[00:00:49] Speaker 04:
May it please the court, my name is Lex Smith.

[00:00:54] Speaker 04:
I am here on behalf of Sandwich Isles Communications.

[00:00:58] Speaker 04:
I have asked to reserve five minutes for rebuttal.

[00:01:03] Speaker 04:
In 2005, the Federal Communications Commission issued an order.

[00:01:11] Speaker 04:
That order

[00:01:15] Speaker 04:
said a number of things about the plan of Sandwich Isles Communications to create a new telecommunication network linking the six main Hawaiian islands.

[00:01:31] Speaker 04:
It's found that that plan was in the public interest.

[00:01:36] Speaker 07:
So you're talking about the Bureau's order?

[00:01:39] Speaker 04:
That's correct, Your Honor.

[00:01:40] Speaker 04:
I apologize.

[00:01:42] Speaker 05:
You're talking about the waiver, the study area waiver.

[00:01:46] Speaker 04:
That's right, Your Honor.

[00:01:48] Speaker 04:
And so what I'm talking about is what they actually, clearly the ordering clause of that order did not say we approve the plan.

[00:01:58] Speaker 04:
But I think if you look at that order and you look at what it says, it says it's in the public interest for Sandwich Isles Communications to build this network.

[00:02:09] Speaker 04:
It says that Sandwich Isles Communications should receive support for building the network.

[00:02:17] Speaker 05:
It says that Sandwich Isles recently submitted a multi-million dollar broadband loan application to RUS, the federal government, for new construction.

[00:02:28] Speaker 05:
It doesn't say they got it.

[00:02:31] Speaker 04:
In fact, they didn't get it.

[00:02:32] Speaker 04:
Pardon me.

[00:02:33] Speaker 04:
It doesn't say what?

[00:02:34] Speaker 05:
It doesn't say they got it from RUS.

[00:02:35] Speaker 04:
In fact, they didn't.

[00:02:41] Speaker 04:
What I said was they said it's in the public interest for SIC to receive support for the network.

[00:02:51] Speaker 05:
What do you mean support?

[00:02:52] Speaker 05:
It says that they get a waiver of the existing situation and then go ahead and try and pursue that.

[00:03:01] Speaker 05:
But there's nothing whereby the FCC indicates that it is providing the resources or the legal authority

[00:03:10] Speaker 05:
to actually operate.

[00:03:15] Speaker 04:
That order says that the SIC is entitled to support.

[00:03:21] Speaker 05:
Where does that say that?

[00:03:23] Speaker 04:
Your Honor, I'll find the exact page.

[00:03:25] Speaker 05:
I'm reading it right here.

[00:03:26] Speaker 07:
I think we're on JA 34.

[00:03:28] Speaker 05:
JA 30, I see right here.

[00:03:29] Speaker 05:
I don't see anything.

[00:03:32] Speaker 04:
The order favors support for sandwich aisles.

[00:03:37] Speaker 04:
It does not, as I said, as I conceded up front, it does not expressly say that this plan is endorsed or supported, but the overall... All of the FCC Bureau decides that they will grant a waiver from the

[00:03:59] Speaker 05:
Existing situation so that sandwich house can pursue their dream or can receive support.

[00:04:05] Speaker 04:
That's right I apologize.

[00:04:11] Speaker 04:
I don't have the police in front of me, but I'll bring it back to you

[00:04:21] Speaker 07:
So they say you're going to have to make large capital investments and they say therefore it's in the public interest for Sandwich Isles and its customers to benefit from the cost savings and lower rates available through NECA participation.

[00:04:32] Speaker 07:
That's all I see.

[00:04:34] Speaker 04:
The purpose of the waiver is so that Sandwich Isles can receive support.

[00:04:39] Speaker 01:
The purpose of the waiver could just be to allow sandwich aisles to continue participating in NECA, which is what this says.

[00:04:51] Speaker 01:
And this is, as I understand the chronology, this was issued two years before you undertook the new cable.

[00:05:05] Speaker 04:
I suppose that depends on what you say about undertook.

[00:05:09] Speaker 04:
We have provided you, we've cited the letter that NECA actually wrote in the year 2000, which indicated that they were fully aware of the plan to build the cable, and that letter expressly said that there should not be a problem receiving support for it.

[00:05:29] Speaker 04:
So I think it's a little bit of a distraction or a confusion for NECA to try to tell the court that they got, they first heard about this in 2007 and they didn't have any, and at that point they said, wait a minute.

[00:05:50] Speaker 07:
Even if they did know, and even if the association had, even if they had signed off,

[00:05:58] Speaker 07:
Does that bind?

[00:05:59] Speaker 07:
What authority is that for binding either the Bureau or the Commission?

[00:06:04] Speaker 07:
Does the Association have that ability?

[00:06:09] Speaker 04:
I'm not saying that NECA was bound necessarily by that order.

[00:06:14] Speaker 07:
What I am saying though is that... What I'm asking is if the Association, if we read the Association,

[00:06:29] Speaker 07:
The question here is whether the Commission's decision should be sustained and does the Association have any, I'm trying to figure out the relationship between the Association's view and the Commission or the Bureau, going through the Bureau first and then to the Commission.

[00:06:48] Speaker 07:
Would the Commission find either one?

[00:06:51] Speaker 04:
I don't have authority that they're bound by what they say.

[00:06:55] Speaker 04:
The statute itself says that the 1996 amendments to the statutes say that the support that's provided for rural telecommunications is to be specific, sufficient, and predictable.

[00:07:11] Speaker 04:
What I'm really suggesting here is that there was a change.

[00:07:14] Speaker 04:
Somewhere between 2005 and 2016, there was a change.

[00:07:19] Speaker 04:
I submit to you the project was supported in 2005 and before, and it wasn't in 2016.

[00:07:28] Speaker 04:
You keep saying supported.

[00:07:31] Speaker 05:
Your original waiver request said you were going to get the money from RUS.

[00:07:39] Speaker 03:
Yes, Your Honor.

[00:07:40] Speaker 05:
You never got the money from our U.S.

