Interisland shipper Young Brothers diverted more than $26 million in wharfage fees it was supposed to remit to the state in 2024 and 2025 and instead used the money to help cover its own operating expenses, according to the company and state officials.

Young Brothers still hasn’t paid that money back to the state and now owes the Department of Transportation about $30 million including penalties and interest.

That move by the company to essentially help itself to a multimillion-dollar loan from state funds is coming to light as Young Brothers lobbies the Legislature for a controversial bill to grant it automatic rate increases of up to 5% per year over the next three years.

Young Brothers has encountered resistance to the automatic rate increase proposal in Senate Bill 2694, in part because the state Public Utilities Commission just granted the company a whopping 25.75% rate increase that took effect Jan. 1.

Young Brothers has a near-monopoly on interisland shipping, and critics of the automatic rate increase include a who’s-who list of neighbor island business organizations, including the Hawaiʻi Island Chamber of Commerce, Maui Chamber of Commerce and the Molokaʻi Chamber of Commerce.

Also opposing the bill are the Hawaiʻi Restaurant Association, the Hawaiʻi Food Industry Association and ABC Stores.

Michael Angelo, executive director of the state’s Division of Consumer Advocacy, raised concerns about the bill, warning lawmakers the automatic rate increases “would result in unnecessarily burdening customers with increasing rates on an annual basis without the opportunity to evaluate whether a water carrier has undertaken steps to sufficiently control its costs and operate more efficiently.”

Besides Young Brothers, the bill is backed by the Hawaii Harbors Users Group, port managers at Kawaihae, Hilo and Maui, and The Maritime Group, which is a consortium of maritime service and management companies.

Struggling With Increasing Costs

Young Brothers moves cargo between Oʻahu, Hawaiʻi island, Kauaʻi, Maui, Molokaʻi and Lānaʻi, and is the only cargo carrier operating among the islands that handles bulk shipments such as construction materials.

It is regulated by the state Public Utilities Commission and needs PUC approval for rate increases. But Young Brothers says that approval process is too slow and cumbersome, and the company complains that inflation and other expenses force it to operate at a loss while it awaits PUC decisions.

Ashlee Kishimoto, director of finance for Young Brothers, told Civil Beat the decision to withhold money from state wharfage fees from fall 2024 to spring 2025 was made at a time when Young Brothers was losing money and awaiting a PUC decision on a request for a rate increase.

Cargo volumes still have not returned to pre-pandemic levels, she said, while operating costs continue to rise. The company is required to maintain sailing schedules to all islands regardless of cargo volumes, she said, but the Hilo route and the Molokaʻi-Lānaʻi run each operate at a loss of $7 million per year.

Another problem has been the less-than-container-load service the company provides, Kishimoto said, which has been operating at a loss of $20 million per year.

The proposed automatic rate increases under SB 2694 are designed to keep shipping rates in sync with actual cost increases, she said, and would provide more predictable shipping costs and fewer large sudden rate increases.

The bill would require the PUC to establish an automatic rate increase mechanism “to address inflation, regulatory lag and other economic factors.” The inflation rate would be based on the wharfage fee increases imposed by the state Department of Transportation up to a maximum of 5% for the next three fiscal years. After that the PUC would have the option of continuing the automatic increases for an additional three years.

“We believe that this would be good for both YB and its customers, looking ahead and looking forward,” Kishimoto said, “to have these smaller rate adjustments of up to 5% to reduce the large increases after a long delay” while the PUC processes a normal rate increase.

That would help the company “get on a path to financial stability and to maintain reliable service,” Kishimoto said. She said Young Brothers is working with the state on a repayment plan for the wharfage fees that the company plans to finalize by the end of this month.

In testimony before lawmakers the company acknowledges the “imposing” 25.75% rate increase that became effective this year but points out the PUC also specified in its decision there would be no additional rate increases for the next two years.

That, the company said, threatens to put Young Brothers and its customers “on a path to repeat this same cycle of financial instability.”

Questioning Management Decisions

State Department of Transportation Director Ed Sniffen told Civil Beat the company informed state Harbors Division officials in fall of 2024 that it needed to retain the wharfage fees it had collected to pay salaries and continue operations.

Administrative rules governing state harbors have mechanisms for repaying late fees, “and this is the same type of situation, just on a bigger scale,” Sniffen said. He said Young Brothers also withheld wharfage fees during the pandemic to help cover its operating costs.

“We thought it best to make sure we work with them to minimize the impacts, first to the communities, and make sure we can help with the long-term resilience of Young Brothers itself,” he said. Young Brothers has since resumed regular payments to the state of the wharfage fees it collects.

DOT is supporting SB 2694, saying in written testimony to lawmakers that formal PUC rate cases are time consuming. The lags between the formal decisions “necessitate large increases when the rate cases are considered. This has a significant impact and burden on businesses that rely on water carriers.”

But Angelo, executive director of the state Department of Commerce and Consumer Affairs’ Division of Consumer Advocacy, said the situation is more complex than Young Brothers suggests.

He cited PUC documents from 2024 showing Young Brothers decided to issue “multiple discretionary dividend payments to its parent company” Foss Maritime Co., which is owned by transportation giant Saltchuk.

Young Brothers made those payments “despite the company’s significant financial decline and foreseeable capital expenditures and debt obligations,” according to the PUC filing.

The most recent rate case also suggested the company should do more to reduce its labor costs including overtime, he said, and highlighted other opportunities for Young Brothers to reduce costs.

Angelo told Civil Beat he objects to the automatic rate increases that would be allowed under SB 2694 because rather than conduct a full review of a requested rate increase, “it’s putting more on the back of ratepayers who are going to have to buy out Young Brothers from their previous management’s decision making.”

“It’s the operations of the company — the management of the company in the past — that has led to the situation that they’re in now,” he said, “and ratepayers should not be the piggybank to pay for those decisions.”

“The question is, what is going on here?” he asked. “So, let’s peel back the layer of the onion and make sure that going forward ratepayers are not paying for management decisions that adversely impact them.”

Lawmakers are scheduled to take final votes in the House and Senate Wednesday on Senate Bill 2694 in advance of the scheduled end of the legislative session on Friday.