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The state agency responsible for ensuring that Sandwich Isles Communications used tens of millions of dollars of ratepayer money appropriately signed off year after year on its operations even though the Federal Communications Commission was picking apart the company’s financial management and raising serious questions.

The federal agency said in May that it appears the company has misspent millions of dollars, calling Sandwich Isles expenses “grossly excessive and unreasonable.” The FCC slashed a federal subsidy for the telecommunications company by 70 percent.

During the year and a half that the FCC was scrutinizing Sandwich Isles’ expenses, Al Hee, the company’s chief executive officer, repeatedly argued that a reduction in its subsidy would cause the company to go bankrupt, leaving thousands of Native Hawaiians without critical phone and Internet services. Sandwich Isles serves about 3,000 customers, according to the Department of Hawaiian Home Lands.

Now, despite the cut in subsidy, Sandwich Isles has again applied to the Hawaii Public Utilities Commission for certification that it has been using ratepayers money appropriately and should continue to receive FCC subsidies. The PUC is currently reviewing the company’s application.

But the PUC won’t allow the public to review critical information that goes into decisions it makes. Civil Beat asked to see documents that could shed light on how the company does business. Even records that are open in FCC files are being withheld by the PUC, at the request of Sandwich Isles.

The PUC also won’t talk about Sandwich Isles and why it’s allowed the company to get away with excessive expenses and other problems the FCC has highlighted.

Under Fire From the FCC

Sandwich Isles has operated on Hawaiian Home Lands since the mid-1990s when the Department of Hawaiian Home Lands granted it exclusive access to provide phone service to new customers.

The company’s operations have been heavily subsidized by the Universal Service Fund, which was created by Congress in 1996 to ensure rural, low-income and remote areas had essential phone service, and later Internet access. It’s funded by a monthly charge of about $2.50 on everyone’s phone bill.

Sandwich Isles has received more than $200 million from the fund during the past decade alone, according to FCC records. The subsidy, that has been as high as $13,000 a year per customer, was than the average subsidy for rural service to the mainland, according to a 2009 Honolulu Advertiser story.

But Congress has been critical of the rural telecom subsidy for years, and the FCC recently began cracking down on companies receiving the subsidy in an effort to reduce waste and abuse. The FCC reduced the subsidy to $250 per customer a month. Sandwich Isles, which was receiving $830 per customer each month, requested a waiver in 2011 in order to keep the higher fee.

That request for a waiver prompted the FCC to review Sandwich Isles’ operations and finances. In May, that the company’s expenses were “grossly excessive and unreasonable.” The company’s corporate expenses were 623 percent higher than the average for companies of similar size with the highest corporate operations expenses, the FCC found. In particular, the FCC said it was concerned about a number of affiliated companies that were receiving large payments from Sandwich Isles, all of which were either owned by Al Hee or family members.

The PUC must annually certify to the feds that all local companies receiving money from the Universal Service Fund meet FCC requirements. The state commission is responsible for scrutinizing the company’s operations and finances.

But for years, the PUC has signed off on Sandwich Isles operating practices. The commission has never raised the kinds of concerns that the FCC finds so egregious.

Sandwich Isles was using the subsidy “only for the provision, maintenance and upgrading of facilities and services for which the support is intended,” PUC Chair Hermina Morita told the FCC in September 2012.

That was two months after the FCC issued a complaining that the company was not being forthcoming about its affiliated companies that were receiving large payments from Sandwich Isles. The letter was picked up by media outlets.

Sharon Gillett, chief of the FCC’s Wireline Competition Bureau, in the letter to Hee published on the FCC’s website, said she was concerned that Sandwich Isles was overpaying affiliated companies that were owned by Hee or his family members.

The “information available to us raises significant questions about whether Sandwich Isles could be obtaining the services it receives from its affiliates at much lower rates from unaffiliated sources,” wrote Gillett. “These affiliate payments also appear to reflect very significant and unexplained corporate expenses and raise concerns that Sandwich Isles may be using Universal Service Funds to cross-subsidize competitive services outside of its territory.”

PUC Won’t Discuss Sandwich Isles

After the FCC’s May ruling, Civil Beat requested interviews with the PUC’s three commissioners and access to heavily redacted PUC documents that describe Sandwich Isles’ operations.

