NBN Co boss Bill Morrow says competition from TPG Telecom will undermine its business model and may see Australians paying more for internet access.
TPG plans to go head to head with the national broadband network by building its own high speed connections to 500,000 apartments across several capital cities.
The plans, announced in March, will see TPG build a fibre-to-the-building network in high density areas around CBDs, taking advantage of the most profitable sites.
In response, NBN Co is speeding up the rollout of its network to inner city areas, working to connect sites before TPG can get its network off the ground.
Mr Morrow on Wednesday said NBN Co may need to end up charging customers more if TPG succeeds in connecting enough premium sites.
Alternatively, the federal government may need to hit TPG with a levy to help cover the higher costs of providing internet access to rural areas - or subsidise the NBN itself, he said.
Securing the inner city sites was vital if NBN Co was to do what it was set up for - providing affordable high speed internet across Australia, Mr Morrow said.
For that to work, the NBN needs users in major cities, where it can provide internet access cheaply, to subsidise those in remote areas.
"Areas in the remote parts of the country do not have the economic justification on their own to deploy the kind of technology that we are, you need to subsidise partly from the areas where it is economically viable," he said.
If TPG, or another competitor, is able to connect enough inner city buildings to its own network, NBN Co will have to charge its customers more, Mr Morrow said.
"That means we have to gain even more subsidy from the metropolitan areas we are serving," he said.
"And that means the difference between someone like TPG coming into cherry pick versus what we have to charge is even greater, meaning more interest for other people to come in," he said.
Presenting NBN Co's financials for the third quarter of the financial year, Mr Morrow conceded the company needs to do work harder on connecting homes and businesses.
The network now passes more than 512,000 premises, but only 166,000 have been connected.
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