FCC issues ruling on phone company

By Sean Hao
Advertiser Staff Writer

For several years, fees on telephone bills have paid for Sandwich Isles Communications Inc. to build a telephone network to serve customers living on Hawaiian Home Lands.

Whether the company will continue to have access to the money has been thrown in doubt following a ruling by the Federal Communications Commission last year. The FCC has ordered Sandwich Isles to go through an application process that could lead to a decision to deny the company access to the money.

If that is the case, "Sandwich Isles revenues will decline so severely that it will be unable to continue operations, much less complete its expansion to serve all of the Hawaiian Home Lands," the company wrote the FCC last month.

Sandwich Isles Communications Inc. is building a telephone network to some of the least-served areas of the state with money from the Universal Service Fund. The fund was created as a means of financing phone service in high-cost rural areas that have small numbers of customers. Money in the fund comes from fees paid by phone customers nationwide.

The FCC originally decided in 1998 that Sandwich Isles did not need to go through a lengthy application process. The FCC granted Sandwich Isles rights to subsidies to help pay for service to Hawaiian Home Lands. In its original petition, Sandwich Isles claimed the areas in question were unserved by the local phone company — an issue later disputed by GTE Hawaiian Tel, which is now Verizon Hawaii.

Now, about six years later, the FCC is investigating the claims by Verizon that Hawaiian Home Lands customers are part of its territory and do not need the services of Sandwich Isles.

It's not the first time questions have been raised about Sandwich Isles. The company was a subject of controversy when it was awarded an exclusive, open-ended license to serve Hawaiian Home Lands by the Hawaiian Homes Commission in 1994. The license was approved without competitive bidding.

Later the company — which is headed by Al Hee, brother of former Office of Hawaiian Affairs trustee Clayton Hee — received approval for up to $400 million in low-interest loan from the U.S. Department of Agriculture. Sandwich Isles also was able to persuade city and state officials to expand the boundaries of O'ahu's Enterprise Zone tax incentive program to include 163 acres of agricultural land it purchased between Wahiawa and Mililani.

Under Sandwich Isles' business plan, the company borrows from the USDA to build its network, then receives money from the telephone-bill fees to help repay the loans.

Without such subsidies "there's no way these rural areas can be built out," said Gil Tam, Sandwich Isles vice president. Sandwich Isles serves customers on Hawaiian Home Lands, where leases go to beneficiaries who, under federal law, must have 50 percent or more Hawaiian blood.

During the new FCC application process, which could take a year or more, Sandwich Isles can continue to draw upon federal subsidies. As a result, the new FCC order hasn't affected operations at the phone company, though it's unclear whether future plans — including construction of a network operations center on O'ahu — will need review, Tam said.

"We're confident that the justification is there for approval," said Tam. "The unfortunate thing is it's taken this long for the FCC to bring it to the front."

FCC spokesman Mark Wigfield acknowledged the FCC has taken an inordinately long period to resolve the issue.

"It just didn't get the attention it deserved," he said. "Now we're looking at it again.

"It's unlikely it will take that long this time."

Among the issues the FCC typically considers in such cases are whether the operation is in the public interest and its impact on the universal service fund, or the money generated from the phone-bill fees.

So far Sandwich Isles has borrowed $166 million under low-interest loans from the USDA and provides service to 1,106 subscriber lines, according to government records. The loans, which typically have terms of 20 years, can be used to cover equipment costs but not operating expenses, said Claiborn Crain, a USDA spokesman. Crain said Sandwich Isles is up to date with loan payments.

This year Sandwich Isles also will receive an estimated $15.3 million from the universal service fund.

While the amount of money spent per telephone line installed may appear high, the universal service fund was established specifically to offset the higher costs of providing phone service in rural areas, said Daryl Schoolar, a senior analyst with telecommunications industry research firm In-Stat.

Whether Sandwich Isles is spending too much "is difficult to know," he said. "One of the reasons they got those funds is because it's so expensive and there's so few customers."

Adding to the expense of deploying the new phone network is Sandwich Isles' decision to install high-speed fiber-optic lines that can provide broadband Internet service among other advanced telecommunications services, Tam said. The company hopes to serve more customers as additional parcels of Hawaiian Home Lands are leased.

The Department of Hawaiian Home Lands plans to offer 6,000 leases to eligible Native Hawaiians during the next five years, said Lloyd Yonenaka, DHHL spokesman. Overall there are about 12,000 residential leases on Hawaiian Home Lands.

Yonenaka said the agency would back Sandwich Isles' effort to retain federal subsidies, which he said allowed the company to offer phone service at no cost to the state.

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.