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Sandwich Isles Communications, Inc.

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Released: May 10, 2013

Federal Communications Commission

DA 13-1067

Before the

Federal Communications Commission

Washington, D.C. 20554

In the Matter of
)
)

Connect America Fund
)
WC Docket No. 10-90
)
Sandwich Isles Communications, Inc.
)
Petition for Waiver of Section 54.302 of the
)
Commission’s Rules
)

ORDER

Adopted: May 10, 2013

Released: May 10, 2013

By the Chief, Wireline Competition Bureau:

I.

INTRODUCTION

1. In this Order, we deny a petition filed by Sandwich Isles Communications, Inc. (Sandwich
Isles or Company) for “a waiver of the universal service and intercarrier compensation reform rules,”
including a ten year waiver of section 54.302 of the Commission rules, which established a $250 per line
per month cap on high-cost universal service support ($250 cap).1 We conclude that Sandwich Isles has
failed to show good cause for a waiver at this time. In particular, Sandwich Isles seeks a waiver that
would allow it to retain a number of significant and wasteful expenses, totaling many millions of dollars,
including significant payments to a number of affiliated and closely-related companies. Indeed,
Sandwich Isles’ corporate expenses are 623 percent greater than the average for companies of similar size
with the highest corporate operations expenses. Against this backdrop, Sandwich Isles has stated that it
plans to reduce certain expenses, but it has failed to do so, instead merely submitting plans for reductions
in the future.2 Meanwhile, if the company were to restructure its operations as it has suggested, it should
be able to meet its obligations for the foreseeable future. Sandwich Isles may file a new petition for
waiver in the future, once it is able to restructure its operations in an appropriate manner that allows it to
reduce unreasonable expenses.

II.

BACKGROUND

2. In the USF/ICC Transformation Order, the Commission comprehensively reformed universal
service funding for high-cost, rural areas, adopting fiscally responsible, accountable, incentive-based
policies to preserve and advance voice and broadband service while ensuring fairness for consumers who


1 Sandwich Isles Communications, Inc. Petition for Waiver of Section 54.302 of the Commission’s Rules, WC
Docket No. 10-90 and WT Docket No. 10-208, at 1 (filed December 30, 2011) (Petition); see also Connect America
Fund et al.
, WC Docket No. 10-90 et al., Report and Order and Further Notice of Proposed Rulemaking, 26 FCC
Rcd 17663 (2011) (USF/ICC Transformation Order), pets. for review pending sub nom. In re: FCC 11-161, No. 11-
9900 (10th Cir. filed Dec. 8, 2011); 47 C.F.R. § 54.302.
2 See 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 Mar. 25, 2013) (March 25th Letter); 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) (April 8th Letter).

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DA 13-1067

pay into the universal service fund.3 Among other things, the Commission imposed a presumptive per
line cap of $250 per month on total high-cost universal service support for all eligible telecommunications
carriers and found that support in excess of the $250 cap should not be provided without further
justification.4 Consistent with the Commission’s goal to provide reasonable transitions so that companies
affected by reform have time to adapt to changing circumstances,5 the Commission phased in the $250
cap over three years.6 From July 1, 2012 through June 30, 2013, carriers were to receive no more than
$250 per line per month plus two-thirds of the difference between their uncapped per-line amount and
$250. From July 1, 2013 through June 30, 2014, carriers shall receive no more than $250 per line per
month plus one-third of the difference between their uncapped per-line amount and $250. Beginning July
1, 2014, carriers shall receive no more than $250 per line per month.
3. The Commission also reformed high-cost loop support (HCLS) by adopting a benchmark rule
to moderate the expenses of rate-of-return carriers with very high costs compared to their similarly
situated peers, while further encouraging other rate-of-return carriers to invest and thereby advance
broadband deployment.7 The new rule responded to problematic incentives and inequitable distribution
of support created by the prior rules, under which some carriers with high costs could receive
reimbursement from the universal service fund for up to 100 percent of their marginal expenditures on
loop costs. The Commission adopted the benchmark rule to reverse these incentives and address these
problems by, for the first time, placing reasonable overall limits separately on capital and operating
expenses eligible for reimbursement through HCLS and redistributing freed-up HCLS to carriers that stay
within these limits to encourage new broadband investment. The Commission delegated to the Wireline
Competition Bureau (Bureau) the authority to adopt and implement a specific methodology within the
parameters set forth by the Commission, which the Bureau did in the HCLS Benchmarks Implementation
Order
.8
4. In the Sixth Order on Reconsideration, the Commission reconsidered some aspects of the
benchmark rule to limit capital and operating expenses for HCLS.9 Specifically, the Commission directed
the Bureau to develop a regression methodology that will generate a single total loop cost cap for each
study area beginning in 2014.10 As an interim measure toward a single cost cap, the Commission summed
capital and operating expense caps generated by the Bureau’s current methodology for purposes of
calculating HCLS support in 2013.11 The Commission also modified the phase-in of the benchmarks for


