The head of the state Public Utilities Commission said liquidating Hawaiian Telcom Inc. would be devastating to Hawai'i's already weak economy.

Speaking at a hearing before U.S. Bankruptcy Judge Lloyd King yesterday, PUC Chairman Carlito Caliboso said much of the state's banking transactions, access to the Internet, alarm services and wireless communications would be affected, if not halted, if Hawaiian Telcom were allowed to be shut down.

He added that many of the essential public services in Hawai'i, including 911 emergency service, civil defense, police and fire rely on the local phone company's networks while wireless competitors such as Sprint, AT&T and Verizon Wireless are wholesale customers of Hawaiian Telcom.

"I'm here to state that the liquidation of Hawaiian Telcom is not a viable option," Caliboso said.

"The liquidation and loss of the company under any circumstances would have tremendous consequences for the state. Under the state's current financial situation, these consequences can only be worsened."

Caliboso's remarks were in response to a query from the bankruptcy court about the public interest served by Hawaiian Telcom and what impact a liquidation would have.

The PUC regulates Hawaiian Telcom, and any reorganization plan that comes out of the bankruptcy will require PUC approval.

Hawaiian Telcom, which filed for bankruptcy last month, is not liquidating its assets but is reorganizing its operations and reducing its debt.

The company is looking to sell itself to an outside investor who would bring new capital and take the company out of bankruptcy, said Paul Basta, an attorney for the company.

Hawaiian Telcom is also pursuing a "stand-alone" reorganization plan, Basta said.

Founded in 1883, Hawaiian Telcom is the state's largest telephone company and has 1,500 employees.

The company, which is owned by the Carlyle Group of Washington, D.C., filed for bankruptcy protection on Dec. 1 after failing to renegotiate the terms of its debt, which totals about $1 billion.

Hawaiian Telcom's reorganization received a boost yesterday when King gave the company permission to use its cash to fund the phone company's daily operations through February.

The company, which has about $90 million in cash, will require further court approval to use the cash after that date.

"This allows us to operate and protect the value of the company," said company Chief Executive Officer Eric Yeaman.

King also approved Hawaiian Telcom's request to retain Mainland law firm Kirkland & Ellis LLP and the local law firm Cades Schutte LLP. He also approved the hiring of tax consultants Ernst & Young, investment bankers Lazard Freres & Co. LLC and turnaround experts Zolfo Cooper Management LLC.

Zolfo Cooper, whose co-founder Stephen Cooper served as Hawaiian Telcom's CEO earlier this year, will receive about $225,000 a month and will be entitled to a bonus of up to $2 million.

Yesterday's hearing was attended by all three members of the PUC, including Caliboso, Les Kondo and John Cole, and state Consumer Advocate Catherine Awakuni. Hawaiian Telcom's senior management, including Yeaman and Chairman Walter Dods, were also present.

Dods was one of dozens of local investors who put as much as $30 million in Hawaiian Telcom when the Carlyle Group bought the company.

According to a recent bankruptcy court filing, other local investors include former Aloha Airlines shareholder Han Ching and his family, Servco Pacific Inc. President Eric Fukunaga and his family, banker Warren Luke, Maui developer Everett Dowling, homebuilder James Schuler, furniture executive Robert Wo and Warren Haruki, who served as president of Hawaiian Telcom's predecessor.

The local investors' stake in Hawaiian Telcom were largely wiped out by the bankruptcy.