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July 2003

Distribution Franchisees
The Business Sense

Workable Solutions to help you make the difference


DISTRIBUTION FRANCHISEES
THE BUSINESS SENSE

DISTRIBUTION FRANCHISEES - THE CONCEPT


Distribution
A distribution franchisee (DF) acts as an intermediary Company
between the distribution licensee and its customers. In a
broader sense, the licensee provides exclusive sale rights
to an agency, which is solely responsible for maintaining
distribution and collection in the specified area. The Distribution Distribution Distribution
Franchisee Franchisee Franchisee
Electricity Act, 2003 provides for the setting up of a
distribution franchisee business in a specified area within
the area of supply of the licensee, with no separate license
or approval from the State Commission. Customers Customers Customers

BENEFITS OF A DISTRIBUTION FRANCHISEE NETWORK its activities outsourced


FThere is a reduced requirement on the management
This arrangement presents a win-win situation with significant time of the licensee.
advantages to both the distribution company as well as to
the end customers. Benefits to the Distribution Franchisee
FThe distribution franchisee will be able to provide
Benefits to the Distribution Company improved service to its members at a reduced tariff.
FThe Distribution Company has to deal with a single FThis arrangement provides a business opportunity for
agency rather than multiple customers. distribution company employees.
FA significant portion of the technical and non-technical
risk is transferred to the franchisee. Benefits to Consumers
FShifting the profit incentive to a point closer to the FShare in the saving due to loss reduction and
occurrence of the problem leads to improved monitoring, improvement in collection efficiency. This profit sharing
which will eventually help in reducing the technical and can often be in terms of discounts in tariffs.
commercial losses. FImprovement in service with the distribution network in
FMetering, billing and collection levels will improve with the control of their own association, or an agency which is
franchisee being responsible for these activities easier accessed.
FReduced capital and operating expenses with a part of

Distribution Licensee Distribution Franchisee

æ Deals
Deals with
with
a single
a single
agency
agency
æ Improved
Improved service
service
to to
members
members
æ
Transfer
Transfer
of of
technical
technical
andand
non-
non
- at reduced tariff
technical risk
æ
Business
Businessopportunity
opportunityforfor
æ
Reduced
Reduced capital
capital
andand
operating
operating distribution company
expenses
Benefits
employees
æ
Reduced
Reduced requirement
requirementonon
management time
æ
Share
Share
in in
savings
savings
due
due
to to
loss
loss
reduction
reduction
æ
Improvements
Improvements in in
service
service

Consumer

A WIN WIN BUSINESS PROPOSITION


Thus, there exists a strong business case for using distribution franchisees particularly in the industrial
segment, where commercial losses are higher than desired.
IMPLEMENTATION OF THE CONCEPT ISSUES IN IMPLEMENTATION

A typical implementation, suggested by CRISIL Infrastructure There are certain issues that need to be addressed
Advisory, would involve the following steps: before the parties concerned realize the benefits of
such an arrangement. Some of the issues are:
Identification Phase ÜThe ownership of assets how that should be
ÜIdentifying the area where such an initiative can be taken. considered for the purpose of calculating returns.
ÜSensitizing the various stakeholders in this area to the ÜSuccess in service levels within a short period of
potential benefits of such an initiative and seek their time to arouse and sustain consumers' interest.
cooperation in this process. ÜIssues relating to theft and non-payment.
ÜAchieving a proper energy accounting process. ÜIncorrect billing and unjust disconnection by the
franchisee
Transition Phase ÜPerformance guarantee by the franchisee
ÜAppointing franchisees with an initial focus on ÜParallel network distribution licensees
commercial loss reduction.
ÜClearly establishing the roles and responsibilities of the
franchisees and framing the terms and conditions of the
agreement for a management transfer.

Complete Transfer
ÜTransfer of managing the technical and commercial
responsibility to the franchisee.
ÜMonitoring and review of the implementation and
progress.

Management
Identification Transition Phase
Transfer

ÿèAppoint franchisees
ÿèIdentify region
initial focus on loss
reduction
ÿèTransfer of
ÿèSensitize stakeholders ÿèEstablish roles and responsibility as per
terms and conditions
to benefits
ÿèProper energy
responsibilities of
franchisees
ÿè Monitoring and review

accounting process ÿèFrame terms and of implementation

conditions of
agreement

IMPLEMENTATION

ROLE OF CRISIL INFRASTRUCTURE ADVISORY

We believe that we can play a substantial role in implementing this model for the benefit of all concerned. The services
that we envisage in this process include:
ÜIdentification of suitable areas by conducting studies to understand the socio-economic characteristics, load
characteristics and current loss levels.
ÜPresentation of the concept to targeted franchisees or the concerned distribution licensee.
ÜAssistance in agreeing on commercial loss reduction targets and profit sharing.
ÜDevelopment of the investments and profit sharing framework.
ÜDevelopment of the detailed financial model to decide on the initial term, profit sharing and discounts in tariff.
ÜDevelopment of the terms of the contract between the licensee and the franchisee.
ÜAssistance in implementing and monitoring on a regular basis.
Head Office
CRISIL House, 121-122,
Andheri-Kurla Road,
Andheri (East), Mumbai - 400 093
Tel: +91 (22) 5691 3001 - 9.
Fax: +91 (22) 5691 3000
Email: crisilinfrastructure@crisil.com

Branch Offices
Ahmedabad:
Paritosh Building, 3 Floor,
Near Darpana Dance Academy,
Usmanpura,
Ahmedabad 380 013
Tel: +91 (79) 755 0317 / 1533.
Fax: +91 (79) 755 9863

Bangalore:
W-101, Sunrise Chamber, 22,
Ulsoor Road,
Bangalore- 560 042.
Tel: +91 (80) 558 0899, 559 4802.
Telefax: +91 (80) 559 4801

Chennai:
Mezzanine Flr, Thapar House, 43/44,
Montieth Road, Egmore,
Chennai - 600 008
Tel: +91 (44) 2854 6205 / 8834.
Fax: +91 (44) 2854 7531

Hyderabad:
4, Nagarjuna Hills, ICICI Building,
Punjaguta,
Hyderabad - 500 082
Tel: +91 (40) 2335 8103.
Fax: +91 (40) 2335 7507

Sanjeev Aggarwal, Kolkata:


Head- CRISIL Infrastructure Advisory, 1A, Satyam Apartments, 1st Floor, 142/1A,
Tel. : +91 (22) 5691 3164 Sarat Bose Road,
Fax : +91 (22) 5691 3040 Kolkata - 700 029
e-mail: saggarwal@crisil.com Tel: +91 (33) 2287 3777/78
Fax: +91 (33) 2283 0597
Sanjay Kumar,
Head- CRISIL Infrastructure Advisory, New Delhi:
Tel. : +91 (11) 2372 1603 Hindustan Times House, 9th Flr, 18-20,
Fax : +91 (11) 2372 1605 Kasturba Gandhi Marg,
e-mail: skumar@crisil.com New Delhi - 01
Tel: +91 (11) 2372 1603
Fax: +91 (11) 2372 1605

Pune:
1187/17, Ghole Road, Shivajinagar,
Pune 411 005
Tel: +91 (20) 553 9064 to 67.
Fax: +91 (20) 553 9068

Website: www.crisil.com/advisory