Bluegrass State Taxpayers Feeling Blue About KentuckyWired

Johnny Kampis

October 4, 2017

From the files of “we told you so,” recent reports on KentuckyWired show that the border-to-border, state-initiated broadband network has been a big bust.  Which isn’t a surprise considering the Taxpayers Protection Alliance (TPA) has been warning citizens and lawmakers about the project’s potential pitfalls.   

These warnings have gone unheeded for at least two years.  An October 28, 2015 article in Spectrum News noted that, “In September, David Williams with the Taxpayers Protection Alliance…said his organization has major concerns with taxpayer dollars being spent on the initiative.  ‘Let’s just pump the brakes a little bit here and make sure there aren’t any kind of weird things in this contract that would really expose taxpayers to more handouts,’ Williams said…Williams said his group is trying to raise multiple ‘red flags’ about the project from privacy to potential duplication…”

The Bluegrass State had grand plans for its network, which was to be the largest publicly owned broadband system in the U.S. State officials, locking arms with consultants and lobbyists, promised more than 3,000 miles of fiber-optic cables crisscrossing the state and reaching into all 120 counties.

But, two years after its launch, KentuckyWired’s installation crews have completed just 68 miles of tubing for the fiber, 13 miles of underground fiber and six miles of fiber along utility poles, ABC News reported. Project leaders have leased 300 miles of existing fiber to kickstart the project, adding yet another unexpected expense to the mix.

But time delays and cost overruns are just the tip of the iceberg.

Construction crews have run into problems getting permission to install the fiber on existing utility poles; local governments already running their own broadband systems don’t want to play ball. That includes the superintendent of a city-owned utility with a broadband network in Glasgow, a town of 15,000 people in western Kentucky.

“You don’t expect a new entrant financed by the government to come along and compete with you,” said that superintendent, Billy Ray, in a quote so thick with irony you could cut it with a knife considering he runs a taxpayer-funded system.

Now comes the expected hammering of taxpayers – the state will pay at least $7 million in penalties to its private-sector partners, led by Australian-based venture firm Macquarie Capital, which has the contract to build and operate KentuckyWired. State officials say there is the potential for tens of millions more in penalties if the project continues to stall.  So, Macquarie gets richer while taxpayers get poorer.

Funding for KentuckyWired consists of $23.5 million in federal funds, $30 million in state taxpayer money and $280 million in issued bonds, with Kentucky taxpayers on the hook for any shortfall.

Macquarie Capital and the other partners, which include Black & Veatch, First Solutions, Fujitsu and Ledacor, will own the network and charge Kentucky governments and institutions to use the network. Unsurprisingly,  partners will recoup their investment from taxpayers.

Kentucky Wired experienced bad ju-ju from the start thanks to a tainted bidding process that took millions of federal funding out of the picture. Project leaders had hoped to capture $11 million in annual funds from the Federal Communication Commission’s E-Rate program by servicing some 1,100 government facilities in the state.

The financial model for KentuckyWired assumed the Kentucky Finance and Administration Cabinet would award the contract to the Kentucky Communications Network Authority, created to facilitate KentuckyWired.

But private providers cried foul after Steve Rucker, former deputy secretary of the Kentucky Finance and Administration Cabinet, became executive director of KCNA and argued that KCNA now had an unfair advantage. The Finance Cabinet abandoned the bid process and Rucker resigned.

Project leaders also played the blame game in the delays, accusing providers like AT&T and Windstream of holding up the process of installing fiber on utility poles. But AT&T spokesman Joe Burgan told last year that his company entered into an agreement with KCNA for access to the poles four months before that association’s director, Chris Moore, blamed the companies for the delay in a meeting with legislators.

It turns out that KCNA didn’t file the paperwork with the Kentucky Public Service Commission to operate as a competitive local exchange carrier until three months after then-Gov. Steve Beshear signed an executive order creating the authority in 2015. Under state law, KCNA couldn’t negotiate for utility-pole access with existing carriers until completing that process.

Moore left his post after less than a year, and was replaced by Phillip Brown.

Fitch Ratings gave the bonds issued for KentuckyWired a mediocre BBB+ rating, and in December 2016 changed the outlook to negative due to construction delays and uncertainties surrounding the project.

Nicholas Hann, senior managing director for Macquarie Capital, downplayed the issues last week as “temporary setbacks,” but some members of the Kentucky Legislature expressed extreme disdain for the brains behind this blunder.

Chris McDaniel, Republican chairman of the budget-writing committee of the Kentucky Senate, said private sector partners “may have to take a haircut” as he called the project a financial boondoggle.

State Rep. Phil Moffett, R-Louisville, opined that, “the people that bought those bonds ought to sue us.”

U.S. Rep. Hal Rogers, the Kentucky Republican who pushed KentuckyWired and secured the necessary federal funding, said the state can’t afford not to finish the project, calling the contract “complicated and costly.”

He’s probably right, given the legal entanglements that would occur if the state tried to pull out now. But Kentucky should have listened to critics in the first place and pulled the plug on KentuckyWired before it even started.