Interisland cargo rates at 91直播’s regulated monopoly service provider Young Brothers Ltd. could be going up in July after a 26% hike approved in November.
The state Legislature passed a bill last week sought by the company to force the state Public Utilities Commission to apply an automatic inflation-linked rate increase in each of the next two fiscal years beginning July 1.
If enacted by Gov. Josh Green, Senate Bill 2694 would require the PUC to raise regulated rates based on a measure of inflation up to 5% for the tug-and-barge operator that provides a lifeline of goods to the neighbor islands.
A rigorous rate-change proceeding by the PUC also would be required under the bill for the fiscal year beginning July 1, 2028, after the two automatic increases.
The move by lawmakers follows a November decision by the PUC to reject the same automated escalations while approving a 26% rate hike after a contentious quasi-judicial case in which a state advocate representing consumers recommended a smaller increase.
Young Brothers actually raised rates by 18.1% last July on an interim basis pending the PUC’s decision, which allowed an additional 7.65% increase that took effect Jan. 1.
The PUC’s decision barred Young Brothers from seeking another general rate increase for two years and included the appointment of a “special overseer” to monitor operations and execution of a new business plan intended to break the company’s cycle in recent years seeking big, urgent rate hikes that included a 46% emergency increase granted in 2020.
Young Brothers, however, told lawmakers that the PUC’s regulatory framework for its industry is broken, with rate proceedings that can last over a year and the last one costing the company $3 million.
Young Brothers also said it wasn’t reasonable for the commission to deny annual inflation-linked rate increases that will help it regain financial stability and avoid seeking bigger increases every few years.
“The gap is really big right now between costs and rates, and it’s just growing a lot faster than it has traditionally for traditional public utilities in the water-carrier industry,” David Veltri, associate general counsel at Young Brothers, said during a Feb. 18 hearing on the bill held by two Senate committees.
“There’s a lot more competition now,” Veltri continued, referring to unregulated segments of Young Brothers business. “And because of this gap, we need to pull all levers. We got to cut costs internally, and we need to have something to just help us get a little bit closer to what rates should be between these long, complex and contentious rate cases.”
Michael Angelo, head of the Division of Consumer Advocacy at the state Department of Commerce and Consumer Affairs, expressed concerns to lawmakers about the bill unnecessarily burdening customers with higher rates.
Angelo noted that Young Brothers already is allowed to pass on higher fuel costs to customers, and that other elements contributing to inflation, which include prices for housing, food and apparel, don’t necessarily add to costs for the company.
“If they’re given an automatic adjustment clause, it removes the incentive to be more efficient in their operations,” he said during the hearing.
During last year’s PUC rate case proceeding, issues were raised over whether Young Brothers was fairly accounting for costs split between its regulated and unregulated business, and prudently managing operations with big investments in new tugboats and barges.
The company also was criticized for sending profits to its parent company, Seattle-based transportation conglomerate Saltchuk, during good times and then seeking a bailout from the state during bad times because Saltchuk would not put money back into its subsidiary.
Public testimony overall on the bill was overwhelmingly in favor of the proposed change and included support from Matson, The Maritime Group and employees of Young Brothers. For the Feb. 18 hearing, 173 individuals and organizations expressed support while five organizations, including the 91直播 Food Industry Association, expressed opposition.
Keali’i Lopez, state director of AARP 91直播, said in written testimony that automatic rate adjustments shift financial risk from companies to consumers, reduce transparency and allow rate increases to occur without meaningful scrutiny of whether costs are necessary, reasonable or prudently incurred.
“These risks fall hardest on households least able to absorb unpredictable price increases,” she said.
Some supportive testimony came from members of a working group formed at the direction of the Legislature in 2020 to assess interisland shipping issues after Young Brothers unsuccessfully sought $25 million from lawmakers to avoid insolvency.
The working group issued recommendations in 2021 that included an annual inflation-linked adjustment for regulated Young Brothers rates.
Steven Hunt, a 91直播 County official who chaired the group, said in written testimony that the annual adjustments were recommended as a means for more timely, but limited, rate changes between the PUC’s “slow, cumbersome, costly and inefficient” normal rate case proceedings.
“While I recognize that there have been many factors at play, it’s worth considering whether earlier implementation of this recommendation might have helped mitigate some of the challenges the state’s water carrier system is facing today,” Hunt said.
The PUC told lawmakers that because of the immediate poor financial condition of Young Brothers last year it decided not to allow automatic rate adjustments without commission review.
The company at the time had not paid state wharfage fees it collected from customers, and the PUC said it could revisit an annual inflation-linked rate adjustment if it became confident that Young Brothers can reasonably control costs and regain financial stability.
Rep. Scot Matayoshi, chair of the House Committee on Consumer Protection and Commerce, said during an April 9 hearing on the bill that the PUC’s denial of annual inflation-linked rate adjustments seemed misguided because such impacts on costs would be factored into more rigorous rate case proceedings regardless of whether Young Brothers is run more efficiently.
“If inflation is going to be considered in their future rate case … then why aren’t we just giving it to them now?” said Matayoshi (D, Kaneohe-Maunawili). “Why are we forcing them to eat it and then come back for a cost that we all agree is going to happen anyway and is reasonable?”
Rep. Kim Coco Iwamoto (D, Ala Moana-Kakaako-Downtown) said at the same hearing that SB 2694 seemed to be offering more predictability for businesses relying on goods from Young Brothers, given that PUC-approved rate changes every three years should be smaller with annual inflation-linked adjustments in the two prior years.
“To have a jump go up 25% one year kind of out of the blue, that feels harsher for small businesses than something more predictable like this bill,” Iwamoto said.
The House gave final approval to the bill May 6 in a 35-15 vote, with Iwamoto casting one of the “no” votes.
In the Senate, the vote on the same day was 25-0, though afterward Sen. Lynn DeCoite (D, East and Upcountry Maui-Molokai-Lanai) explained that her decision was difficult.
“Like many residents and businesses in my district, I have serious concerns,” said DeCoite, who lives on Molokai.
Voting for the bill, she explained, came down to her support for continued dependable service for the community that relies on Young Brothers for most goods, even though she wants to see accountability, transparency and continued oversight of the cargo carrier.
“It was a bitter pill to swallow,” she said.
