The Coalition government could be forced to directly subsidise national broadband services for rural and regional Australians unless the network remains a “monopoly provider” of services in high-margin suburban areas with cable broadband access, NBN Co has warned the incoming government.

The current model for the NBN relies on “significant cross-subsidies” from the estimated 2.7m high-value customers whose homes have already been passed by Telstra, Optus and Neighbourhood Cable pay-TV networks based on hybrid fibre coax technology, NBN Co noted in a confidential report prepared during the caretaker period for inclusion in the ‘blue book’ guidance to incoming Communications Minister Malcolm Turnbull.

Allowing those customers to use alternative broadband infrastructure would compromise the profitability of the government’s own network, as well as threatening the financial viability of the multi billion-dollar, “structurally loss-making” fixed wireless and satellite services being deployed to deliver broadband outside of metropolitan areas and regional centres.

“It will be difficult to maintain Universal National Wholesale Pricing, and maintain price caps without any other form of subsidies if HFC areas are not passed by NBN Co as monopoly provider or if HFC areas are overbuilt and infrastructure competition in those areas is maintained,” the report warns.

Switching HFC customers to the NBN was critical to the NBN’s viability because they are generally seen as residing in the most profitable areas of Australia “and were forecast to cross-subsidise other, less profitable areas….that have higher cost per premise passed (due to longer distances),” the report notes.

“Under the current policy settings, the FTTP areas also subsidise the rollout of structurally loss-making fixed wireless/satellite infrastructure.”

Recognising the threat of competitive infrastructure, the former Labor government negotiated arrangements to transfer customers from Telstra and Optus HFC networks onto the new NBN.

Under the current government’s model, however, the planned fibre build would be replaced with a fibre-to-the-node network that would run fibre to a neighbourhood ‘node’ and complete the customer connection over Telstra’s existing copper access network.

Infilling unserviced parts of the HFC networks “will likely result in significantly delayed profitability, or worst a situation where no returns...may be reasonably forecast.”

Most HFC-using homes also have Telstra copper connections, so if these were enabled under the Coalition’s broadband policy the government’s NBN would find itself competing with HFC operators.

This would have a direct impact on the NBN’s profitability, NBN Co warned: “If NBN Co is not able to be the monopoly provider of open access, wholesale...broadband infrastructure in HFC areas, then NBN Co’s ability to generate returns under the current price construct may be significantly affected.”

HFC networks could potentially service an estimated 4.2m to 4.6m premises, the report notes.

Turnbull has previously argued that the HFC networks were valuable assets that could help reduce the capital cost of the NBN. However, to achieve broadband ubiquity the node infrastructure would necessarily need to fill the many holes in the HFC coverage – particularly in multi-dwelling units that presented undue complexity during the carriers’ 1990s-era rollouts.

The report recommends against rolling out NBN services in these areas, warning that ‘infilling’ unserviced parts of the HFC networks “will likely result in significantly delayed profitability, or worst a situation where no returns...may be reasonably forecast.”

The exercise would involve high capital costs but would not guarantee a commensurately high level of broadband services revenue due to a “leakage effect” as potential NBN customers were lost to competitors, the report advises, noting the “significant impact on profitability in these areas if a significant portion of existing HFC customers elect to stay on the HFC networks and/or a significant portion of existing copper-based services decide to migrate onto the HFC networks.”