The Federal Communications Commission’s Wireline Competition Bureau has denied a petition filed by Sandwich Isles Communications, Inc. seeking waiver of universal service fund reforms adopted by the FCC in the 2011 USF/ICC Transformation Order.[1] Sandwich Isles sought a waiver of the $250 per line per month cap on high-cost USF support for a period of ten years, and requested receipt of the full amount of USF support per line that it was receiving.

The Wireline Bureau shot down the waiver, concluding Sandwich Isles failed to show good cause after determining “Sandwich Isles has certain expenses that appear grossly excessive and unreasonable.”[2] Though the exact amounts are unclear because the order is redacted, the unreasonable expenses cited by the Bureau include high corporate operations expenses and “significant” payments from Sandwich Isles to its parent company and an affiliate. 

There are a couple important takeaways from the order. First, the decision serves as a reminder that if rate-of-return carriers want to have a chance at successfully navigating the FCC’s USF waiver process, they must be able to provide a justification for every expense, and show that they are actively taking steps to reduce their expenses and their overall dependence on high-cost universal service support. Second, the FCC is ready to go after carriers if there is any evidence of potential waste, fraud, and abuse of USF support. With respect to Sandwich Isles, the irregularities cited by the Wireline Bureau in the order appear to be just the tip of the iceberg.

The $250 Per Line, Per Month Cap On USF Support

One of the most significant reforms in the USF/ICC Transformation Order other than the quantile-based regression analysis is the rule that caps high-cost support at $250 per line per month ($3,000 annually).[3] Pursuant to that reform, from July 1, 2012 through June 30, 2013, carriers were to receive no more than $250 per-line monthly plus two-thirds of the difference between their uncapped per-line amount and $250. From July 1, 2013 through June 30, 2014, carriers will receive no more than $250 per-line monthly plus one-third of the difference between their uncapped per-line amount and $250. Starting July 1, 2014, carriers will receive no more than $250 per-line monthly.

Carriers that are negatively affected by the $250 cap or any other reform adopted in the USF/ICC Transformation Order may petition the FCC for a waiver. However, many times, the FCC and Wireline Bureau have made clear that waivers will not be granted routinely. Carriers must demonstrate that good cause exists, and in the Fifth Order on Reconsideration, the FCC clarified that when analyzing a waiver request, it will examine and take into consideration “the size and nature of payments made to affiliated companies.”[4] In other words, the FCC will examine whether carriers may be engaging in cost shifting, tricky accounting practices, or any activity that smells like fraud, waste, or abuse.

Sandwich Isles Waiver Petition

Sandwich Isles is an incumbent local exchange carrier that provides all wireline communication services on the Hawaiian Home Lands which consist of approximately 70 noncontiguous parcels, totaling 203,500 acres on six islands. Sandwich Isles was designated as an eligible telecommunications carrier (ETC) in 1997. It received $25,107,678 in high-cost USF support in 2011 to serve approximately 243,921 lines, at over $858 per line, per month.[5]

On December 30, 2011, Sandwich Isles filed its petition, requesting a waiver of the $250 cap for ten years and continued receipt of the full amount of support per line that it was receiving.[6] Sandwich Isles maintained that without a waiver it would be forced into insolvency, and as recently as February and April 2013, met with the Wireline Bureau to discuss plans to reduce its expenses.

The Wireline Bureau’s Denial Order – Excessive Costs!

The FCC’s Wireline Bureau denied Sandwich Isles’ waiver request based on its ultimate conclusion that “Sandwich Isles has certain expenses that appear grossly excessive and unreasonable,” and “[i]n particular, Sandwich Isles has spent millions of dollars with affiliated and related entities for services that appear unrelated to the provision of a broadband-capable network.”[7] The following “unreasonable costs” were identified by the Bureau:

• Corporate operations expenses that are 623 percent greater than the average for similar companies with the highest corporate operations expenses;

• Significant payments between 2009-2011 to Waimana Enterprises, Inc. (Waimana), Sandwich Isles’ parent company, for providing services to Sandwich Isles; and

• Significant payments to an affiliated entity, ClearCom, Inc. (ClearCom), for use of abandoned water mains.

