RISING COSTS, SMART CHOICES

Maintaining healthy margins is essential for any business, as poor margins can have serious financial and operational impacts. Because we are member-owned and operate on a not-for-profit basis, we rely on healthy margins to cover costs, maintain infrastructure, and build equity for future investments. In the last two years, the cooperative has had unfavorable operating margins. Thin or negative margins limit our ability to invest in system upgrades, respond to emergencies, and manage rising expenses like fuel, labor, and interest rates. They can also affect the cooperative’s creditworthiness, making it harder and more expensive to borrow money for capital projects.

Margins shrink when expenses outpace revenue. Rising costs caused by inflation, price escalation, and investments necessary to meet State of Maryland policies and legal requirements outstripped the amount of revenue being recovered through SMECO’s distribution service base rates. Unchecked continuation of this financial gap had the potential to put SMECO in jeopardy of not meeting our obligations to lenders and limited our ability to make necessary upgrades to the infrastructure and ensure reliable service.

To increase margins, the gap between revenues and expenses needs to grow wide enough to ensure continued financial stability for the cooperative. This can happen with an incremental increase in revenue and continued efforts to decrease expenses.

The SMECO bill is comprised of three main components: regulatory costs, the cost of energy, and the cost to deliver the energy reliably and safely to our end users. Only one of those bill components supplies revenue for the utility—the distribution service base rate—and that rate is regulated by the PSC.

On May 1, 2024, SMECO filed a request with the PSC to increase its distribution service base rates to recover an additional $37.9 million in distribution revenue, as well as additional rate design changes. Following the PSC’s full review process, the Public Utility Law Judge overseeing the case released a proposed order reducing the requested amount by approximately 40 percent and allowing the cooperative to increase its distribution revenue by only $22.8 million. The approved rates mean that residential customers using an average of 1,100 kilowatt-hours (kWh) per month would experience an overall increase of 4.7 percent in their total monthly electric bill, which amounts to $7.95 per month. The new rates became effective for bills rendered on and after December 1, 2024.

The distribution charge on the bill covers the cost of cables, poles, substations, vehicles, office buildings, employees, and more. SMECO’s investment in these facilities does not change with the weather or the amount of an electricity customer’s use. While the increase in distribution revenue helped improve margins, reducing expenses for our distribution costs was, and continues to be, a top priority, even as inflation and supply chain issues continue for essential materials like transformers, poles, wire, and fuel.

Time-of-Use Rates
Residential and commercial members can choose between SOS and time-of-use (TOU) rates.

Rider G
Members can choose to have 100 percent of their electricity come from renewable sources.

At SMECO, we can’t control market prices or global supply chains—but we can make smart, proactive choices on what we can manage by reducing internal expenses, leveraging cooperative purchasing agreements to stretch every dollar, and reevaluating project timelines to balance long-term needs with financial prudence. Our priority is to minimize the impact on our members. Cost increases have hit everyone. And, like our members, the cooperative is constantly looking for ways to reduce costs without compromising the customer service, safety, and reliability our members deserve.

Some recent cost-saving measures include switching the cooperative’s
fleet to lower-octane fuel, installing a bulk diesel dispenser, and implementing automations for time-intensive manual activities.

