Bankruptcy is expanding into new places, even at home. In December, after losing $30 million a quarter, Hawaiian Telcom filed for relief under Chapter 11, signifying a new chapter for all of us.

Then, in January, the company introduced SB 603, a bill to reduce its level of regulation at the Public Utilities Commission. The Legislature passed it Monday, and it's also a game-changer.

By these two unprecedented moves, Hawaiian Telcom is trying to improve its position in the marketplace. Will this put telecom back in balance or will it give the company too much of an advantage?

DIRE STRAITS

In 2005, Verizon sold Verizon Hawaii (now Hawaiian Telcom) to Carlyle Group for $1.2 billion. Carlyle paid too much and didn't get Verizon's wireless operation or back office. Carlyle had to pay much more for back office services, and the PUC would not let it charge that cost to customers. This put a hole in Hawaiian Telcom's budget and gave it a reputation for poor service. It lost customers and ran up debts in the billions. Things were not going well.

When the company filed for Chapter 11, it reported assets of $1.4 billion and debts of $1.3 billion. The industry was surprised because it is an incumbent local exchange carrier, traditionally a monopoly that can always ask the PUC to give it rate increases. That should have made staying afloat easy. This is the first time an incumbent local exchange carrier of this size has filed for bankruptcy.

A Chapter 11 bankruptcy must propose a plan of reorganization to come out of bankruptcy. Hawaiian Telcom has until June 30 to file its plan. It says it will come out of bankruptcy by the end of this year. Creditors will get stock for debt. Carlyle's stock in the company will be heavily diluted and it will suffer substantial and perhaps well-deserved losses.

PLAN IN MOTION

With the bill, the company's strategy went further. Hawaiian Telcom said it wanted to bundle new technology (Internet and television) with its landlines, but that the PUC took 30 days to approve these bundled services, and that during that time, competitors could read the company's filings and beat it to market. Concerned about this, Hawaiian Telcom argued for less regulation.

It also argued that its landline customers had dropped from 735,000 in 2001 to 541,000 in 2007 because they were moving to wireless phones. Although the company serves 84 percent of Hawai'i households and sees the competition as "muted," it asked the Legislature to determine that the local services market has become "fully competitive." The Legislature accepted the testimony of Hawaiian Telcom executives without further inquiry on that point.

The troublesome thing is that state administrative rules provide for an evidentiary proceeding by which the PUC determines whether local services are "fully competitive." The Legislature upstaged the PUC and made this determination by fiat. Didn't they consider that landlines are still a Hawaiian Telcom monopoly? Wouldn't it have been more accurate to find that local services are not fully, but "partially competitive"?

Neither the PUC nor the state consumer advocate supported the bill or the finding of "fully competitive." The Legislature nevertheless excused the company from tariff approval procedures that have historically worked to protect consumers. The bill moved quietly under the shadow of the broadband bill, then also in play. The first time SB 603 was reported in the press was when passage was all but assured.

The bill was passed unanimously, testament again to the political influence of utilities in Hawai'i. Now it's on the governor's desk for signature or veto. Things are made more complicated because Hawaiian Telcom and the PUC don't agree on how much power the PUC will retain to approve tariffs and rates.

UNFAIR ADVANTAGE?

The competitive local exchange carriers that compete with Hawaiian Telcom feel the bill will give the company an unfair advantage. For one thing, they point out that Hawaiian Telcom is already aggressively competing on bundled phone and Internet. Thus they argue that the bill is unnecessary.

Although the bill requires PUC approval before Hawaiian Telcom can raise retail rates, it leaves the company free to raise interconnection rates — rates paid by the competitors to Hawaiian Telcom — high enough to prevent them from matching retail price cuts. The competitors say this price squeeze could put them out of business.

The bill provides that tariffs are "informational" only, and Hawaiian Telcom will not be required to provide backup for the costs to support its rates. The competing companies argue that the bill upstages the administrative rules provision that prohibits: (a prices for fully competitive services from being set below cost, and (b cross-subsidization between "fully competitive" and other services.

The consumer advocate and others are reviewing the bill to ascertain its effects. Since it was passed without significant input from the public, we may find errors and inequities that require amendment. Albeit late, there should be public discourse on this bill. It will affect all of us.

ALWAYS CHANGING

It's tough to be in a market that changes while you watch. To survive, you need to be nimble. Utilities are not very nimble, not only because regulators are not nimble, but because the interaction of monopoly and regulation is mired in ponderous process. That process is out of date.

Everyone, especially including Verizon, knew Hawaiian Telcom was falling behind in an increasingly fast-moving market. Perhaps Hawai'i is again the laboratory of early tech adopters, and Hawaiian Telcom is simply a casualty of that phenomenon. While we can sympathize with the company's troubles, we should not sympathize to the point of allowing it to develop unfair advantages.

The intersection of the bankruptcy and the bill is a place where old legal structures will meet new technologies, where converging Internet, TV, dial tone and long distance services are offered by companies who are no longer in the telecom industry but in the "information" industry. Tech has struck again, and has again disrupted outmoded monoliths.

These convergences are only beginning. People will adopt cell phones for all their emerging new uses, but without continuing new technology, they will ultimately abandon landlines. Will Hawai'i participate freely in these discoveries, or will we spend our time arguing over who can get special advantages selling them? When will Hawai'i be comfortable enough to accept a free market for new tech? Not yet — things are still locked up.

A BRAVE NEW WORLD

Some say the PUC didn't do enough to head off either the bankruptcy or the bill. The bill's modest reduction of the PUC's powers could have a downsizing effect on the PUC, although it will also leave the PUC better able to deal with the challenges of Hawaiian Electric Co., the state Department of Business, Economic Development and Tourism, and renewable energy.

For the public, this is like jumping off a cliff. We don't know how Hawaiian Telcom will leverage the advantages it is achieving by the bankruptcy and the bill. We don't know what will happen to its rates or service. We should watch out for nickel-and-dime charges, as has happened in other deregulation scenarios elsewhere. The price of a free market is eternal vigilance.

Will Hawaiian Telcom be a better player with less regulation? How will we know when things are in balance? It's hard to say, but if we see the company buying local banks, we'll know things may have worked out just a little too well.