After reviewed similarly-sized companies, the Bureau determined that Sandwich Isles’ corporate operations expenses – salaries, legal and consulting expenses, audit expenses, insurance, management fees – appear disproportionately high. According to the Wireline Bureau, as of year-end 2011, Sandwich Isles had 2,439 loops and corporate operations expenses of $6,554,263 – $224 per loop per month. “[F]or the next five companies in Sandwich Isles’ peer group with the highest corporate operations expenses, the average total corporate operations expenses were $1,093,290 for an average of 2,968 loops—$31 per loop; Sandwich Isles corporate operations expenses are nearly seven times this average.”[8]

Much of Sandwich Isles’ “unreasonable” expenses consist of many millions of dollars paid to Waimana, ClearCom, and Paniolo Cable Network (Paniolo). Sandwich Isles made significant payments to Waimana between 2009 and 2011. The Bureau concluded that the payments increased substantially in recent years, without any explanation for the need for additional services, and that the payments were for services that Sandwich Isles’ own employees could perform.

ClearCom leases abandoned water mains from the city of Honolulu and then leases them to Sandwich Isles. The exact details of the agreement in place between Sandwich Isle and ClearCom for the use of abandoned water mains and the total payments made under the agreement are unclear because the paragraph of the Order addressing the issue is highly redacted. So something shady must be going on, right? Maybe. In the Order, the WCB notes that no other broadband provider in Honolulu uses the water mains and states that “for use of…the abandoned water mains, Sandwich Isles appears to be paying both significant amounts of money and a significant portion of ClearCom’s lease costs.”[9]

The FCC’s Wireline Bureau also took issue with Sandwich Isles’ lease agreement with Paniolo to receive telecommunications transport services because “the Paniolo-related costs may undermine Sandwich Isles’ overall financial viability.” Although information related to the Paniolo lease agreement is redacted, the Order shows that the Paniolo lease was one of the topics included in an April 8th confidential ex parte in which Sandwich Isles discussed measures to reduce its expenses.[10]

The Sandwich Isles Petition Is The Fourth USF Waiver Petition Denied By The Wireline Competition Bureau In The Past Ten Days

Denial of Sandwich Isles petition marks the fourth USF waiver petition in ten days that was denied by the WCB. On April 30, 2013, the WCB dismissed petitions for waiver of the FCC’s universal service rules filed by three Texas carriers based on a section of Texas state law, instead of addressing the actual merits of each petition. In contrast, it was likely easy for the Bureau to address the merits of the Sandwich Isles petition.  After taking a look at the full record – from the initial filing of the petition to the public version of the last ex parte – it’s not surprising the petition was denied. Sandwich Isles was aware that the FCC considered many expenses unreasonable and excessive, and offered “plans” to reduce these expenses, but failed to act on those plans. Nevertheless, as noted in the final section of Order, Sandwich Isles may pursue a waiver in the future, once it is able to restructure its operations in a way that allows it to lower its costs and reduce its dependence on USF support. Realistically though, Sandwich Isles is in big trouble. The Wireline Bureau’s order foreshadows something bigger to come, like a full-blown investigation for fraud.

***** Footnotes *****

[1] Connect America Fund: Sandwich Isles Communications, Inc. Petition for Waiver of Section 54.302 of the Commission’s Rules, WC Docket No. 10-90, DA 13-1067 (May 10, 2013) (Order).

[2] Order at ¶12.

[3] Connect America Fund, WC Docket No. 10-90 et al., Report and Order and Further Notice of Proposed Rulemaking, FCC 11-161, ¶274-5 (Nov. 18, 2011) (USF/ICC Transformation Order).

[4] Connect America Fund, WC Docket No. 10-90 et al., Fifth Order on Reconsideration, FCC 12-137, ¶22 (Nov. 16, 2012) (Fifth Order on Reconsideration).

[5] Order at ¶6.

[6] Sandwich Isles Communications, Inc. Petition for Waiver of the Commission's Rules implementing reform of Universal Service Support and Intercarrier Compensation for Rate-of-Return carriers, WC Docket No. 10-90 (filed Dec. 30, 2011).

[7] Order at ¶12.

[8] Order at ¶15.

[9] Order at ¶18.

[10] Letter from Frederick M. Joyce, Counsel to Sandwich Isles, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 and WT Docket No. 10-208 (filed Apr. 8, 2013).