Kentucky’s $1.5 billion information highway to nowhere
- By Alfred Miller, ProPublica
- May 09, 2019
The internet arrived in some parts of eastern Kentucky’s Jackson and Owsley counties on the back of a mule named Old Bub.
Nine years ago, Old Bub trudged between the rugged counties’ most remote utility poles, hauling the high-capacity fiber-optic cable intended to help bring Appalachian residents into the information age.
Today, Old Bub symbolizes something else -- a poor state plodding along the information highway. Despite spending hundreds of millions of state and federal dollars, Kentucky still lags behind other states in providing high-speed internet access to its residents.
The state’s signature effort to catch up -- an ambitious statewide broadband project known as KentuckyWired that was launched with bipartisan support five years ago -- is well behind schedule and more than $100 million over budget, a joint investigation by the Courier Journal and ProPublica reveals. So far, Republican Gov. Matt Bevin has offered no solution to the boondoggle he inherited.
State officials estimate that a little over one-third of KentuckyWired’s more than 3,000 miles of fiber-optic cable has been installed. The state’s private sector partners don’t give the precise location of much of that cable.
State Auditor Mike Harmon conservatively estimates that Kentucky taxpayers over the next 30 years will be on the hook for $1.5 billion -- 50 times what they were originally told the project would cost them. That’s because the state quietly assumed most of the risk for this public-private partnership in the closing weeks of the previous Democratic Gov. Steve Beshear’s administration, Harmon said in his September 2018 report on the project.
Perhaps Bevin’s boldest move to dig the state out of its technological quagmire has been hiring an old Army buddy, Chuck Grindle, to advise him as the state’s IT chief at a salary of $375,000 annually, the highest-paid position of its kind in any state.
While Grindle makes clear that he does not directly supervise the stalled project, he has publicly disdained it. And his job gives him the power to direct millions in state business annually away from KentuckyWired to other vendors.
Grindle has hitched the state’s tech future to AT&T and other major tech companies, which have raised his national and international profile by featuring him as a speaker at company conventions, the Courier Journal and ProPublica found in an investigation that included dozens of interviews across Kentucky and a review of thousands of pages of documents obtained under public records laws.
Bevin has said Grindle’s stature in the tech world justifies his high salary, which stayed intact despite a legislative furor this year.
But Bevin administration officials are engaged in a high-dollar tug of war over KentuckyWired, with some officials fighting to complete the project as promised and others such as Grindle seemingly willing to let it die an expensive death.
The result threatens to keep Kentucky, with its estimated 4.5 million people, lagging behind neighboring states in its attempts to bring high-speed internet to rural areas thirsty for new jobs and economic prosperity.
For disenchanted Kentuckians like Tina Sparkman, the frustrations of the state’s lagging and unreliable internet service hit painfully close to home. Sparkman, who lives on a farm in eastern Kentucky’s rural Letcher County, pays $69 a month for the only internet service available there -- satellite.
Each month, she’s able to download the equivalent of three Kindle e-books before her bandwidth is throttled. On cloudy days, she’s lucky to get any service at all, she said.
“We can’t wait 10 more years for internet,” Sparkman said.
Creating “Silicon Holler”
Tucked away in the hills and crags of Daniel Boone National Forest, Jackson and Owsley highlight the challenges of wiring Kentucky’s rural counties.
Without a telephone provider as late as 1950, residents of the two eastern Kentucky counties formed the nonprofit Peoples Rural Telephone Cooperative. Over the years, the co-op shifted focus from telephone lines to the 21st century’s more essential communication medium: the internet.
When the Obama administration made federal stimulus money available in 2009 for rural broadband projects, the co-op’s longtime CEO, Keith Gabbard, pounced.
The Jackson County native saw it as a way to kick-start the economy of what historically had been two of the country’s poorest counties and turn eastern Kentucky into what hopeful proponents named “Silicon Holler.”
The project required a mule team like Old Bub’s and about five years to complete, but visitors to Jackson County today are greeted by a giant billboard declaring the area home to the state’s fastest internet.
All told, the project cost about $50 million in Jackson and Owsley. But it brought high-speed fiber-optic lines within reach of every home and business of both counties’ combined 18,000 residents.
