Hawaii lawmakers are pushing through a bill to provide cash subsidies to the state’s only interisland cargo shipper in an attempt to soften the impact of the shipper’s proposal to increase its rates.
But the state Department of Transportation opposes House Bill 2475, saying it unfairly benefits just one company.
Higher shipping prices could mean a spike in prices for everything from milk to automobiles and building materials on some neighbor islands, and lawmakers have swiftly and quietly pushed the bill along as a way to solve the problem.
Molokai Rep. Lynn DeCoite’s measure comes as Young Brothers, which is the only cargo shipping company serving all of the Main Hawaiian Islands, is trying to convince regulators to let the company increase its shipping rates by 34% to offset escalating operating costs.
DeCoite’s district includes parts of Maui, as well as Molokai and Lanai, where small merchants could see a big impact if Young Brothers gets the rate increase it wants.
As a regulated shipper — essentially with a monopoly on the inter-island cargo business — Young Brothers has to get permission from the state Public Utilities Commission to raise its rates. The approved rate is designed to guarantee a certain level of revenue and profit.
The proposed subsidy apparently would do the same thing. Young Brothers presumably would have to amend its rate request before the PUC if it suddenly got an influx of cash from the Legislature.
DeCoite declined requests for an interview but provided a statement outlining her position.
“I had concerns about how the requested/proposed rates would affect my constituents,” she said. “Young Brothers inter-island cargo carriers are the main source of food delivery, agriculture products/livestock and many other integral goods, including vehicles to my district.”
In proceedings before the PUC, Young Brothers executives have said the increase would boost its annual revenue by $27 million, which they say is necessary to offset increased operating costs and ensure reasonable profits.
Deliveries to smaller islands like Molokai and Lanai are especially expensive because they often include parcels smaller than a whole container load of cargo, which take a lot more work – and expense — to handle and track.
The company’s rate request has prompted opposition from businesses that say it would force them to charge customers more or erode profit margins, or both.
Among those who have testified against the rate increase is John Caudell, owner of Pre-Owned Motor Cars, which employs about a dozen full-time employees in Kailua-Kona on the Big Island. The cost of labor is one of the fixed costs that keep profit margins modest. Nobody gets paid less than $17 an hour, Caudell said, and all get health insurance.
The company ships five to seven cars a week on average from Oahu using Young Brothers, he said.
A rise in rates would be tough on the business in part because the price people will pay for a used car is generally determined by the Kelley Blue Book. It’s also the price banks use for financing.
So how would he pay for the increased shipping fees?
“It comes off our profit margin,” he said.
DeCoite’s bill would allow lawmakers to steer money to Young Brothers from a special fund used to maintain and operate the state’s harbors. The fund has been flush with cash in recent years, with a balance of $200 million to almost $320 million annually from 2014 to 2018, according to a report by the Hawaii State Auditor published in January.
That’s far more than enough needed to subsidize Young Brothers the full amount of its proposed rate increase.
Still, as written, the measure raises numerous questions. It’s not clear, for instance, why the Legislature has proposed to subsidize operations only in Maui County and not others that would get hit by the rate hike.
It’s also unclear how the subsidy would interact with a rate increase. For example, the bill doesn’t prohibit Young Brothers from getting a subsidy from the Legislature and charging higher rates. Nor does the bill limit the amount Young Brothers could receive as a subsidy.
Still, the measure moved easily through the House.
And it has generated support from constituents like the Maui Chamber of Commerce, who says small islands like Molokai and Lanai depend on Young Brothers’ regular trips to the islands, even though it’s expensive for the shipper to make trips there.
Pamela Tumpap, president of the Maui Chamber, declined interview requests but submitted written testimony.
“If the state is providing subsidies to ensure a fair system, then we would hope that the subsidy would offset some of the rate hikes Young Brothers was looking to propose in Maui County, which is significant,” she wrote. “These rate hikes will creates [sic] hardships to local businesses who provide goods and services to local people and thereby, would increase the cost of living for residents.”
