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Monday, January 14, 2019
FCC Slaps Down Sandwich Isles Again--Orders Company to Continue Serving Customers
By Andrew Walden @ 6:08 PM :: 4949 Views :: DHHL, Ethics

Before the Federal Communications Commission, Washington, D.C. 20554

In the Matter of Sandwich Isles Communications, Inc.

WC Docket No. 10-90


Adopted: December 4, 2019 Released: January 3, 2019 (excerpts)

By the Commission:

2. Between 2002 and 2015, the Commission’s high-cost universal service support mechanisms provided nearly $250 million of funds to Sandwich Isles Communications, Inc. (SIC) to provide service to customers in the Hawaiian Home Lands.4 Yet SIC only provides service to less than [Redacted] lines—a small fraction of the customers it originally stated it planned to serve.5 Far more troubling, an investigation by the Universal Service Administrative Company (USAC) begun in 2015 determined that SIC received more than $27 million in high-cost universal service support to which it was not entitled.6 In addition to these findings by USAC, the Hawaii Public Utilities Commission in 2015 concluded that it could not certify that all federal high-cost support provided to SIC was used in the preceding calendar year, and would be used in the coming calendar year, only for facilities and services for which the support is intended, as required by the Commission’s universal service rules.7

3. The Commission confirmed USAC’s findings in the SIC Improper Payments Order.8  The Commission concluded that SIC violated the Commission’s regulatory cost accounting rules and related requirements, resulting in inflated costs being used as the basis for SIC’s universal service support payments. In particular, the Commission found that SIC relied on three general types of costs and expenses as the basis for improper high-cost universal service support:

• Costs associated with facilities that were not serving any customers;9

• Costs associated with network facilities used for purposes that are not compensable under the Commission’s high-cost support rules,10 and

• Inflated expenses that violated rules governing how carriers account for transactions with affiliates, or that otherwise were excessive.11

4. SIC filed a petition seeking reconsideration of virtually all aspects of the SIC Improper Payments Order.12 SIC contends that the Commission ignored its legal arguments and factual submissions, but in fact, the Commission painstakingly responded to those arguments and submissions and deemed them unpersuasive. On reconsideration, SIC fails to take account of the text of the Act and the reasonable policies underlying the Commission’s universal service rules, which among other things preclude recovery for facilities that are not actually used to provide service in covered areas. While SIC points to evidence that it claims shows that its cost accounting did in fact comply with Commission rules, that evidence is either incomplete, unpersuasive, or else outright contradictory to other facts and claims made elsewhere by SIC. Nor are we persuaded by the other legal or equitable arguments SIC raises in seeking to avoid the consequences of having received improper universal service support. None of these arguments prevents the Commission from exercising its specific statutory obligation to make sure that high-cost funds are used for their intended purposes and seek repayment of improperly distributed funds.13 We thus deny the SIC Petition.

5. Our decision today does not diminish in any way the Commission’s commitment to service for customers on the Hawaiian Home Lands. SIC still has ongoing obligations to its customers, under both the Communications Act and Commission rules, to continue to provide interstate telecommunications services.14 SIC may not discontinue service without our express authorization.15  Nor, however, may SIC ignore our accounting rules and universal service safeguards going forward.

13. Under Part 32 of the Commission's rules, rate-of-return carriers record their investments, expenses, and other financial activity in the uniform system of accounts (USOA).41 These rules differ if the investments and expenses are incurred in connection with affiliate transactions. For example, when services are purchased by a carrier from an affiliate, cost shall be recorded at no more than the lower of fair market value and fully distributed cost. 42 If an affiliate exists solely to provide services to members of the carrier's corporate family, all services the carrier purchases from that affiliate shall be recorded at fully distributed cost.43 These affiliate transaction rules were adopted to guard against the risk that rate-of-return carriers would pay excessive rates to unregulated affiliates for services and pass such costs onto ratepayers.

