Southern Maryland Electric Cooperative (SMECO) and Potomac Electric Power Company (Pepco) today announced they have agreed to revise their contractual relationship in light of competition in the electricity industry.

Under a new arrangement that is subject to acceptance by the Federal Energy Regulatory Commission, Pepco will continue as SMECO's sole energy supplier for up to three more years. SMECO will gain early access to the wholesale power market, and Pepco will be fairly compensated for its pre-existing, long-term contractual rights.

SMECO has purchased electricity from Pepco since 1945 under numerous contracts of varying lengths. Under the previous contract, which provided for annual renewals of its 10-year term, Pepco supplied all of SMECO's wholesale power requirements, and, under certain conditions, SMECO could give Pepco notice that it wished to pursue other energy options.

SMECO President I. Wayne Swann and Pepco President and Chief Executive Officer

John M. Derrick Jr. referred to the agreement, which began January 1, 1999, and will expire on or before December 31, 2001, as a new chapter in a long and mutually beneficial relationship between these two companies.

"We wanted earlier access to the wholesale power market than was possible under the previous 10-year contract," Swann said, "and Pepco was willing to accommodate us as long as we recognized the company's contractual rights. It's a win-win solution that allows us both to go forward in the new marketplace."

"We've always worked cooperatively with SMECO," Derrick said. "This arrangement provides us with needed flexibility as we enter a new era of electricity competition and provides us both with a smooth and amicable transition."

SMECO is an electric distribution cooperative that serves 1,150 square miles in Southern Maryland. Pepco is an investor-owned electric utility serving the District of Columbia and surrounding Maryland suburbs.

EXCERPT from Pepco SEC 8-K Filing 1-4-99

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

CURRENT REPORT

PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) December 31, 1998

POTOMAC ELECTRIC POWER COMPANY

(Exact name of registrant as specified in its charter)

District of Columbia and Virginia 1-1072 53-0127880

(State or other jurisdiction of (Commission (I.R.S. Employer

incorporation) File Number) Identification No.)

1900 Pennsylvania Avenue, N. W., Washington, D. C. 20068

(Address of principal executive offices) (Zip Code)

Item 5. Other Events.

The Company has had a rolling 10-year full service power supply requirements contract with the Southern Maryland Electric Cooperative, Inc. (SMECO), the Company's principal wholesale customer with a peak load of approximately 600 megawatts. The wholesale portion currently represents approximately 10% of the Company's total kilowatt-hour sales. The contract, by its terms, is extended for an additional year on January 1 of each year, unless notice is given by either party of termination of the contract at the end of the 10-year period. The contract allows SMECO to reduce, by up to 20% each year, the percentage of its annual requirements that it is obligated to purchase under the contract with a five-year advance notice for each such reduction.

On December 31, 1998, the Company and SMECO entered into a new full-requirements agreement that supersedes their existing rolling 10-year power supply contract. The agreement will continue the current total rate for electricity but with a non-varying fuel component and will become effective as of January 1, 1999, if accepted by the Federal Energy Regulatory Commission (FERC) without change or modification. The agreement will expire on December 31, 2001, following which, SMECO will make a one-time termination payment to the Company of $19 million which compensates the Company for future earnings it would otherwise have received under the 10-year contract. SMECO may elect by January 15, 2000, however, to advance the termination date to December 31, 2000, in which case the termination payment would be $26 million. The Company filed the agreement with FERC for acceptance on December 31 and expects a decision during the first quarter of 1999. The Company will record the $19 million termination payment as income upon acceptance of the agreement by FERC. After the termination date, capacity previously used to supply SMECO would be used to serve the Company's retail customers. To the extent the Company makes sales of such capacity in the competitive marketplace, such sales would be used to offset costs otherwise charged to retail customers. Accordingly, applicable costs are expected to be fully recovered in rates charged to retail customers under historical rate making principles.

-end-