3 See USF/ICC Transformation Order, 26 FCC Rcd at 17670, para. 11.
4 Id. at 17765, para. 274.
5 Id. at 17671, para. 11.
6 Id. at 17765, para. 275.
7 See id. at 17741-47, paras. 210-26.
8 See id. at 17743-44, paras. 214, 217; Connect America Fund; High-Cost Universal Service Support, WC Docket
Nos. 10-90, 05-337, Order, 27 FCC Rcd 4235 (Wireline Comp. Bur. 2012) (HCLS Benchmarks Implementation
Order
); see also Connect America Fund et al., WC Docket Nos. 10-90, 05-337, Sixth Order on Reconsideration and
Memorandum Opinion and Order, 28 FCC Rcd 2572, 2576-85, paras. 8-36 (2013) (Sixth Order on Reconsideration)
(addressing, in part, petitions for reconsideration and applications for review of the HCLS Benchmarks
Implementation Order
).
9 See Sixth Order on Reconsideration .
10 See id. at 2581-83, paras. 24-28.
11 See id. at 2583-84, para. 29.
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2013 to provide carriers additional time to adjust to the changes.12 Finally, the Commission reconsidered
the requirement that the benchmark regression be rerun annually, and delegated consideration of the
frequency for running the regression analysis to the Bureau.13
5.
To prevent disruption to consumers as the rules in the USF/ICC Transformation Order are
phased in, the Commission permitted “any carrier negatively affected by the universal service reforms . . .
to file a petition for waiver.”14 Generally, the Commission’s rules may be waived if good cause is
shown.15 In the USF/ICC Transformation Order and in the Fifth Order on Reconsideration, the
Commission provided guidance “to potential applicants of the circumstances that would be persuasive
and compelling grounds for grant of a waiver . . . to assist potential applicants in effectively formulating
their waiver petitions.”16 For example, the Commission found that one compelling factor would be
whether consumers would, absent a waiver, be at “significant risk of losing access to a broadband-capable
network that provides both voice as well as broadband today.”17 In delegating to the Bureau the authority
to approve or deny all or part of requests for waiver,18 the Commission indicated that it did not anticipate
granting waiver requests routinely or for “undefined duration[s].”19 The Commission provided guidance
on the types of information that would be relevant for such waiver requests and delegated authority to the
Bureau and the Wireless Telecommunications Bureau to rule on such requests.20

III.

SANDWICH ISLES’ PETITION

6. On December 30, 2011, Sandwich Isles filed a petition for a ten year waiver of the universal
service rules, including section 54.302 of the Commission rules, which established the $250 cap, phased
in over three years. Sandwich Isles received $25,107,678 in universal service fund (USF) support in 2011
to serve approximately 243921 lines, at over $858 per line per month.22 Sandwich Isles is an incumbent


