Kentucky continues to disappoint free-market advocates with its lagging efforts to cut regulations that harm broadband growth, while the financial albatross that is KentuckyWired continues to loom over taxpayers.
Even though most work on the border-to-border, middle-mile fiber network KentuckyWired is complete, Joshua Crawford, executive director of the Pegasus Institute, points out that not all fiber rings are operational yet. Advocates touted that effort as a way to bridge the digital divide, but the project quickly became a boondoggle.
Taxpayers were initially supposed to be on the hook for just $30 million, but after state officials decided to take advantage of tax-exempt bonds by creating the Kentucky Wired Infrastructure Company, project costs shifted from private partner Macquarie Infrastructure Developments LLC to Kentucky taxpayers. As the Taxpayers Protection Alliance (TPA) previously reported, the project costs ballooned and now taxpayers could be out $1.5 billion, especially after an expected revenue source – federal money to connect schools to high-speed internet—will not be realized.
In a scathing 2018 audit of KentucyWired, state Auditor Mike Harmon said that “misled does not really do justice to this bait-and-switch on the taxpayers.”
Crawford calls KentuckyWired “the elephant in the room” that will complicate efforts at broadband expansion by private providers for years to come.
The Pegasus Institute has a message for state officials: pull the plug. Despite the costs already incurred, the organization believes residents would be better served with the project’s suspension. That’s because the fiber rings primarily provide duplicative services already offered by private companies and those companies used the revenue from serving facilities like schools, government buildings and businesses to make “rural last mile service economically feasible,” Pegasus Institute said in a 2020 report.
“These customers provided an essential foundation that made the economics of continued broadband expansion possible,” the report said. “The removal of this customer base, especially for the regional and rural providers that provide the backbone of Kentucky’s telecommunications infrastructure, severely complicates the economics of expansion.”
And even though the auditor found that KentuckyWired officials were warned that rights to pole attachments would complicate the project – and it would eventually cause delays – state lawmakers have yet to tackle that issue legislatively to the disappointment of Crawford.
The issue of high fees that owners of utility poles often charge for access to install the equipment needed for broadband expansion has been at the forefront of broadband issues in many states. In recent years, many legislatures have passed laws limiting fees, as well as who pays the brunt of costs for utility pole replacements.
As Crawford points out, pole owners (usually electric cooperatives in southern states) often “take private providers behind the shed on attachment rates.”
Kentucky also continues to levy sales taxes on telecommunications equipment. While the majority of states continue to tax equipment, the Bluegrass State’s rate of 6 percent is higher than most jurisdictions. The Pegasus report references a study by Raul Katz, director of business strategy at the Columbia Institute for Tele-Information, who found that every one percentage decrease in taxes on telecom equipment increased investment by nearly 2 percent.
Kentucky lawmakers have yet to act to reduce these taxes, but Crawford anticipates that could change. With state legislators seeing what other lawmakers in other states are doing, combined with the desire to close the digital divide, future regulatory action seems likely.
“I expect that virtually every session there will be movement on this,” Crawford said. “I think this will be an ongoing conversation.”
And while some of the federal stimulus money designated for broadband will go to municipal networks, the state allocated most of it to private providers with the know-how and expertise to expand infrastructure the quickest.
“In that sense they did make positive movement in the past session,” Crawford said.
KentuckyWired’s once grand idea of connecting the state is now draining taxpayers and slowing down the closing of the digital divide.
Johnny Kampis is a senior fellow and investigative reporter for the Taxpayers Protection Alliance.