SMECO Proposes Rate Increase

Originally Published: July 11, 2024

Utility Needs Add’l $37.9M In Revenue

According to a July 10th press release from the Maryland Public Service Commission (PSC), SMECO requested a rate increase as of May 2024. “The company proposes a rate increase of $37.9M…an approximate 11% overall bill increase for the average customer-member.” Rate increases requested by SMECO are considered by the PSC during a public hearing. If granted, the increase will affect all customers in Calvert, Charles, Prince George’s and St. Mary’s counties.

SMECO, in an application filed May 1st, writes it’s “experiencing mounting financial pressure to meet all of its customer-member and financial obligations…The increase is necessary to maintain financial integrity, meet debt-service obligations, continue providing safe, reliable and affordable service” among other priorities. SMECO claimed a net loss of $8.5M for the “electric distribution line of business.”. The Board of Directors, elected by SMECO’s customer-members, approved the proposal in April. With a proposed effective date of May 31, 2024, the request is a “10.92% increase ($18.56/mth) for the average residential customer” based on a use of 1100 kilowatt hours per month.

SMECO’s President & CEO, Sonja M. Cox, provides further background in her testimony. Cox says “customer-members help finance SMECO’s business by using its service and by allowing the Cooperative to retain any money collected in excess of actual operating costs as ‘capital’.” At the end of each year, “capital credits” are entered in SMECO’s accounts for each customer-member, which are then issued as small refunds over a “35-year cycle.” Rates will increase between 8.49-12.54%, Cox said, depending on customer type.

Testimony from several witnesses on behalf of the Office of People’s Council (OPC), a body charged with representing the interests of utility customers, gives an opposing view.

James A. Lenko writes “SMECO’s claimed revenue deficiency is overstated by approximately $19M” from overestimating inflation-related cost increases. SMECO’s estimated inflation increases for 2024 and 2025 are 5.63% and 5.18%, respectively. But, the numbers are based on the past few years, when inflation was at a historic high. Lenko argues these numbers should be based, instead, on economist projections due to falling inflation. The “June 2024 Blue Chip Financial Forecasts” projects inflation to be 3.1% in 2024 and 2.4% in 2025,” much lower than SMECO’s projections. Additionally, Lenko demonstrates SMECO’s failure to account for new customer growth, which has been positive year over year.

Ron Nelson, another OPC witness, summarizes “SMECO should reduce the proportion of costs allocated to the residential class.” Nelson describes a Cost Of Service Study (COSS) used to find “which customer classes caused the utility’s various embedded costs associated with providing service.” Then, “costs are allocated to customer classes based on each class’s contribution to the particular cost.” The rate of return (ROR) describes income from customers vs. investment to provide service. “The residential class is over performing compared to the overall system…while most general service and large power classes are markedly underperforming and not paying their cost of service,” Nelson explains.

SMECO’s suggested rate increase “places over 70% of the [burden] onto the residential class.” This is problematic because “higher customer charges, by definition, shift cost collection to lower usage customers,” Nelson said. In fact, the burden is larger on lower income households. In Maryland, the average energy expense across all incomes is 2%, but it’s 18% for households below the federal poverty level. “In 2022, 13% of Maryland’s population lived below 150% of the federal poverty level,” according to Nelson’s testimony. In his recommendation to the PSC, Nelson proposes an 8.42% increase for residential vs. SMECO suggested 9 percent. Nelson also more evenly distributes increases across other categories.

SMECO last requested a rate increase in 2023 to help finance costs related to the “smart meter” system. The program saw replacement of older electric meters with updated technology, reducing the need for employees to physically read meters. If the latest rate increase request is not granted, according to SMECO, the utility will struggle with cash flow to meet financial obligations because of a poor debt-service cost ratio.

A public hearing will be held on Tuesday, July 23, 2024 at 7PM at SMECO’s Headquarters, 15035 Burnt Store Road, Hughesville. For those who cannot attend in person, you can request to participate virtually by sending an email to psc.pulj@gmail.com by noon on July 22nd. Include Case Number 9738 in your request, or in any public comments. Comments can be submitted electronically at: https://www.psc.state.md.us/make-a-public-comment/