B. Procedural Background

25. The investigation that culminated in the SIC Improper Payments Order began in 2015, after the criminal tax fraud conviction of Albert Hee, an owner and executive of SIC during the periods at issue here.95 On July 28, 2015, the Commission’s Chief Financial Officer, Office of Managing Director (OMD), directed USAC to suspend high-cost funding to SIC pending completion of further investigation and/or other ameliorative measures to ensure that any funding provided is used solely in a manner consistent with Commission rules and policies. On August 7, 2015, USAC informed SIC that its federal high-cost support was suspended, beginning with the disbursement for July 2015.96

26. Also in August 2015, the Wireline Competition Bureau (Bureau) directed USAC to investigate whether SIC received any improper payments from the federal high-cost support mechanisms from 2002 to June 2015.97 The Bureau also directed USAC to determine if there were sufficient assurances that high-cost support amounts provided on a going forward basis would be used consistent with the Commission’s rules. The investigation focused on testing reported costs affecting disbursements between 2002 and June 2015. From August 2015 through April 2016, USAC and Commission staff held weekly meetings by telephone with SIC to discuss inquiries and documentation needed for the investigation.

27. On February 5, 2016, USAC sent SIC a draft report containing USAC’s exceptions and observations from the investigation for the period 2002 to June 2015.98 USAC tentatively concluded that SIC received $61,850,980 in improper payments, of which $58,024,044 related to the misclassification of category 1 (CAT 1) C&WF.99

28. The USAC draft report spurred further development of the record in the investigation.  SIC submitted comments in response to the draft report on February 25, 2016, in which it disagreed with the USAC draft report exceptions and observations.100 Regarding the category 1 cost misallocation exception in particular, SIC disagreed with USAC’s treatment of SIC’s use of DLC equipment as switches and USAC’s claim that certain network facilities did not connect to subscriber premises.101 USAC and Commission staff reviewed SIC’s comments and requested further documentation. As relevant here, on March 31, 2016, USAC provided SIC with a spreadsheet including a line count analysis and requested clarification regarding the exchanges and network facilities that USAC identified as not having subscribers.102 SIC responded on April 11, 2016, identifying the exchanges for each location.  Based on SIC’s submissions, USAC updated and finalized its report.

29. On May 13, 2016, USAC submitted its final report to both the Bureau and SIC.103 In its final report summarizing the results of its investigation, USAC identified eight exceptions that it concluded had resulted in $27,270,390 in overpayments from the high-cost programs to SIC.104 The exception resulting in the greatest monetary recovery from the Fund related to the misclassification of category 1 C&WF (Exception 1).105 As part of Exception 1, USAC found that SIC received $26,320,270 in high-cost overpayments because of its improper classification of facilities between central offices (Exception 1A - $7,420,638), and its improper classification of facilities without subscribers during certain years (Exception 1B - $18,899,632).106

30. On May 18, 2016, USAC provided SIC with a spreadsheet highlighting cable and wire facilities for which costs had been included in category 1 (USAC Routes Spreadsheet), but for which information from SIC showed no subscribers for certain years—i.e., costs associated with Exception 1B.107 USAC presented the cable and wire facilities as associated with a numeric identifier, which we refer to here as the “route” number.108 The USAC Routes Spreadsheet shows for each route what years appeared to have no subscribers based on USAC’s review of SIC’s annual cost studies and other information provided by SIC. Below is a summary table of the routes identified by USAC as associated with the ‘no subscribers’ finding and the relevant years.


31. USAC’s Final Report also presented seven other exceptions from the investigation, generally arising from violations of the affiliate transactions rules and otherwise unsupported or excessive costs:

• Inflation of Management Fees Paid to Waimana (Exception 2), involving SIC’s treatment of certain payments to its parent company;

• Improper Allocation of ClearCom Watermains (Exception 3), involving SIC’s treatment of water main lease payments made to an affiliate;

• Unsupported or Misclassified Cost Study Amounts (Exception 4), involving SIC’s misclassification of accumulated amortization;

• Exorbitant Expenses (Exception 5), involving certain SIC corporate bonus payments;

