Developing Jobs and New Services for a Rural, Low-Income Population I. TOPIC Rural Energy Enterprises II. LOCATION Alaska (Statewide) III. SUBJECT Developing Jobs and New Services for a Rural, Low-Income Population IV. SUMMARY The Rural Alaska Community Action Program (RurAL CAP), a Community Action Agency serving the entire state of Alaska, wanted to establish a for-profit venture to generate unrestricted, non-grant income to increase efficiency in its delivery of services and, at the same time, assist low-income people save money by reducing their energy costs. Employing a combination of funding sources, including a U.S. Department of Energy grant, an Alaska Rural Development Loan, private loans, and several small bank loans, RurAL CAP established Rural Energy Enterprises, Inc. (REE), a wholly owned, for-profit subsidiary that sells high-efficiency, oil-burning, space heaters, compact fluorescent lighting products, marine heaters and stoves, portable cooking stoves, portable kerosene heaters, wood-burning camping stoves, snow scoops, and miscellaneous energy conservation products. REE recruited and trained independent dealers in Alaska and four northwestern states to sell its products. REE's gross income was $3.2 million in 1994, and net income was $170,000. REE employs 180-200 dealers. V. SUCCESSFUL PRACTICE Established a wholly owned, for-profit subsidiary that allows RurAL CAP to implement new programs to benefit Alaska's rural, low-income population, provides income to low-income residents throughout Alaska and four northwestern states, reduces energy costs for consumers, and enhances the environment by selling energy-efficient products. VI. CONTACT Jeanine Kennedy, Executive Director Conrad Zipperian, Project Director RurAL Alaska Community Action Program (A Community Action Agency) P.O. Box 200908 Anchorage, Alaska 99520 907-279-2511 907-279-6343 (FAX) VII. CASE STUDY The Problem: Most of RurAL Alaska Community Action Program's (RurAL CAP's) operating funds are in the form of grants to conduct specific programs. The grants often require the funds to be used only for program activities. Grants may include provisions for administrative and overhead costs of the programs, but they do not allow the funds to be used by the agency for purposes outside the program itself. RurAL CAP recognized that it needed to increase its pool of unrestricted funds so it could work to develop new programs to serve the low-income population in its service area, which includes the entire state of Alaska, and improve its service delivery capabilities. Low-income people in rural Alaska are isolated, experience extreme cold weather, and pay a high price to heat seriously dilapidated and often inadequate housing. RurAL CAP was particularly interested in finding ways to alleviate this situation. The Approach Adopted: RurAL CAP's Board of Directors proposed developing a for-profit enterprise with a two-fold purpose: (1) to generate unrestricted, non-grant income; and (2) to assist low-income people save money by reducing their energy costs. How They Implemented The Approach: In 1985, RurAL CAP applied for and received a $35,000 grant from the U.S. Department of Energy to conduct feasibility studies on three potential for-profit activities that would promote energy conservation. RurAL CAP's research concluded that selling Toyostoves, an oil-burning, space heater with one of the highest fuel efficiency ratings in the world and manufactured by Toyotomi of Japan, was the most feasible option. RurAL CAP used its Community Services Block Grant (CSBG) funds to support the new business endeavor, which it incorporated into its existing Energy Conservation program. In 1987, the project's first year of operation, RurAL CAP became a Toyostove franchisee and sold 25 stoves. Demand for the stoves grew quickly, but RurAL CAP's CSBG funds were insufficient to order as many stoves as were needed. The speculative nature of the business, and RurAL CAP's non-profit status, made banks reluctant to extend credit. Therefore, RurAL CAP sought out and received $75,000 in loans from private investors. Sales continued to rise, and the for-profit entity began paying its own costs without RurAL CAP's CSBG funds. In light of this success, banks dropped their reluctance to extend credit to RurAL CAP and made several small loans for inventory purchases from 1988-1990. In 1989, RurAL CAP incorporated the project as Rural Energy Enterprises, Inc. (REE), a wholly owned, for-profit subsidiary. Also in 1989, the Community Enterprise Development Corporation of Alaska gave REE a $50,000 Rural Development Loan to develop and provide training to new, small, rural dealerships. Results: In 1988, REE sold more than 700 stoves and made an $80,000 profit a profit margin of 25 percent. Individual dealers in 25 villages augmented their incomes with sales commissions, and stove buyers saved $200-$500 per year in energy costs. As sales and profits rose, REE expanded its staff and added more independent dealers. REE also diversified its product line. In addition to Toyostoves, it also sells compact fluorescent lighting products, Toyotomi marine heaters and stoves, Toyotomi portable cooking stoves, Toyotomi portable, unvented kerosene heaters, wood burning camping stoves, Wolverine brand snow scoops, and miscellaneous energy conservation products. In 1991, REE had gross sales of $1.2 million and made an $80,500 profit. By 1994, annual sales grew to $3.2 million, and net income for REE was $170,000. REE now enjoys a $200,000 line of credit with its primary bank. To ensure its continued viability, REE is reinvesting much of its profits into expansion. In 1992, adding to its 85 dealerships throughout Alaska, REE established 25 dealerships in Idaho, Montana, Washington, and Wyoming. Currently, REE has about 180-200 dealers in Alaska and the northwest. In 1995 REE will expand into Canada with dealers in British Columbia and the Yukon Territory. VIII. KEY WORDS Community Action Agency Community Services Block Grant Department of Energy Energy Conservation Energy Efficiency Franchises Low-Income Profits Rural Development Loans Subsidiaries