12 See id. at 2584, para. 30.
13 See id. at 2576, para. 8.
14 USF/ICC Transformation Order, 26 FCC Rcd at 17839-40, paras. 539, 540. The Commission may exercise its
discretion to waive a rule where the particular facts make strict compliance inconsistent with the public interest.
Northeast Cellular Telephone Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990) (Northeast Cellular). In addition,
the Commission may take into account considerations of hardship, equity, or more effective implementation of
overall policy on an individual basis. WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969); Northeast
Cellular
, 897 F.2d at 1166. Waiver of the Commission’s rules is appropriate only if both (i) special circumstances
warrant a deviation from the general rule, and (ii) such deviation will serve the public interest. Northeast Cellular,
897 F.2d at 1166.
15 47 C.F.R. § 1.3.
16 Connect America Fund et al., WC Docket No 10-90 et al., Fifth Order on Reconsideration, 27 FCC Rcd 14549,
14556-57, para. 19 (2012) (Fifth Order on Reconsideration). See USF/ICC Transformation Order, 26 FCC Rcd at
17839-42, paras. 539-44.
17 Fifth Order on Reconsideration, 27 FCC Rcd at 14557, para. 21.
18 USF/ICC Transformation Order, 26 FCC Rcd at 17840, 17842, paras. 540, 544.
19 Id. at 17766, para. 278.
20 Id. at 17840-42, paras. 542, 544.
21 The National Exchange Carrier Association (NECA) reports that as of year-end 2011, Sandwich Isles had 2,439
loops. See NECA, Universal Service Fund Data: NECA Study Results, 2012 Report (filed Sept. 28, 2012),
available at http://www.fcc.gov/wcb/iatd/neca.html (2012 NECA Report).
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local exchange carrier that was designated as an eligible telecommunications carrier (ETC) in 1997.23
Sandwich Isles’ affiliate relationships and corporate organization structure are as follows: Sandwich Isles
Communications, Inc., a Hawaii corporation, is a subsidiary of Waimana Enterprises, Inc., (Waimana),
and Mr. Albert S.N. Hee is the President of both companies.24 Sandwich Isles is also affiliated with
ClearCom, Inc., (ClearCom), a Hawaii corporation and competitive local exchange carrier.25
7. Further, Sandwich Isles has a contractual relationship with Paniolo Cable Network (Paniolo),
a closely-related company.26 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. Blue Ivory Hawaii Corporation is held equally by the private trusts of the three children of
Mr. Hee.27
8. According to Sandwich Isles, by virtue of a license granted to it by the State of Hawaii
Department of Hawaiian Home Lands (DHHL), it assumed the obligation to provide all wireline
communication services on the Hawaiian Home Lands.28 Sandwich Isles contends that the State of
Hawaii placed obligations solely on Sandwich Isles for the deployment of communications infrastructure
in unserved areas of the Hawaiian Home Lands.29 Sandwich Isles also asserts that the State of Hawaii has
tremendous cost barriers that have curtailed communications infrastructure deployment, and that the
Company has deployed a statewide transport and switching communications platform with the help of
Rural Utilities Service and commercial financing.30
9. Sandwich Isles states that only a portion of the planned 20,000 home sites on the Hawaiian
Home Lands have been completed and occupied.31 According to Sandwich Isles, as a result of the slow
pace of development on the Hawaiian Home Lands, it has a relatively small number of access lines. As
of December 2011, Sandwich Isles had 2,439 lines.32 Sandwich Isles also states that because substantial
(Continued from previous page)


22 Federal Communications Commission Response to House Committee on Energy and Commerce USF Data
Request, 6-2 (July 9, 2012), available at http://transition.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-
State_Link/IAD/2012responses.pdf.
23 Sandwich Isles was designated an ETC on May 14, 1997, and the Company’s tariff became effective on
December 17, 1997. Petition at 12.
24 See In re Hawaiian Telecom Communications, Inc., Debtor, Case No. 08-02005 (Bankr. Hawaii), Declaration of
Albert S.N. Hee (June 12, 2009).
25 See Letter from Sharon E. Gillett, Chief, Wireline Competition Bureau, FCC to Albert S.N. Hee, President,
Sandwich Isles, WC Docket No. 10-90 and WT Docket No. 10-208, at 2 (June 6, 2012) (June 6th Letter); see also
Letter from Frederick M. Joyce, Counsel for Sandwich Isles, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
10-90 and WT Docket No. 10-208, at App. Item 3 (Organizational Chart), Attach. (filed Apr. 16, 2012) (April 16th
Letter).

