With the coming of Electricity Act 2003, the power sector, which was highly regulated with lot of licensing requirements, is in the throes of a long awaited change.

The licensing requirements have been reduced, as the generation company will be free to enter distribution business and vice-a-versa. Read more

Industry Wish List Tax on dividend for power companies to be removed, as it is not the pass through. Since companies have post tax 16% return guarantee, dividend tax is extra burden on companies. All infrastructure projects should be granted tax exemption for first 20 years. Not even MAT should be levied. Custom duty on fuel and equipments should be removed because fuel cost being a pass through, increases the power tariffs. This beats the main aim of power generation companies. CII has recommended implementation of N K Singh committee report for fiscal reforms in the power sector to continue.  Budget over the years Budget 2001-02 Budget 2002-03 Budget 2003-04 10-year tax holiday for investments in infrastructure continues. For investments made prior to March 2003, the tax holiday is applicable on retrospective basis. There was also mention of increasing user charges for services provided by the government. But there is no clarity on that An accelerated rural electrification program with an outlay of Rs 1.6 bn was provided. APDRP outlay enhanced to Rs 35 bn (from Rs 15 bn earlier). The focus of reform has shifted from generation to transmission and distribution. Setting up of an infrastructure equity fund of Rs 10 bn to provide equity investment for infrastructure projects. For development of the power infrastructure, the FM announced that mega power status would now be given to all power projects meeting the existing norms. Customs duty reduced on high voltage equipments from 25% to 5%. Import of capital goods relating to water treatment exempt from duties.
Key Positives In order to plug the existing demand supply gap, India has plans to add nearly 150,000 MW capacity over the next decade. So demand growth is not a constraint. But adding capacity has various limitations. If government is willing, investment in the power sector could grow at a faster rate. The Electricity Act 2003 provides great opportunity for power companies, given its abolishment of various licensing norms, liberalisation on the power distribution side business and opening of power trading for private power companies continues to be a big positive. Provision for unbundling of power generation, transmission & distribution companies has been laid. This will result in reducing T&D losses, as incentives to these private players are directly linked to reduction in T&D losses. Passage of the Securitisation Act was another major development, as power companies will be able to pursue their expansion plans with ease.		Key Negatives With the allies of the newly formed government demanding changes to some of provisions of the Electricity Act 2003, the reform process may be delayed. The T&D losses, which are still on the higher side, results in lower effective realisation of per unit of power produced by generation companies. Poor T&D infrastructure remains a cause of concern. It is due to the poor T&D infrastructure and few other factors, the losses are on the higher side as compared to other countries. As a result, the industry is able to deliver much than its actual potential. This in turn has also affected the ability of players to reinvest in the sector. Poor financial health of SEBs continues to be cause of concern. Though some measures have been taken to address this issue but the measures have been half backed. Inability to take hard decisions has been impacting industry fortunes.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.