[00:07:42] Speaker 03:
That's true.

[00:07:43] Speaker 03:
It was privately financed.

[00:07:43] Speaker 05:
You got the money from Deutsche Bank.

[00:07:45] Speaker 05:
And I must say, as an ex-banker, I am utterly astonished that any bank would have given a loan on this one.

[00:07:52] Speaker 04:
Deutsche Bank hired their own cost consultant, looked at the law.

[00:07:58] Speaker 05:
They have to speak for themselves to whatever regulators they have in Germany.

[00:08:02] Speaker 05:
But in any event, there's nothing about the FCC providing support for this.

[00:08:08] Speaker 05:
It was supposed to be coming from RUS, the federal government, and the federal government refused.

[00:08:15] Speaker 04:
The way the system works, the system that is mandated by the Communications Act as amended by the 1996 amendments, is that the RUS provides the loans for these things.

[00:08:29] Speaker 05:
But the RUS refused.

[00:08:32] Speaker 04:
I'm trying to explain the RUS provisional.

[00:08:36] Speaker 04:
You're right that RUS refused, but the funds to service the debt come from the FCC.

[00:08:46] Speaker 05:
So in this case, the... Funds for service the debt come from the FCC?

[00:08:51] Speaker 04:
That's correct, Your Honor.

[00:08:52] Speaker 05:
The money actually flows from a check from the FCC?

[00:08:57] Speaker 04:
I beg your pardon?

[00:08:58] Speaker 05:
I don't understand.

[00:08:59] Speaker 05:
You're saying the FCC actually provides money for this?

[00:09:02] Speaker 04:
Yes, the FCC provides funds called universal service funds.

[00:09:09] Speaker 05:
Not for the construction?

[00:09:11] Speaker 04:
Correct, to service the debt that was incurred for the construction.

[00:09:16] Speaker 05:
Did the FCC ever agree to that?

[00:09:22] Speaker 04:
It was NECA that was supposed to do it.

[00:09:26] Speaker 04:
You're right.

[00:09:30] Speaker 04:
There are multiple mechanisms under the law for providing universal service.

[00:09:37] Speaker 04:
This whole statute exists because

[00:09:40] Speaker 04:
The big telecoms who are all here today won't service rural areas because it's not economic, so they need subsidies in order to provide the service.

[00:09:56] Speaker 04:
And the funds for the service come from a couple of different places.

[00:10:03] Speaker 04:
The universal service funds that come from the FCC and NECA.

[00:10:08] Speaker 04:
The 2005 order expressly said you should join NECA because you'll be able to get support for this program through them.

[00:10:18] Speaker 04:
So there were funds from NECA as well as universal service funds which really aren't the subject of this case today.

[00:10:28] Speaker 04:
So something happened between 2005 and 2016.

[00:10:33] Speaker 05:
You don't dispute the notion that regulated industries must show used and useful test with respect to expenditures?

[00:10:53] Speaker 04:
What I would say about that is that

[00:10:58] Speaker 04:
When a company puts in a new cable, they don't put it in for just the amount of capacity they have that day.

[00:11:08] Speaker 04:
They need to be able to put in more.

[00:11:10] Speaker 05:
You put in a cable which actually astonished me.

[00:11:14] Speaker 05:
It was able to provide service, both telephone and other kinds of service, to everybody in the state of Hawaii.

[00:11:23] Speaker 05:
in order to reach 2,000 people.

[00:11:26] Speaker 04:
That's true under today's standards.

[00:11:29] Speaker 04:
At the time of the design, the multiplexing technology has advanced greatly since that time so that it looks much more outrageous today than it did at the time.

[00:11:43] Speaker 04:
But the other point about that is that the incremental expense... I hate to say this, but I agree with you.

[00:11:50] Speaker 05:
It is much more outrageous, meaning that it was outrageous at the time.

[00:11:55] Speaker 04:
The other point, Your Honor, the incremental expense between putting in, say, a 12 fiber cable and putting in a 48 fiber cable is negligible.

[00:12:09] Speaker 05:
Of course, you could lease as you had on existing cables.

[00:12:18] Speaker 04:
The existing cables are voice quality, not modern quality.

[00:12:25] Speaker 04:
They're at the end of their life cycle.

[00:12:27] Speaker 04:
Something was going to have to be done on this anyway.

[00:12:29] Speaker 04:
Those things were all recognized by the RUS when they originally gave their approval for the law.

[00:12:35] Speaker 05:
Hawaii telephone that doesn't operate adequate service?

[00:12:39] Speaker 04:
That's correct, Your Honor.

[00:12:41] Speaker 04:
Their undersea cables are, as I say, at the end of their life cycle, and the least lines that they provide are of poor quality.

[00:12:53] Speaker 04:
And that was recognized by the RUS approval.

[00:12:55] Speaker 05:
Let me ask you another question about your sort of settlement offer, $8.1 million.

[00:13:02] Speaker 05:
You don't have any agreement on that, do you?

[00:13:04] Speaker 04:
An agreement on... The 8.1 million.

[00:13:11] Speaker 04:
We... We had an agreement, but it's not been signed, and that's the reason it was not submitted.

[00:13:22] Speaker 04:
You don't have an agreement.

[00:13:24] Speaker 04:
Okay.

[00:13:24] Speaker 04:
Fair enough.

[00:13:25] Speaker 04:
We don't have a signed agreement.

[00:13:27] Speaker 04:
We did reach a handshake agreement with them.

[00:13:35] Speaker 04:
I see that my time is up.

[00:13:38] Speaker 04:
I'll hold on for a little.

[00:13:41] Speaker 05:
You have a lot of pillar care.

[00:13:51] Speaker 08:
Good morning.

[00:13:52] Speaker 08:
May it please the court, I'm Sarah Citrin for the FCC.

[00:13:55] Speaker 08:
This is not a case about the FCC's universal service subsidy program.

