours. Then even if the tariff increases, he will have no issue in paying that increased tariff -- provided you take care of him in those 18 hours. This was the model we adopted. Take care of the customer technically, commercially or administratively and they respond. They did respond and the collection efficiency which was lamenting between 60-70 per cent within one-and-a-half years reached 100 per cent. Importantly this fuelled growth. In Bhiwandi the land cost rose by almost 30 per cent in one year because of good power supply and industries which were on the outskirts of Thane started moving to Bhiwandi and this brought in much more load growth to Torrent than they had anticipated. So franchisee also infuses economic growth to the country. That is most important.Torrent was named best ‘Power Distribution Management Company’ by the Ministry of Power for two consecutive years. By when can we expect Essar to bag such a title?We will enter into distribution shortly and have applied for a Mumbai distribution license. We are in the process of studying the area and will revert to the MERC with our application.In late 2009 about 50-odd cities were expected to adopt the franchisee model. Also apart from Bhiwandi, the Torrent model didn’t work well in Agra or Kanpur. So what makes the company confident that this model will work?Every area has to be studied in detail and once you have done a proper due diligence of the area and whether it is a license area or franchisee area or for that matter any model, it is important to tackle T&D losses, have the right customer care and the right O&M facilities for the customer and the political will of the state. If you take care of these three things, there is no reason why one should fail in any of the areas.Which states have been selected for the model and why?Madhya Pradesh, Maharashtra, Haryana, Karnataka and Jharkhand have been identified which are very active in franchisee. We [Essar] will plan in all the states of India. These states have high loss and there is scope of improvement by bringing in the desired Capex.What measures will the company undertake in its distribution franchise apart from 24x7 call centres, mobile vans for onsite services, more technologically advanced solutions etc?Our focus will be on ensuring that once the improvement in services takes place to reduce T&D losses and bring in 24x7 of power to the areas. We will bring in world-class technologies, smart metering, etc.Input-based franchise model improves power supply for consumers and revenue collection for discoms but its success depends on successful execution. So what are the challenges (also in recovery model of franchise and input model) and what can be done to overcome them?In a recovery [collection contract] model you appoint an agent to collect money, whereas in a franchise model he brings in improvements and better technology for the consumer. If there is an overhead line in a dense city area the franchisee, especially a big player, will plan underground cabling whereas in a collection model he will restrict his planning, do some metering and collect the money without overall improvement on supply. Thirdly, no big players will go in this model. For big players to come in the model has to be substantially large enough and it should at least have an input energy of 2,500 million units so that they can bring in their expertise, people, suitable partners and the right technology.Of the major challenges that the country is going to face, the first one is to reduce the subsidies that are being given by the central government to discoms by improving the efficiency of operation. Second is to allow private players to bring in their own power for their designated area. The third challenge will be man management and cultural differences between the private player and the utility or the franchise circle taken over.Despite Bhiwandi’s success, two issues impact the franchise model. They are: A) Inadequate power supply: The franchisee model aims to cut distribution losses but in turn depends on the utility for power supply B) Rehabilitation of existing employees of the utility: It is not obligatory for the franchisee to take on employees of the utility. So what can be done about these issues?The franchisee should be permitted to bring his own power in the interest of consumers at the prevailing competitive market rate. This will bring the desired customer satisfaction and fuel growth in the region. The Regulatory approval plays a key role and this must be supported by the States.As far as the discom employees are concerned, their biggest fear is that a private player coming in does not have job security. Big players can assure that they are in the right hands and working with the right people, and since most of the people from the discoms are equally competent [to private players], which was the example in Bhiwandi, the reward and recognition mechanism should be fair to all the people across the board thereby ensuring a level-playing field across the board.Comment on the scenario of franchisee model in implementation, pros and cons of the model and how it will pan out in the years to come.The Shunglu committee has recommended 255 towns under franchisee and with the subsidy burden further increasing, at least 50 - 100 franchisees will be on offer in the next two to three years and ultimately competition would bring in desired improvement in the distribution sector with new technologies. As our economy grows, the demand for quality power will increase and the consumer would be willing to pay more for all these new technologies.Is Open Access a step in the right direction since it may affect MSEDCL?Open Access must take care of the interests of discoms. A state discom plays a big social role by serving the people who are below the poverty line and by resorting to Open Access we are taking away his cream paying customers from him. Obviously there will be some resentment by discoms to protect their interests. So there is a need to find an acceptable solution for bringing Open Access to these high-paying consumers.Your views on uniform tariffs and its viability in Maharashtra.When you bring uniform tariffs there must be a fuel adjustment because fuel today is critical and there have been far too many fluctuations in the last two years. Therefore there should be a component to adjust.What are the issues, challenges and potential of a tariff hike?The major issue is fuel. If you want growth in this country you should ensure that fuel is made available to all power plants. Also loss reduction in distribution will be key to meeting tariff reductions. Unit saved is money earned thereby reducing the need to buy costly power. So loss reduction will play a big role.If tariffs are hiked, as per global benchmarks, will the customers be able to afford such a hike?I do not think that there will be a major tariff hike in the next two years because the elections are due. Increasing tariffs may mitigate your problem for a short duration but ensuring proper systems and loss reduction programmes would be better long-term measures.
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