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Fueling interest FAA, Verizon among potential customers who like what they see in Avista’s fuel cells

A green light flashes on at a McChord Air
Force Base radio transmission station. The sign beneath it
reads: Hydrogen Fuel Cell Power.

Alison Boggs
Staff writer The Spokesman Review

This Tacoma station houses air traffic control
communications equipment for nearby airports. A steady
power supply helps make sure planes land on time. Even a
short delay can cost airlines millions of dollars.

Yet three times a day, technicians simulate a power outage.
The power is cut and picked up by a bank of fuel cells
outside. Fuel cells made by Avista Laboratories of
Spokane.

"With the fuel cell system, all they have to do is flip the
switch," said Larry Hager, an application engineer with
Avista Labs. "We’re actually powering the facility with fuel
cells. It’s carrying the full load right now."

The fuel cells are being tested for a year. Federal Aviation
Administration officials said they’re willing to experiment
with the power supply for one reason: to make it work
better. They think fuel cells might provide a more reliable
backup power supply than industrial batteries.

"Hopefully it will be a precedent," said Dave Powers, a
regional program manager for the FAA in Seattle. "We just
got permission last week to go into the Great Lakes
region."

With customers like the FAA interested in Avista Labs, that
green light on the wall could be a metaphor for the
45-person Spokane Valley company.

Green means go, and Avista Labs is charging forward,
adding partnerships with distribution companies,
surpassing expectations on tests of its systems, and
working with high-profile potential customers like Verizon.

"If we can present ourselves as cost-competitive with
batteries, and in fact more reliable than batteries and
cleaner and lighter and use less space, damn, we might
have something," said Avista Labs CEO Mike Davis. "And
that’s exactly what we’re attempting to do. In fact, that’s
what we’re gonna do."

Formed in 1995 under the auspices of Avista Corp., Avista
Labs has really discovered and begun to exploit its chosen
niche in the past couple of years.

After dashing — or at least postponing — initial hopes of
powering homes with fuel cells, Avista Labs now has set
its sights on the backup power industry. The goal: to
replace batteries used as a backup power supply anywhere
50 watts to 5 kilowatts of power are needed.

Small potatoes you say? Think again. The backup power
industry is worth an estimated $2.7 billion a year, and is
growing by 6 percent every year, said Davis, a former
assistant energy secretary under the first President Bush.

And though the company’s sales are picking up steam — on
track to hit $1.6 million this year — the future is uncertain.

Avista Labs does not expect to be profitable until 2005. Its
parent company, Avista Corp., which has struggled
through an energy crisis and water shortages, said it wants
to sell 80 percent of the subsidiary by spring — essentially
now. When a company owns less than 20 percent of
another entity, any losses suffered are not charged against
the parent company’s earnings.

"We can’t afford to continue putting money into that
venture to take it to the next level," said Avista Corp.
spokesman Hugh Imhof.

It’s unclear, however, when the breaking point comes and
what happens if a buyer can’t be found. "We’ll cross that
bridge when we get to it," Imhof said, though he
acknowledged that finding investors in this economy is
daunting.

So Davis is hard at work courting venture capitalists who
could take over as majority partners. He says he’s close to
a deal, and expects new ownership to be a syndicate of
companies, but won’t say whom he’s talking to.

"Candidly, we’re at a point where we’ll either exist or not
exist in a few months time," said Davis, who previously led
Kyocera Solar, the world’s largest producer of solar
electric systems.

Avista Labs does have the benefit of national momentum
surrounding fuel cells. In his State of the Union address,
President Bush proposed that $1.2 billion in federal money
be spent to develop automotive fuel cells. Avista Labs is
not in the automotive market, but the company is hoping
spill-over attention will help pave its path to commercial
success.

In addition, the Senate’s energy bill dedicates $3 billion
over 10 years for fuel cell research. The House bill devotes
$1.8 billion over four years. Whether the two chambers
will settle on a final bill remains to be seen, but fuel cells
are obviously on the radar.

Fuel cells are lauded as a non-polluting way to create
electricity. Pure hydrogen pumped into a fuel cell goes
through an electrochemical reaction that creates electricity.
The only byproducts are water and heat.

Avista Labs’ fuel cells have an additional design benefit.
The fuel cells are set up inside cartridges, each about the
size of a laptop computer. Six to eight of the cartridges fit
into units about the size of a microwave. Together, the
cartridges create the needed amount of energy.

However, if one of those cartridges fails, the rest of them
keep working. And the failed cartridge can be pulled out
and replaced, with no interruption in the flow of energy; it
just flows at a lower rate until a new cartridge can be
inserted. The process of replacing cartridges while the fuel
cell is working is called "hot-swapping," and it’s a patented
feature of the company’s fuel cells.

"The most unique thing about Avista Labs is that modular
cartridge approach," said David Redstone, editor and
publisher of the Hydrogen and Fuel Cell Investor, an
industry portal and weekly newsletter. "That’s a great idea.
It makes them user-serviceable, and there is no other
user-serviceable fuel cell."

There are other types of fuel cells, some geared toward
cars, some toward homes and other uses. Avista Labs is
not pursuing the residential market right now for a couple
of reasons, Davis said. First, the plethora of license, permit
and inspection issues that dominate the housing industry
make it difficult to navigate. Second, he said, utility
companies do a "fantastic" job of delivering low-cost
power to homes. It’s simply not cost effective to compete
with them right now, he said.

The type of fuel cells Avista Labs makes use "proton
exchange membranes" (PEM). Hydrogen is pumped into a
thin membrane that feels like a square of plastic wrap. A
layer of platinum next to the membrane acts as a catalyst
and breaks hydrogen’s molecular bond into two protons
and two electrons. The protons move through the
membrane. But the electrons are repelled and instead move
around the outside in a circuit — and that’s electricity.