[00:14:01] Speaker 08:
It's a case about what rate payers should pay for the services they purchase, and it's a case that arises from Sandwich Isle's decision to build the largest undersea cable in Hawaii, which, as Judge Silverman said, had the capacity to serve every landline subscriber in the state when Sandwich Isle served less than 1% of those subscribers.

[00:14:23] Speaker 08:
And the question for the court

[00:14:25] Speaker 08:
reasonably determined that Sandwich Isles has not met its burden to justify recovering the full cost of that cable through pooling.

[00:14:36] Speaker 08:
Sandwich Isles has challenged the reasonableness of the Commission's decision on two narrow Administrative Procedure Act grounds.

[00:14:44] Speaker 08:
It says first that the Commission improperly ignored evidence concerning

[00:14:52] Speaker 08:
says it could total in full $8.1 million, and it says that the commission departed without sufficient explanation from the 2010 declaratory ruling of its subordinate bureau.

[00:15:06] Speaker 07:
In 2000, the Association, NECA, notified Sandwich Isles that

[00:15:14] Speaker 07:
based on information it had received, quote, it is reasonable to assume, this is a JA 148, it is reasonable to assume that Sandwich Isles Communications will receive the estimated NECA settlements throughout the projected period.

[00:15:31] Speaker 08:
What do you do with that?

[00:15:33] Speaker 08:
I think that assurance, whatever it meant to NECA at the time, and I'm not entirely sure, but I don't believe that it binds the commission later.

[00:15:43] Speaker 08:
I get that.

[00:15:47] Speaker 07:
I'm not sure.

[00:15:49] Speaker 07:
Is that right that what the association decides just has no binding impact on the commission?

[00:15:56] Speaker 07:
It's an odd relationship.

[00:15:58] Speaker 08:
The process, as I understand it, for the costs included in NECA's pool, NECA makes an initial determination and the commission, they file annual tariffs which, if challenged, the commission would review de novo NECA's assessment of the reasonableness of the costs.

[00:16:17] Speaker 08:
But that didn't happen here.

[00:16:18] Speaker 05:
It happened later.

[00:16:21] Speaker 08:
It happened later.

[00:16:22] Speaker 05:
AT&T challenged.

[00:16:23] Speaker 05:
AT&T challenged.

[00:16:25] Speaker 08:
No, what happened actually in this context was not at the time of the filing of a tariff, but Sandwich Isles and NECA had been seeking in 2000, well, from 2007 to 2009 to resolve whether these costs were... Who first challenged it?

[00:16:45] Speaker 08:
Sandwich Isles brought a petition for declaratory borrowing to the Commission.

[00:16:48] Speaker 05:
Because NECA was refusing to pay the... That's right.

[00:16:53] Speaker 05:
All right.

[00:16:55] Speaker 05:
2009.

[00:16:57] Speaker 05:
2009.

[00:16:57] Speaker 05:
2009.

[00:16:58] Speaker 08:
So at that point, Sandwich Isles, nine years after this letter, that's nine years after this letter, the Paniolo cable wasn't, the chronology is that Sandwich Isles decided to lease the Paniolo cable conceived of and decided to lease the Paniolo cable in 2007.

[00:17:16] Speaker 08:
And that's when it initiated this back and forth with NECA, which ultimately led to the petition before the commission.

[00:17:27] Speaker 08:
I don't think it's relevant to the court's decision today.

[00:17:30] Speaker 08:
And in fact, I don't think the question of reliance at all is the question on which the APA challenges in this case turn.

[00:17:43] Speaker 08:
Well, hang on a second.

[00:17:45] Speaker 07:
I mean, their argument is about, hey, we were told we were getting at least 50% of this stuff, and then everything changed five or six years later between the Bureau and the Commission.

[00:17:59] Speaker 07:
And then so they're told one thing in 2000, then another thing in 2005, and something totally different in 2011.

[00:18:05] Speaker 07:
And just to understand how this scheme works, maybe not with respect to this specific case, but capital investments aren't something one can do on little 12-month spurts.

[00:18:18] Speaker 07:
And so how are people supposed to, I mean, I think that's what their argument about the unexplained switches is, look, we're making a capital investment here.

[00:18:27] Speaker 07:
It's a long-term investment.

[00:18:29] Speaker 07:
We went to the association in 2000, got some kind of green light.

[00:18:35] Speaker 07:
And then in 2005, they got 50%.

[00:18:39] Speaker 07:
And a decade later, 11 years later, the Commission pulls a plug on the whole thing.

[00:18:46] Speaker 07:
But it's a little hard to undo all that capital investment 11 years later.

[00:18:51] Speaker 08:
Well, because the Commission wasn't involved in 2000 and with this NECA letter, I don't really know.

[00:18:56] Speaker 08:
I see what they've quoted and I understand Sandwich Isle's understanding of what NECA was representing.

[00:19:02] Speaker 08:
I don't know.

[00:19:03] Speaker 08:
But what I do know is that... When the Commission doesn't act...

[00:19:06] Speaker 07:
by statute, when the commission does not act, which it can do for six years, that the Bureau's orders shall have the same force and effect and shall be made evidence and enforced in the same manner as orders, decisions, reports of the commission.

[00:19:18] Speaker 07:
So what are people supposed to rely on in trying to make capital investments with a scheme like this?

[00:19:24] Speaker 07:
They're told to rely on the Bureau.

[00:19:25] Speaker 07:
The commission doesn't act.

[00:19:27] Speaker 07:
That's what holds.

[00:19:28] Speaker 07:
Six years, they're getting 50%, and then someone pulls a rug out from under their feet.

[00:19:34] Speaker 08:
So that question, as I understand it, goes to reliance on the 2010 order.

[00:19:38] Speaker 05:
And I think there... The cable had been built long before the 2010 order, so it's impossible for petitioners to argue that it relied on the 2010 order to build the cable.

[00:19:50] Speaker 08:
Chronologically, that's right.

[00:19:52] Speaker 01:
And furthermore, the 2010 order was immediately appealed... No, but they say the 2000 letter... What do we know about the cable at the time of this 2000...