REDACTED

.
26

REDACTED

. See Letter from Frederick M. Joyce, Counsel for Sandwich Isles, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 and WT Docket No. 10-208, at 13 (filed July 2, 2012) (July 2nd Letter).
27 July 2nd Letter at 12; see also June 6th Letter at 2 n.5.
28 Petition at iii. According to Sandwich Isles, the Hawaiian Home Lands consist of approximately 70 non-
contiguous parcels, which total 203,500 acres on six islands. Id. at 9.
29 Id. at iv. As discussed below, Hawaiian Telcom, Inc. disputes this claim. See infra para. 9.
30 Petition at v.
31 Id. at iv, 17.
32 See 2012 NECA Report, available at http://www.fcc.gov/wcb/iatd/neca.html.
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infrastructure is needed to serve its small subscriber base, the Hawaiian Home Lands per household costs
are high, but that such costs should be reduced as the Company’s subscriber and access line counts
increase.33 Sandwich Isles also argues that because the DHHL recognizes the Company as the exclusive
provider of wireline communication services, there is no reasonable expectation that an alternative
provider will replace its service.34 Finally, Sandwich Isles states that “[b]ecause [its] current support level
exceeds [the] cap by a material amount, it will, absent timely waiver, . . . be forced into insolvency
without justification and with the result that residents of the Hawaiian Home Lands will no longer be
assured of continuation of voice and broadband service.”35 The Bureau sought comment on Sandwich
Isles’ Waiver Petition on January 10, 2012.36 The United States Telecom Association (USTelecom)
opposes the Petition, arguing that Sandwich Isles has not demonstrated good cause sufficient to justify the
waiver.37 According to USTelecom, it is unreasonable to expect those contributing to the Universal
Service Fund to pay for facilities on Hawaiian Home Lands home sites that will not be used in the near
future, or indefinitely.38 Furthermore, USTelecom argues that Sandwich Isles fails to request a necessary
amount above the cap, but instead requests the continuation of the full amount of its current level of
support, without presenting any evidence of necessity, as required by the Commission’s rules.39 Hawaiian
Telcom, Inc. (HTI) also filed comments raising certain concerns. 40 HTI contends that Sandwich Isles has
not fairly characterized HTI’s history of service to rural parts of the state and that it overstates its own
importance as a service provider to Hawaiian Home Lands.41 HTI claims that it provided service
throughout the Hawaiian Home Lands long before Sandwich Isles received permission to provide service
and continues to do so today.42 HTI further argues that Sandwich Isles is not the only service provider
authorized in the Hawaiian Home Lands, asserts that it is the carrier of last resort for the entire state of
Hawaii, and states that it can and will continue to serve all rural areas of Hawaii, including the Hawaiian
Home Lands.43 Alexicon Telecommunications Consulting (Alexicon) filed reply comments in support of
Sandwich Isles request.44 On April 16, and July 2, 2012, Sandwich Isles filed supplemental information
in response to the Bureau’s March 13, and June 6, 2012 letters seeking additional information.45


33 Petition at 17.
34 Id. at 5.
35 Id. at 3.
36 See Wireline Competition Bureau Seeks Comment on Sandwich Isles Communications, Inc. Petition for Waiver of
Universal Service and Intercarrier Compensation Reform Rules,
WC Docket No. 10-90 and WT Docket No. 10-
208, Public Notice, 27 FCC Rcd 206 (Wireline Comp. Bur. 2012).
37 Comments of United States Telecom Association, WC Docket No. 10-90 and WT Docket No. 10-208 (filed Feb.
9, 2012) (USTelecom Comments).
38 Id.
39 Id. at 3.
40 Comments of Hawaiian Telcom, Inc., WC Docket No. 10-90 and WT Docket No. 10-208 (filed Feb. 9, 2012)
(HTI Comments).
41 Id. at 1.
42 Id. at 2-3.
43 Id. at 3.
44 Reply Comments of Alexicon, WC Docket No. 10-90 and WT Docket No. 10-208 (filed Feb. 24, 2012).
45 See Letter from Sharon E. Gillett, Chief, Wireline Competition Bureau, FCC to Albert S.N. Hee, President,
Sandwich Isles, WC Docket No. 10-90 and WT Docket No. 10-208 (Mar. 13, 2012); April 16th Letter; June 6th
Letter; July 2nd Letter.
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10. On June 26, 2012, Sandwich Isles filed a separate request for stay or interim relief, requesting
that the Commission stay application of the $250 cap and maintain the Company’s current level of
support pending review of Sandwich Isles’ Petition.46 Sandwich Isles claims that it will suffer
“unnecessary financial hardship . . . from a material reduction in its high cost support” absent interim
relief and that there will be no harm to the Commission’s regulatory goals if the requested relief is
granted.47