Unemployment in the two counties is still nearly double the national rate, but an influx of call center jobs that followed the advent of high-speed internet has helped offset the loss of factory work. Last year, the combined unemployment rate there dropped to 7% from 8.5%, according to data from the Kentucky Education and Workforce Development Cabinet.
“It’s really making a difference in our community,” Gabbard told the Courier Journal. “We re seeing our economy change.”
Building the Kentucky “I-Way”
In December 2014, at about the same time the phone co-op was completing its rural broadband project, Kentucky leaders unfurled a plan for a statewide version.
Kentucky would build a new information superhighway -- the “I-Way,” longtime U.S. Rep. Hal Rogers, a Republican, called it. Rogers and Beshear pushed the project as a way to jump-start Kentucky’s rural economy.
Six massive loops of fiber-optic cable would be draped across the state, connecting about 1,000 government sites to one another and the internet.
The state-owned loops wouldn’t connect directly to individual homes and businesses, but the private companies the state chose to construct and operate the loops would be able to sell access to third-party internet service providers.
In theory, that would promote broadband access in areas otherwise lacking good internet infrastructure. However, where exactly private companies have existing fiber lines is typically a closely held trade secret, meaning the project could duplicate existing private infrastructure.
In addition to indirectly supporting the spread of high-speed internet to homes and businesses across Kentucky, the state was also taking in-house what it had for two decades paid a group led by AT&T to do: provide state agencies with internet service.
In 1995, it was this AT&T internet service that was praised for pushing Kentucky into the information age, said Aldona Valicenti, the state’s first chief information officer, who is now head of the Lexington city government’s IT arm.
Through AT&T, Kentucky schools were the first in the nation to all be connected to the internet, something the state Department of Education still notes proudly on its website. As part of that deal, state agencies also began buying internet service through AT&T and its partners.
In the intervening years, however, the state as a whole has stumbled far behind in the internet race. The Federal Communications Commission ranks Kentucky below the national average for access to high-speed internet and cellular data.
Kentucky is fifth worst in the nation when it comes to the rate of high-speed internet use, Microsoft says. According to the latest U.S. Census Bureau data, it’s also fifth poorest, with a median household income of $46,535.
To catch up, the state essentially decided it wanted to stop renting its internet equipment and service at a cost of $27.2 million annually. Instead, it wanted to buy its own set of internet pipes -- the new I-Way.
Doing so would require the equivalent of a 30-year mortgage, said Australian investment bank Macquarie Capital and its partners, which were awarded the KentuckyWired contract in December 2014.
Negotiations with the Macquarie team dragged on for months after the initial award, but in September 2015, in the waning days of the Beshear administration, a deal was signed that won praise from bond market observers.
Bond Buyer magazine named KentuckyWired its 2015 “Deal of the Year,” and Fitch Ratings later described it as a first-of-its-kind project.
The deal was to work like this. Macquarie and its partners — Kansas engineering firm Black & Veatch and Canadian construction company Ledcor, among others — would build and operate the I-Way that Kentucky wanted, at a price not too much greater than what the state was already paying annually to companies like AT&T for internet service. In exchange, Macquarie could count on a steady flow of cash for 30 years, adding up to about $1.2 billion. Afterward, the state would own its I-Way.
Much of that $1.2 billion was supposed to come from the money state agencies were paying existing internet service providers like AT&T. The state also promised to put up an extra $30 million in equipment, and Rogers, then chair of the powerful House Appropriations Committee, promised to secure another $23.5 million in federal grant money.
Macquarie would also have the ability to sell access to the network to third-party internet service providers and split the spoils with the state. The share, after expenses, that Macquarie can keep varies from 10% to 25% depending on the type of access it sells, but it’s estimated at $600 million over 30 years.
All told, the project was supposed to cost roughly $330 million to build, Finance and Administration spokeswoman Pamela Trautner said at the time. But Rogers promised KentuckyWired would deliver to constituents “unlimited potential.”
“This is going to give you the mechanics, the technology, the capability to expand your business and attract new ones like you’ve never even thought of before,” Rogers said to applause at a speech in eastern Kentucky announcing the deal. “So I’m asking you to open up your head and start dreaming about the future and what you can do with this new technology that will be in place in eastern Kentucky by April of next year.”
His constituents are still waiting.
