FCC examines mobile termination fees

The U.S. Federal Communications Commission should abolish early-termination fees because they're unfair to customers, two mobile phone customers and a state regulator said Thursday.
Early-termination fees, or ETFs, charged by wireless carriers are "unique and frankly predatory," Molly White, a corporate consultant from Portland, Oregon, told the FCC.

"I do not sign time-sensitive contracts and agree to early termination fees with any other utility with whom I do business," said White, who had to pay an ETF for her personal phone service when former employer Nike provided a mobile phone to her. "The cellular industry appears to have built an elaborate system of additional fees, early termination clauses and hardware purchase requirements, all with the intentional appearance of offering the consumer, me, a deal, while ultimately locking me into a long-term service agreement."

A second mobile phone customer, Harold Schroer, asked the FCC to take action on ETFs, but also requested that the agency not end class-action lawsuits against the carriers in exchange for abolishing ETFs, as has been proposed by FCC Chairman Kevin Martin. In late 2007, after two senators introduced legislation that would regulate ETFs, Martin said he wanted to examine ETFs charged by mobile carriers and broadband providers.

Schroer, part of a class-action lawsuit against Verizon Wireless, told the FCC that the 4 million Verizon customers represented in the lawsuit paid about US$500 million in ETFs.

"We are seeking a refund of every penny of that money," said Schroer, a resident of New York state. "I never signed a contract [with Verizon], nor was I ever requested to sign a contract."

In 2003, Schroer cancelled a Verizon contract extension that was recommended by a sales representative, and he refused to pay the $175 ETF. Verizon then reported him to credit agencies, resulting in higher interest rates on credit cards and in him being turned down for new credit, he said. Bill collectors harassed him, he added.

Schroer complained to the FCC, but staffers there told him the agency had no authority over New York contract law, he said. "When I came to this commission for help, you sent me away," he said. "When I'm now about to get my day in court somewhere else, the commission purposes to step in and prevent me from doing that."

The FCC shouldn't take half steps such as requiring that ETFs be prorated based on how long the customer has had service or requiring that wireless carriers give customers more information about pricing plans and fees, said Anne Boyle, the chairwoman of the Nebraska Public Service Commission. Instead, the FCC should prohibit wireless carriers from offering plans with ETFs, she said.

Wireless carriers would benefit from the elimination of ETFs, Boyle said. "For some time, the wireless industry has ranked among the highest in the nation for consumer complaints," she said. "Many [complaints] are related to misunderstandings, misstatements and confusing, non-negotiable contracts."

Other witnesses at the hearing said ETFs help subsidize the cost of mobile handsets and allow customers to get cheaper rates than pay-as-you-go plans. "Term contracts allow the consumer to take advantage of bundled services at competitive prices and the latest devices they choose in exchange for a commitment to keep the service for usually one or two years," said Tom Tauke, Verizon's executive vice president of public affairs policy and communication.

Verizon would support an FCC policy governing ETFs as long as the agency also took away the "patchwork" of state regulation on the fees, Tauke added.

Verizon would support an FCC policy that set reasonable ETFs, required more information be provided about ETFs, that they be prorated and have test-drive periods, Tauke said. "While we continue to question the necessity of some of these provisions, we nevertheless believe that an FCC-adopted national policy ... is workable for the wireless industry," he said.

Verizon has listened to customer demand and began prorating ETFs in November 2006, Tauke said. The carrier also allows customers a test-drive period for new service, usually 30 days, and customers who cancel service within that time period are not charged an ETF, he added.

But one witness questioned the assertion from some wireless carriers that ETFs cover the costs of subsidizing mobile handsets. Lee Selwyn, president of the Economics and Technology consulting firm, said his calculations show that mobile carriers subsidized an average of $14.33 per handset in 2006, while ETFs were in the $150 to $200 range.

Selwyn, who testified last month on behalf of customers in a class-action lawsuit against Sprint Nextel in California, said Sprint lost less than $10 per customer when customers ended their contracts early.

Wireless providers have long used handset subsidies as a marketing tool, Selwyn added. "Over time, as the volume of handsets being manufactured mushroomed and the product costs plummeted, the magnitude of such subsides diminished to the point where it has all but disappeared," he said.