hunterbishop.com

Hawaiian Tel has no cash to invest in system, seeks infusion of fed funds

Aaron Stene at Kona blog wrote a good piece Saturday on Hawaiian Telcom’s bid to get Universal Service Funds to improve its telephone network in Hawaii, and Puna plays a key part in the telephone company's application to the Federal Communications Commission.

Stene calls the telephone service provider hypocritical for applying for access to the USF after unsuccessfully opposing Sandwich Isle Communications' access to the fund a couple of years ago. Maybe so, but in business I think it’s less hypocrisy than good business sense, and could be more delicately termed a change in strategy. In other words, if you can’t beat ‘em, join ‘em.

But Stene also provides links to all the pertinent documents that paint a startling picture of HT’s precarious financial situation.

Hawaiian Telcom wants $30 million over five years from the USF, a pool of money raised by a fee attached to every telephone bill in the nation. The fund is meant to ensure that rural and other expensive and difficult-to-serve areas of the country can get modern telephone services. In Hawaii, SIC, which is expanding its telecom network to Hawaiian Home Lands throughout the state, and Nextel already get a combined $44 million every year from the USF, most of it going to SIC.

I'd encourage the FCC to OK the application for the benefit of the customers HT serves, since it's apparent we qualify and most of us contribute to the fund already anyway. But the kicker in the application is that HT says it needs the money because it has none of its own to invest in the Hawaii network. It can’t raise rates high enough to build a fund, and can’t get loans because its debt level is too high and the return on investments in rural areas is too low. So HT wants to feed at the federal trough so it can get modern, affordable telecommunications services to the people of Hawaii, “especially Native Hawaiians.”

Puna was cited specifically in the application by HT as an example of steep challenges facing the company in rural Hawaii where it is required to provide service to all customers even where they are spread sparsely over a wide area that “lacks any meaningful infrastructure.” Molokai and Paauilo residents formally lodged complaints by petitions to HT about their dial-up only Internet service and other serious system deficiencies, which HT actually used in its argument in favor of getting access to the USF.

Pacific LightNet, an HT competitor, said emphatically that HT’s “poor business planning” in having no financial investment alternatives should not be a factor in the FCC’s decision-making, and argued that if the FCC grants HT access to the fund, then Pacific LightNet and all other local providers should get it as well. But there were better arguments that should persuade the FCC that Hawaii indeed is a uniquely expensive place to do business so that the assistance should be provided.

Still, it shouldn't take HT off the hook for mismanagement that could have seriously detrimental effects on telecommunications customers in Hawaii. Pacific LightNet pointed out that at the time the Hawaii PUC approved Carlyle’s takeover of Verizon, the PUC required the debt ratio to be 74 percent by 2009, giving HT impetus for further reduction to 65 percent, which would boost the company’s opportunities for improving its own infrastructure. But HT went in the other direction and company has pushed its debt structure to more than 90 percent against equity, reducing its ability to borrow money to invest in its infrastructure even further.

Just as disturbing is this report today by Rick Daysog in the Honolulu Advertiser:

Hawaiian Telcom Inc. gave ousted CEO Michael Ruley a $1.2 million severance package, which includes $20,000 for personal travel, $22,000 for his family's health coverage and reimbursement of up to 6 percent for the real estate broker commission on the sale of his Kahala home. During Ruley's tenure, the company lost tens of millions of dollars and thousands of residential telephone customers, and is being investigated by the state Public Utilities Commission for poor service.

Pacific LightNet also pointed out that while HT has its hand out for $6 million a year over a five-year period, it recently “retained Kroll Zolfo Cooper LLC, a corporate recovery and crisis management firm, at a cost of $600,000 per month ($7.2 million over a 12-month period.)”

If the FCC does approve HT’s access to the Universal Service Fund, the commission should consider insuring that the telephone company’s funds are actually used to improve services to customers instead of giving consultants big contracts and rewarding top execs with lucrative buyouts after establishing records of “poor service.”