Arbitrator: State agency cut corners in rush to qualify for 'middle mile' grant
Though he stopped short of calling it fraud, the arbitrator who decided against the Massachusetts Technology Collaborative last week had harsh words for the quasi-public agency responsible both for the broadband "middle mile" and its financial shortcomings.
Philip D. O'Neill Jr. rapped actions taken by Mass Tech as it sought to "elude its duty" and "escape the consequences of its own promises."
O'Neill's duty, on behalf of the American Arbitration Association, was to find facts, accumulating 1 million pages of documents as he sat for a month of hearings this spring and summer. His Oct. 2 decision provides the fullest public accounting to date of what went wrong with a $90 million project — and also an attempt at a solution.
His finding in a nutshell: Mass Tech failed to deliver the 1,200-mile fiber-optic network it had outlined to bidders. And later, it refused to adjust a contract's terms to reflect the reality of the network's "losing proposition," as positions on both sides hardened and became more litigious.
"The fighting never stopped, but simply moved on from forum to forum," O'Neill wrote.
Part of the blame for that, he said, stemmed from "coercive" moves by Axia NetMedia "in trying to club MTC into honoring its own responsibilities."
Massachusetts taxpayers came out the losers, as The Eagle reported Oct. 3.
O'Neill rejected Mass Tech's request for tens of millions of dollars in compensation from Axia, the Canadian company it tapped to operate the network that was supposed to help close the digital divide in Western and Central Massachusetts.
Instead, he awarded $12.2 million to Axia and to an associated firm, KCST USA, the latter of which is expected to come out of bankruptcy and continue to operate the system.
"Axia has been vindicated," said Brian Voke, an attorney with the Boston firm Campbell, Campbell, Edwards & Conroy PC, which represents Axia.
As of last week, Mass Tech's spokesman said the agency was digesting the ruling. Arbitration decisions are normally considered binding, though an attorney for Axia said Mass Tech might have narrow grounds for appeal.
Lawyers for Axia and KCST quickly filed last week's arbitration ruling in U.S. District Court and U.S. Bankruptcy Court, where litigation has been awaiting the outcome. They asked a district court judge to lift an injunction requiring Axia to pay to underwrite continued middle mile operations under the terms of a contract guaranty — which the arbitrator found to be unenforceable due to Mass Tech's actions.
Further, lawyers are now asking that Mass Tech deliver on a $4 million bond it was required to obtain as part of the federal court process, as partial payment of the arbitrator's ruling. As of Tuesday, a judge had not ruled on that request.
A hearing in the bankruptcy case is coming Friday. For the past 18 months, KCST USA has been in bankruptcy proceedings due to losses it said resulted from problems related to the network operating agreement. The company's biggest asset is the contract it holds to operate the network.
The arbitrator's ruling is a game changer for KCST because the decision orders Mass Tech to revise the contract to reflect better financial terms for the operator.
KCST requested that it be granted the same terms that Mass Tech worked out in 2017 with another company, Holyoke Gas & Electric, as the agency prepared to replace the current operator.
O'Neill notes that if Axia had been offered the same terms in 2014, when it sought to negotiate with Mass Tech to "cure" problems with the contract, in light of the network's shortcomings, it would have accepted it.
While arbitration exists to wind down legal disputes, easing court backlogs, O'Neill's 30-page report includes pointed criticism of Mass Tech's handling of the new network.
He found, for instance, that Judith Dumont, a former Mass Tech official, rebuffed calls from three of the agency's consultants that it confirm how many customers of the new network — dubbed MassBroadband 123 for the number of communities served — it would be able to turn over to the network operator.
"MTC continued to stick its head in the sand so as not to recognize its own culpability," O'Neill wrote.
And sure enough, the number of network customers came up far short of what Axia expected when it signed an operating agreement in February 2011.
It was an agency that rushed pell-mell, in 2010, to qualify for tens of millions of dollars in public investment suddenly available to spur the economy out of the chasm of the Great Recession.
Rather than start up with the 1,392 "community anchor institutions," as some Mass Tech documents said, there were far fewer.
By the fourth quarter of 2017, the network was being used by 244 government-affiliated clients, such as fire stations (or 43 percent of the 559 planned) and 242 nongovernment clients (or 29 percent of the 833 planned), according to the ruling.
Axia's financial losses from not getting the customer base it expected, plus a delay by Mass Tech in turning over the network's 36 segments, cost the company as much as $2 million a year, O'Neill said. The company had been paying fees to Mass Tech since February 2011.
