Relief from those hefty early termination fees might be on the way.
The FCC heard arguments for and against imposing federal regulation on the fees, which range from $150 to $225, at a public hearing June 12.
You’re not alone if you’re hoping for some reprieve from early termination fees (ETFs). The fees inspired more than 3,700 complaints to the FCC in 2006 and 2007 combined, FCC Chairman Kevin Martin notes in his written statement.
Only about 2% of enterprises are able to negotiate their way out of these charges entirely, report Kevin DiLallo and Steve Rosen, partners at telecom law firm Levine, Blaszak, Block & Boothby, in Washington, D.C.
Good luck getting wireless carriers to even reduce their standard ETFs if you have fewer than 5,000 devices, the attorneys add.
ETFs Collected Can Surpass Subsidy Value
Carriers argue that the fees recoup money spent on subsidizing handsets and advertising expenses.
But many fear the costs don’t add up. “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 says.
Analysis presented to the commission by Lee Selwyn, president of Boston-based Economics and Technology Inc., a research and consulting firm specializing in telecom economics, regulation and public policy, seems to indicate that’s the case. Wireless handsets cost $115 on average when purchased wholesale in 2006, according to data Selwyn cited from the United States International Trade Commission.
Meanwhile, consumers spent an average $65.67 per handset in 2006, according to data from wireless industry association CTIA, Selwyn says. After adding in Sprint’s $35 activation fee, Sprint’s average subsidy is only $14.33, which undermines its justification for charging $200 ETFs.
Sprint lost about $17.6 million when 1.9 million subscribers involved in a class-action lawsuit left their contracts early, Selwyn testified May 22 in Ramzy Ayyad et al. v. Sprint Spectrum, a suit challenging ETFs in the Superior Court for the State of California. Sprint charged those customers $238 million in ETFs, enough to recoup its losses more than 13 times.
Martin’s 5 Rules and a Call to Scrap ETFs
In light of the many ETF complaints brought to the FCC, commission chairman Martin outlined five “rules” that he thinks should guide the commission’s decision on the fees:
• ETFs should be sized according to the cost of the phone. “A $500 phone shouldn’t have the same early termination fee as a $50 phone,” Martin reasons.
• ETFs should be prorated over the life of the contract. (Verizon Wireless began prorating early termination fees in late 2006, lessening them by $5 per month over the length of the contract. But Verizon Wireless’ early termination fees never dip below $60. AT&T Mobility began prorating early termination fees May 25.)
• Any service contract should be for a “reasonable” length of time.
• ETFs should not be extended to subscribers who renew their contracts without receiving new phones.
• Subscribers should receive their first bills to ensure the service and prices meet their expectations before ETFs apply.
Anne Boyle, chairwoman of the Nebraska Public Service Commission and vice chairwoman of the Consumer Affairs Committee for the National Association of Regulatory Utility Commissioners, called for the elimination of early termination fees altogether.
‘Rates’ or ‘Other Terms?’
The ETF proceeding at the FCC was born of a 2005 CTIA filing (Petition 05-194) asking the commission to impose consistent regulation across the country. But there’s some question as to whether the FCC is the appropriate body to adjudicate ETFs.
The debate centers on whether these fees are “rates” or whether they fall under the umbrella of “other terms and conditions.” It isn’t just semantics. Rates are regulated by the FCC and other terms and conditions are under state purview.
Those arguing for ETFs to be designated as rates include Verizon Wireless, AT&T Mobility and the CTIA.
Verizon argued in its statement to the FCC that ETFs should be considered rates because they are “valid methods of structuring payments in telecommunications contracts.” And AT&T Mobility’s lawyer cited a 1987 lawsuit between MDI and the FCC in which the D.C. Circuit upheld the FCC’s determination that AT&T’s charges for early termination of private line service are “rates.”
“The prospect of 50 different sets of rules related to consumer contracts with ETFs would be confusing to customers, add unnecessary and unreasonable costs to providers (which ultimately are paid by customers) and not be in keeping with the goal of a national wireless marketplace policy,” says Thomas Tauke, Verizon’s executive VP of public affairs, policy and communications, in his written statement.
Martin seems convinced, saying “I do not believe a patchwork of 50 different regulations with widely varying protections benefits consumers or the industry.”
Opponents of federal regulation argue that because ETFs provide for subsidized devices purchased in conjunction with services, the package constitutes a “bundled service.”
Congress designated the bundling of services and equipment as “other terms and services” when it amended the Communications Act in 1993, says Patrick Pearlman, deputy consumer advocate at the West Virginia Public Service Commission, who spoke on behalf of the National Association of State Utility Consumer Advocates.
Those in favor of retaining state regulation also argue that states are better equipped to handle disputes than is the federal agency. “The states are simply closer to consumers and have a track record of being more vigilant and more responsive to consumer complaints than their federal counterparts,” Sen. Amy Klobuchar, D-Minn., told the commission.
Klobuchar, a member of the Senate Commerce Committee (which has jurisdiction over the telecom industry and FCC), also is concerned that FCC regulation would deny wronged consumers their day in court. Regulating ETFs on a federal level would eliminate subscribers’ right to sue in state courts, notes Chris Murray, senior counsel for Consumers Union, which publishes Consumer Reports.
While he couldn’t predict when the FCC would rule on whether it will assume responsibility for regulating ETFs, FCC spokesman Robert Kenny tells Voice Report that it’s a high-priority issue, and chairman Martin favors a federally regulated approach.
Congress, Courts Weigh In
The FCC isn’t the only body haggling over ETFs. Congress is getting in on the act, too. Sens. Klobuchar and John Rockefeller, D-W.V., introduced the Cell Phone Consumer Empowerment Act, which calls for ETFs to be pro-rated so that, for example, a customer who exits a two-year contract after the end of the first year only pays half of the ETF.
In the meantime, the courts are continuing to hear ETF cases. On June 12, a jury ruled in favor of Sprint in Ramzy Ayyad et al. v. Sprint Spectrum, the California case challenging the carrier’s ETFs. A similar case against Verizon began June 16 in the same court. (