•  Higher Cost of Relocation (Exception 6), involving SIC’s use of the temporary office space on the Pine Spur property it owned while at the same paying rent in Honolulu, Hawaii;

• Misclassification of Expenses (Exception 7), involving SIC’s misclassification of certain general and administrative services expenses; and

• Affiliate Financials Not Provided (Exception 8), regarding certain financial statements of SIC affiliates that were not provided.110

The monetary amounts of Exception 2 and Exception 7 were not determined at the time of the USAC Final Report. USAC also presented six observations from the investigation, focusing on two of them – Complexity of Corporate Structure (Observation 1) and Transactions Involving Relatives of Albert Hee (Observation 2) – as the most significant areas of concern that increase the risk of waste, fraud, and abuse in the cost-based high-cost programs.111  In reaching its conclusions, USAC relied on the responses it has received from SIC to over 350 inquiries and review of more than 3,200 files submitted by SIC to USAC.112

32. On June 13, 2016, SIC submitted its response (SIC Final Report Response) to the USAC Final Report, in which it sought modification of the Final Report’s findings and a substantial reduction of the total net monetary effect calculated by USAC.113 Regarding the issue associated with the largest amount of universal service support, SIC admitted that it misclassified one route and a segment of another route as category 1 during the relevant time period and that the monetary impact was approximately $4.1 million.114 However, SIC otherwise disagreed with USAC’s finding that the costs relating to certain routes were improperly allocated to category 1 because there were no subscribers on those routes.115 SIC argued that it built the facilities associated with four of the routes at issue at the direction of the state of Hawaii and therefore should be able to recover for the cost of those routes even though it agrees they did not serve subscribers during some or all of the time periods at issue.116 With respect to the other routes, SIC argued that each had at least one subscriber during the relevant time period.117

33. On December 5, 2016, the Commission adopted and released the SIC Improper Payments Order, concluding that SIC improperly received payments in the amount of $27,270,390 from the federal high-cost support mechanisms from 2002 to June 2015.118

• Consistent with the USAC Final Report, the Commission found that SIC misallocated C&WF costs for the period 2002 to 2015 and, as a result, received $26,320,270 in improper payments.119 The Commission’s conclusions focused on inclusion in category 1 of the cost of routes between central offices (Exception 1A - $7,420,638) and of facilities associated with routes without subscribers (Exception 1B - $18,899,632).120

• The Commission also found that SIC received $950,120 in improper payments from the Fund for corporate and operational expenses.121

• In addition to these improper payment findings, the Commission directed USAC to calculate the total amount of improper payments for inflated management fees paid by SIC to its affiliated companies for the period 2002 to 2015.122 USAC determined this amount to be $6,771,363 and issued a demand letter to SIC.123

• The Commission also directed USAC to complete a review of SIC’s 2016 Affiliated Transactions, which remains underway.124

34. On the same day that the Commission adopted the SIC Improper Payments Order, it adopted two other SIC-related orders. First, the Commission adopted the SIC Notice of Apparent Liability for Forfeiture and Order (SIC NAL), which found that SIC apparently violated the Act and Commission rules by failing to keep its accounts, records, and memoranda in the manner prescribed by the Commission’s rules, and by submitting and certifying inaccurate data included in annual cost studies for years 2002 through 2013 that were used in calculating high-cost support.125 Second, the Commission adopted a Memorandum Opinion and Order, the SIC Paniolo Order,126 which granted an Application for Review filed by AT&T and denied an SIC petition for reconsideration of the Bureau’s Declaratory Ruling in that proceeding.127 In the Declaratory Ruling, the Bureau concluded that certain disputed Paniolo, LLC (Paniolo) undersea cable lease expenses should not be included in SIC’s revenue requirement for recovery through the NECA pooling process.128

35. On January 4, 2017, SIC filed a petition for reconsideration of the SIC Improper Payments Order (SIC Petition).129 On February 1, 2017, the Commission published the SIC Petition in the Federal Register and invited public comment.130 Only the United States Telecom Association (USTelecom) filed comment, and it urged the Commission to deny SIC’s request on the basis that all the facts raised in the SIC Petition were previously considered and found unpersuasive by the Commission when it adopted the SIC Improper Payments Order.131 The Commission received no replies, but SIC subsequently submitted additional information and arguments.

