The state Public Utilities Commission is holding a quasi-judicial hearing this week in Honolulu to consider Young Brothers’ application seeking to increase revenue by almost $26.4 million, a 27.06% increase over current shipping rates.
According to the PUC, Young Brothers — which has a virtual monopoly as an interisland ocean cargo shipper — is seeking a rate of return of 10.92% on its rate base, revisions to its rate schedules and rules, and implementation of the first tier of the Water Carrier Inflationary Cost Index, or WICI, an automatic yearly rate adjustment mechanism.
According to Young Brothers, the requested rate hike is to recover costs of capital investments, including new barges and tugs, account for increasing operating expenses, and adjust for shipping volumes that remain lower than pre-pandemic levels.
Proposed increases include 30% for automobiles and other roll-on, roll-off cargo with a 10% rollback on bulk auto shipment discounts, 35% for less than a pallet of dry cargo, 45% for less than a pallet of refrigerated cargo, 35% for Hilo containers, and and 35% for hazardous cargo shipments.
Young Brothers says the company’s 2024 losses were $14 million, and losses of more than $25 million are forecast for 2025, “even after the recent approval of temporary customer rate hikes for the remainder of the year.” It added that despite the 18.1% temporary hike granted July 1, the Hilo route runs at a $7 million loss, with similar losses for the Molokai and Lanai routes.
The hearing started Monday with opening statements, and will run daily between 9 a.m. and 4:30 p.m. through Friday, or until conclusion, should they wrap-up earlier.
Representing Young Brothers, attorney David Nakashima said the rate increase request is “about saving the lifeline between the islands.”
“There are only two main outstanding issues that have a significant impact on the revenue requirement — the rate of return on cost of capital and the (PUC Consumer Advocate’s) blanket adjustments to various operating expenses,” Nakashima told commissioners. “With respect to the first issue … YB has submitted a comprehensive analysis performed by a cost-of-capital expert. Specifically, YB’s cost-of-capital expert implemented standard cost-of-capital estimation models including a discounted cash flow model and a capital asset pricing model, along with an analysis of YB’s risk.
“The Consumer Advocate, on the other hand, didn’t do any of that. … The CA’s consultant just took YB’s … range of the proposed cost of equity — which, by the way, they agreed is reasonable — and simply selected the bottom number of that range. Because, according to the consultant, YB’s a regulated utility, and therefore, it’s risk must be lower. If the record in this case shows anything, it’s shows that YB’s risk is not lower. If anything, it’s at the high end of that range.
“With regard to the second outstanding issue, the evidence will show that the Consumer Advocate’s recommended operating expenses fall way short of YB’s actual annualized expenses for 2025. In other words, under the CA’s proposal, YB’s new rates will be insufficient to cover its own operating costs from the outset. … In fact, the record will show that YB has done everything that the commission has asked for it to do, within its control, to continue providing safe and reliable water carrier service in the state. But it cannot do it alone and it cannot do it with … inadequate rate relief.”
Edward Knox, a staff attorney for the Consumer Advocate, argued it is “vital we need to help Young Brothers, because it’s not clear that Young Brothers best knows how to help itself.”
“Young Brothers’ business decisions have not been geared towards long-term financial resilience or even toward long-term financial stability,” Knox told commissioners. “Rather, Young Brothers has made significantly large capital investments and has been unable to control its expenses. Additionally, Young Brothers also sent out profit distributions as much as it thought it could.
“Young Brothers has habitually left itself unable to weather downturns. That is, the company has not been controlling its expenses for the past several years, squeezing profits out of the company in up years, thus leaving itself cash-strapped, and then going into financial crises in down years. That state of crisis is a predictable result of Young Brothers’ decisions. At least, predictable to everyone else except Young Brothers, it seems.”
Knox said that as the applicant, Young Brothers has the burden of proof that “another steep rate increase” is warranted.
“But because of Young Brother’s cycle of repeated recent rate increases — all built up by now, one after another on top of each other — granting it any additional rate increase … any amount over what it really needs, actually hurts it over the long term,” he said. “If not guided by the commission’s better judgment and discernment, Young Brothers would price itself out of its own market.”
Testimony started Monday, including Frank Almaraz, Young Brothers’ interim president, and Robin Chiu of the national consulting firm Portage Point Partners, who drafted the business plan the shipper submitted to the PUC.
Julia Verbrugge, a PUC attorney, asked Chiu if Young Brothers sought input from customers “as to what they would be willing to accept, in terms of service level” prior to the plan’s submission.
“In general, I think business plans are developed by management and … in the development, there’s not consultation, necessarily, in a formal sense with external parties,” Chiu replied. “I think the conversation that YB has had through their ordinary course dealings with customers, specifically, would be incorporated in the ideas that are considered during the development of the business plan.”
Verbrugge also questioned Almaraz about customer feedback, or the lack thereof, in developing the plan.
“As (Chiu) mentioned, our representatives routinely speak with customers — all day, every day — and in informal ways get their thoughts and opinions on what matters most to them and where their biggest concerns are …,” Almaraz replied. “To the extent that those were applicable, they were mentioned and discussed in the development of the business plan, so that it was not developed in a vacuum … . It was developed … by Portage Point Partners, but for YB, in connection and coordination with YB.”
The hearing is being broadcast live on Na Leo channel 55 and streamed on the PUC’s YouTube channel. Written public testimony continues to be taken, as well, on the PUC website and by email at puc@hawaii.gov.
Email John Burnett at jburnett@hawaiitribune-herald.com.