Specifically, Civil Beat requested an interview to discuss Sandwich Isles’ “operations and how ratepayer funds are being spent to support the company’s telecommunications network.”

Civil Beat also asked if the PUC, in light of the FCC ruling, was concerned that it hadn’t provided adequate oversight over the years and whether going forward, the PUC planned to provide stricter regulation.

Commissioners declined Civil Beat’s interview request, saying through a staff attorney, Ji Sook Lisa Kim, that speaking publicly about Sandwich Isles would violate the PUC’s rules about ex-parte communications. Kim noted that Sandwich Isles has an open case in front of the PUC.

Kim also said that it was up to the FCC to regulate Sandwich Isles, although she acknowledged that the PUC was responsible for certification.

“The criteria for participation and the regulation and policing of the program lies with the FCC,” she wrote. “Thus, your questions regarding SIC, including your specific questions regarding the recent FCC ruling, should be addressed by the FCC.”

But the FCC says it’s the state’s responsibility to make sure that the company is operating in a financially sound way and not squandering ratepayers’ money from the federal fund.

Civil Beat reviewed hundreds of pages of documents covering previous certifications of Sandwich Isles by the PUC. The records include extensive questions from the PUC and the Consumer Advocate’s office about company operations and finances.

The PUC has allowed Sandwich Isles to hide the majority of its responses from the public, including basic information about the company’s use of the Universal Service Fund.

Civil Beat asked that certain portions of the documents be made public. In a 15-page reply, the PUC denied the request, saying that it agrees with Sandwich Isles that release of the information could mean companies would be less likely in the future to be open with the regulators about their operations. (Civil Beat has appealed the denial to the Office of Information Practices.)

“Disclosure of the information would not only be detrimental to SIC because of substantial competitive harm that would likely result from such disclosure, but it would likely frustrate the commission’s ability to carry out functions such as decision making that require complete and full information and evidentiary record,” the PUC said in an order denying Civil Beat’s request.

That means the PUC won’t reveal how much money Sandwich Isles has received in recent years from the Universal Service Fund and how it was being used. Yet the FCC considers this to be public information and lists all the USF subsidies that telecommunications companies have received over the years on its website.

According to the FCC, Sandwich Isles has received more than $100 million in USF money since 2009 to subsidize about 2,500 lines.

The PUC also refused to release information about whether the company has used facilities built with USF funds to serve customers that were not eligible for the subsidy, a question raised by the FCC.

The PUC also refused to release information about whether Sandwich Isles had competitively bid contracts and which companies received the contracts — an issue particularly relevant given the FCC’s concerns about Sandwich Isles’ affiliates.

The consumer advocate also asked Sandwich Isles in 2010 why it should continue receiving support from the Universal Service Fund if customers on Hawaiian Home Lands “already have access to comparable telecom services.” Sandwich Isles’ response is redacted.

Hawaii’s Consumer Advocate, Jeff Ono, said his office gets to see the full Sandwich Isles files, so he’s not concerned that the PUC won’t release information to the public and that Sandwich Isles is asking its information be kept secret for competitive reasons.

“We can do our analysis based on what we have received,” Ono told Civil Beat.

Ono said that he thinks that the PUC and Consumer Advocate’s oversight of Sandwich Isles “has been adequate” over the years, despite the FCC’s findings.

Ono suggested that Civil Beat contact Sandwich Isles for specific information about the company’s operations.

But Hee, Sandwich Isles’ CEO, declined an interview request for this story.

In a July 16 email to Civil Beat, he said that he was reluctant to talk to anyone in the press out of “a conviction to do things that need to be done because it does.”

Hee did talk to the Honolulu Star-Advertiser recently about the company. In a about Sandwich Isles’ attempt to take over Hawaiian Telcom phone lines on Hawaiian Home Lands, the newspaper quoted an email interview with Hee in which he talked about the companies need to re-trench after the FCC cut its subsidies.

He wasn’t as forthcoming with Civil Beat.

“If someone living on Hawaiian Home Lands is able to read Civil Beat, get healthcare, education, participate in government or start a business and never attributes their ability to do those things to SIC, I am more than fine with it,” he wrote in the email to Civil Beat.

 

You can review Sandwich Isles’ responses to consumer advocate questions below:

DISCUSSION: *Do you think the PUC should allow so much of Sandwich Isles operations and finances to be kept hidden from the public? Could disclosure hurt the company’s business?