[00:20:03] Speaker 01:
letter, order, whatever it was that Judge Millett's been asking you about.

[00:20:07] Speaker 01:
So my understanding is they conceived the cable in 2007 and had it built by 2009.

[00:20:16] Speaker 08:
Right.

[00:20:17] Speaker 01:
Is there anything, is there anything circa 2000 where they're not just coming in and saying, let us into NECA, but saying, hey, we wanna build this super duper expanded new cable?

[00:20:31] Speaker 08:
No, and my understanding is the first NECA heard of the Penielo cable was in 2007, but that earlier there may have been discussion with NECA about

[00:20:45] Speaker 07:
Hawaii, which is a record that I'm a little confused about because there's a 2,000 letter, then in the study area waiver, there's certainly a recognition, at least, that they were going to have to make expensive capital investments.

[00:21:01] Speaker 07:
So somebody must have thought something was going to happen.

[00:21:05] Speaker 07:
Now maybe it changed

[00:21:06] Speaker 07:
Maybe it became ballooned in 2007 or not, but what I found very confusing about this case is I can't figure out the basic who knew what when question.

[00:21:18] Speaker 07:
And all we got was, well, don't pay attention to anything the Bureau said because the Commission gets to review it six years later.

[00:21:28] Speaker 07:
And that seemed to me a better cavalier answer to this.

[00:21:31] Speaker 08:
Well, I think on the 2005 order and what the Commission was looking at there, Judge Katz has understood it correctly, that the Commission understood that Sandwich Isles was thinking to undertake large capital investments and that it was in the public interest to allow Sandwich Isles to participate in the Universal Service Program and to

[00:21:53] Speaker 08:
join to be part of the NECA pool.

[00:21:55] Speaker 08:
But that was not an assessment of any particular facilities or whether those facilities were used and useful to rate payers.

[00:22:02] Speaker 08:
And that didn't come, Judge Silberman, as you've said, until two years later in 2007.

[00:22:07] Speaker 07:
So what were they thinking when they sat?

[00:22:10] Speaker 07:
Because part of the benefit of NECA is that these

[00:22:12] Speaker 07:
small companies can group together because it's really hard for any one of them to bear the capital expenses.

[00:22:19] Speaker 07:
And I get the argument that already nobody knew it was 24.1 million when that showed up later, but is there anything in the record that tells us

[00:22:29] Speaker 07:
If there's a finding here that they're going to have to make expensive capital investments that are expensive enough, they can't sort of hand it all on their own.

[00:22:37] Speaker 07:
They need to join NECA.

[00:22:39] Speaker 07:
Is there any sense?

[00:22:40] Speaker 08:
There's nothing in the record of this case about what, if anything, specifically Sandwich Isles told the Commission in 2005 about the exact nature of its facilities, but what we can be sure of

[00:22:54] Speaker 08:
could not have presented the cost of these facilities.

[00:22:57] Speaker 07:
Okay, so it doesn't say here's the Panneola cable plan.

[00:23:00] Speaker 07:
What if, just hypothetically, what if as part of the that 2000 letter from the Association and this 2005 study area waiver, when they said we need to be in, we're gonna have a lot of expensive capital costs, if they'd given notice that we're talking we think somewhere in the range of 15 to

[00:23:21] Speaker 08:
The notion of reliance that Sandwich Isles is advancing, which again I don't really think is one of the legal issues in the case, but I also don't think it can be right in the abstract hypothetical sense because the implication would be that whatever enormous investment

[00:23:46] Speaker 08:
was approved at some early stage in time.

[00:23:50] Speaker 08:
However useless it turned out to be and whatever benefit, whatever anticipated benefit did not materialize for rate payers, they could be on the hook for the cost of those facilities.

[00:24:00] Speaker 07:
That makes perfect sense.

[00:24:02] Speaker 07:
The problem is

[00:24:06] Speaker 07:
to act and you're talking about capital investments, what are people supposed to do?

[00:24:11] Speaker 07:
If it's that easy, why does it take six years and reopening the record to

[00:24:18] Speaker 08:
So in this case, Judge Mallette, the investment was before any delay by the commission, and the delay, in this case, if anything, benefited Sandwich Isles because the commission did not claw back those payments.

[00:24:30] Speaker 07:
That's not my point.

[00:24:31] Speaker 07:
My point is they were told then in, I'm sorry, 2010 when the Bureau said they could get the 50%, right?

[00:24:39] Speaker 07:
And then it was six more years before the commission said, no, I get that they

[00:24:44] Speaker 07:
They didn't make it retrospective.

[00:24:45] Speaker 07:
That would be a much harder case.

[00:24:47] Speaker 07:
That's a good answer to reliance.

[00:24:49] Speaker 07:
But I'm just trying to understand the scheme and how it's supposed to work if your theory of don't rely on what the Bureau did for your capital investments because we can pull the rug out from under you six years later if we get some new facts and decide differently.

[00:25:08] Speaker 07:
I'm just asking generically, not even specifically

[00:25:11] Speaker 07:
in the context of this case, but how is the system supposed to work?

[00:25:16] Speaker 08:
Well, I'm not sure if it would work differently in the situation where someone had challenged the tariff before it went into effect, but I think that delay is a function of the way that the case developed here, which was by this petition for declaratory

[00:25:33] Speaker 07:
If no one had ever challenged this, then you could have just gone on paying.

[00:25:36] Speaker 07:
The commission or bureau don't do any independent review.

[00:25:39] Speaker 07:
They just start cutting the checks for 24 million.

[00:25:45] Speaker 08:
The tariff, if it is approved in the streamline process, that's the system.

[00:25:53] Speaker 08:
The rate is approved, the tariff is approved on a streamline basis.

[00:26:00] Speaker 05:
I'm a little confused.

[00:26:01] Speaker 05:
Did anybody challenge the tariff?

[00:26:04] Speaker 08:
No one challenged the tariff, no.

[00:26:06] Speaker 05:
The tariff is put in by NECA.

[00:26:09] Speaker 05:
That's right.