A “wildly aspirational” project
What taxpayers didn’t realize were all the concessions Kentucky made to its private partners to seal the deal during the nine months of negotiations in 2015. That $330 million construction cost estimate didn’t tell the whole story; it didn’t even tell a quarter of it.
The state was obligated to provide Macquarie its steady stream of payments regardless of whether the network was generating revenue from the sale of access to third parties, which has not yet begun. That adds up to $1.2 billion over 30 years, potentially out of the state’s general fund — at taxpayers’ expense.
Then there are the costs the state agreed to cover in the event of unforeseen circumstances. Take, for instance, what are known as “pole attachment agreements.”
Wiring Kentucky meant physically hanging fiber-optic cable from tens of thousands of utility poles across the state.
For each utility pole, KentuckyWired needed the pole owner’s permission to hang its cable and the consent of existing utilities already attached to the pole to make space for the new competitor. Every pole required an engineering check to plan the safe rejiggering of the pole’s many lines.
Further complicating things, one of the biggest pole owners in the state was KentuckyWired’s main competitor, AT&T.
But the state didn’t realize how big a player AT&T was until it agreed to work out a deal with the communications giant on behalf of Kentucky’s Australian banker, according to the state auditor’s report.
Kentucky, on the advice of Macquarie’s partners, thought AT&T owned 5,000 of the poles that KentuckyWired needed, the state auditor said.
In reality, AT&T owned nearly 12,000 poles, and because of the deal Kentucky signed with Macquarie, suddenly the state had less than a month to negotiate agreements for all of them -- or pay penalties to the Macquarie team.
In the end, it took more than seven months to get the agreements. All the while, Kentucky racked up penalties with its partners. That was just one of the reasons for cost overruns and delays on KentuckyWired.
In February 2019, the state finalized a settlement that pays Macquarie and its partners $93 million for that and other delays, and pushes back the project completion date two years to late 2020.
Add that to $1.2 billion in payments Kentucky owes Macquarie, along with the cost of network upgrades and of running a state agency to keep tabs on KentuckyWired, among other project costs, and the state auditor estimates taxpayers will be responsible for $1.5 billion. The costs would eventually be offset by money the state is already spending on internet service as well as revenue from the sale of access to the network to third parties.
Phillip Brown, who until recently oversaw the state agency in charge of KentuckyWired, said in an interview that it was implausible to negotiate a pole attachment agreement with AT&T in 3 weeks. He contends the state set an unrealistic construction schedule to make it appear the state would break even on the project from Day One.
Brown led the Kentucky Communications Network Authority for two years starting in April 2017. He resigned from the authority in April 2019 to take a job with cell tower operator Crown Castle, authority spokesman Randy Lutke said.
“What would the reaction to KentuckyWired have been if the state had said at the beginning it will take us until 2020 and it’s going to cost about $400 million?” Brown asked. “Well, maybe the state doesn’t do the project, but it also means that we don’t have those false expectations that were created by a schedule that wasn’t achievable.”
The state made the mistake of letting its desired costs on paper dictate an ultimately impossible construction schedule, he said.
Lawyers who negotiated the deal for the Macquarie team did not respond to requests for comment. Attorney James Baller, who advised the state, also did not respond to a request for comment. Another attorney for the state, Marc Lemon, declined to comment, citing attorney-client privilege.
An expert in rural broadband at the University of Texas at Austin, Sharon Strover, agreed that Kentucky’s overall timetable was unrealistic.
“Building a big network in four years is quite a feat, actually,” she said.
Three years? “That would be wildly aspirational.”
Saving the “Taj Ma-Hal”
KentuckyWired’s next problem was Bevin’s 2015 election as governor.
The network represented the antithesis of the small-government approach that Bevin and his conservative followers espoused. Shortly after taking office in December 2015, Bevin vowed to scale back the project.
He was prompted in part by the revelation in November 2015 that nearly half the money the state had counted on for KentuckyWired suddenly disappeared -- and perhaps never existed.
The venture had banked on taking from AT&T about $13 million that Kentucky schools paid annually for internet service, part of a federal program known as E-rate that subsidizes broadband access in public schools and libraries.
But strict federal procurement rules disqualified the state-owned network, AT&T said in a protest it lodged at the time. Less than a month later, the state canceled a new solicitation for bids on school internet service that it had counted on KentuckyWired winning.