Opponents include the Hawaii Department of Transportation, which says the measure proposes to single out Young Brothers to benefit from a fund that receives money as fees, rates, fines and penalties from a wide range of harbor users to pay to operate and maintain the state’s harbors.
Specifically, the money covers things like personnel services, maintenance, equipment and vehicle replacements, fuel, utilities and insurance. It’s also used to compensate the Office of Hawaiian Affairs for the state harbor division’s use of so-called “ceded lands,” which is real property held in trust to benefit the Native Hawaiian people.
The Hawaii Department of Transportation says the bill unfairly benefits Young Brothers and raises potential legal issues.
Transportation Department spokesman Tim Sakahara did not respond to a call for comment. But in written testimony, the department’s director, Jade Butay, said the measure would discriminate against shippers that bring in cargo from outside Hawaii and carry it on to neighbor islands themselves, instead of handing it off to Young Brothers.
“The bill proposes DOT, Harbors Division, favor an overseas carrier who subcontracts cargo to the inter-island carrier by providing subsidies that would create an unfair competitive advantage,” Butay wrote.
DeCoite rebutted the issue of fairness by saying, “We are ‘ohana – we need to take care of each other.”
“Is it fair to other harbor users who pay into the special fund but don’t get a subsidy?” DeCoite wrote. “Well if this bill can help offset the rates proposed by Young Brothers then doesn’t the entire state benefit?”
“We are an island state!” she added. “Each island and community has different needs. Sometimes one island, county or community needs more than others, so we all (all taxpayers) pay for it as a state.”
Beyond the question of fairness is whether such a subsidy would be allowed under the law governing special funds. Among other criteria, the law says there must be “a clear nexus between the benefits sought and charges made upon the program users or beneficiaries or a clear link between the program and the sources of revenue.”
The Hawaii State Auditor is tasked with reviewing funds to see if they meet the legal criteria. The auditor has generally interpreted the law to mean there has to be a connection between the source of the revenue and its use. In this case, Butay argues, the beneficiaries of the special fund would go far beyond those paying into it.
“The harbor special fund generates revenue from collecting wharfage, port entry, land leases, and other maritime related fees,” Butay testified. “The benefit of offsetting costs to service counties with small populations go beyond those of just the maritime industry.”
State Auditor Les Kondo declined to say whether the fund would still comply with the law if amended as DeCoite’s bill proposes. DeCoite did not respond to the question in her statement to Civil Beat.
Others questioned the bill’s fairness.
Felicia Cowden, a Kauai County council member who has testified against the Young Brothers rate increase before the PUC, said Kauai businesses also would be hurt if Young Brothers raises shipping rates to the Garden Isle.
“That’s not fair, not including us,” she said in an interview. “Why would they leave us out?”
Young Brothers executives were not available for comment, but through a spokeswoman pointed to the written testimony of its current chief executive, Jay Ana, as well as the thousands of pages of documents submitted to the PUC as part of the formal rate request.
In his testimony, Ana said the company has been operating in the red for the past five years and hasn’t been able to raise rates in response.
“We have not been allowed to raise additional revenue, with the exception of a negligible increase of $88,000 in 2017 and a $3.4 million [increase] in 2018 – not enough to break-even, let alone earn profit necessary to reinvest in our operations,” he wrote.
Other documents show Young Brothers is a company in the midst of major changes. The company invested some $80 million in new vessels in 2016. Meanwhile, the company has seen a decline in business.
This appears to be partly the result of more people buying goods online, which are generally transported to Hawaii by air.
But it’s also the result of more competition. According to testimony of Young Brothers’ previous acting chief executive, Paul Stevens, Matson Inc. is increasingly shipping unregulated, interstate cargo on to neighbor islands instead of handing it all off to Young Brothers on Oahu. And Young Brothers expects the trend to continue.
These trends make it difficult for Young Brothers to provide regular service to small islands like Molokai and Lanai.
“Our twice weekly barge sailings are absolutely critical to each of these islands,” Ana testified. “However, given the relatively small populations of each island, the reality is that we need to subsidize those sailings with the transport revenues generated from other ports.”
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