[00:26:11] Speaker 05:
On behalf of not just... It's a nationwide tariff, right?

[00:26:16] Speaker 05:
That's correct.

[00:26:18] Speaker 05:
Yes.

[00:26:19] Speaker 05:
But somebody was challenging the used and useful aspect of this cable.

[00:26:26] Speaker 05:
Who was it?

[00:26:29] Speaker 08:
Well, NECA was refusing to approve the inclusion of these costs.

[00:26:34] Speaker 08:
That's what I thought.

[00:26:35] Speaker 08:
And then Sandwich Isles came.

[00:26:37] Speaker 05:
That's right.

[00:26:38] Speaker 05:
So NECA refused to accept these costs.

[00:26:41] Speaker 05:
That's right.

[00:26:42] Speaker 05:
And that's why I pushed Sandwich Isles to petition for a declaratory ruling from the FCC in 2010.

[00:26:50] Speaker 05:
That's right.

[00:26:52] Speaker 01:
Let me just try a different way of getting at Judge Millett's point.

[00:26:57] Speaker 01:
Company is contemplating a major capital investment, and let's assume for purposes of the hypothetical, it's a close case whether that makes economic sense or not.

[00:27:12] Speaker 01:
What are they supposed to do to get the blessing before they invest all of that money?

[00:27:22] Speaker 01:
Is it get a declaratory ruling and go all the way through NECA up to the board, up to the FCC, and if they don't do all of that, they proceed at their own risk?

[00:27:34] Speaker 07:
That's right.

[00:27:36] Speaker 07:
What are they supposed to do if it takes a decade to get through that process?

[00:27:40] Speaker 08:
You can't do capital investments that way.

[00:27:43] Speaker 08:
Well, they always have recourse, if nothing else, to a petition for mandamus to the court.

[00:27:50] Speaker 08:
I don't think here the record shows that Sandwich Isles was complaining about the delay.

[00:27:55] Speaker 08:
And as I said, that may be because the delay in this case was benefited.

[00:28:00] Speaker 05:
Was it to their benefit?

[00:28:01] Speaker 08:
That's right.

[00:28:02] Speaker 08:
If there are no further questions, I ask that the petition for review be denied.

[00:28:06] Speaker 08:
Thank you.

[00:28:19] Speaker 02:
Good morning.

[00:28:20] Speaker 02:
May it please the court.

[00:28:21] Speaker 02:
Daniel Fife for Intervener AT&T.

[00:28:24] Speaker 05:
May I ask you a question concerning your interest in this case?

[00:28:29] Speaker 05:
I was a little confused by the briefs, but if there's a payment to sandwich aisles, it comes, I thought from the brief, it comes out of the pool.

[00:28:41] Speaker 05:
It doesn't increase the total payments into the pool.

[00:28:45] Speaker 05:
It comes out of the pool, so therefore it's taken

[00:28:48] Speaker 05:
from other small carriers all across the country.

[00:28:53] Speaker 02:
Let me clarify that for you, Judge Silverman.

[00:28:56] Speaker 02:
The cost that Sandwich Isles recovers from the pool affect the overall rates that the pool members charge.

[00:29:02] Speaker 02:
And those rates are then passed on to interchange characters.

[00:29:06] Speaker 05:
So it's not a zero sum game whereby if Sandwich Isles gets a certain approval, the total rates go up.

[00:29:17] Speaker 05:
It looked from the briefs that it was a zero sum.

[00:29:21] Speaker 05:
If Sandwich Isles got it, it came away from the pool and came away from smaller carriers all across the country.

[00:29:29] Speaker 02:
I think it's fair to say that it's zero sum in two respects.

[00:29:32] Speaker 02:
First is the basic respect that any money Stammer Childs gets is coming out of ratepayers' pockets.

[00:29:37] Speaker 05:
But it's also... From the small carriers around the country?

[00:29:41] Speaker 02:
From the exchange carriers and the customers of those small carriers around the country.

[00:29:46] Speaker 05:
And it's... The exchange or the access?

[00:29:48] Speaker 05:
You're talking about the local carriers.

[00:29:51] Speaker 02:
The local carrier, the cost of Sandler Chiles' recoveries from the pool affect the rates that those local carriers charge to rate payers.

[00:29:59] Speaker 02:
So it's zero sum.

[00:29:59] Speaker 05:
Yes, but I didn't see it affected the rates they charge the interstate carriers.

[00:30:07] Speaker 02:
So it affects the access, it affects the inter-exchange carriers through the access charges.

[00:30:12] Speaker 05:
They actually go up.

[00:30:13] Speaker 02:
They actually go up.

[00:30:17] Speaker 02:
Yes, that's correct.

[00:30:18] Speaker 02:
I'd like to turn to the reliance interest that the court was asking about.

[00:30:23] Speaker 02:
I wanted to first address the 2000 NECA letter and make two points respecting it.

[00:30:29] Speaker 02:
The first is that, and I unfortunately don't have a direct citation to the record on this, but the 2000 letter, in addition to the comments that the court asked about,

[00:30:40] Speaker 02:
stated and warned Sandwich Isles that consistent with FCC and NECA rules, Sandwich Isles would still have to on a going forward basis justify its costs annually as NECA requires.

[00:30:54] Speaker 02:
And that's consistent with the basic use and useful principle that on an ongoing basis, carriers need to show that the costs that they are recovering from rate payers are benefiting rate payers.

[00:31:05] Speaker 02:
The second point is that the 2000 letter was by no means NECA's last word on this investment before Sandwich Isles decided to enter it.

[00:31:13] Speaker 02:
When Sandwich Isles came to NECA in 2000 before signing the Panayola lease, NECA warned that the cost... 2000?

[00:31:22] Speaker 02:
I'm sorry, 2007.

[00:31:23] Speaker 02:
I apologize.

[00:31:25] Speaker 02:
When Sandwich Isles came to NECA in 2007 before signing the lease,

[00:31:29] Speaker 02:
NECA warned Sandwich Isles that the costs and capacity of the cable appear excessive.