1. Routes without Subscribers

48. Within Exception 1, the issue of routes without subscribers (Exception 1B) represents the largest portion of the universal service support at issue and was the specific focus of much of SIC’s Petition and subsequent factual submissions. In the SIC Improper Payments Order, the Commission found that SIC misallocated costs to category 1 C&WF for facilities that were not used to serve subscribers at the relevant time periods.163 The Commission also explained that SIC’s reliance on buildout performed at the behest of the DHHL based on a hope of potential future subscribers was inadequate as a basis for its regulatory cost accounting and receipt of high-cost support.164 In seeking reconsideration, SIC broadly claims that the Commission misinterpreted relevant rules and failed to consider all the relevant facts…..

122. In the SIC Improper Payments Order, the Commission found that, for multiple categories of expenses, SIC had failed to meet its burden of demonstrating that the high-cost funds it received were consistent with the above-listed affiliate transactions rules. The list below is an illustrative list of some (not all) of the Commission’s findings and conclusions:

• Payments to Waimana for Rent and Office Supplies. The record showed that SIC’s affiliate, Waimana, rented office space from a nonaffiliated commercial real estate company for per month.345 SIC then paid Waimana per month to lease that space.346 The Commission found that SIC had not provided evidence that the additional amount per month that Waimana charged SIC above the rent charged to Waimana was used to offset the costs of legitimate, used and useful office expenses.347

• Other Expenses Paid to Waimana as Management Fees. The record showed that some SIC employees were receiving a salary from both SIC and Waimana, with the costs of both recorded as an expense recovered from the Fund.348 The record also showed that the Fund was supporting salaries to Albert Hee’s wife and children when the children were attending college full time and living outside of Hawaii.349 USAC calculated that, in 2014 alone, SIC was charged at least more for services than Waimana incurred to render such services.350 The Commission deemed SIC’s response on these issues insufficient to demonstrate that SIC paid Waimana the lower of fully distributed cost or fair market value for services.351

Payments to ClearCom. In cost studies that SIC submitted for USAC’s use in calculating SIC’s high-cost support, SIC included “the costs of portions of water mains” leased from its affiliate ClearCom when SIC “was not using” those facilities.352 The Commission concluded that SIC had “violated section 32.27(c)(2) of the Commission’s rules for recording the transaction between Sandwich Isles and ClearCom above the lesser of fair market value or fully distributed cost.”353 The Commission likewise concluded that SIC “failed to demonstrate that it paid the lower of fair market value and fully distributed cost” when it paid ClearCom in prepaid rent for office space that ClearCom would construct and own on land owned by SIC, when ClearCom had only [REDACTED] and ClearCom “[REDACTED]”354

Ineligible Corporate Bonuses and Activities. An additional focus of USAC’s investigation was bonus payments that SIC made to its affiliate Waimana and to SIC executives and employees. For example, in 2014—a year in which SIC received over $368 per line per month in high-cost support, well in excess of the $250 per line cap that the Commission has established 355—SIC paid one employee a bonus of [REDACTED], which amounted to 45 percent of the employee’s previous year’s salary. SIC made that payment, and an [REDACTED] bonus payment to Waimana, despite the fact that the Commission’s Wireline Competition Bureau had in 2013 denied SIC’s request for a waiver of the $250 per line per month cap, finding that SIC’s expenses were significantly higher than other companies of similar size.356 In light of that and other circumstances discussed in the SIC Improper Payments Order, the Commission determined that SIC’s bonus payment to its employee and the payment to Waimana were not reasonable or prudent under the “used and useful standard.”357 The Commission likewise determined “on the facts before us” that certain sponsorships and donations to organizations related to the interests of the Hawaiian Home Lands were not “necessary for the provisioning of telecommunications service.”358

read … Full Report (PDF)



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