FCC Hits Sandwich Isles With $27 Million USF Tab, Proposes Fine Near $50 Million

Sandwich Isles Communications faces $77 million in repayment duties and proposed fines from the FCC for violations and apparent violations of the USF high-cost program in Hawaii, with more repayments to come. The commission also ruled against SIC in a cost dispute with AT&T and the National Exchange Carrier Association (NECA) over an undersea cable. The agency noted Sandwich Isles has continuing obligations to its customers and can't discontinue telecom service without express authorization.

“Accounting and accountability go hand in hand,” said Enforcement Bureau Chief Travis LeBlanc in a release Monday announcing the actions. “We take our duty seriously to ensure that providers submit true and accurate data to support their requests for federal funds. Any company that fails to do so will be held accountable.”

Sandwich Isles “believes it used the high-cost support program to provide, maintain and upgrade its facilities and services, as the funds were intended, to serve its subscribers,” the telco emailed Tuesday. “We will be reviewing the allegations in the FCC orders and will be responding to them.” NECA said it would implement FCC directives. Representatives of AT&T and the Department of Hawaiian Home Lands didn't comment.

The agency found Sandwich Isles improperly received $27.3 million in subsidy support from 2002 to June 2015, and directed the Universal Service Administrative Co. to recover the funds from the company. In an order, the commission also found SIC management fees to its parent company Waimana Enterprises were inflated, and it directed USAC to determine and recover the excess amount. The agency ordered SIC to resubmit cost studies and forms for 2013-2015 within 60 days so USAC can determine the proper high-cost payments for 2015-2017. The FCC also directed USAC to investigate SIC affiliate transactions for 2016 costs to ensure the company accurately reports costs going forward. There were no dissents; Commissioner Mike O’Rielly approved in part and concurred in part on the order and two companion items.

Commissioners Mignon Clyburn and Ajit Pai said the FCC was speaking "with a unified voice as we take action to restore the integrity the Universal Service Fund." Sandwich Isles "improperly accrued" subsidies "that were intended to benefit the people of the Hawaiian Homeland but instead lined the pockets of the company’s owner," they said in a rare bipartisan joint statement. The company’s conduct was so "egregious" that "its founder was sentenced to 46 months in prison following his conviction for 'corruptly interfering with the Internal Revenue Service in the calculation and collection of his taxes, and with filing six false individual tax returns,'" they wrote. In the companion items, they said, "we end the ability of Sandwich Isles to force other rural telephone companies to fund its self-dealing and we propose a forfeiture of almost $50 million for its misconduct.”

Separately, the agency said SIC and associated parties apparently violated various rules "by failing to keep its accounts, records, and memoranda" as required and "by submitting and certifying inaccurate data" in annual cost studies for years 2002 to 2013 that were used in calculating high-cost payments. Although the commission found repeated rule violations over many years, "we specifically find, pursuant to Section 220(d) of the Act and Section 1.80(c) of our Rules, that SIC, Waimana Enterprises, Inc. (Waimana) and Albert S.N. Hee are apparently jointly and severally liable for a proposed forfeiture penalty in the amount of $49,598,448 based upon violations related to cost study years" 2010-2013, said a notice of apparent liability. Hee is the company's former controlling owner.

The commission granted an AT&T appeal of a Wireline Bureau ruling prospectively while rejecting a related SIC petition. "In the Declaratory Ruling, the Bureau concluded, based on equitable considerations, certain disputed Paniolo, LLC (Paniolo) undersea cable lease expenses should be included in SIC’s revenue requirement for recovery through the NECA pooling process," said the commission opinion and order. AT&T filed an application for review, backed by NECA and USTelecom, that said none of the equitable considerations justified the bureau departing from a "used and useful" standard. Because SIC failed to demonstrate any telephone service need for the Paniolo cable, "the $15 million annual expense associated with that cable is neither ‘used and useful’ nor ‘prudent investment,'" AT&T said. Saying it renegotiated its cable lease costs down from $24 million to $8 million annually, SIC this year asked the FCC to approve a new funding plan (see 1604290035). AT&T and NECA disputed the plan (see 1605100063).

The commission said the bureau's predictive judgments and the equities "do not support continued inclusion of the disputed Paniolo lease expenses in SIC’s revenue requirement. We thus grant AT&T’s Application on a prospective basis and to the extent discussed herein. Additionally, we deny the SIC Petition." The commission said the company could continue to receive $1.9 million per year that approximates its lease of voice-grade capacity before the bureau ruling. SIC could "provide NECA with additional evidence of its current used and useful expenses beyond those previously" allowed in its revenue requirement, though it carries the burden, the agency said.

NECA Vice President Jeffrey Dupree said his group had urged the FCC to act. "NECA is reviewing the details and preparing to implement the directives" in the order granting AT&T's appeal, he emailed.