Rethinking Franchisee Efficacy in India’s Power Sector: A Critique of Input-Based Distribution Models

Abstract

In the Indian electricity business, a franchisee is an entity appointed by a distribution company to undertake all distribution operations within a specified area, except for power procurement and planning. The distribution company remains responsible for regulatory and legal compliance. It supplies electricity to the area, and the franchisee pays a fixed, predetermined rate per unit of the electricity supplied, known as the “input rate.” The franchisee aims to make profits by reducing losses to a lower degree (and quicker) than the level indicated by the input rate quoted in their bid. This arrangement is known as the “InputBased Distribution Franchisee” (IBDF) model.

Inspired by the success of Bhiwandi, franchisees have become a major element in the electricity distribution reform toolkit. They are prescribed as a standard measure for reducing technical and commercial losses to all the loss-making electricity distribution companies. Bailout packages, ranging from the Financial Restructuring Plan of 2012 to the latest Revamped Distribution Sector Scheme (RDSS) in 2023, have advocated implementing franchisees as a solution for reducing distribution losses. Although policymakers favour the franchisee model for loss reduction, evidence from on-the-ground experiences suggests otherwise.

Currently, the IBDF model and its variants are implemented in about twenty-eight divisions or circles across nine states. Of these, only twelve are operational, and the status of four remains uncertain due to the absence of publicly available data. Although operational franchisees often claim significant loss reduction, most of this data is self-reported. Despite contractual requirements and regulatory directives, independently verified third-party audits of their performance are frequently delayed or not publicly available. Data regarding their capital expenditure plans and actual capitalisation is also not available in the public domain; unlike similar data for the distribution company, which is usually publicly available through the tariff revision process.

The analysis also reveals serious limitations in the distribution company’s ability to enforce contractual terms and conditions that safeguard its financial interests. It reveals that most state regulatory commissions view the franchisee as a vendor or subcontractor of the distribution company and hence they do not monitor its operations or performance. In cases where commissions have intervened, such as in Uttar Pradesh, their jurisdiction has been challenged, with the matter pending before the Supreme Court of India. Contractual disputes between distribution companies and franchisees have also arisen, leading to complex and protracted legal or arbitral proceedings with financial impacts on consumers.

Considering these experiences across various states, the paper advises caution in prescribing the IBDF model as a “standard” policy solution for loss reduction. While the franchisee was once viewed as an alternative to privatisation, which was deemed more difficult and challenging to implement, the ground reality shows that without political support for the franchisee—a private player—the model is unlikely to even take off, let alone be sustainable. In other words, the franchisee model does not circumvent the need for political support, arguably the toughest challenge in the privatisation process.

With the rapidly unfolding energy transition, the nature and role of the traditional distribution company is also evolving. In this context, when considering a shift in ownership structure to attract investments or enhance managerial efficiency, a stronger case emerges for privatisation as opposed to the franchisee model. In privatisation, greater ownership provides a stronger incentive not only to reduce losses, but also to enhance the overall network, service delivery, and introduce innovative practices to stay relevant in the industry. More importantly, in privatisation, the accountability of the licensee to the regulatory commission, consumers, and the public at large is more direct and hence greater and much stronger.