FCC debates regulation of wireless early termination fees

With complaints to the FCC rising over the long-held practice of fining those who end their cellular contracts early, the agency looks poised to intervene. And for the first time, all sides may be nearing some sort of agreement.

Yesterday afternoon, FCC commissioners heard testimony from consumer advocate groups and carriers alike, and there seemed to be at least some agreement among all parties on the subject of early termination fees (ETFs). Chairman Kevin Martin has taken the lead on the subject, questioning the reasoning for the fee that has become a common part of everyday life with wireless devices.

"I am concerned that early termination fees are being used not as a means of recovering legitimate costs but as a means of locking consumers into a service provider," Martin said in his opening remarks.

Depending on the carrier, fees range from $150 to $225. Some carriers have taken the lead in prorating these fees based on the number of months that a customer has left in the contract: Verizon was first in 2006, with AT&T changing its policy in April of this year.

Carriers typically argue that the fees are necessary to recoup subscriber acquisition costs and the losses incurred from subsidized handsets.

However, it's apparently not enough, and Martin has expressed concern that ETFs are being abused. He disclosed that the FCC received more than 3,700 complaints from consumers in 2006 and 2007.

Congress has even stepped into the matter, with a bill introduced last year in the Senate mandating prorating. "Too often, consumers find out only after committing to a multi-year contract that their wireless service doesn't meet their needs," said Sen. Amy Klouchbar (D - Minn.), a co-sponsor of that bill.

Martin recommended that any new policy meet some basic standards for protection. First, the ETF should bear direct relation to the cost of the phone purchased, and should be prorated over the life of the contract. If a consumer does not purchase new equipment when renewing, his or her ETF should not be extended. He also called for carriers to give customers more time to see if the service is right for them -- up until they receive their first bill.

Currently, most providers only give new subscribers about two weeks to test out the service before the termination fees kick in.

Regulation at the federal level may make some uneasy; however, the FCC is arguing that a national policy is the best option. If states are allowed to set their own ETF policies, there could be significant differences in consumer protection from state to state.

While the wireless industry questions the need for federal regulation, Verizon Wireless seems prepared to support Martin's proposal if the FCC decides to implement it. The carrier said that if anything is to be done, it should be on the federal level.

There were some panelists who used the hearing to argue against the necessity of such fees, presenting evidence that losses from a departing subscriber are nowhere near the amount of the associated penalty.

Dr. Lee Selwyn, president and founder of Economics and Technology Inc., presented evidence that showed carriers on average were only losing about $14 per handset, and there was "very little" lost profit from early termination.

Nebraska Public Service Commission head Anne Boyle went even further, saying the practice should be banned altogether. Customers should be able to purchase the products on their own and pay month-to-month, arguing that consumers pay for most other services in the same way.