SMECO PROPOSES RATE INCREASE
Originally Published: February 23, 2023
SMECO is proposing a rate increase for customers to bring in an additional $15.75 million in revenue. This increase translates to an overall increase of 8% on the bill for the average customer. They have filed documents with the Maryland Public Service Commission (PSC) to gain approval.
Among the reasons for the proposed rate increase, SMECO cites the following:
costs associated with completed the Advanced Metering Infrastructure (AMI)
paused payment collections associated with their Bill Stabilization Adjustment revenues after an unexpected increase in energy cost last year
ability to increase their debt service ratio to borrow more money and maintain access to financial institutions with competitive borrowing rates
SMECO has added over $220 million in new utility plants between 2018 and 2021, including a $41.1 million cost related to the AMI
Witness testimony has been filed online, including witnesses from within SMECO as well as from the Office of the People’s Counsel for the State of Maryland (OPC). OPC works to improve utility performance and protect residential utility customers from unfair sales practices and unreasonable service rates.
The testimony from Dr. Marlon F. Griffing of the OPC refutes SMECO’s argument for the $15.75 million increase. Here are his main points:
SMECO is asking for debt service coverage of 1.85%
SMECO’s ask is supposed to help increase their credit rating from BBB+ by two points, to A+, which they argue will lower borrowing costs in the future
No SMECO witness identified or analyzed what the magnitude of lowering borrowing costs might be if a higher credit rating were achieved
Dr. Griffing recommends a debt service ratio of 1.75%, which would only require a $6,879,409 increase in revenues, nearly $9 million less than what SMECO is asking
Bill Collet, of the Collet & Associates investment banking firm, points out in his testimony that “there is no single financial metric…that is required for any specific credit rating.”
Dr. Griffing further argues against the rate increase:
When asked to provide estimated savings by increased credit ratings, SMECO says “it would be impossible to estimate annual savings to SMECO customers.”
SMECO offered a hypothetical situation where they borrow $100 million, saying with a better credit rating they would get a 4.98% interest rate versus 5.37% under the current rating, a savings of $291,736 in interest annually.
Griffing says the $15.75 million would increase SMECO’s debt service ratio from 1.498% to 1.850%, and states “SMECO has not provided an estimate of any specific immediate benefits or future benefits from lowering the cooperative’s borrowing costs.”
SMECO is concerned future debt offerings may encounter objections from traditional lenders because it is approaching single borrow credit limits. Dr. Griffing points out that SMECO successfully borrowed $150 million in long-term debt in 2022, and has the option of private bond placements in lieu of traditional lenders.
Finally, Dr. Griffing states SMECO’s debt service ratios since 2015 have ranged from 1.59% to 1.87% through 2021. A ratio of 1.75%, as he suggested, is above the midpoint of that range. A “$6,879,409 adjustment to the SMECO revenue requirement will bring the SMECO debt service ratio to 1.75%.” Further, “experience shows that SMECO has not experienced a lack of access to capital. Thus, it is not reasonable to authorize an additional $8.87 million in higher rates for SMECO member-customers for unproven benefits.”
You can provide feedback by attending the Public Forum in person, or by submitting feedback through the PSC’s online portal. Click the link below to find the link to their website.
You can view all associated documents with the requested rate increase by clicking the link below, then clicking on the case number “9688” highlighted in blue in the document.
https://www.psc.state.md.us/.../Public-Comment-Hearing...
Comments must be submitted by May 1, 2023. The PSC will make a final decision by June 30, 2023.
