With the best intentions, Kentucky announced in late 2014 that it would build out a statewide open access fiber optic network to at least one location in each county to encourage high-quality connectivity in both urban and rural communities. Hopes were high as rural residents and businesses that depended on DSL and dial-up envisioned connectivity to finally bring them into the 21st century. After almost three years and multiple issues that have negatively impacted the project, legislators and everyday folks are starting to wonder what’s in store for the KentuckyWired project.
Local Communities Are Best Suited To Deploy Community Networks
There is no one-size-fits-all method of deploying across a state filled with communities and landscapes as diverse as Kentucky. From the urban centers like Louisville and Lexington to the rocky, mountainous terrain in the southeastern Appalachian communities, demographics and geography vary widely. But most lack modern Internet access and local ISPs have found it hard to get affordable backhaul to connect to the rest of the Internet.
There are several municipal networks in Kentucky, some of which have operated for decades. In addition to Glasgow, Paducah, Bowling Green, Frankfort, and others, Owensboro is currently expanding a pilot project that proved popular. As our own Christopher Mitchell discussed at the Appalachia Connectivity Summit, several cooperatives have made major fiber-optic investments in the state.
When it comes to connecting residents and local businesses, we strongly believe local entities are the best choice. Local officials have a better sense of rights-of-way, the challenges of pole attachments, and the many other moving pieces that go into network investment. Projects with local support see fewer barriers – people are more willing to grant easements, for instance.
As a state, building an open access fiber network into each county makes sense. States also need to connect their offices, from public safety to managing natural resources and social services. Rather than overpay a massive monopoly like AT&T, use those funds to build an open network that can nourish competition.
The general idea was smart, but we have had strong reservations about the execution from the beginning. To start with, the state chose an Australian firm to embark on the massive, expensive project that they describe as a public-private partnership. We see a significant amount of public risk and a guaranteed private profit.
Partnership Means Shared Investment
Frequent readers of MuniNetworks.org know that we caution local governments to take care when engaging in public-private partnerships. Too often, municipalities and counties step into an agreement with a private sector partner and underestimate what they bring to the negotiating table. Community leaders approach public-private partnerships after being repeatedly rejected by large national companies, and lose site of their value within the realm of the telecommunications industry. They often give too much and ask too little from their private sector partners. We’ve written reports and shared lessons learned to help local communities that consider public-private partnerships.
One of the most important lessons learned is that a public sector partner should not take on all the risk. In fact, many projects labeled as “public-private partnerships” don’t appear on our community networks map because they don’t meet this requirement. It looks to us like Kentucky has taken on most of the risk in this project.
The state legislature allocated $30 million from the state budget to add to $23.5 million in federal grants for construction. In order to complete financing for the 3,200-mile project, the Kentucky Economic Development Finance Authority issued $232 million in tax-exempt revenue bonds and $58 million in taxable revenue bonds. Bond Buyer named the issue the “Deal of the Year” in 2015 because the project had such promise. Sixty percent of the employees on the project are to be Kentuckians, as stipulated in the contract.
When the project began, state officials from the project and Macquarie, with little-to-none experience in the U.S. telecommunications market, optimistically estimated a one-year completion date. Since then, more than 150 “supervening events” have delayed deployment. As part of the agreement, Macquarie Capital and its partners will operate and maintain the network for 30 years while the state pays “availability payments.” Over time, those payments increase in amount regardless of the status of the construction.
The state intended to first connect 173 school districts to the infrastructure. Federal E-rate funding that had been used in the past to pay incumbents like AT&T for telecommunications costs would instead be used as revenue to help pay for the availability payments to private partners involved in the project. However, due to delays in construction, schools are not connected and they continue to obtain Internet access from incumbents. Nevertheless, Kentucky is still responsible for $28.5 million per year to private sector partners, a figure that will grow over the 30-year period up to more than $56 million annually.
