A Honolulu telecom company that has enjoyed exclusive rights to provide phone and Internet services to residents on Hawaiian Home Lands is under fire by the Federal Communications Commission for questionable business practices.

A scathing FCC ruling earlier this month rejected a request by Honolulu-based Sandwich Isles Communications for a 10-year waiver from new rules that restrict the amount of federal subsidies companies can tap when providing telecommunications services to underserved areas.

Federal regulators pointed to exorbitant corporate expenses and unjustified payments made by Sandwich Isles to affiliated companies. Many of those entities are owned or operated by Al Hee, CEO of Sandwich Isles, or his family members.

We “conclude that Sandwich Isles has certain expenses that appear grossly excessive and unreasonable,” the FCC wrote in its May 10 ruling. “In 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 . . . Granting a waiver in these circumstances would be inappropriate and unfair to consumers and businesses that support the universal service fund.”

Neither Hee nor Robert Kihune, the former chairman of the Kamehameha Board of Trustees who is vice president for Sandwich Isles, returned calls for comment for this story.

The FCC’s new rules are aimed at cracking down on fraud and abuse related to the Universal Service Fund. The fund is paid for through fees tacked on to most people’s phone bills and distributed to telecommunications companies to subsidize services in high-cost areas. The goal of the fund is to ensure that people in rural or remote areas have basic communication services at affordable rates.

The FCC ruling comes amid longstanding concerns about the amount of federal subsidies being paid to Sandwich Isles Communications and its affiliates, as well as a cascade of criticism leveled at the Department of Hawaiian Home Lands. A recent state audit of DHHL, which has allowed Sandwich Isles to operate exclusively on Hawaiian Home Lands since the mid-1990s, said that the department suffers from mismanagement and lax oversight and is failing in its mission to serve Native Hawaiian beneficiaries.

DHHL is in charge of about 200,000 acres of land throughout Hawaii that has been set aside for qualified Native Hawaiians.

Hefty Subsidies

The FCC’s new regulations cap the subsidy for companies like Sandwich Isles at $250 per line per month. But Sandwich Isles has been receiving more than $800 per line per month, according to FCC documents. In rural Hawaii, the cost of phone service has been about 100 times higher than the average for rural telephone service on the mainland.

Sandwich Isles has received about $25 million a year from the ratepayer fund for the past three years, according to FCC filings. Mark Wigfield, a FCC spokesman, said he didn’t immediately know the full amount paid to Sandwich Isles over the years.

The company serves about 3,000 customers on Hawaiian Home Lands, according to DHHL.

The FCC ruling said that the company’s corporate expenses are about seven times higher than companies of similar size that have the highest level of expenses. Sandwich Isles’ corporate expenses include salaries, legal expenses, consulting fees, audit expenses, insurance and management fees.

The FCC also raised concerns about local affiliated companies, which receive large payments from Sandwich Isles. Those include Waimana Enterprises, its parent company, Paniolo Cable Network, ClearCom and Blue Ivory Hawaii. Hee is the executive of Waimana Enterprises, Sandwich Isles Communications and ClearCom.

“Although Sandwich Isles contends that Paniolo is a non-affiliated entity, we note that it is owned by Blue Ivory, LLC, which in turn is wholly owned by Blue Ivory Hawaii Corporation,” wrote the FCC in its ruling. “Blue Ivory Hawaii Corporation is held equally by the private trusts of the three children of Mr. Hee.”

The FCC report redacted the amount of the payments to the affiliated companies. But the FCC said that payments to Waimana Enterprises had increased in recent years and seemed to be for redundant services. Payments to Paniolo also increased and could “undermine Sandwich Isle’s overall financial viability,” according to the FCC.

Lex Smith, a Honolulu attorney at Kobayashi, Sugita and Goda who has also represented Sandwich Isles in proceedings before Hawaii’s Public Utilities Commission, is the manager for Paniolo Cable Co.