Then-Commissioner of Education Terry Holliday had warned Finance and Administration Cabinet Secretary Lori Flanery that KentuckyWired couldn’t qualify as early as February 2015, according to a June 2015 email on which was copied Mary Lassiter, Beshear’s former cabinet secretary.
Flanery and Lassiter ignored the warnings, the state auditor later found. Flanery did not respond to a request for comment. Lassiter, through attorney Guthrie True, declined to comment.
Suddenly, KentuckyWired had a huge funding gap. The money from Kentucky schools was supposed to account for about 45% of the annual payments the state owed Macquarie and its partners.
Scaling back the project earned approval from some. The Bluegrass Institute, a conservative, free-market think tank, praised the announcement and called for more cutbacks.
Soon, however, Bevin changed his position on KentuckyWired. Standing beside Rogers at a September 2016 press conference in the state Capitol, Bevin announced he had solved KentuckyWired’s funding gap, but didn’t explain how. Bevin’s office did not respond to an interview request.
The lack of detail seemed par for the course to Bluegrass Institute head Jim Waters, who called KentuckyWired one of the state’s “most secretive projects” ever when it comes to tracking how taxpayer dollars are being spent.
“I was disappointed when only a short time after the governor said he would scale back this project we find him standing in the rotunda with a big-spending congressman from Washington telling us that the funding issue had been solved,” Waters told the Courier Journal.
As a member of an eastern Kentucky economic development group that initially hatched KentuckyWired as a way to bring jobs to the region, Jim Host had previously briefed the new Republican administration on the project but hadn’t won Bevin’s full backing until that press conference.
Why Bevin’s change of heart? The press conference followed a meeting between Rogers and Bevin.
While he wasn’t present in that one-on-one meeting, Host, a former state commerce secretary and longtime friend of Rogers, said the congressman can be very persuasive.
“All I know is that he has a pretty good-sized arm when he wants to put his arm on somebody,” Host said.
Bevin also saw that scaling back the project wouldn’t actually be cheaper, said former KentuckyWired overseer Brown. In early 2016, the state examined multiple scenarios, including scaling back the project to just its eastern ring.
The savings were “negligible to nonexistent,” Brown said. He placed the cost of terminating the project at that time at $163.9 million, before any lawsuits.
Dropping the two westernmost of the project’s six loops would still cost the state $300 million overall and leave Kentucky less able to pay back Macquarie, Brown said.
The deal Kentucky signed with Macquarie was, by design, difficult for the state to get out of. That’s not unusual for complex public-private partnerships, said Aaron Renn, who has studied such deals as a senior fellow at the Manhattan Institute, a free-market think tank. Renn said states must be wary when their negotiating partner is a sophisticated player like Macquarie.
“The contracts are generally written to protect these investors very well and often not necessarily to protect the public,” Renn told the Courier Journal, adding, “I’ve never heard of anybody being able to easily break out of one of these deals.”
Moreover, the big costs in a large-scale broadband project are not in the raw materials -- the miles of fiber-optic cable -- but in mobilizing the workforce to lay that fiber, Brown said.
To offset those costs, the state needed the money that would otherwise go to KentuckyWired’s competitors, namely AT&T and others already providing internet service to government offices.
Rogers, whose office did not respond to a request for an interview, perhaps had another reason to push for the full project’s completion.
In his hometown of Somerset, Kentucky, stands the Center for Rural Development, a nonprofit dedicated to stimulating eastern Kentucky’s economy. Locals call it the “Taj Ma-Hal.”
The glass-faced 90,000-square-foot complex, along with an array of nonprofits similarly tied to Rogers, have benefited over the years from tens of millions in federal funds, according to left-leaning ethics watchdog Citizens for Responsibility and Ethics in Washington.
But with Rogers, now 81, approaching retirement age, the Taj Ma-Hal needed a new funding stream to perpetuate its economic development work.
The nonprofit center would oversee construction of the eastern portion of KentuckyWired. In exchange, it would be entitled to half of the net revenues generated from what, when completed, would likely be one of the network’s busiest portions -- the “I-75 spine” from Cincinnati to Georgetown, Lexington and Richmond -- and all net revenues generated from portions in eastern Kentucky, according to an addendum to the KentuckyWired deal revealed by the state auditor last September.