AT&T is serving the schools under a long-term contract and sits poised to file a lawsuit if the state chooses to re-bid to give the Kentucky Communications Network Authority (KCNA) an opportunity later to bid on school connectivity. KCNA was established by the state in order to operate and maintain the KentuckyWired network. AT&T has already submitted a letter of protest, claiming that allowing the Authority to bid on connectivity to schools would give the Authority and “unfair advantage.” AT&T was able to intimidate state officials into abandoning an attempt at a re-bid back in October 2015 and now the KCNA feels, “It will be ‘very difficult’ for one arm of state government to award the schools connectivity contract to another arm of the state government in a truly competitive process.” Somehow other states have figured out proper ways to engage in such bidding – generally to the benefit of all because schools better networks at lower prices than AT&T is willing to offer even when it isn’t dramatically overcharging schools.
The gap in funding created by the loss of the federal E-rate funding is approximately $11 million per year. While that gap may not be permanent, it has unsettled some state legislators who are losing patience with Macquarie and the project.
Macquarie: We Had Our Doubts
Kentucky chose to establish a partnership with Australia’s Macquarie Capital to develop the project. The investment bank has an array of infrastructure projects on its resume, including bridges, wind power, and broadband networks in Asia. Communities and broadband researchers have encountered the organization before when it sought to invest in the Utah Telecommunications Open Infrastructure Agency (UTOPIA) back in 2014.
Several communities served by UTOPIA chose not to authorize a public-private partnership. Macquarie wanted to invest in the network that was facing financial trouble at the time, in exchange for building out the network. The firm would have collected a guaranteed utility fee from every premise in the average amount of approximately $18 – 20 per month. At the time, only six of the 11 member communities voted to proceed forward with negotiations with Macquarie; the deal fell through and the firm moved on. According to Free UTOPIA’s Jesse Harris, “Macquarie is probably dead, and that’s probably okay.”
Since then, UTOPIA has seen better days and is expanding to serve several local communities through franchise agreements beyond its member towns. However, it will take many years of incremental expansion to achieve the scale that Macquarie would have allowed it to quickly hit.
Nonetheless, having seen Macquarie at multiple events and listening to their pitch leaves us suspicious of the value they contribute, aside from strong boosterism of any project in which they are participating.
Poles, Poles, Poles
Obtaining the ability to place fiber optic cable on existing utility poles has proved to be difficult for the Macquarie crew. In fact, executive director of the KCNA Phillip Brown said in July that the agency’s inability to obtain the necessary agreements might require some redesign. The result of changing the route would be that some communities would not have access to the network. At the time, approximately 6,600 poles were inaccessible because the Authority had not procured agreements with utility companies, municipal utilities, or telecommunications companies that own the poles.
We’ve seen other instances of municipal network projects delayed because of pole attachment issues. Often an incumbent telecommunications provider owns a utility pole that becomes part of a municipal network design. In order to delay the deployment as a way to stave off competition from a municipal network project, the incumbent might drag their feet on an agreement or make unreasonable demands.
On other occasions, ownership of poles can be used as a delay tactic. In locations where poles have been in place for many years or in rural communities where record keeping has not been kept up to date, determining who owns the utility poles may be a challenge. In Lake County, Minnesota, a municipal network project ran far behind schedule and over budget when the local municipality didn’t verify ownership of utility poles that had been used in the city for many years. Incumbent Frontier Communications wasn’t sure who owned the poles either, but took advantage of the situation to hold up the deployment. Even though the city had maintained and replaced the poles for years with not a peep from Frontier, the ISP raised objections when it faced possible competition. The two entities eventually worked out agreements, but only after Lake County had already significantly invested in their infrastructure and after a costly delay.
Every time a new venture requires use of a pole, proper procedure can cause a bottleneck. Traditionally, each entity that owns wires on a utility pole will send a crew to the pole to move the wires and, since safety dictates where each wire must rest on the pole, each crew will complete their task in a particular order. Again, incumbents can use the opportunity to delay a deployment by slowing down the “make ready” work.
In Kentucky, however, Louisville and AT&T recently tested the old make ready approach and now we know that it doesn’t have to hamper the KentuckyWired project. When Louisville passed a One Touch Make Ready (OTMR) ordinance, AT&T sued to stop them. OTMR allows one pre-approved crew to make one trip to a utility pole in the public right-of-way and move all the wires at one visit. This method greatly reduces make ready time and prevents AT&T and others from using the procedure to slow deployment of new entrant networks.
