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The Honolulu Advertiser

Posted on: Sunday, June 19, 2005

Firms reap telcom bonanza

 •  Chart (opens in a new window): Telecommunication service to the Hawaiian Home Lands

By Sean Hao
Advertiser Staff Writer

While Hawai'i may be home to the nation's highest gasoline prices and some of the most expensive real estate, it also has the costliest rural telephone network in the country.

The federal government is on pace to pay Honolulu-based Sandwich Isles Communications Inc. $13,743 per customer this year for providing high-speed fiber-optic phone lines to families living on Hawaiian Home Lands. The Hawai'i subsidy — funded by a $2 fee attached to all phone bills — is 100 times higher than the average for rural telephone service on the Mainland.

Nextel Partners Inc. of Reston, Va. — using the same program that gives wireless phone companies a payout similar to the land-line subsidy — should get $13,389 this year for each wireless customer on Hawaiian Home Lands.

"It's definitely a lot of money," said John Cole, executive director of the state consumer advocacy office. "I would think there's other (cheaper) ways to do it. When you look at the amount, it does seem out of line with what it should be."

Next to Hawai'i, the most expensive rural phone subsidy was the $559 paid per customer in Kansas.

The money comes from the Universal Service Fund, a federal program designed to ensure that customers in high-cost rural areas have affordable phone service. In Hawai'i, the fund is financed by an 11.1 percent fee on interstate phone bills paid by Hawaiian Telcom, the state's main land-line phone provider, and a higher rate for local wireless customers. Hawai'i customers paid an average $2.04 per phone per month last year.

Sandwich Isles and Nextel Partners are on track to receive a combined $24.9 million in federal subsidies this year for providing service to a total of 1,823 customers on Hawaiian Home Lands.

"It is needed," said Pikake Pelekai, executive director for the State Council of Hawaiian Homestead Associations. "For so long Verizon (now Hawaiian Telcom) and its predecessors had the capability, but they chose not to serve those areas. Everybody, everywhere should be able to have that service, not just because you live in Honolulu."

Marjorie White appreciates that. Her mother and sister live on Hawaiian Home Lands in Pu'ukapu on the Big Island. Before Sandwich Isles installed phones, the family had to rely on spotty wireless service to communicate.

"It was pretty scary. We just didn't have any way to communicate," White said. Now, it's "really wonderful because I live in Honolulu, and I can call and check up on them."

Going beyond basics

The rural phone fund has been criticized, however, for straying beyond the role of financing basic communications services. Some projects now involve high-speed Internet hookups and wireless service or subsidize multiple competitors. These high-priced services lead to higher Universal Service Fund fees for all long-distance users.

Sandwich Isles, which has exclusive, open-ended rights to wire Hawaiian Home Lands with telephone service, said it decided to provide fiber-optic lines to ensure that customers would have the best network possible. Fiber-optic lines allow Sandwich Isles to offer high-speed Internet that can host video services such as "telemedicine" to areas which, in some cases, lack access to running water, electricity, paved roads and nearby healthcare.

The Hawaiian Home Lands are approximately 200,000 acres of property formerly owned by the Hawaiian monarchs and government that were ceded to the United States when Hawai'i was annexed as a territory in 1898. In 1921, the land was set aside for use by eligible Hawaiians. There are about 6,000 parcels of land leased to Hawaiians for residential use and about 18,000 Hawaiians on a waiting list for property.

The subsidies given Sandwich Isle and Nextel equate to an average of $13,642 per customer, or more than 100 times the $130-per-line average annual subsidy provided for rural communications projects nationwide, according to Federal Communications Commission records.

Cost explained

A brief look at 2 companies

Who provides phone service on Hawaiian Home Lands:

Name: Sandwich Isles Communications Inc.

Headquarters: Honolulu

Employees: 42

Rural customers: 1,106 *

Rural subsidy: $3.8 million. *

Name: Nextel Partners Inc.

Headquarters: Reston, Va.

Employees: 85 in Hawai'i.

Rural customers: 717 *

Rural subsidy: $2.4 million. *

* During the first three month of 2005.

