Companies Warn Kentucky Broadband Project Could Fall Apart Without Funding

Apr 6, 2018

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Businesses that have invested in Kentucky’s delayed statewide broadband network are concerned that the budget passed by legislators earlier this week doesn’t provide enough certainty that the state will hold up its end of the public-private partnership.

Under the budget, which is currently being considered by Gov. Matt Bevin, KentuckyWired would be funded as a “necessary government expense,” meaning Bevin would have the choice to fund the project using money from the state’s rainy day fund or in the event of a budget surplus.

Rob Morphonios, CEO of KentuckyWired, said if the payments don’t come through, the project could fall apart.

“There’s been good money put into this project already that we don’t want to see end up as sunk-costs,” Morphonios said. “We want to be able to go forward and finish the project for the commonwealth because there’s a lot of benefits of this project to the state.”

The 3,000 mile-long project is supposed to stretch through every county in the state, creating the “middle mile” of a high-speed internet network.

Cities and businesses across the state would be in charge of building out the “last mile” to connect services to customers, and eventually the project is supposed to generate revenue by charging to use the network.

The private partners — led by Australian firm Macquarie Capital — issued bonds totaling about $280 million to begin construction and will operate and maintain the network for 30 years, charging escalating “availability payments” that amount to $33.4 million in 2019 fiscal year and $34.2 million in the 2020 fiscal year.

These are the payments that are not officially budgeted for in the spending plan that lawmakers passed on Monday.

But the project has been hampered by difficulties in setting up agreements with owners of telephone poles that the fiber optic wire needs to hang from.

As a result of the delay, the state has had to begin paying the availability payments without the planned-on revenue stream from charging for use of the network.

This has led some state lawmakers to call for the project to be dismantled or scaled back.

Acting House Speaker David Osborne said the legislature didn’t want to make the final decision that the money should be spent on the project “that we didn’t know was going to survive.”

“It’s a horrendous outcome if we shut it down, it’s a horrendous outcome if we build it out,” Osborne told reporters on Monday.

“If the governor is comfortable with the fact that it needs to move forward and that there’s a way to complete this thing in a reasonable fashion, then we wanted to give him that opportunity and that ability.”

Morphonios warned that canceling the project would cost the state more than going forward with it.

“Funding of the project is a contractual obligation of the commonwealth,” Morphonios said.

“Any type of termination of the project, whether for convenience or a default on the part of the commonwealth, which we’re hoping it never comes to, would trigger some termination costs that would well-outweigh the costs of paying the availability payments and the settlement amount that we’ve come to in finishing the project.”

Officials have estimated it would cost about $500 million for the state to pull out of the project.

Morphonios said the state and Kentucky Wired had also agreed to a settlement that would require the state to pay $88 million to compensate for the delays — but the legislature did not include those funds in the budget that passed last week.

“At some point you’ve got to pay the piper,” Morphonios said. “There might be a little bit of time period in which we could work things out if at some point we could have some certainty that it would be funded. But that is a big issue in itself separate from the funding to pay our bonds back in the original contract.”

Bevin is now considering whether to veto parts of the budget.

Lawmakers will return to Frankfort on April 13 and 14 to consider overriding any of Bevin’s vetoes and pass other legislation before adjourning for the year.