Usually, the FCC has jurisdiction in settling this type of issue, but Kentucky chose to opt out of the Commission’s purview years ago. As a result, the court found in favor of Louisville, and OTMR was not overturned. AT&T and Comcast filed a similar lawsuit in Nashville when the city passed a OTMR ordinance. Other communities that want to encourage competition and create policies that welcome new entrants are putting OTMR on their books. Even West Virginia’s state legislature sees the value of OTMR policy.
According to news reports, Macquarie’s team is having difficulties obtaining easements from private property owners in order to run fiber optic cable on utility poles. In addition to private property owners, there are also local community leaders whose towns have already invested in municipal networks. Billy Ray, who heads up the municipal network in Glasgow, Kentucky, says leaders from communities such as Glasgow hesitate:
“You don’t expect a new entrant financed by the government to come along and compete with you. We have some concerns about what is their ultimate goal.”
In the case of municipal objections, we are curious about how much work the state of Kentucky has spent working with local groups to get their feedback and include them in the process. Given the arrogance we have seen from Macquarie officials, it isn’t hard to believe local folks are annoyed at having to deal with KentuckyWired on any level.
Lack of Support At The State Capitol Doesn’t Help Much
Since Governor Bevin assumed office in 2016, enthusiasm for the project appears to have waned. Macquarie says that, “We have the utmost confidence that we can work through these challenges,” and reminds the public that:
“KentuckyWired is pioneering the use of the public-private partnership model in a new sector, and therefore the model is subject to temporary setbacks.”
There has also been talk of scaling back the project as a way to reduce the overall costs (and make AT&T happier – often a priority of governors in AT&T states). Governor Bevin has thrown out the idea of reducing the size of the project to only covering the eastern areas of the state where the need for Internet access is the greatest. Changing direction midstream might sound like a simple way to reduce the price tag in the short-term, but it could sacrifice the long-term viability of the project. Oh and there is that matter of the signed contract with Macquarie (one of the pesky negatives of partnerships that are rarely remembered by those who extoll partnerships as the solution to all policy woes).
It’s true that the more rural and less economically stable areas in the eastern part of the state need the economic stimulus that high-quality connectivity can bring, but the urban centers in the other sections of the state will help set KentuckyWired on a strong financial path. The infrastructure needs to be in areas where there is ample opportunity for business and residential subscribers. Only then will ISPs see the value of using the middle mile infrastructure to serve last mile subscribers. Through those business arrangements, adequate support will help maintain the entire network, including the infrastructure in the sparsely populated Appalachian areas.
Middle Mile Dreams
For the past 10 years, the Institute for Local Self-Reliance has explained on multiple occasions that middle mile investment is only a piece of the necessary investment needed for rural America. States like Massachusetts and the NTIA in adminstering the BTOP broadband stimulus program have suggested that middle mile will catalyze last mile investment.
It might, a little. But there is no good evidence of it. The barrier to last mile investment is a capital investment and a strong middle mile network changes the capital cost of last mile very little. Good middle mile can reduce operating costs by lowering backhaul cost to the rest of the Internet – but (and this is a big but) that can come at the cost of key community anchor institutions taking service from the middle mile network rather than the last mile network. And that makes the economics of last mile worse again.
Building last mile networks can create a market for middle mile networks because last mile networks will pay the middle mile networks for transit. But middle mile networks rarely change the capital cost of last mile networks, which are vastly more expensive.
The Silver Lining
The KentuckyWired project has some problems to overcome. The state of Kentucky could have chosen a better partner or better yet, hired a good team to manage it themselves. Nevertheless, they are beginning to establish good rural policy that they can expand and others can emulate. Rather than spending public dollars on expensive services from incumbents like AT&T, Kentuckians will own the fiber optic infrastructure that can be leased out to other ISPs at reasonable rates.
Time, money, and politics will limit whether Kentucky stays steadfast and completes the project as planned, or decides to reassess the choices they’ve made so far. However they move forward, they’ve established some important lessons on scale, partnerships, and thoroughly preparing a sound plan. From our perspective, it has not done much to change our argument that large scale investments are best done at the local level and public-private partnerships are significantly riskier than many realize.
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