[00:31:35] Speaker 02:
It also raised concerns about the affiliate transactions.

[00:31:40] Speaker 05:
And this is an important point, that Paniola was built by another company, not Sandwich Isles.

[00:31:48] Speaker 02:
Yes, the Paniola cable was built by a company.

[00:31:51] Speaker 05:
Now there's a disturbing interrelationship, but nevertheless it's a separate

[00:32:02] Speaker 05:
at any time.

[00:32:03] Speaker 05:
It only had sandwich aisles.

[00:32:05] Speaker 02:
That's correct.

[00:32:05] Speaker 02:
Paniola came on the scene in 2007.

[00:32:07] Speaker 02:
Separate company.

[00:32:09] Speaker 05:
And Paniola never appeared before the FCC, did it?

[00:32:14] Speaker 02:
That's correct.

[00:32:15] Speaker 05:
That's right.

[00:32:15] Speaker 05:
It's a separate company altogether.

[00:32:17] Speaker 05:
They put its own money into this deal on the Kamahai soon.

[00:32:24] Speaker 02:
Yes, that is correct.

[00:32:26] Speaker 07:
Paniola was trying... Well, did it do it because it had an agreement with... I mean, it's a question of whether it was agreeing to do the building at the Sandwich Isles behest, if those two had... I mean, imagine a scenario in 2000 where Sandwich Isles, and it seems like we don't quite know, goes to the association and says, we've got to build

[00:32:49] Speaker 07:
this network, including the submarine cable, and it's going to cost XX million, double digits, maybe not the exact right price.

[00:32:59] Speaker 07:
And the association blesses it in the letter.

[00:33:03] Speaker 07:
And the Sandwich Isles goes and finds a contractor to build this thing.

[00:33:07] Speaker 07:
And they have, long-term it takes a while to get the negotiations, to get the thing going.

[00:33:11] Speaker 07:
But it's being built by another company.

[00:33:14] Speaker 07:
Not a contract.

[00:33:15] Speaker 07:
They have a contract with somebody to build it.

[00:33:19] Speaker 07:
Sandwich Isles isn't going to build it itself.

[00:33:24] Speaker 07:
And then 2005, they've got their view.

[00:33:29] Speaker 07:
I get there's different readings of their view.

[00:33:30] Speaker 07:
And they think they're still getting another nod now from the commission to make capital investments.

[00:33:39] Speaker 07:
And then by the time, you know,

[00:33:42] Speaker 07:
2007, they go, okay, here's the bill.

[00:33:46] Speaker 07:
Or here's what we think the bill's gonna be.

[00:33:48] Speaker 07:
We've been doing what you all said was okay, and of course we told you it was gonna make sense.

[00:33:52] Speaker 07:
So here's the bill, and that's when everyone goes, oh my gosh, way too much.

[00:33:58] Speaker 07:
So the fact that it's another company doesn't really matter so much.

[00:34:01] Speaker 07:
The question is whether or not the Chiles was reasonable to

[00:34:08] Speaker 07:
get into that relationship and have that obligation to have infrastructure built for its service.

[00:34:16] Speaker 07:
A couple of points in response.

[00:34:19] Speaker 02:
Yes, a couple of points in response.

[00:34:23] Speaker 02:
I think that first as a matter of chronology,

[00:34:28] Speaker 02:
Sandwich Isles lost funding to build the Paniola cable, to build what ultimately became the Paniola cable in 2004.

[00:34:35] Speaker 05:
Be very, very careful about this.

[00:34:37] Speaker 05:
My understanding is Sandwich Isles built nothing.

[00:34:41] Speaker 05:
Paniola, a separate company, built the cable.

[00:34:45] Speaker 05:
Paniola was never in front of the FCC.

[00:34:49] Speaker 05:
Am I not correct?

[00:34:51] Speaker 02:
Yes, that is technically correct, yes.

[00:34:54] Speaker 07:
They were building it for Sandwich Isles.

[00:35:00] Speaker 05:
Anybody could use that cable, right?

[00:35:03] Speaker 05:
My telephone could use that cable, right?

[00:35:07] Speaker 02:
In principle, yes, except that Sandwich Isles in 2007, despite warnings from NECA that it might not be able to recover all of the costs of the cable through the NECA pooling arrangement,

[00:35:21] Speaker 05:
Why do you keep talking about it recovering the cost of the cable?

[00:35:26] Speaker 05:
You're assuming you're making the same mistake that the other side makes, which you try to distinguish in your brief.

[00:35:33] Speaker 05:
Paniola is not before the FCC.

[00:35:36] Speaker 05:
Sandwich Isle didn't build the cable.

[00:35:41] Speaker 02:
That's correct, but Sandwich Isle is now seeking to recover its lease costs on the cable.

[00:35:45] Speaker 05:
Its lease costs, that's right.

[00:35:47] Speaker 05:
Not the construction costs, its lease costs.

[00:35:51] Speaker 02:
Yes, and because Sandwich Isles entered an exclusive lease for the cable's entire capacity,

[00:35:59] Speaker 07:
When did they do it?

[00:36:00] Speaker 07:
This is part of my who knew what when.

[00:36:02] Speaker 07:
Do we know when they agreed to do it?

[00:36:06] Speaker 07:
Was it 2007 that they agreed to enter into that exclusive lease for this massive cable?

[00:36:10] Speaker 02:
Yes.

[00:36:10] Speaker 02:
I think that's a key point is that in 2007, they've lined up the financing from Deutsche Bank.

[00:36:16] Speaker 02:
They've approached NECA.

[00:36:17] Speaker 02:
NECA has warned them that the costs might not all be recoverable through the pool because the costs and capacity seem so excessive.

[00:36:23] Speaker 05:
Wait a minute.

[00:36:25] Speaker 05:
You keep saying they.

[00:36:27] Speaker 02:
Sorry.

[00:36:27] Speaker 02:
Mecca has worn sandwich aisles.

[00:36:28] Speaker 05:
No, no, wait.

[00:36:31] Speaker 05:
Sandwich aisles did not get a loan from George Frank.