11. On February 28 and April 2, 2013, Sandwich Isles met with the Bureau to discuss Sandwich
Isles’ plans to engage in measures to reduce its expenses.48

IV.

DISCUSSION

12. We deny Sandwich Isles’ request for waiver of the Commission’s rules.49 In the Fifth Order
on Reconsideration, the Commission reiterated its commitment “to providing support that is sufficient but
not excessive.”50 As the Commission made clear, in the waiver context, this commitment includes a focus
on the financial operations of a waiver applicant, including its “operating expenses” and “the size and
nature of payments made to affiliated companies.”51 With this in mind, we conclude that Sandwich Isles
has certain expenses that appear grossly excessive and unreasonable. 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. Universal service is a finite resource paid for by consumers
and businesses across the country, and should not be used to support unreasonable or excessive costs.
Granting a waiver in these circumstances would be inappropriate and unfair to consumers and businesses
that support the universal service fund.
13. As discussed in greater detail below, some of the unreasonable expenses, totaling many
millions of dollars, include:


46 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 June 26, 2012) (Stay Request).
47 Id. at 2.
48 See March 25th Letter; April 8th Letter.
49 In demonstrating whether a waiver is warranted, the petitioner bears the burden of pleading specific facts and
circumstances that would make the general rule inapplicable, Tucson Radio, Inc. v. FCC, 452 F.2d 1380, 1382 (D.C.
Cir. 1971), and of “demonstrat[ing] that [its] arguments are substantially different from those which have been
carefully considered at the rulemaking proceeding,” Industrial Broadcasting Co. v. FCC, 437 F.2d 680, 683 (D.C.
Cir. 1970).
50 Fifth Order on Reconsideration, 27 FCC Rcd at 14557, para. 22 and n.42 (internal quotation omitted); see also 47
U.S.C. §§ 254(b)(1),(4)-(5), (d), (e); Alenco Communications, Inc. v. FCC, 201 F.3d 608, 620-21 (5th Cir. 2000)
(“The agency’s broad discretion to provide sufficient universal service funding includes the decision to impose cost
controls to avoid excessive expenditures that will detract from universal service”); Qwest Communications Int’l, Inc.
v. FCC
, 398 F.3d 1222, 1234 (10th Cir. 2005) (“excessive subsidization arguably may affect the affordability of
telecommunications services, thus violating the principle in § 254(b)(1)”) (citing Qwest Corp. v. FCC, 258 F.3d
1191, 1200 (10th Cir. 2001)); Rural Cellular Assn. v. FCC, 588 F.3d 1095, 1102 (D.C. Cir. 2009) (explaining that,
in assessing whether universal service subsidies are excessive, the Commission “must consider not only the
possibility of pricing some customers out of the market altogether, but the need to limit the burden on customers
who continue to maintain telephone service”).
51 Fifth Order on Reconsideration, 27 FCC Rcd at 14558, para. 22.
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·
Corporate operations expenses that are 623 percent greater than the average for similar
companies with the highest corporate operations expenses. On a per loop basis Sandwich Isles’
corporate operations expenses averaged approximately $224 per month; this compares to the
monthly average, for the next five companies with the highest corporate operations expenses in
Sandwich Isles’ peer group of approximately $31 per loop per month.
·
Payments of over

REDACTED

between 2009-2011 to Waimana, Sandwich Isles’ parent
company, for providing services to Sandwich Isles for the performance of

REDACTED

.52 These
payments remain ongoing.
·
Payments to an affiliated entity, ClearCom, for use of abandoned water mains, which
have resulted in payments of over

