Young Brothers applies for rate increase - Hawaii News Now - KGMB and KHNL

Young Brothers applies for rate increase

 HONOLULU (HawaiiNewsNow) - Young Brothers Wednesday filed an application with the Public Utilities Commission requesting an average 24 percent rate increase effective August 2011.

The rate increase is being driven by a sharp decline in cargo volumes since 2008 and by the entrance of Pasha Hawaii Transport Lines, to which the PUC recently gave interim approval to begin transporting intrastate (interisland) cargo, according to the company.

Young Brothers' last rate increase of 13.46 percent took effect in August 2009.

"We recognize that all businesses in Hawaii have been doing everything in their power to run as efficiently as possible during this extended down economy," said Young Brothers president Glenn Hong. "Our commitment has been to continue providing frequent, reliable service while controlling costs so that we can maintain reasonable rates for our customers."

The company said that the entrance of Pasha makes the rate case more complex than in recent years. The typical rate application factors in cargo volumes, costs of doing business and capital investments.

The dramatic drop in cargo volume accounts for about 18 percentage points of the proposed 24 percent increase. This sharp drop-off is reflected in Young Brothers' rate of return, which was less than 1 percent in calendar year 2009, with similar results to date in 2010.

Even though its intrastate operations are barely exceeding break even and cargo volumes have continued to fall, Young Brothers has maintained its frequency of service.

"However," Hong said, "the company is clearly at a point where either rates have to increase or service frequency has to decrease."

According to Roy Catalani, Young Brothers vice president of strategic planning and government affairs, the company voluntarily reduced its rate increase request by about 5 percentage points.

The reduced rate was calculated by using the average cargo growth projections over a three-year period (2011 to 2013) rather than using the cargo volume projected for 2011 alone. Because 2011 is expected to show a further decline in cargo volumes while 2012 and 2013 are expected to include modest growth, using the three-year average reduces the amount of revenue that the rate case needs to generate. Therefore, the proposed rate increase is lower than it would otherwise have been.

Pasha's entrance accounts for about 6 percentage points of the overall increase. Young Brothers said the commencement of service by Pasha will result in:

 · Loss of a certain percentage of Young Brothers' profitable automobile and roll-on/roll-off cargo.

· An increase in Young Brothers' cost of capital or rate of return. The risk associated with an investment in Young Brothers has increased due to the fact that a State regulatory authority has changed the rules under which Young Brothers' substantial investments were made and allowed a new "competitor" to operate under a different and advantageous set of rules. This elevated risk results in an increase in the rate of return that investors will fairly require for the use of their capital. Because an increase in the rate of return results in an increase in cargo rates for our State's consumers, this lack of regulatory certainty and consistency is to the detriment of consumers.

· A move to movcompetitive pricing for all lines of business.

"Young Brothers has sought to make a significant concession in using average growth figures over a three-year period to reduce the rate increase" Catalani said. "However, the Pasha impact neutralizes this reduction and increases the size of our requested rate proposal by one-third.

 "Young Brothers is doing what it can to keep costs stable and reasonable. However, in addition to closely and efficiently managing our operations, we're trying to ensure regulatory certainty and consistency and the opportunity to compete with Pasha on a level playing field."

 Hong, citing the company's capital-intensive shipping operations, said, "The more serious impact of the Pasha case will not be reflected in the rate case. As much as we, as a company, do not like to increase rates for our customers, the more troubling consequence is this: If the regulatory instability of the Pasha case is not remedied, Young Brothers will lose its status as a viable investment target, and, as a result, the company will be unable to attract capital to maintain its present service levels."

Arlie Sterling, Young Brothers' cost of capital expert, confirms this conclusion in stating that, "The new market structure within which YB now operates poses such a downside risk that investors would not perceive the allowed return to be achievable. Failure to attract investor capital will result in decreased or no service to small ports, and lesser frequency and higher rates to all ports. In addition, local farmers and ranchers could lose discounted rates currently provided under Young Brothers' rate structure."

Farmers and ranchers currently receive a 30- to 35-percent discount.

In 2006, Young Brothers initiated a 10-year capital reinvestment plan totaling $186 million, and from 2006 to 2010 it made capital expenditures of more than $100 million on barges, cargo-handling equipment and customer service systems.

 "These investments were made based on the regulatory structure as it existed in 2006, but when the PUC approved Pasha's application to operate with a lesser set of service requirements, that environment shifted dramatically and created great uncertainty," Catalani said.

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