Cutting Edge in Rural Colorado?

A tiny energy co-op comes up with creative innovations

In 5 or 10 years, your relationship with your electrical utility may be different from what it is now. For a fixed fee, the power company might heat and cool your home with a geothermal heat pump it has buried in your backyard. Or your utility may offer to sell you electricity from a superclean fuel cell it installs in your garage, then buy back any excess juice you don't consume. The power company might even link itself via the Internet to your most energy-hungry appliances--maybe your air conditioner or water heater--so that it can switch them to a power-saver mode when necessary.

You might expect these sorts of high-tech innovations to pop up in energy-starved Silicon Valley, the brainchild of some tech-savvy venture capitalist. You'd be wrong. First out of the gate is the Delta-Montrose Electrical Assn. (DMEA), a 64-year-old rural energy cooperative in southwestern Colorado. And many of the new options are quickly gaining popularity with the co-op's 28,000 members.

By focusing on energy services such as heating and cooling, rather than straightforward power generation, DMEA is transforming its once-quiet business. Faster than most power players, DMEA is plugging into new technologies. In some cases, it's also forming partnerships with companies developing promising technologies--an unusual step for a once-unadventurous co-op. "I think they're one of the most innovative co-ops in the country," says Peggy Plate, an energy services manager for the Energy Dept.'s Western Area Power Administration. If these strategies pay off, big utilities may soon find themselves looking to DMEA for tips on how to prosper in a new era of energy deregulation.

NEW WAVE. For now, Delta-Montrose is no more than a speck on anyone's radar. But the co-op is intensely focused on finding creative ways to deliver electric services to its customers. Like many of the other 950 or so consumer-owned electric cooperatives in the U.S., DMEA dates back to the Depression (table, page 106D). Its roots, modest size, and simple mission nurtured a conservative business culture. But in 1997, the co-op's managers and board took the measure of the coming wave of deregulation and the pace of technological change and decided to get ahead of the curve. "We began investing hundreds of thousands of dollars in research and development, which for a co-op is unheard of," says Edwin H. Marston, the board's president.

DMEA's first big innovation, in 1997, was a combined heating and cooling service dubbed Co-Z GeoExchange. For a fixed, year-round price, DMEA equips customers' homes and businesses with a geothermal heat pump. This device is unlike conventional furnaces and air conditioners, which heat air by means of combustion and chill it through mechanical compression. Instead, the pump circulates fluid through pipes buried underground. Even when it's cold out, the earth only a few feet belowground is always around 58F in Colorado. In winter, the pump pulls heat out of the ground and pushes it into the home. The earth's warmth is then distributed through the building, typically via an air-duct system. In cooling mode, this process is reversed.

It's a simple technology that can deliver big savings. Under a Co-Z agreement, a customer pays about $100 per month and is guaranteed a comfortable house. DMEA estimates that a 2,000-square-foot home might cost $2,645 per year to heat with propane. A Co-Z GeoExchange home can be heated for around $1,600--a savings of 40%.

So far, the service is a winner. Between late 1998 and the end of 2000, DMEA installed 115 GeoExchange systems, about half of them under Co-Z service contracts. This year, it expects to install an additional 75 to 100. The venture is already profitable, and DMEA expects that to continue. Managers say that retained earnings (akin to profits for a nonprofit co-op) on Co-Z should grow tenfold by 2005, to $478,000, from $46,000 last year. Indeed, the Co-Z contracts deliver profit margins in excess of 50%--good business in an industry that typically sees a 4% return on investment.

DMEA puts these retained earnings to work by paying down debt and developing other technologies. Fuel cells, which convert propane or hydrogen into electricity, attracted DMEA's attention because many of its customers live off the grid, in sparsely populated rural areas. True, fuel-cell power is expensive: At 25 cents to 30 cents per kilowatt hour, it's four times the average cost of power for DMEA's wire-connected residential customers. But since building out new power lines can cost $20,000 to $60,000 per mile, it's sometimes cheaper to install a fuel cell on site than to string a few miles of wire.

Once the co-op grasped this logic, it went looking for a fuel-cell maker interested in rural markets. In early 1998, the search led to a partnership with H Power Corp., a Clifton (N.J.) manufacturer of proton exchange membrane (PEM) fuel cells. Then, DMEA took things one step further. It put H Power together with Energy Co-Opportunity (ECO), an arm of Cooperative Finance Corp., based in Herndon, Va., which serves as a bank for electrical co-ops. The two got on so well that ECO invested $15 million in H Power and inked an $81 million deal to buy 12,300 4.5-kilowatt fuel cells--H Power's largest order to date--to be delivered to member co-ops over the next two years. Last March, H Power repaid DMEA's favor by siting its first out-of-the-laboratory test unit in the co-op's Montrose (Colo.) headquarters. DMEA, meanwhile, plans to begin leasing the fuel cells to its customers this fall.

In 1998, DMEA began work on another leg of its reinvention strategy: Internet connectivity. "It's our job to be on our tippy toes to get our customers the best," says the co-op's general manager, Daniel R. McClendon. Sixty years ago, that meant bringing electricity to farmers and ranchers. Today, the equivalent of lights in the milk shed is fiber-optic connectivity. So DMEA took a 6% position in REAnet, a telecom startup formed by two other electric co-ops.

NET SAVVY. In addition to providing Web connectivity and e-mail, DMEA hopes to use the Net to optimize customers' energy use and reduce their costs. The co-op is serving as a test bed for technology from Mainstreet Networks Inc. Modified by a small attachment made by the Morgan Hill (Calif.) startup, a homeowner's electrical meter becomes an Internet communications point through which utility managers can power down energy-hungry appliances at a distance. DMEA points out that during a recent spike in power prices, it could have saved $48 per home had it been able to turn down their water heaters for just one hour. DMEA expects to roll this program out in the next six months.

Further out, DMEA is trying to repeat the matchmaker role it played with H Power. In 1999, DMEA invested in CoEnergies LLC, a Traverse City (Mich.) startup that modifies existing central air conditioners. In effect, it turns them into ground-based heat-pump systems by the addition of a buried ground loop, similar to the GeoExchange heat pump. In many regions this retrofit could replace conventional furnaces. "This machine has huge energy-savings potential around the country, but nobody knows about it," says Paul S. Bony, DMEA's marketing manager, who has a unit installed at his own house. "We're talking terawatts." Now he's seeking investors.

The flurry of developments at DMEA distinguishes it not just from other co-ops but also from many of the better-known for-profit players that are preoccupied with building power plants. Size has something to do with DMEA's agility. But it's the cooperative culture that is key. The co-op's staff sees itself as running a nonprofit skunk works that helps their owner-customers and those of other co-ops. "We used to have a circle drawn around our membership," says Business Development Manager Steven M. Metheny. "Now it's wide open--whatever we can do, in whatever markets there are."

Delta-Montrose's strategic punch lies in the institutional structure. Rather than trying to grow and dominate a market, co-op managers say their job is to share what they know with the nation's other co-ops, which provide electricity to 34 million people in 46 states. "They're doing a lot of work that the other co-ops are going to benefit from," says the Energy Dept.'s Plate. And just maybe, the big city power companies will, too.

By Hal Clifford in Telluride, Colo.

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