REDACTED

between 2009 and 2011.
We cannot conclude that a waiver is appropriate to allow federal high-cost universal service funds to
continue to be paid to Sandwich Isles while it continues to incur such excessive expenses at current levels.
Nor has Sandwich Isles persuaded us that its expenses are necessary in order to maintain a broadband-
capable network that provides both voice as well as broadband to Sandwich Isles’ approximately 2,500
subscribers.53
14. Although Sandwich Isles recently stated that it plans to reduce certain expenses, we cannot
evaluate the reasonableness of future expenses until after reductions have been implemented.54 Indeed,
Sandwich Isles has not filed updated financials indicating whether other expenses would increase as a
result of eliminating or reducing transactions with affiliated and closely related entities. Accordingly, we
conclude that Sandwich Isles has failed to show good cause and demonstrate that the waiver is necessary
and in the public interest. If and when Sandwich Isles has reduced such expenses and needs additional
relief, it may refile its request for a waiver.

A.

Corporate Operations

15. Sandwich Isles’ corporate operations expenses appear disproportionately high as compared to
its peers.55 Corporate operations expense categories include salaries, legal expenses, consulting fees,
audit expenses, insurance, and, as further discussed below, management fee payments.56 Based on data
provided by NECA, companies with 2,000 to 3,000 loops have median corporate operations expenses of


52 April 16th Letter at 20.
53 See Fifth Order on Reconsideration, 27 FCC Rcd at14557, para. 20. NECA reports that as of year-end 2011,
Sandwich Isles had 2,439 loops. See supra n.21. Pursuant to the Commission’s rules, Sandwich Isles’ 2013 support
is based on 2011 cost data filed with the Bureau on September 28, 2012. See 2012 NECA Report.
54 See March 25th Letter; see also April 8th Letter.
55 Corporate operations expenses include the costs of performing executive and planning activities, and general and
administrative activities, described in narratives for individual accounts. These costs also include the costs of
supervision, office support and training for these activities. See 47 C.F.R. § 32.5999.
56 See Petition at Exh. B (Sandwich Isles Summary of Corporate Operating Expenses). We note that for USF
purposes, Sandwich Isles is limited by Commission rule to eligible corporate operations expenses of $1,026,399 for
purposes of calculating high-cost support. See id; see also 47 C.F.R. § 36.621(a)(4). Despite the fact that over $5
million of Sandwich Isles’ corporate operations expenses are not eligible to be included in calculating high-cost
support, such significant corporate operations expenses appear excessive, and undermine Sandwich Isles’ long term
viability.
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DA 13-1067

$814,975, or approximately $27 per loop per month.57 By contrast, as of year-end 2011, Sandwich Isles
had 2,439 loops and corporate operations expenses of $6,554,263—$224 per loop per month.58 In fact,
for 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.59 Stated
differently, Sandwich Isles’ per-loop corporate operations expenses were 623 percent greater than the
average for similarly sized peers with the highest corporate operations expenses.60 Even recognizing the
“unique geographic challenges” of serving Hawaii,61 we conclude that these expenses far exceed any
reasonable level.

B.

Payments to Affiliates and Related Companies

16. A significant amount of Sandwich Isles’ expenses consist of many millions of dollars paid to
certain affiliated companies, and one closely-related company. As described below, based on the
information in the record to date, these payments appear excessive, and therefore unreasonable.62 Before
we will consider granting a waiver, Sandwich Isles should reduce such expenses, whether by restructuring
its operations and financial arrangements with its affiliates, or should obtain similar services (to the extent
these services are needed) from unaffiliated entities at competitive rates or through full-time Sandwich
Isles employees, to bring its expenses to reasonable levels, and reduce its dependency on federal high-cost
USF support.63
17. Waimana. Sandwich Isles has made payments to Waimana which have totaled over

REDACTED

between 2009 and 2011.64 Waimana provides

REDACTED

.65 Of particular concern,
Sandwich Isles’ payments to Waimana have significantly increased in recent years, without any
explanation for the need for additional services.66 For example, its payments to Waimana were
approximately