The addendum doesn’t define “net revenues.”
The state auditor has questioned under what authority the addendum was created. Center for Rural Development President and CEO Lonnie Lawson did not respond to a request for comment.
Mixed messages from Bevin’s administration
More than three years after taking over, Bevin administration officials are still sending conflicting messages about KentuckyWired.
The governor’s cabinet secretary, Scott Brinkman, who is chairman of the authority overseeing KentuckyWired, pleaded with state lawmakers not to shut it down during a February skirmish in the state legislature over the project’s request for an additional $20 million related to the settlement with Macquarie.
Last year, lawmakers reluctantly granted KentuckyWired the ability to borrow $110 million for the settlement agreement and future loss claims. In February, they didn’t provide the additional $20 million needed for what officials described as unanticipated borrowing costs, but they held back from killing the project altogether.
That would have triggered a $325.4 million charge, not to mention the likely damage to Kentucky’s credit rating, Brown said, which would hurt taxpayers by making it more expensive for state agencies to borrow money.
“We’re on the cusp -- the eve, literally -- of this project being completed and starting to produce revenues, and we’re having a discussion about terminating this project? It makes no sense, financial or otherwise,” Brinkman told state lawmakers. “It makes no sense.”
At around the same time, however, Grindle, the administration’s technology czar, was saying something quite different.
Kentucky’s tech colonel targets a “terrible project”
With his close-cropped white hair and square jaw, Grindle looks and sounds every bit a retired U.S. Army colonel.
In a speech to academics and business people at the University Club on the University of Louisville’s campus in February 2019, Grindle lambasted KentuckyWired as a “terrible project” that was “underhandedly done” and said he wasn’t ready to immediately switch over the state’s business from AT&T.
“At any location I have a government connection, I’m supposed to immediately terminate that contract and start using the KentuckyWired fiber there,” Grindle said before rattling off all the added security and network optimization features AT&T provides.
He added: “I’m supposed to just stop and move over to this new environment? And they don’t have a call center set up.”
Grindle cast doubt on whether he would allow KentuckyWired to bill the state for internet service without it first demonstrating its comparability to AT&T. Emails obtained by the Courier Journal show that the telecom giant is now deeply entrenched within the Commonwealth Office of Technology when it comes to billing for internet service.
Describing data billing as a “manual process,” state technology office employee Ozanna Waltz-Allen praised AT&T’s billing manager for her “outstanding performance” in an email that made its way to the company’s regional sales director last March.
“It makes a difference when you can trust the resource AT&T provides to do the job and to do it right!” wrote Waltz-Allen, asking that the billing manager’s colleagues let her know “how deeply she is valued” by the state.
Grindle appeared to be looking for the same level of customer service from KentuckyWired.
“They’re trying to come to me in order to do billing,” Grindle said during his speech at the University Club. “They want me to bill once a year for every single agency. One time. Think about that. One time at the beginning of the year, X number of millions of dollars.
“Doesn’t matter if it’s turned up or not. Just pay. Not happening. We got challenges. And we’re working through them.”
Grindle, through a spokeswoman, declined to be interviewed because his office doesn’t directly run KentuckyWired.
Grindle told the audience at the University Club that AT&T is doubling down on its rural broadband infrastructure.
AT&T is building a network of cell towers called FirstNet for the federal government. A post-9/11 initiative, FirstNet is designed to allow emergency responders to communicate with one another from even the most remote locations using a dedicated nationwide broadband system.
Ordinary AT&T customers in those areas are set to benefit as well from the increased connectivity, AT&T spokeswoman Ashley Hoptay said.
In Kentucky alone, AT&T is planning to build 182 new cell towers, Grindle said. That means AT&T’s fiber-optic infrastructure in Kentucky is likely also expanding.
But if the state doesn’t switch to KentuckyWired’s internet service, the premise of the entire $1.5 billion project would be negated.
Grindle said he prefers working with “trusted partners” such as AT&T. And his office argues that the money he has saved by consolidating contracts under larger players has more than paid for his hefty $375,000 public salary.
Grindle has pointed, for example, to his consolidation of the state’s various video conferencing agreements and to his cancellation of a contract with IT consultant Gartner.
