Franchising electricity distribution operations as a way of improving service delivery in the power sector
More than two years after the conclusion of the power sector privatization process, the Power sector seems to have gotten much worse. Generation is at an abysmal low; system collapses are now more frequent, and the much-touted investments and efficiency in the power sector is yet to materialize.
Even worse, the power sector is faced with huge liabilities that require urgent government intervention to avert a financial collapse of the sector. Under the CBN-Nigeria Electricity Market Stabilization Facility (CBN- NEMSF), the CBN has injected over $1billion (N197/$) just to cover liabilities in the power sector from November 2013 to December 2014 as well as legacy liabilities to the gas sector.
The CBN is looking at an additional injection of over $600million to cover further liabilities from January 2015 to February 2016. The CBN-NEMSF financing to the power sector is at an interest rate of 10 percent per annum and will cost electricity consumers over N124 billion in interest payments alone, over the next 10 years. In addition, the Nigerian Bulk Electricity Trader (NBET) seeks to raise a minimum of $1.5billion debt financing in long-term bonds to finance future liabilities in the power sector.
Geographical Coverage Areas of Discos
A factor not usually considered in the poor service delivery of Discos is their geographical coverage areas. All Discos, with the exception of Eko Disco and Ikeja Disco, cover a minimum of four states. Lagos State has the unique advantage of having two Discos. Enugu Disco operations cover the five states of the South East.
In our view, the current geographical coverage of Discos is unsustainable to allow for efficient operations and customer service delivery. Had Discos been unbundled along geographical state coverage i.e. one Disco per state, we would have had at least 36 Discos, with the resources of each Disco serving a state dedicatedly as opposed to being spread too thinly across four states to provide efficient customer services.
While not readily admitted, business districts of a Disco that are located outside of the city or state wherein the Disco headquarters is located, struggle to receive funding and materials to efficiently carry out their operations. They often have to escalate and wait for decisions and even minor issues, to be resolved at headquarter levels.
The Concept of Electricity Distribution Franchise
Electricity Distribution Franchise is an emerging PPP model pioneered in the Indian electricity distribution sector. Under the electricity distribution franchisee arrangement, specific functions for a demarcated area within the total licensed area of distribution is franchised out by the distribution utility to a private sector entity, while the Distribution company retains the ownership of assets.
The appointed Distribution Franchisee provides certain services to consumers in the service area on behalf of a Distribution Company, including corrective and preventive maintenance of network, breakdown rectification and other routine operation and maintenance of the distribution system, attending complaints, meter reading & bills distribution as well as attending to the commercial complaints of the consumers within the service area as set out by the main agency. The Distribution franchisee is responsible for the collection of money in the service area and commits to reduce the collection and distribution losses as per terms and conditions of franchise agreement between both parties.
Initially, such an arrangement was restricted to outsourcing of basic functions such as billing, collection and repair & maintenance (R&M) of transformers. Over time, it evolved into incentive-based arrangements for the private sector to invest in the distribution network and be responsible for all functions after receiving energy from the utility right up to collection of revenues from consumers.
How to Structure a Distribution Franchising Opportunity
The distribution-franchise model was first tried December 2006, when Maharashtra State Electricity Distribution Company Ltd (MSEDCL) in India gave Torrent Power, a private entity, the rights for the Bhiwandi circle. Bhiwandi circle is textile hub, where 60 per cent of the demand comes from the textile factories and has a customer base of about 200,000, spread over 721 square km.
The Maharashtra example provides a template for franchising Disco operations in Nigeria. We expect any franchising structure would be based on service improvement, aggregate loss reduction, customer complaints satisfaction and improved revenue collection services. It cannot and must not only be about revenue collection alone, which seems to be the focus of Disco operators.
The advantages of well-structured Disco franchise operations are numerous: it improves operational efficiency of Discos. Save for major faults at certain voltage levels (possibly at 33kV), customer complaints are quickly attended to and resolved as the franchisee is on ground and remuneration is incentive based. Service improvement and customer satisfaction in our view should be the primary driver of any Disco franchisee structure. Resolving customer complaints in a timely manner actually increases Disco revenues.
Also, franchisees can take upon themselves to secure operational/working capital to finance their operations in their areas of operations. Lenders are able to better assess their operations and provide working capital to the Disco franchisee being that the cash flow from the franchisee area of operation may be ring-fenced. At the moment, most Discos are unable to secure significant working capital to finance their operations. Discos have very few operation field vehicles, which are insufficient to service even one business unit.
Lastly, franchisees are better able to carry customer enumeration exercises as well as metering services on behalf of Discos. Proper customer enumeration and metering are key success factors in Disco operations. In addition, franchisees are able to address the issue of electricity theft via meter bypasses or unauthorized connections within their areas of operations without deploying much capital in doing so.
The input and investment based franchise model is the most prominent franchise model for distribution of electricity in India. Distribution Franchise model has been implemented in various Indian cities for supplying electricity to the consumers, and was able to bring down the AT&C losses by more than 20 percent during its period of operation.
Over the years, government of India has continuously been voicing intentions of implementing distribution franchise model in 200 cities based on the success of distribution franchisees in the cities of Maharashtra, Uttar Pradesh and Odisha. In Varanasi district, AT&C losses were over 30 percent in 2014, resulting in inadequate power supply, thereby calling for the implementation of distribution franchise model in the district.
Currently there are several prominent Indian companies that are operating as power distribution franchisees in India such as Torrent Power, SPML Infra, Essel Utilities, Feedback Energy Distribution Company and CESC Limited.
Franchising Disco Operations in Nigeria
To address the service delivery challenges currently facing Discos, we suggest NERC and the Discos look at the Distribution Franchise model and the possibility of franchising specific areas of their network geographical coverage areas to third party Disco Franchisees. Disco franchising operations, if well structured, should allow 3rd party operators provide revenue collection and protection services, fault clearance, network operations and maintenance services, meter reading and inspection services and customer services to electricity customers on behalf of the Discos.
At the moment, a number of Discos seem to be operating some form of franchising or rather outsourcing in the area of revenue collection, whereby revenue collection services have been outsourced to third-party revenue collectors. Beyond outsourcing revenue collections, Discos need to start looking at broader franchising opportunities in rural areas and in areas with high losses.
Disco Franchisees can be the state or local government, private third party utility companies, estate associations and even community unions with the financial and technical means. However, Disco Franchisees must emerge from a competitive bidding process with clearly defined bid parameters, operational outputs and standard operating procedures during the contract period.
ODION OMONFOMAN
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on orionomon@outlook.com