• Most modern gasoline-powered vehicles are designed to run on 87 octane fuel, unlike older vehicles, which required higher-grade fuel to guarantee better performance. SMECO’s shift from mid-grade to regular fuel for its fleet will save the cooperative approximately $40,000 to $50,000 per year. The change in fuel grade has not caused a decline in performance or an increase in maintenance costs.
• Installing an aboveground diesel tank in Hughesville also racked up savings. When SMECO built the Engineering & Operations Center in 2013, construction included an emergency generator to support the Operations department. The generator is powered by dyed fuel stored in a 20,000-gallon on-site underground diesel tank. Diesel fuel degrades over time. Because the Operations generator is crucial and needs fresh fuel, the cooperative installed a 2,000-gallon aboveground diesel tank nearby. Old diesel fuel is pumped manually from the underground to the aboveground tank, enabling SMECO to freshen the fuel in the underground tank and maintain its quality. Dyed diesel, also known as off-road diesel, has a red dye added to it and cannot be used in the utility’s trucks, but it can be used in the cooperative’s forklifts, backhoes, lawn equipment, portable generators, etc. Repurposing the fuel enables SMECO to save money on disposal fees and ensures we are maximizing the use of all purchased materials.
• Efforts to automate time-consuming and repetitive activities yielded savings opportunities, as well. By the end of 2024, four Robotic Process Automation (RPA) bots were active, saving the cooperative more than 1,000 manual hours per year—plus an additional 900 hours to clear a six-year backlog—and more than $80,000 within three years. Five additional bots were under development and scheduled for activation in early 2025, netting an additional savings of close to 2,000 manual hours per year and more than $370,000 within three years.

Cooperative teams will continue to look for opportunities to reduce spending, improve operational efficiencies, renegotiate vendor contracts, and optimize fleet usage. These strategic efforts helped offset some of the inflationary pressures and kept rate impacts to a minimum for our members. However, while these efforts help reduce expenses, the cooperative can only impact about 35 to 40 percent of the costs on the typical utility bill.

SMECO does not control the cost of wholesale power.

The Standard Offer Service (SOS) energy charge on a member bill represents the cost of electricity on the wholesale market. SMECO members who receive their electric supply through the cooperative pay exactly what SMECO pays per kWh with no mark-up.

Legislation passed by the Maryland General Assembly in 2024 included a package of reforms that provides greater protection for utility customers who purchase power from alternate suppliers and enables the cooperative to advertise its SOS rate and alternative rate of 100 percent green energy.

While the cooperative is not able to control the cost of wholesale power, our Rates and Procurement team works with ACES, a nationwide energy management company, to secure the best price possible by analyzing market trends, negotiating supplier contracts, managing risks, and designing fair rate structures to ensure cost-effective and reliable service for members.

set pricing for delivery year 2025/2026, with clearing prices increasing by more than five times that of the previous auction—from $49.49/megawatt (MW)-day to $269.92/MW-day. The spike in capacity prices reflects a tighter margin between the supply and demand of electric power—likely causing higher electricity bills in the near future and prompting investment in new generation resources in the PJM territory.

The cost of wholesale power remained consistent through most of 2024; however, the cost of purchased power will jump significantly following the PJM capacity auction held in August 2024. The auction set pricing for delivery year 2025/2026, with clearing prices increasing by more than five times that of the previous auction—from $49.49/megawatt (MW)-day to $269.92/MW-day. The spike in capacity prices reflects a tighter margin between the supply and demand of electric power—likely causing higher electricity bills in the near future and prompting investment in new generation resources in the PJM territory.

SMECO actively manages its capacity demand from PJM to the extent possible. Time-of-use rates incentivize our members to adjust their usage to ease SMECO’s peak demand. In addition, the state-mandated EmPOWER Maryland programs have successfully incentivized energy efficiency for well over a decade.

SMECO does not control the EmPOWER Maryland charge, or other regulatory fees, state, and local taxes.

The EmPOWER Maryland Energy Efficiency Act was passed by the Maryland General Assembly in 2008, creating a statewide goal to reduce per capita electricity consumption and on-peak demand. On May 9, 2024, Governor Wes Moore signed House Bill 864, providing direction for the next cycle of the efficiency programs and shifting the efficiency targets from energy savings to reductions in greenhouse gas. EmPOWER Maryland runs in three-year cycles and just began its fifth cycle. The costs to administer the state-required programs are factored into cooperative utility bills under the Distribution Services portion of the SMECO utility bill. Members who participate in the programs help themselves by taking advantage of an opportunity they are already paying to receive, and they also help the cooperative meet the energy-saving and greenhouse gas reduction goals set by the state.