[00:36:35] Speaker 05:
Right.

[00:36:36] Speaker 05:
Paniola got a loan from George Frank.

[00:36:38] Speaker 02:
Allow me to clarify.

[00:36:39] Speaker 05:
Keep that clear in your mind, counsel.

[00:36:42] Speaker 02:
Yes, Judge.

[00:36:44] Speaker 02:
Sandwich Isles, in 2007, approaches NECA and says, we plan to lease the cable's entire capacity from Paniolo.

[00:36:54] Speaker 02:
NECA warns Sandwich Isles that the cost and capacity of the cable, the cost and capacity of the lease, I should say, appear excessive given Sandwich Isles' very small customer base.

[00:37:04] Speaker 02:
And this is laid out, I believe, at J98-99.

[00:37:08] Speaker 02:
It occurs in the May-June 2007 timeframe.

[00:37:12] Speaker 02:
In July of 2007, despite those warnings,

[00:37:17] Speaker 02:
Sandwich Isles enters the lease with, enters an exclusive lease with Paniolo for the cable's entire capacity, despite the fact that the cable's entire capacity appeared to be roughly 200 times what Sandwich Isles required.

[00:37:30] Speaker 07:
And up until that moment in time, was Sandwich Isles still using, when it had some prior cable, it was, capacity was leasing, was it still doing it up until that moment in time?

[00:37:39] Speaker 02:
Yes, up until that time, Sandwich Isles had been leasing capacity from Hawaiian Telecom.

[00:37:43] Speaker 02:
And crucially, the commission found, and Sandwich Isles doesn't mean it's a challenge, that it could have continued to do so to this date and adequately serve the needs of both its current and future customers.

[00:37:55] Speaker 02:
And so the commission found that there was no need in the first place, effectively, to build this cable.

[00:38:03] Speaker 07:
To build the cable or to lease the entire cable?

[00:38:06] Speaker 02:
Well, to lease the cable.

[00:38:11] Speaker 02:
Sandwich House could have continued to serve its rate payers adequately by leasing capacity from unaffiliated third parties.

[00:38:19] Speaker 07:
The confusion here on building and leasing might be because of the, at least some evidence about the unusual relationship.

[00:38:24] Speaker 02:
Yes, that accounts for the

[00:38:27] Speaker 02:
slipping between the terms, but it's correct.

[00:38:31] Speaker 02:
It is a putatively different company.

[00:38:32] Speaker 07:
Let's imagine in 2007 when they came and said, we're still on our old lease, but here's the new lease we'd like to sign on Ex-State in 2007 or 2008, and it's a $24 million lease.

[00:38:49] Speaker 07:
And if at that time, the association had said no, 24 hours later, or they'd appealed, and within a week or so, the commission said, are you nuts?

[00:39:00] Speaker 07:
There's no way we're going to approve that.

[00:39:04] Speaker 07:
Would Sandwich Isles wouldn't have been out any money?

[00:39:06] Speaker 07:
It would have just done its old lease?

[00:39:10] Speaker 07:
Or would we know it wouldn't have lost investment money in this campaign?

[00:39:14] Speaker 05:
I apologize.

[00:39:14] Speaker 05:
Have they answered the question?

[00:39:24] Speaker 07:
I'm asking whether they would have lost any money.

[00:39:28] Speaker 07:
Is the only money outlay in 2007 prospective lease expenses?

[00:39:36] Speaker 02:
Um, my understanding is that in 2007 they did not have a lease commitment to Paniola and that Sandwich Isles... The 24 million was what they were going to incur starting the lease going forward.

[00:39:48] Speaker 02:
The question was whether they were going to enter this 20-year lease for the Paniola... Going forward, that's all.

[00:39:53] Speaker 07:
The 24.1 or something was the lease expense going forward.

[00:39:56] Speaker 02:
Yes, that's correct.

[00:39:58] Speaker 02:
Um, I think, uh, the point is that because this cable, um, because this cable

[00:40:06] Speaker 02:
was never necessary to serve Sandwich Isles rate payers.

[00:40:10] Speaker 02:
This is exactly the sort of gold plating that the Use and Useful Standard is meant to prevent.

[00:40:16] Speaker 02:
And the Use and Useful Standard requires that the Sandwich Isles show that the costs it's recovering on an ongoing basis are benefiting rate payers.

[00:40:25] Speaker 05:
When is the first time that AT&T complained to the FCC?

[00:40:30] Speaker 02:
AT&T, I believe, participated, submitted comments in response to Sandwich Isles petition for a declaratory ruling asking the FCC to override NECA's determination that these costs shouldn't be included in the pool.

[00:40:44] Speaker 05:
I'm asking for the date.

[00:40:45] Speaker 02:
The precise date?

[00:40:47] Speaker 02:
I don't know the precise date, but it was in conjunction with Sandwich Isles petition.

[00:40:53] Speaker 02:
What year?

[00:40:54] Speaker 02:
It was in 2009 or 10.

[00:40:58] Speaker 05:
Not in 2007?

[00:41:00] Speaker 02:
No, because what happened was in 2007, when Sandwich Isles approached NECA in 2007 about entering this lease, NECA warned that it might not be able to recover the costs.

[00:41:13] Speaker 02:
Sandwich Isles went ahead, entered the lease.

[00:41:15] Speaker 02:
Over the next two years, Sandwich Isles and NECA went back and forth with each other over the degree to which these costs should be allowed to be included in the pooling.

[00:41:24] Speaker 02:
Finally, in 2009, around June, NECA issued a – Mayor June, I apologize – NECA issued a definitive determination that costs beyond what Sandwich Isles was previously paying Hawaiian telecom plus an allowance for growth would not be allowed into NECA pooling.

[00:41:45] Speaker 02:
At that point, Sandwich Isles petitioned – So it was a declaratory ruling.

[00:41:49] Speaker 02:
Exactly.

[00:41:49] Speaker 02:
It started a declaratory ruling.

[00:41:51] Speaker 05:
That led to the 50-50 ruling by the Bureau, correct.