Grindle’s affinity for big technology companies has won him invitations to their exclusive conferences in such places as Las Vegas and Dallas. It has also put him on a first-name basis with Dell Technologies founder Michael Dell, according to a March 18, 2019, letter the Courier Journal obtained through a public records request.
“On behalf of the global Dell Technologies team, thank you,” Dell wrote in the letter addressed to Bevin and “Chuck” after the state opened a new Dell-powered data center. “We can’t wait to see what’s next.”
In September, AT&T brought Grindle up on stage at an invitation-only business conference in Dallas that featured private concerts by Gwen Stefani and Imagine Dragons.
The two-day conference is valued at $2,995 but is free for clients nominated by AT&T salespeople, The Dallas Morning News reported. Asked whether the company paid for Grindle to attend, a spokesman for AT&T said the company doesn’t comment on conference expenses. Representatives for Grindle did not respond to multiple inquiries about who paid for the trip.
Sitting on stage between an industry analyst and an AT&T executive, Grindle talked about the importance of choosing “trusted partners” for state contracts, according to a video of the appearance posted on YouTube.
There Grindle said he preferred Kentucky work with a “trusted partner.”
Two weeks after the conference, AT&T told Grindle’s office it was slashing the rate it charged Kentucky for internet service by 31%, according to emails obtained by the Courier Journal through a public records request.
KentuckyWired project “on the cusp”
But while AT&T may be playing hardball, that doesn’t mean the state should abandon KentuckyWired now, insists Brown, the project’s former overseer within state government.
The project has saved money by striking deals with existing local fiber providers, like Cincinnati Bell Telephone in Northern Kentucky, to fill gaps quickly in KentuckyWired’s six proposed rings across the state, Brown said. The state won’t own those sections at the end of 30 years, but the deals have accelerated the project.
“We’re on the cusp,” Brown said before leaving state government at the end of April.
He noted the first of the project’s rings would be completed by September, followed a month later by a second.
That means some of the project’s biggest customers, including the University of Kentucky, the University of Louisville and Northern Kentucky University, should be able to use the network -- if only KentuckyWired can figure out how to start charging its own creator.
The network promises to be up to 50 times faster than what is currently installed at most government sites, and software changes could increase those speeds by another 100 times, Brown said.
Administrators still have their doubts. In an email obtained by the Courier Journal through a public records request, the chief of technology for Kentucky’s Education Department, David Couch, questioned the quality and skill of the people operating KentuckyWired.
“It’s much more important to have the right amount of bandwidth at a fair price that is of high quality that is valued/respected by a very high percentage of customers versus gobs more bandwidth than is needed at a cheaper price that is not of high quality,” Couch wrote last April.
The longer Kentucky waits, the more costly KentuckyWired becomes to taxpayers; it’s the state’s responsibility to switch government sites over to the state-owned network as soon as possible, Brown said.
“If Kentucky wants the project to pay for itself -- or part of itself -- we have to use it,” he said.
But Kentuckians such as Sparkman have lost faith that KentuckyWired will ever arrive, or even be of much help when it does, leaving her with unreliable service. Her two sons, now in college and graduate school, rarely visit her these days, she said.
“They can’t be guaranteed that they’ll have internet available to them if they have homework or have to do a project. … As a mom, it’s kind of heartbreaking,” she said. “But I have to understand that their school has to come first right now.”
Sparkman joined her county government’s broadband board to lobby for better broadband options. That board is currently pitching a plan that would draw on fiber now serving an AT&T cell tower rather than KentuckyWired, fellow board member Roland Brown told the Courier Journal. Unlike AT&T, the KentuckyWired fiber footprint just doesn’t come close enough to the neediest parts of Letcher County, Brown said.
Asked about the project’s future, the governor’s office released an email statement saying Bevin recognizes the value of “having a fully functioning high-speed broadband network.”
“As has been well documented, the Bevin administration inherited a project guaranteed to have significant challenges from the day it was launched by the prior administration,” spokesman Woody Maglinger wrote. “However, Gov. Bevin is encouraged by the current pace of construction of the KentuckyWired project, and he remains firmly committed to completing the project on a statewide basis.”
This article, which first appeared on ProPublica, was produced in partnership with the Louisville Courier Journal, a member of the ProPublica Local Reporting Network.
ProPublica is a nonprofit newsroom based in New York.
This story is part of an ongoing investigation into what went wrong with KentuckyWired.