REDACTED

.67 We are not convinced that the significant payments to Waimana are
warranted for the services provided by Waimana to Sandwich Isles. And, as noted above, the record does
not explain whether and how those services changed during this period, in a manner that sufficiently
justifies the increased payments. In addition, we are concerned that Sandwich Isles’ payments to


57 See 2012 NECA Report. 2013 support is based on 2011 cost data, as reflected in the 2012 NECA Report.
58 Id.
59 See id.
60 See id.
61 Sandwich Isles Communications, Inc. Petition for Declaratory Ruling, WC Docket No. 09-133, Declaratory
Ruling, 25 FCC Rcd 13647, 13654-55, paras. 19-20 (Wireline Comp. Bur. 2010) (Sandwich Isles Declaratory
Ruling
).
62 See infra paras. 17-20.
63 See supra n.50. Although Sandwich Isles filed a proposed cost reduction plan, in its April 8th Letter, to address
certain aspects of its unreasonable expenses, that filing does not: (1) provide updated financials to analyze the
impact of these proposals, (2) explain whether other expenses would increase, (3) propose any immediate reductions
to the expenses outlined herein, or (4) address whether the proposed expense reductions are permanent. See
generally
April 8th Letter.
64 April 16th Letter at App. 11, Attach.
65 April 16th Letter at 20.
66

REDACTED

. April 16th Letter at 20.
67 Id. at 20 -21.
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Waimana for these services may be redundant services its own employees perform or are capable of
performing.68
18. ClearCom. Sandwich Isles has made over

REDACTED

in payments to its affiliate
ClearCom, for the use of some abandoned water mains in Honolulu. ClearCom also provides

REDACTED

.69 Of particular concern, ClearCom leases abandoned water mains from the Board of
Water Supply for the City and County of Honolulu (Board of Water Supply), which it currently provides
portions of to Sandwich Isles.70 Sandwich Isles paid approximately

REDACTED

these abandoned water
mains from 2009-2011.71 The agreement between ClearCom and Sandwich Isles gives Sandwich Isles the
right to

REDACTED

.72 According to Sandwich Isles, the abandoned water mains serve as

REDACTED

.73 None of the other entities providing broadband service in Honolulu indicate they use the
water mains.

REDACTED

.74 While ClearCom leases

REDACTED

of mains, Sandwich Isles currently
uses

REDACTED

of those water mains and plans to use

REDACTED

.75 Thus, for use of this fraction 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.
19. Other Issues and Concerns. In 2007, Sandwich Isles entered into with Paniolo an

REDACTED

lease to receive telecommunications transport services at a cost of over

REDACTED

during the period of the lease.76 These payments increase over time yet they do not include costs for
engineering, insurance, operation, and maintenance costs, for which Sandwich Isles also is responsible.77
The expenses associated with the Paniolo agreement are considered transport and switched access, not
common line loop costs, and therefore are not recoverable through the universal service fund for loop
costs, except to the extent permitted as part of intercarrier compensation recovery consistent with the
Sandwich Isles Declaratory Ruling and the Commission’s USF/ICC Transformation Order.
Nevertheless, we are concerned that the Paniolo-related costs may undermine Sandwich Isles’ overall
financial viability. To that end, Sandwich Isles has stated that it has

REDACTED

.78 As noted above, if
the Company were to refile its waiver Petition after reducing its expenses and reorganizing its operations,


68 Between 2009 and 2011, Sandwich Isles reports that it employed a number of well-compensated persons, such as

REDACTED

. See April 16th Letter at Attachment to Appendix Item 10.
69 See July 2nd Letter at 11 (listing special projects).
70 See April 16th Letter at 16.
71 Id. at 17.