When the protons and electrons reunite on the other side of
the membrane, they combine with oxygen from air
pumped in by a small fan. That produces water, which
provides needed hydration to the membrane, another
patented function.

"Avista Labs has a very complete intellectual property
package," Davis said.

Most other PEM fuel cells are designed in a structure
referred to within the industry as "stacks." That is — stack
a bunch of the fuel cells next to each other until enough
electricity is created. However, if one of the cells has a
defect, the entire unit goes down. But if one of Avista
Labs’s fuel cells fails, just one cartridge is lost. The rest of
the system continues to operate.

That idea came from an engineer named Bill Fuglevand in
1994.

An electrical engineer with 23 years experience working at
Avista Utilities, Fuglevand brought this perspective to fuel
cell research: He knew people expected their power to be
available all the time. When he looked at the fuel cells
designed in stacks, he saw that a single point of failure
could bring down the entire unit. So he looked for an
alternative and came up with the idea for the modular
design.

Avista Labs was incorporated in 1995 to develop and
commercialize fuel cells. The company landed a two-year
grant from the Spokane Intercollegiate Research and
Technology Institute (SIRTI) to launch research and
development.

By 1999, the company had 23 employees and had filed for
patents. It had secured a $2 million technology grant from
the U.S. Department of Commerce and forged a contract
with Logan Industries of Spokane to manufacture the fuel
cells. However, Avista Labs took that function in-house
this year.

The company moved to Euclid Avenue in the Spokane
Valley in 2000 and acquired its initial patents. Davis took
over as CEO in September of that year, as the company
prepared for an initial public offering (IPO) of its stock.

"Avista Corp. had retained Merrill Lynch to do an IPO for
Avista Labs," Davis said. "And Merrill had us valued north
of $900 million in the fall of 2000. That’s what they viewed
as the potential of (Avista) Labs."

But the IPO plan fell apart. Financial analysts felt the
company wasn’t ready.

"Having just come from a small public company, my own
view is that we weren’t ready and I knew what life would
be like. The other companies that are public in fuel cell land
are struggling today," Davis said. "They’ve gone from
market valuations of nearly a billion dollars to market
valuations of a tenth of that, or less. Some of them are
gone already. So if you go public, you better be ready."

So the company went back to building itself up. Avista
Labs formed a subsidiary called H2Fuel that focused on
ways of producing hydrogen for fuel cells. But now, with
the company focusing on marketing its new line of fuel
cells, H2Fuel has been shelved. Avista Labs is instead using
industrial hydrogen to power its systems.

By 2001, the company had 80 employees, but its parent
was going through difficult times. An energy crisis and
water shortages caused Avista Corp. to cut expenses.
Avista Labs laid off 44 percent of its work force in 2002,
including six top executives.

At the same time, the company was making progress. The
Washington Air National Guard was testing fuel cells in a
maintenance facility at Geiger Field. The system surpassed
expectations in that recently completed year-long test. The
company introduced its new line of fuel cells and signed
agreements for them to be distributed to the railroad
industry, into backup power markets, into renewable
energy markets and even into Italy. One fuel cell system
supplies backup power to a remote mountaintop resort in
that country.

The company sold 97 products — for a total of 70
kilowatts — in 2002, with revenues of about $600,000.

The company’s continuing success depends on its ability to
convince customers that fuel cells are a better deal than
batteries.

"And batteries are an original love-hate deal," Davis said.
"People that use batteries for backup power are open to
alternatives. It’s not like no, not ever, never, you’re not
going to get my batteries from me.

"It’s — `if you can show me something that we can
establish is cost effective over a certain time period and
you show me something that’s as or more reliable and, oh
by the way, clean and green is good, we can talk,"’ Davis
said.

Avista Labs has three primary commercial products: a
1,000-watt unit for $8,050, a 500-watt unit for $4,945,
and a 100-watt unit for $3,415. A $15 to $20 bottle of
hydrogen runs the 1,000-watt unit for 6.5 hours, the 500
for 13 hours, and the 100 for 65 hours.

Right now, fuel cells are more expensive than batteries,
Davis said. But the only way to increase the amount of
power supplied by batteries is to buy more batteries.
Owners of fuel cell systems just need to refill their
hydrogen bottles, Davis said. When a customer needs
more than four hours of backup power, Davis said, fuel
cells become more cost effective than industrial batteries.

Also, batteries have hidden costs, said Chuck Caldara, an
FAA air traffic systems specialist. Caldara is responsible
for running the radio transmission station at McChord.

"There’s lower maintenance requirements on fuel cells than
there are on batteries," Caldara said. "Also, each one of
those jars (batteries) holds two to three gallons of acid.
They’re corrosive. Their life expectancy is five to seven
years, so you have to change them out."

There are also environmental regulations regarding battery
disposal, he said.

"Look at what’s in them. You’ve got acid, you’ve got lead.
You can’t just take them to the dump and discard them,"
Caldara said. "Those are things that have to be added into
the cost."

So Avista Labs has some positive features in its corner and
some challenges to surmount. Davis said that’s to be
expected with any new business venture.

"In an entrepreneurial business, until you generate your
own cash, you’re at risk. That’s a good thing to remember.
And right now, we’re not generating our own cash," he
said. "So it’s a challenging time. Still, I think we’ll navigate
that space.

"It just isn’t done for Avista Labs yet. We’re in the process
and so far the process is going well. But I’m just not going
to relax about it until we’re done. I do believe there’s clear
value here."

•Business writer Alison Boggs can be reached at (509)
927-2150 or by e-mail at [email protected]

http://www.spokesmanreview.com/news-story.asp?date=042703&ID=s1341556

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