As California reels from its experiment in the energy marketplaces deregulation, a bank on the other side of the country sees the opening of the sector as a major opportunity.
Unlike most banks, which are leery of lending to energy cooperatives because of the risks associated with collective ownership, commodity price volatility, and shortage of tangible assets, First International Bank in Hartford, Conn., wants to make this type of lending a niche.
The $328 million-asset bank made its first loans to energy co-ops in November and intends to make more as deregulation enables co-ops to expand in new ways. Despite the trouble California has had deregulating electricity, First International executives expect energy co-op lending to take off with nationwide deregulation.
These are new opportunities being created as a result of deregulation, said Matthew J. Ide, head of energy finance at First International Bank. Now customers can buy electricity from entities other than utilities.
First International has made only two loans to energy co-ops, but we see this becoming more and more a part of what we do, Mr. Ide said.
Deregulation is giving consumers more providers of electricity, fuel oil, and propane to choose from. As a result, new co-ops are cropping up and the established ones are diversifying. This growth requires funding that has traditionally been provided by government and cooperative financing organizations, Mr. Ide said.
Electric co-op sales grew twice as fast as the electricity industry as a whole in 1998, according to the National Rural Electric Cooperative Association. The association says electric cooperatives own and maintain 2.3 million miles, or 44%, of the nations electric distribution lines; deliver 7.9% of kilowatt-hours sold in the nation each year; and generate 4% of electricity produced.
Still, traditional lending institutions have generally steered clear of the cooperatives.
Lending in the sector has a level of risk that is commensurate with a lot of new-business-type transactions, Mr. Ide said. You have an element of risk here by nature of there being a lot of acquisitions and start-ups.
Another red flag for banks is the co-op structure. There arent a lot of individuals with deep pockets that you can have recourse to, Mr. Ide said.
Mike OBrien, a spokesman for Cooperative Financing Corp., a nonprofit in Herndon, Va., that provides its members with low-cost capital, pointed to other problems. He said banks generally have been uninformed about the sector or have not provided attractive interest rates. Moreover, they tend not to have the right relationships with the federal government, he said.
Mr. Ide said it was banks lack of interest in the sector that led to the establishment of Cooperative Financing.
Co-ops needed a source of capital designed for their needs, and they couldnt find that through established banking, he said.
But that may change.
First International says one good thing about co-op financing is that many of the loans are guaranteed by federal and state agencies.
The companys first opportunity came late last year, shortly after deregulation in Massachusetts and Connecticut gave rise to southern New Englands first two energy cooperatives. It lent the Connecticut Energy Cooperative about $500,000 and Co-opPlus of Western Massachusetts $3.9 million. The loan to the Connecticut cooperative is guaranteed by the Small Business Administration and the other is backed by the Department of Agriculture.
First International may have an edge in experience. Though the financing of energy co-ops is new to the bank, for several decades it has provided financing to small industrial companies, with an emphasis on manufacturing, wholesale, and distribution.
The reason we are active in the energy finance sector is that energy is a critical component to industrial business, said Brett N. Silvers, chairman and chief executive of First International.
Mr. Ide said this promises to be one of First Internationals best lines.
The profitability of these co-ops is no different than privately held propane and fuel oil companies, he said.