Janeen-Ann Ahulani Olds, a former attorney at Kobayashi, Sugita and Goda and a Kamehameha Schools trustee, is listed as president of Blue Ivory Hawaii Corp. She is also general counsel for Waimana Enterprises.

Smith and Olds declined to comment on the FCC ruling.

Olds said that she didn’t think it was a conflict of interest for her to serve as the counsel for Waimana Enterprises and the head of Blue Ivory Hawaii. She referred questions relating to Waimana Enterprises to Hee.

Political Influence

Sandwich Isles Communications has long attracted interest in Hawaii’s political circles because of its ties to former legislators, well-known business executives and people connected with Kamehameha Schools, formerly known as the Bishop Estate, which has an endowment of about $9.2 billion.

Hee, who is the brother of state Sen. Clayton Hee, was granted exclusive rights to serve new Hawaiian Home Lands communities in the mid-1990s. The Department of Hawaiian Home Lands approved Hee’s license to serve Native Hawaiian beneficiaries after his plan was evaluated by former state Sen. Mike Crozier, according to past news reports. There was no competitive bidding process.

As of 2001, Sandwich Isles’ employees included former Democratic House Majority Leader Tom Okamura and former state Rep. Devon Nekoba.

Ties to Kamehameha Schools include Olds and Kihune. Gil Tam, who served as a vice president for Waimana Enterprises until 2011, also served as a director for Kamehameha Schools.

But information about current employees of Sandwich Isles or its affiliates is hard to come by.

Company filings with the Hawaii Public Utilities Commission are heavily redacted and there are only a few company executives listed in filings with the state Department of Commerce and Consumer Affairs.

Al Hee is listed as the president, vice president, secretary, treasurer and director of Waimana Enterprises. Hee is also listed as the president, secretary and director of Sandwich Isles, while Kihune is listed as vice president, treasurer and director.

Olds is listed as the president, vice president, treasurer, secretary and director of Blue Ivory Hawaii.

In addition to the company’s political ties, executives have made hefty political contributions over the years.

Since 2006, Sandwich Isles and its affiliates have spent at least half a million dollars on contributions to Hawaii lawmakers and political leaders and lobbying activities, according to campaign spending records and national databases.

The largest donations at the state level have gone to Gov. Neil Abercrombie, who has received $42,700 from Sandwich Isles and Waimana Enterprises since 2009, according to state campaign finance records.

The companies have also donated more than $170,000 to members of Hawaii’s congressional delegation since 2000, according to OpenSecrets.org.

Phone and Internet Service to DHHL in Jeopardy?

Darrell Young, deputy director for DHHL, said that it was too early to comment on whether the FCC ruling will have any impact on the department’s policy to allow Sandwich Isles to exclusively serve beneficiaries.

DHHL “is monitoring the situation and will work with SIC to address any issues and concerns, if any, as they arise,” he said in an email.

In petitioning the FCC for a waiver from new rules, Sandwich Isles argued that a reduction in federal subsidies would push the company into insolvency and jeopardize phone and Internet services to the thousands of Native Hawaiians that the company serves.

However, the FCC said that it saw no evidence to support this claim.

Jeffrey Ono, Hawaii’s consumer advocate, wasn’t sure what sort of concerns his office might have.

“Sandwich Isles certainly is dependent on receiving USF funds,” said Ono. “To what extent their business model is dependent on the (subsidy) that they cannot do business, I don’t believe that is the case.”

Hawaiian Telcom has also served DHHL properties for years, prior to Sandwich Isles’ operations, according to FCC filings.

The company is required by state regulators to serve areas even if they are not profitable.

Scott Simon, a company spokesman, said that Hawaiian Telcom remains committed if Sandwich Isles can no longer provide service.

“Hawaiian Telcom has always been committed to serving all of Hawaii consistent with its ‘Carrier of Last Resort’ status, including the most rural areas,” he said by email.

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