Cell Phone Termination Fees Prompt Legislation

Published June 30, 2010

Sen. Amy Klobuchar (D-MN) has launched a new campaign to reform telecom industry billing practices in the wake of an FCC report highlighting concerns over cell phone fees. Chief among these concerns are early termination fees, which can be very expensive.

Klobuchar authored the Cell Phone Early Termination Fee Transparency and Fairness Act of 2009, which would mandate carriers to prorate early termination fees for customers, make cell phone billing more transparent, and curtail customer “bill shock,” according to a letter Klobuchar wrote Federal Communications Commission Chairman Julius Genachowski.

In the same letter, Klobuchar lauds the FCC’s plans to require telecoms to text customers at the time they might incur an additional charge.

‘Like a Rigged Carnival Game’
The proposed legislation garnered early popular support, thanks largely to an FCC survey released May 2010 that found 88 percent of cell phone users were not contacted prior to rate hikes; 54 percent faced early termination fees (ETF) if they sought to opt out of their plans in objection to new cost structures; 47 percent were unaware of the amount of any ETF should they attempt to terminate their cell phone contracts; 18 percent were unaware if they would be charged an ETF; and 17 percent reported a pronounced increase in cell phone bills over two consecutive months.

Klobuchar called the study an eye-opener for many who may have passively accepted this type of business practice from phone companies.

“Like a rigged carnival game, wireless providers bury these fees in the fine print and slam consumers if they try to find better service or save a few bucks in their monthly bill,” the senator said in a prepared statement. “The FCC’s consumer survey confirms what we have known for a long time—that confusing early termination fees undermine competition and result in less consumer choice.”

Good Intentions = Good Policy?
 “This sounds like good intentions, and perhaps it is, but we have been down this path before and it continues to make matters worse,” said Jeff Kagan, a wireless and telecom analyst based in Atlanta, Georgia.
“In the 1990s we had simpler [telephone] bills,” Kagan explained. “Then the government kept adding fees and taxes that increased the cost. The carriers then decided to break the bill up so the customer could see what they were paying for. That was a real eye-opener for the users. However, nothing good happened and they stayed just the way they were.

“There have been several changes since in the way that bills are presented to users,” he added. “At the same time, I am not going to say that all cell phone carriers are innocent of some extra charges. All in all it has not been in the customers’ favor. Billing has gotten way too complicated and out of control.”
Kagan continued: “Now we see the government wanting to clean up the billing.Sounds good. However, much of the problem comes from the government itself. So what will they clean up: Their nuisance fees or the companies’ nuisance fees or both? The bottom line [is] the consumer is always burdened with too many taxes and fees and it is getting worse.”

Who Rigs the Game?
“For Sen. Klobuchar to say ‘early termination fees undermine competition and result in less consumer choice’ reveals that she doesn’t understand how markets work,” said Jim Lakely, co-director of the Center on the Digital Economy at The Heartland Institute in Chicago. “Early termination fees, for one thing, vary from carrier to carrier, which is a function of a well-operating market. And competition is fierce, with some companies offering to cover your termination fees to switch. And that’s not to mention the prepaid market, which also puts pressure on traditional carriers.”

Lakely added: “But what Sen. Klobuchar ignores in her railing against early termination fees is that without them, most consumers—especially the poor and middle class—would be stuck with lousy phones. You can walk into a cell phone store and walk out minutes later with a $300 Smartphone that puts the world in the palm of your hand. Why? Because the carriers are practically giving away the phone, and in exchange the consumer agrees to stick with the carrier for the duration of the contract. Staying with one carrier for what is usually two years is a small price to pay for that exchange.

“If you get the government between the consumer and the carrier, these transactions will slow to a crawl or even stop. Companies in a market as competitive as wireless can’t ‘rig’ any ‘carnival game.’ They simply don’t have the power. Only the clowns in government can do that—and always to the detriment of consumers in the long run.”

Phil Britt ([email protected]) writes from South Holland, Illinois.