Island Internet Plugs into Political Favors: Taxpayers on the Hook for Rural High-Speed Bailout

BY KELLY WILLIAM COBB – You’ve probably never heard of the company because it has only a few thousand customers. But every day, you pay it to connect a handful of rural Hawaiians to the Internet – to the tune of more than $20 million per year.
The Universal Service Fund (USF) is that pesky tax on your phone bill that subsidizes connections for rural or lower-income households. The multibillion-dollar fund has caught enormous flak over the years for waste, fraud and abuse. And amid an ongoing and much-needed debate in Congress on how to reform the USF, the Federal Communications Commission is set to rule any day on the future of one small, politically connected company that built its entire business around receiving these taxpayer funds.

Back in 1995, Sandwich Isles Communications Inc. won a no-bid contract from Hawaii to be the exclusive provider of telecom service on the Hawaiian homelands for native Hawaiians. Soon after, the company secured a $400 million low-interest, taxpayer-backed loan from the U.S. Department of Agriculture’s Rural Utility Service. When the Agriculture Department program suspended funding a few years later, the Federal Communications Commission (FCC) quietly ruled in May 2005 that Sandwich Isles was eligible to receive up to $400 million in federal USF support.

Since then, the company has siphoned off millions of dollars from American taxpayers in recurring payments. A congressional report last year labeled Sandwich Isles as one of the largest abusers of USF funding, accepting as much as $26.4 million in 2008 to connect just 1,967 households to the Internet. That’s a whopping $13,408 in subsidies for each home. In 2009, the company raked in another $24 million.

Last year, the National Exchange Carrier Association (NECA) stalled the abuse by ruling that Sandwich Isles could not receive subsidies related to the cost of building a new interisland fiber network. The cable connecting the Hawaiian Islands would be the state’s fourth and is largely unnecessary, given the capacity of the other three.

Sandwich Isles immediately demanded that the FCC intervene to reinstate the subsidies, and it ramped up a lobbying campaign to keep the spout of federal dollars running. Creating a company reliant on taxpayer money requires political connections, and Al Hee, the company’s founder, certainly has plenty. The company has employed former Democratic state legislators, and a family friend who chaired the Hawaiian Homes Commission approved its original license to operate.

Mr. Hee and other executives have poured $9,200 into the campaign chest of Sen. Daniel Inouye, Hawaii Democrat – mostly in the past year, according to the Hawaii Free Press. Perhaps not coincidentally, Mr. Inouye traveled around Hawaii with FCC Chairman Julius Genachowski earlier this year to discuss “why government resources are critical” to deploying broadband in rural and native Hawaiian areas.

Records show that last month, the company also began meeting frequently with top FCC officials. It tried to create a false need for the subsidies, making erroneous accusations about its competitors and the current broadband market. It even has asked the FCC to establish a broadband fund in which money specifically goes to tribal areas. It’s not surprising because the company already has a state-sponsored lock on that market from subsidies that undercut most free-market competition.

Unfortunately, the FCC has a bad habit of picking winners and losers in the market. Its effort to regulate the Internet under Net Neutrality would turn over Internet providers’ business models to the whim of government regulators, to the benefit of select Internet-content companies. The commission is poised to subsidize Internet connections for rural health care providers, but only if they connect through one of two select university and government consortiums. And until it was shot down in court, the commission’s application of rules and fines to censor speech on broadcast TV and radio was highly inconsistent and capricious.

Sandwich Isles is poised to go into bankruptcy if the FCC doesn’t approve its Hawaii high-speed bailout. But an FCC decision that pours more taxpayer money into the company would continue this anti-free-market trend. Virtually all of the few customers Sandwich Isles serves can switch to other mobile or satellite broadband options. In the meantime, what incentive does a household have to switch providers if massive taxpayer subsidies guarantee Sandwich Isle has the lowest price? And why would the private sector invest in rural broadband expansion if it can’t fairly compete against a government-backed business?

The case of Sandwich Isle reflects the need for the FCC and Congress to completely overhaul the Universal Service Fund, including the imposition of limits or caps on the fund. Last year, the FCC shot back at a 2007 report that claimed as much as 20 percent of USF money was distributed in error. Even if it wasn’t in error, Sandwich Isles shows how a pool of taxpayer money combined with a healthy dash of political favoritism can still bring wasteful and costly bureaucratic decisions.

Kelly William Cobb is executive director of Americans for Tax Reform’s Digital Liberty Project.

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