Federal regulators are pressing ahead with their decision to slash government subsidies used by Sandwich Isles Communications to provide telephone and high-speed Internet service to customers living on Hawaiian Home Lands, saying the Honolulu-based company was not able to justify “significant and wasteful expenses totaling many millions of dollars.”

Since the mid-1990s Sandwich Isles — which is run by Albert Hee,  the brother of state Sen. Clayton Hee (D, Kahuku-Kaneohe) — has had exclusive rights to wire Hawaiian Home Lands with telephone service to be paid for with a fee of up to $2.75 attached to every phone bill.

Sandwich Isles has about 3,000 customers and was collecting about $830 per customer, per month from the fee in 2011. The Federal Communications Commission, which oversees the program, said in 2011 it would cut Sandwich Isles’ payment in stages to $250 per customer, per month by June 2014.

Sandwich Isles asked for a waiver to continue collecting more than $250, but the FCC turned down the request this month.

“Sandwich Isles has certain expenses that appear grossly excessive and unreasonable,” the FCC said in its decision. “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.”

The FCC decision said Sandwich Isles’ expenses are 623 percent greater than the average for companies of a similar size. Sandwich Isles’ operating expenses for each subscriber line averaged $224 a month compared with an average of $31 per line for the next five companies with the highest expenses in its peer group, the FCC said.

The FCC also accused Sandwich Isles of improperly awarding contracts and leases to a network of “affiliated and closely related companies.” Sandwich Isles has a contractual relationship with Paniolo Cable Network, a wholly owned subsidiary of Blue Ivory Hawaii Corp., which is held equally by the private trusts of Al Hee’s three children, according to the FCC.

Hee did not return a telephone call seeking comment.

Sandwich Isles has received about $25 million a year from the ratepayer fund, known as the Universal Service Fund, for the past three years, according to the FCC.

The company said without the current level of subsidies, it will be forced into insolvency, raising the possibility that its customers would be left without a telecommunications provider, according to the FCC filing.

The FCC’s Wireline Competition Bureau denied Sandwich Isles’ request for a waiver that would have exempted the company from new federal regulations that cap the amount telecommunications firms can draw from the ratepayer-funded account to cover the expense of running phone lines to rural and remote areas.

Sandwich Isles filed the waiver request in December 2011. The Universal Service Fund, which was revamped by Congress in 2011 partly due to concerns of abuse, takes in about $8 billion a year through the fee ranging from $2.50 to $2.75 attached to all phone bills.

Sandwich Isles failed to follow through with a pledge to cut costs that would have put the company on a sound financial footing, FCC Wireline Competition Bureau Chief Julie Veach wrote in the agency’s decision on May 10.

Noting that the Universal Service fund is a finite resource Veach said that “granting a waiver in these circumstances would be inappropriate and unfair.”

She said Sandwich Isles may file a new waiver petition in the future “once it is able to restructure its operations in an appropriate manner that allows it to reduce unreasonable expenses.”

Sandwich Isles’ 3,000 customers are mainly on Hawaii island, Maui and Molokai. The company charges them rates below or comparable to what urban customers pay. The customers live on Hawaiian Home Lands, the more than 200,000 acres of former Crown lands intended for use by those who are at least 50 percent Native Hawaiian.

However, Sandwich Isles officials have said in the past that providing the service to remote areas in Hawaii would be impossible without the federal subsidies, and that the costs are high because the company is building a fiber-optic network from the ground up.

Using fiber-optic lines allow Sandwich Isles to offer high-speed Internet that can host video services such as "telemedicine" to areas which, in some cases, lack access to running water, electricity, paved roads and nearby health care.

In addition to serving as president of Sandwich Isles, Hee is president of its parent company, Waimana Enterprises. Sandwich Isles also is affiliated with local telecom provider ClearCom Inc.

The FCC provided a long list of what it considered questionable transactions between Sandwich Isles and the other companies. The FCC said the value of the transactions amounted to “many millions of dollars,” although exact amounts were redacted.

“Of particular concern, Sandwich Isles’ payments have significantly increased in recent years, without any explanation for the need for additional services,” according to the FCC ruling. “We are not convinced that the significant payments to Waimana are warranted for the services provided by Waimana to Sandwich Isles.”

Waimana Enterprises and Sandwich Isles have been active politically during the past decade, contributing more than $120,000 to the political campaigns of Hawaii’s congressional delegation, according to the website OpenSecrets.org.

Hawaiian Telcom, the state’s largest phone company, is required under its mandate by the Public Utilities Commission to provide service to all areas.

“Hawaiian Telcom has always been committed to serving Hawaii’s residents consistent with our voice carrier of last resort status, including rural areas,” company spokesman Scott Simon said in an email.