Legislation stalls to aid interisland cargo firm Young Brothers

Hawaii’s regulated interisland ocean cargo transportation monopoly is still treading water after a fizzled effort to provide the company, Young Brothers LLC, with public aid.

The state House Finance Committee decided Tuesday not to advance a recently drafted measure that could have provided Young Brothers with $30 million to avoid a threatened shutdown of its critical service.

A proposed draft of Senate Bill 1427 authorized the state Department of Transportation to loan Young Brothers up to $20 million next year provided that the cargo carrier obtained at least $10 million this year from one or more counties.

The measure also intended to transfer state authority for determining Young Brothers rates to DOT from the Public Utilities Commission through the end of next year.

The draft was offered Friday, about a month after Young Brothers publicly appealed for $25 million in federal coronavirus aid money held by the state as a way to avoid insolvency given that Young Brothers said its $2.75 billion parent company, Seattle-based Saltchuk Resources Inc., would quit covering operating shortfalls after May 31.

Following the bill’s deferral Tuesday, Young Brothers President Jay Ana said he appreciates what he considered a thoughtful proposed solution.

“We look forward to continuing the productive dialogue about weathering these challenging times and charting a sustainable course for the future,” he said in a statement.

Young Brothers supported SB 1427 and suggested some tweaks that included a provision for one or more counties to provide at least $15 million this year.

Written testimony supporting the measure also came from Matson Inc., which transfers some of its cargo from the mainland to Young Brothers, the Maui Chamber of Commerce, Molokai Chamber of Commerce, Maui County Council Chairwoman Alice Lee and the Hawaii Cattlemen’s Council.

However, concerns were raised by DOT, the PUC and the state Consumer Advocate.

DOT said in written testimony that it would need $3 million and additional staff to fulfill proposal provisions.

The agency questioned whether it would need to formulate rules to issue loans from a special harbor operations fund, and whether it would need some authority to require collateral for such lending.

DOT also asked whether it would have to allow the consumer advocate and the public to participate in setting rates as is required under the PUC process.

The PUC took no position on the loan provision, which included service requirements and limitations on how Young Brothers could use proceeds. But the commission expressed concern about temporarily transferring its rate authority to DOT.

PUC officials examine Young Brothers finances and operations to allow a reasonable rate of return given that regulation bars competition but also mandates service to smaller ports that typically aren’t financially viable.

“These procedures ensure transparency of the rate setting process, enable the commission to provide informed and balanced oversight of regulated entities, and are essential to protecting the public interest,” PUC Chairman James Griffin said in written testimony.

Robert Stephenson, president and CEO of the Molokai Chamber of Commerce, also noted that such authority transfer could be troublesome.

“The island of Molokai is reliant on Young Brothers as our transportation lifeline for virtually all of the groceries, goods and materials our residents and businesses require to survive,” he said in written testimony. “If rate increases are going to affect our most vulnerable communities then we should have the ability to be heard as a valuable participant in the process.”

Dean Nishina, the state consumer advocate, questioned what criteria DOT would use to establish rates.

“Simply allowing rate increases pursuant to annual freight rate adjustments, without ensuring reasonable efforts to control costs to deliver affordable services to Hawaii’s businesses and residents, is concerning,” he said in written testimony. “Given the current economic condition and the need to help businesses and residents recover from the economic effects of the COVID-19 pandemic, customers need adequate protection to ensure they pay only reasonable rates.”

Young Brothers in September applied to the PUC for a 34% rate increase that has yet to be decided on. In recent years the company agreed to rate increases that it expected would return a profit, but expenses rose while cargo volumes stayed close to flat.

As a result, Young Brothers reported losses of $10.4 million last year and $11.4 million in 2018 following profits of $554,068 in 2017, $2.6 million in 2016 and $15.3 million in 2015.

This year the company projected a $12.3 million loss before the coronavirus pandemic arose. Now with drops in business related to COVID-19, Young Brothers expects to lose $25 million this year through early next year after making $7 million in emergency expense reductions.

Even if Young Brothers obtains its requested $25 million, it has said it would need a 25% rate increase next year to sustain operations.

The company hopes to receive public aid from the Legislature by the end of July, close to when it projects running into cash shortfalls.

To expedite potential assistance, lawmakers took SB 1427, which was introduced last year to expand a highway contra-flow operation on Kauai but stalled in the House, and proposed replacement language to help Young Brothers.

The House Finance Committee held a hearing on the measure Monday. Committee Chairwoman Sylvia Luke deferred the bill Tuesday after noting that a struggle remained over finding a viable approach to achieve what the measure aimed to accomplish.