Tata Power Co. Ltd, which recently signed a power distribution franchise agreement with the Jharkhand State Electricity Board (JSEB), will invest Rs.500 crore in the Jamshedpur circle of the Jharkhand state. The country's largest integrated power company, which will upgrade existing infrastructure and distribution network there, also hopes it can reduce aggregate technical and commercial (ATC) losses to 13% from the current 33% in the new circle. This is Tata Power's first power distribution franchise, although it has distribution operations in Mumbai and Delhi with its own licence. A franchisee uses the distribution network owned by the state distribution company instead of setting up its own.
The franchisee, which is responsible for supplying power, needs to maintain the network and manage bill collection. The franchisee is also responsible for upgrading the distribution network to reduce technical and commercial losses, including pilferage. According to Planning Commission data, Jharkhand is one of the states with the highest ATC losses, pegged at 40%.
"We will be investing Rs.500 crore in improving the distribution network," said Tata Power's executive director and chief financial officer S. Ramakrishnan. Of this, Rs.400 crore will be raised through loans under the Restructured Accelerated Power Development and Reform Programme (R-APDRP) and Rs.100 crore from internal resources, he said. The company aims to reduce ATC losses to 13% over the next five years.
R-APDRP was launched by the central government in the 11th Five-Year Plan (200712) targeted at towns with a population of 30,000 or more with an aim to reduce ATC losses to 15%. Under the scheme, the central government gives financial assistance to distribution utilities implementing the scheme through soft loans and grants.
Tata Power is expected to take over distribution operations in the Jamshedpur circle by mid-2013.
The franchisee model has gained favour over outright privatization following the success of Maharashtra state- owned power distribution company Mahavitaran Ltd implementing this in the Bhiwandi circle.
In 2006, Mahavitaran entered into a franchisee agreement with Ahmedabad-based Torrent Power Ltd for the power loom town of Bhiwandi with ATC losses of around 48%. Torrent reduced this to less than 20%.
After this, power distribution in three other cities in Maharashtra—Nagpur, Aurangabad and Jalgaon—has been given to franchisees. They have also introduced in Madhya Pradesh and Uttar Pradesh.
"It is a easy and quick solution. Outright privatization is a complex exercise as it involves issues like asset valuation, resistance from employees, general political opposition, among others," said Kameswara Rao, executive director and leader of the energy, utilities and mining practice at audit and consulting firm PricewaterhouseCoopers.
According to Ajoy Mehta, managing director, Mahavitaran, reduction in ATC losses is a target for state-owned power distribution utilities, but for the private operator it is profit. "Our experiment with the franchisee model has been satisfactory," he said.
"The franchisee model has worked and it has improved quality of service for average consumer," said Ashwini Chitnis, senior research fellow at Pune-based thinktank Prayas, which carries out research on policy issues related to energy sector. "However, present franchisee agreements are skewed in favour of the franchisee, so there should be periodic review of the franchisee's performance and safeguards should be incorporated in the agreement to protect the interest of general consumers and the state power utility."