NBN Co challenged on size of ARPU increases from fibre customers

NBN Co’s predicted increases to average revenue per user through to FY33 “may be materially overstated”, according to an expenditure consultancy engaged by the ACCC, undermining some of the company’s spending on upgrades.

The consultancy was engaged to assess whether NBN Co’s spending in the last three years, and forecast spending for the next three years, is “prudent and efficient”.

Establishing prudency and efficiency is required for costs to be considered reclaimable by NBN Co through its prices in future years.

The consultancy, HoustonKemp, challenged NBN Co on several aspects of network upgrades, arguing in part that copper-based portions of the network could have been maintained without upgrade for longer.

While acknowledging that NBN Co had to meet certain upgrade targets in return for equity funding, the consultancy took a position that “compliance” with government policy and equity agreements did not necessarily make the investments “prudent”.

It argued [pdf] - among other things - that the upgrade of the 3.5 million premises from fibre-to-the-node (FTTN) to fibre-to-the-premises (FTTP) should have been slower, and that the fibre-to-the-curb (FTTC) footprint could have served users’ needs for longer.

More broadly, the consultancy raised concerns that NBN Co is investing too far ahead of customer demand and willingness - or appetite - to pay.

Specifically, the consultancy suggested the difference in average revenue per user (ARPU) collected from a fibre customer compared to if they were left on copper was lower than NBN Co may have predicted.

“Our review identified significant concerns about whether customer willingness-to-pay supports the accelerated delivery timeline [of fibre-to-the-premises],” HoustonKemp wrote.

“NBN Co's revenue forecasts rely on estimates of ARPU uplift – the incremental revenue generated by upgrading a premise from FTTN to FTTP – that appear inconsistent with other evidence provided.

“The IOP26 [Integrated Operating Plan, covering the years FY26 to FY29] business case assumes monthly ARPU uplift will increase sharply from FY24 to FY33. 

“However, our analysis of NBN Co's data book indicates that the actual monthly ARPU difference between FTTP and FTTN customers peaks at just over half the increase modelled in the IOP26 business case over FY21 to FY29. 

“This substantial divergence suggests the ARPU uplift estimates may be materially overstated.”

The consultancy also took aim at early work on preparing the HFC network for multi-gigabit speeds, slated for later this decade, suggesting that it may also be too early.

It’s not clear what impact the report had on the Australian Competition and Consumer Commission (ACCC), although the competition watchdog has indicated it will approve lower capital expenditure for the next three years than NBN Co had wanted.

“Our preliminary view is [that] several categories of NBN Co’s proposed expenditure do not reasonably reflect prudent and efficient expenditure by an operator in NBN Co’s position in achieving its expenditure objectives,” the ACCC wrote. [pdf]

“Accordingly, our preliminary view is to determine alternative amounts for these categories that would do so.

“In particular, our preliminary view is that a total forecast capital expenditure of $6.9 billion (real FY2024) for the 2027–29 regulatory cycle, which is 18.2 percent lower than NBN Co’s proposal, reasonably reflects prudent and efficient expenditure. 

“And our preliminary view is that a total forecast operating expenditure of $7.9 billion (real FY2024) for the 2027–29 regulatory cycle, which is $5.1 million above NBN Co’s proposal, reasonably reflects prudent and efficient expenditure.”

The consultancy found no issues with NBN Co’s planned spending on technology, including AI and automation, in the next three years.

“The evidence demonstrates that NBN Co's technology investment framework incorporates cost efficiency considerations throughout the investment lifecycle,” HoustonKemp found.