Source: Advertiser research; the Federal Communications Commission.

Gil Tam, Sandwich Isles vice president, said the high cost is the result of building a new network to rural areas whereas other states are mostly maintaining existing networks. Sandwich Isles costs are higher because it is burying fiber cable to connect homes in various rural pockets of the Big Island, O'ahu, Maui, Moloka'i, Lana'i and Kaua'i. These areas ultimately will be connected via a string of undersea fiber-optic cable linking the Islands.

"We know (the costs) look big, but over time, with the number of customers that will come on stream, they will go down," said Tam. "You just can't really take a snapshot. It's like building a condo. You don't wait for 100 percent occupancy before you finish the next floor."

The high subsidies are in part a result of the way companies are compensated for providing service in rural areas, said Susan Gately, senior vice president for telecommunications consultant Economics and Technology Inc.

Under the Universal Service Fund, companies are guaranteed an 11.5 percent return on network expenses and face little scrutiny over how they spend money. Neither the state Public Utilities Commission nor the Universal Service Administrative Co., a nonprofit corporation that administers the fund nationwide, has audited Sandwich Isles. The Universal Service Administrative Co. has conducted just seven audits between 1998 and 2004.

However, up to 250 audits are planned within the next three years, said Wayne Scott, vice president for internal audit at the Universal Service Administrative Co. Overall, about 1,400 companies receive subsidies from the fund.

"We realize that there need to be more audits," he said. "There are going to be a lot more audits to follow."

The high costs of providing communications services doesn't signal anything improper, Gately said of Sandwich Isles.

"It doesn't sound like they're doing anything that the Universal Service Fund doesn't allow them to do," Gately said, adding that the problem is the program's loose rules.

"There is no question that the system has to be fixed," Gately said. "There's not an incentive for these guys to be efficient or watch their expenses."

System 25% complete

Sandwich Isles plans to serve 4,600 customer by 2010 and so far has spent about $160 million on a system that's about 25 percent complete. The company plans to borrow up to $400 million in low-interest loans from the U.S. Department of Agriculture to finance the network.

Sandwich Isles currently serves 1,300 customers, mainly on the Big Island, Maui and Moloka'i, and charges them rates below or comparable to what urban customers pay. That would be impossible without the federal subsidies, Tam said.

"The costs are high because they're building a network," said Federal Communications Commission spokesman Mark Wigfield. "Most (rural phone companies) aren't building new networks."

The cost might have been less if Sandwich Isles had opted for cheaper technologies such as satellite.

For example, Hughes Network Systems' Direcway offers satellite broadband Internet service in 50 states with a $599 equipment and installation cost and $59.99 monthly service price. Iridium Satellite LLC offers phone plans worldwide with a starting price of $100 a month for 55 minutes of talk time and a $50 activation fee.

While those options may not be as reliable as fiber-optic land lines, they do illustrate what is available in the communication market for far less than the $13,000-plus that Sandwich Isle is getting.

Customers' choice

The Universal Service Fund is also being used to attract multiple phone companies to rural areas to create competition and give customers a choice.

That's how Nextel managed to get in on the lucrative subsidies.

A decision by the state Public Utilities Commission last summer led to Nextel's receiving subsidies for providing a service that competes with Sandwich Isles.

Because of the way the fund is set up, Nextel is paid a subsidy based on Sandwich Isles' costs. That means Nextel is on track to get more than $13,000 for each customer even though the company's expenses are likely lower because it doesn't have to physically wire homes for service.

Pete Jaeger, Nextel's Hawai'i technical operations manager, would not say how much Nextel is spending per new Hawaiian Home Lands customer or how much profit the company is earning off this portion of its business.

Regulators are considering a variety of changes to the Universal Service Fund that would limit future subsidies. They include reimbursing rural telecom companies based on the cheapest way to serve customers rather than actual costs and limiting reimbursements to one company that provides a rural home's main phone service.

Those changes could eventually lead to a lowering of the $2-per-month average fee that all phone users are now paying.

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