[00:42:04] Speaker 05:
And you objected to the 50-50 ruling before the Commission?

[00:42:08] Speaker 02:
Yes.

[00:42:09] Speaker 02:
After the Bureau issued the 50-50 ruling, AT&T filed an application for review.

[00:42:14] Speaker 05:
What date was that?

[00:42:15] Speaker 02:
That was in 2010.

[00:42:17] Speaker 02:
The Bureau ruling was in September of 2010.

[00:42:20] Speaker 02:
I believe it was late 2010.

[00:42:22] Speaker 05:
Do you have any explanation as a keen observer on this, why the FCC sat on this case for six years?

[00:42:34] Speaker 02:
I can't speculate as to why the FCC sat on the case for so long.

[00:42:38] Speaker 05:
I don't want you to speculate.

[00:42:39] Speaker 05:
You don't have any knowledge.

[00:42:40] Speaker 02:
I'm afraid I don't.

[00:42:41] Speaker 02:
But I think I would echo my colleague's point that to the extent there was delay in this case, it inured to Sandwich Isles benefit.

[00:42:47] Speaker 07:
Well, one can imagine it being a problem for others, though, going forward.

[00:42:52] Speaker 07:
Yes, ma'am.

[00:42:54] Speaker 07:
I'll ask your friend on the other side, but were there, was Sandwich Isles lease with Panneola Cable at full capacity a year-by-year lease, or was it for a set term of years?

[00:43:06] Speaker 02:
It was a 20-year lease, the price of which escalated over time until it reached a certain cap, and then it leveled off.

[00:43:13] Speaker 02:
A 20-year lease as usual?

[00:43:16] Speaker 07:
Is that usually how it's done?

[00:43:19] Speaker 02:
I'm not sure, Your Honor.

[00:43:23] Speaker 02:
If the court has no further questions, we'd ask that you deny sandwich house petition.

[00:43:26] Speaker 07:
Thank you very much.

[00:43:37] Speaker 04:
Thank you.

[00:43:38] Speaker 04:
I didn't realize the yellow light meant I was done.

[00:43:43] Speaker 04:
The design of the network, including the undersea cable, was done in the late 90s.

[00:43:51] Speaker 04:
It was approved by the RUS, and the entire design of the network, as approved, was before the commission when it issued its 2005 order.

[00:44:04] Speaker 04:
The commission knew it would be expensive.

[00:44:07] Speaker 04:
The 2005 order contemplates $14,000 per loop per year in cost.

[00:44:16] Speaker 04:
You can find that at Joint Appendix 37 and 38, footnote 53.

[00:44:22] Speaker 04:
They knew it would serve relatively few customers.

[00:44:27] Speaker 04:
There was a change between 2005 and 2016 that can only be explained by the fact that it was arbitrary and capricious.

[00:44:40] Speaker 04:
The focus on 2007 as though somebody walked in and shocked and surprised NECA with the plan to build this cable is simply a deception.

[00:44:53] Speaker 04:
It's not true.

[00:44:54] Speaker 04:
It was on the boards for a long time.

[00:44:57] Speaker 04:
It was opposed at every step by the big telecoms, Hawaiian Tell, Verizon, etc.

[00:45:05] Speaker 04:
Their position has not changed.

[00:45:08] Speaker 04:
From the outset, they said it was too expensive, it was unnecessary, et cetera, and they've been very consistent.

[00:45:15] Speaker 04:
The only party that's changed is the FCC.

[00:45:18] Speaker 04:
No facts have changed.

[00:45:20] Speaker 04:
The FCC changed for no reason, and they're going to drive my client out of business with this decision.

[00:45:25] Speaker 04:
Who is your client?

[00:45:26] Speaker 04:
My client, Sandwich Isles Communications.

[00:45:28] Speaker 05:
Not Paniola.

[00:45:30] Speaker 04:
but not Paniola.

[00:45:31] Speaker 05:
And Paniola is the one with the capital investment.

[00:45:33] Speaker 04:
Paniola is the one that borrowed the money.

[00:45:36] Speaker 05:
But Paniola is the one with the capital investment.

[00:45:40] Speaker 04:
Yes, the arrangement... They're not in front of us.

[00:45:43] Speaker 04:
I'll just explain.

[00:45:44] Speaker 04:
The arrangement was Sandwich Isles entered a lease for the full capacity of cable, and Paniola doesn't even have a bank account.

[00:45:55] Speaker 04:
Paniola's only account is

[00:45:57] Speaker 04:
in Deutsche Bank, so that when the rent goes to Paniolo, it goes straight to Deutsche Bank.

[00:46:04] Speaker 05:
All I want to make clear, all I want to make clear is Sandwich Islands is before us, Paniolo is not.

[00:46:13] Speaker 04:
Absolutely correct, Your Honor.

[00:46:14] Speaker 07:
Sandwich Islands is locked into a 20-year lease.

[00:46:19] Speaker 04:
Which it can't pay.

[00:46:21] Speaker 07:
But that seems a little inconsistent with your position for the Commission that actually it's not locked into a 20-year lease of $24.1 million, but actually we can knock it down to $8.1 million.

[00:46:35] Speaker 07:
So maybe you weren't so locked in at all.

[00:46:36] Speaker 07:
They were totally renegotiated.

[00:46:38] Speaker 07:
Maybe they could renegotiate some more.

[00:46:41] Speaker 07:
How are you supposed to know how locked in or how reliable you were?

[00:46:45] Speaker 04:
I understood, Your Honor.

[00:46:47] Speaker 04:
Keep in mind that Deutsche Bank

[00:46:50] Speaker 04:
was recognizing the same reality we were that we weren't going to get the 24 million.

[00:46:56] Speaker 04:
So they were kind of flexible about what they would be willing to do too.

[00:47:04] Speaker 04:
But there isn't any margin for anybody except Deutsche Bank.

[00:47:13] Speaker 04:
The full amount of the rent to Paniolo goes straight to Deutsche Bank.

[00:47:18] Speaker 04:
That was the point