Power distribution firms shine in Maharashtra

With the recent awarding of electricity distribution franchises to Torrent Power and CESC in Shil-Mumbra-Kalwa and Malegaon circles, Maharashtra state has now been at the forefront of involving private companies in improving power distribution through better efficiency. This will help lower losses in transmission and generate higher revenue for the state. 

But, can the private sector better the situation despite years of neglect by state-run distributors?

Bhiwandi was the first instance of electricity distribution being given out in the country as a franchise model when Torrent Power in 2006 was awarded a 10-year contract for a circle with Transmission & Distribution (T&D) loss of more than 64% and transformer failure rate of above 42%.

After achieving success in Bhiwandi where the contract with Torrent was extended, Maharashtra government implemented input-based franchisee model in Nagpur, Aurangabad and Jalgaon.

Not all the experience were good though.

After a gap of about eight years and after the cancellation of two distribution franchisee mandates, MahaVitaran, or Maharashtra State Electricity Distribution Co, invited proposals for areas under Thane urban circle, Akola urban division and Malegaon within Nashik Zone. 

MahaVitaran has recently selected the winners. 

Torrent was the most aggressive winning Shil-Mumbra-Kalwa and emerged the second preferred in Malegaon which went to CESC.

Akola has been dropped, for now, sources said.

As per the contract, Torrent will have to reduce the aggregate technical and commercial (AT&C) losses to 15% from 46.73% while CESC will have to bring down losses to 15% from 45.30%.

The targets are a challenge though achievable, says industry expert Murhari S Kele, former chief engineer at Mumbai circle of MSEDCL.

“While private players can bring down T&D losses as we have seen in Bhiwandi and elsewhere, both the circles where distribution franchisee have now been finalised are notorious areas with numerous small industrial units which don’t pay electricity bills,” Kele, who also worked at the Bhiwandi circle, told DNA Money.

Giving out distribution franchisees to the private sector has proved to be beneficial for the health of companies involved.

Torrent Power’s distribution franchise operations in FY18 saw a sharp reduction of 5% in AT&C to 19% in the previous fiscal from 24% in FY17.

“We will continue to invest in improvement and expansion of network and customer services to further reduce the AT&C losses and bringing in more consumers,” said Samir Mehta, chairman of Torrent Power at the last annual general meeting of the company.

India Power, which started distributing power to consumers of Gaya in Bihar in 2014, has brought down transmission and distribution losses from 82% to 35%.

Reduction in T&D losses means higher revenues for the franchise operator, leading to more investment in distribution infrastructure, which, in fact, is part of the agreement drawn up by the state-run power companies and private sector franchisee.

Currently, the distribution franchisee model in Maharashtra is being successfully operated in Bhiwandi by Torrent Power while Essel Utilities-owned SND Ltd takes care of distribution franchisee for Nagpur city in three divisions of Gandhibagh, Civil lines and Mahal.

Despite the early success in Bhiwandi, the experience of private sector managing distribution franchisees haven’t been successful everywhere.  MESDCL in 2014 cancelled distribution franchisee of GTL for Aurangabad divisions and took away possession of all infrastructure with a demand notice for immediate payment of outstanding dues of Rs 393.07 crore.

Crompton Greaves’s contract for Jalgaon franchisee given in 2011 ended in a messy note in 2015 with dues mounting.

The private player in 2014 complained to Maharashtra Electricity Regulatory Commission that MESDCL violated terms by transferring a large set of consumers within Crompton Greaves’s distribution franchise area to Jalgaon Energy, a company floated to distribute power to Khandesh Mill area over 20 acres.

The dispute has now been settled between Crompton Greaves and MESDCL following which the company has written off Rs 79.56 crore which it claimed was due from MESDCL while balance Rs 74.80 crore would be paid by the state-run entity to Crompton Greaves as and when power bill dues are collected from consumers in Jalgaon, according to the annual report of the company.  

Torrent’s winning of Mumbra franchisee hasn’t gone down well with a certain section of the political class.

The opposition, to some extent, is triggered by recent reports of consumer dissatisfaction post Adani Transmission taking over consumers of Mumbai from Reliance Infrastructure. 

“The Malegaon franchisee would be our entry into Maharashtra and we would be participating in future opportunities as well,” Sanjiv Goenka, chairman of CESC said.

“We now have a very strong distribution business platform which will allow the company to participate in the opportunities arising from deregulation and privatisation of electricity distribution in India,” said Samir Mehta, chairman, of Torrent Power, at the annual general meeting of the company.

In a DF model, the key driver of profit is the pace and scale of reduction in AT&C losses.

The winning bidder is selected on the price of input energy it will pay the distribution company (MESDCL in case of Maharashtra).

DF has no role in fixing tariff which is determined by the regulator for the discom's operating area.

Capex, in most cases, is generally low as the basic infrastructure for supply of electricity is already in place. 

"We believe privatisation of the distribution function will continue to gather pace as public discoms burdened with high losses and vast operating area take steps to manage their operations. Unlike the past, the recent privatisation initiatives are dominated by few players with wide experience in distribution function. The recent privatisation of four distribution circles in Rajasthan saw limited competition," Motilal Oswal Securities said in a report.

In Rajasthan, three circles were won by CESC and one by Tata