REDACTED

. Id.
72 See id.
73 Id.
74 Id.
75 See id.
76 See Sandwich Isles Declaratory Ruling; July 2nd Letter at Paniolo Lease Schedule A. In 2010, Sandwich Isles’
base lease costs were approximately $15 million annually. See Sandwich Isles Declaratory Ruling, 25 FCC Rcd at
13649, para. 5.
77 Sandwich Isles Declaratory Ruling, 25 FCC Rcd at 13649,para. 5 n.19. Prior to the construction of Paniolo,
Sandwich Isles paid $1.9 million annually to HTI for similar transport services. See id. at 13654, para. 18. As noted
above, in 2010, Sandwich Isles’ base lease costs for the Paniolo system were approximately $15 million annually.
Id. at 13649, para. 5. Based on the terms of the lease, between 2013 and 2015, Sandwich Isles will pay Paniolo
approximately

REDACTED

. See July 2nd Letter at Paniolo Lease Schedule A.
78 See April 8th Letter at 1.
9

Federal Communications Commission

DA 13-1067

we will look more closely at the Paniolo-related and other expenses, to determine their overall
reasonableness.
20. Another issue of concern is insurance costs, specifically the

REDACTED

.

C.

Consumer Impact

21. Finally, if the Company were to reduce its expenses and reorganize its operations, as
highlighted above including the Paniolo-related expenses, the Company should continue to have positive
cash flow in the near term, and be cash balance positive for an even longer period of time.79 Sandwich
Isles has taken measures to reduce its

REDACTED

80 and it appears that the company has

REDACTED

to meet its obligations, including

REDACTED

.81 If this analysis proves to be incorrect, Sandwich Isles
could petition the Bureau for interim relief, if it can show that it has begun adequate progress toward
reducing its expenses as proposed.

D.

Future Consideration and Request for Stay

22. As noted above, because we cannot sufficiently determine the reasonableness of Sandwich
Isles expenses following the proposed reductions, before such reductions are made, unless and until those
reductions occur, we find that grant of a waiver to Sandwich Isles would not be in the public interest.82
However, the Company may pursue a waiver in the future, once it is able to complete the restructure of its
operations in a manner that allows Sandwich Isles to lower its costs and reduce its dependence on high-
cost USF support.83
23. Finally, we deny Sandwich Isles’ request for a stay of section 54.302 for the same reasons
that we deny its limited waiver of section 54.302. In addition, we deny the request for a stay because we
find that Sandwich Isles’ request did not demonstrate in its request for stay that it would suffer irreparable
harm in the absence of a stay.84 At best, Sandwich Isles makes a vague claim that it will experience
“unnecessary financial hardship” without describing what that financial hardship is, or how it constitutes
irreparable harm to the Company. 85

V.

ORDERING CLAUSES

24. Accordingly, IT IS ORDERED, pursuant to sections 1, 4(i), 5(c), 201, and 254 of the
Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 155(c), 201, and 254, and sections


79 See March 25th Letter at 6.
80 See April 8th Letter at 1.
81 See March 25th Letter at 6.
82 See supra para. 13.
83 If Sandwich Isles reduces expenses, the Bureau would still need to analyze whether good cause exists to grant a
waiver.
84 A showing of irreparable injury is a critical element in justifying a request for stay of an agency order. See Winter
v. Natural Res. Def. Council, Inc.
, 555 U.S. 7, 22 (2008) (“Our frequently reiterated standard requires plaintiffs
seeking an injunction to demonstrate that irreparable injury is likely in the absence of an injunction”); see also
Wisconsin Gas Co. v. FERC
, 758 F.2d 669, 674 (D.C. Cir. 1985) (denying requests for stay after considering only
irreparable harm).
85 See Stay Request at 1.
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0.91, 0.291, and 1.3 of the Commission’s rules, 47 C.F.R. §§ 0.91, 0.291, and 1.3, that this order IS
ADOPTED.
25. IT IS FURTHER ORDERED that the petition for a ten year waiver of section 54.302 of the
Commission’s rules, 47 C.F.R. § 54.302, filed by Sandwich Isles Communications, Inc. IS DENIED as
described herein.
26. IT IS FURTHER ORDERED that the petition for stay, filed by Sandwich Isles
Communications, Inc., IS DENIED as described herein.
27. IT IS FURTHER ORDERED that, pursuant to section 1.102(b)(1) of the Commission’s rules,
47 C.F.R. § 1.102(b)(1), this order SHALL BE EFFECTIVE upon release.
FEDERAL COMMUNICATIONS COMMISSION
Julie A. Veach
Chief
Wireline Competition Bureau
11

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