The issue with customers and the delay constituted a "material breach" by Mass Tech of the network operating agreement, O'Neill said. The agency admitted in the arbitration proceeding that it did not study what financial impact the smaller network would have on Axia.
What's more, Mass Tech's general counsel decided at one point not to notify Axia of the agency's decision to "substantially reduce the number of CAIs while it was designing and building the network," the ruling states.
As for the way the agency communicated with Axia on that issue, O'Neill writes, Mass Tech's behavior was "unwarranted, unreasonable and unlawful. MTC failed to deliver a network within a reasonable range of the 1,392 CAIs that it contracted to provide ."
An in-house consultant had alerted Mass Tech in December 2013 that the network it was turning over in segments was not financially sustainable. But once litigation began, Mass Tech was able to keep Axia on the hook, winning an injunction in Suffolk Superior Court in August 2014 to preserve operations, and then securing another injunction in U.S. District Court last year.
Rather than smoothly transfer newly built segments of the network to Axia, O'Neill found, Mass Tech delivered them in bunches. At one point during a holiday season, in December 2013, it gave Axia five days to object or raise concerns — a request that the arbitrator said was not reasonable.
"MTC continued to foist the remainder of the network onto KCST in a manner and condition that did not comply with the [network operating agreement] by dumping the remaining segments in bulk ." O'Neill wrote.
That "dumping" included nonworking "community anchor institutions" not physically connected to the network. The network was not finished until Jan. 16, 2015, the ruling states; the target date for delivery had been Aug. 25, 2013. But at that point, just one of the 36 segments was delivered to Axia.
Years before, as it positioned itself to secure government grants, Mass Tech skipped its homework, the ruling suggests.
Three times, a consultant hired to advise Mass Tech recommended doing more to measure actual market interest and need for a fiber network.
Today, the pleas from those experts sound plaintive. One came after the agency drafted a response to a question from a prospective bidder.
"I think we are getting carried away with our claim here," the consultant wrote. "Let's be very careful that we only provide `facts' for which we can provide `evidence,'" he wrote.
According to O'Neill, a chief financial officer for Mass Tech appeared to brush aside such requests, saying the agency decided to balance "reasonable due diligence tradeoffs."
That statement led the arbitrator to note coldly: "MTC chose to ignore the advice of its consultants then — and going forward for a year through the proposal process, negotiating and signing of the [contract], during which time there is no record of it being raised or considered again."
Through arbitration, Mass Tech argued that it did not have a duty to disclose uncertainties about the network, or later developments.
O'Neill felt otherwise.
"MTC should have recognized this responsibility toward bidders," he writes. "Instead it sought to elude its duty on the basis of cautionary statements."
That behavior dated to at least March 3, 2010, when Dumont, then a Mass Tech executive director, refused to authorize a market survey of nongovernment CAIs that might be served by the new network. Two consultants had urged her to take that action, in part to justify prices and fees it wanted to charge.
Dumont said there wasn't enough time to conduct a worthwhile study, just weeks before a grant deadline. And even if a study were to be conducted, she said, it might not benefit the agency.
"I worry that once we have it even if it's not quality it could cause our application problems," she said.
The agency had lost its first attempt at a major grant through the federal Broadband Technology Opportunities Program.
That loss might have led Mass Tech to reach for more customers than mentioned in its first application. O'Neill uses a footnote to capture one consultant's incredulous reaction to the fact that the state proposed, in its failed grant application, to serve 30 community anchor institutions. "That's all? !!! what ???" the consultant wrote.
The total jumped to 1,392 instead.
Mass Tech did not disclose to Axia that it decided not to conduct market research recommended by its own advisers, O'Neill notes.
Another consultant chimed in with a warning about revenue. "We are planning on much higher revenue from the Commonwealth than can be justified here," the consultant said.
Dumont refused to back the call for that study, the ruling says.
The arbitrator notes that after the grant deadline passed, Mass Tech had a year before signing a contract with Axia to get a better count of network customers, "but took no action to do so."
"Plainly, MTC was more concerned about delivering a sufficient amount of CAIs so that neither federal nor state would complain, while leaving its fighting confined to private parties," the ruling says.
Additional research might have revealed how uninterested national internet service providers like Comcast and Charter were in tapping into the middle mile.
"They absolutely refused to even consider connecting to the MB123," the arbitrator notes.
Larry Parnass can be reached at email@example.com, at @larryparnass on Twitter and 413-496-6214.
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