FCC May Regulate Wireless Termination Fees

Published August 1, 2008

Complaints about the wireless industry’s fee policies on early contract termination have prompted Federal Communications Commission (FCC) Chairman Kevin Martin to announce hearings on the matter.

According to Martin, the hearings may be a prelude to FCC regulation of early termination fees (ETF).

One of several fees in consumers’ contracts with wireless companies, ETFs are typically about $175 for consumers canceling contracts before the industry standard two-year agreements are up. ETFs are not generally pro-rated, so customers who cancel in the first month are subject to the same fee as those who fulfill the majority of their contracts.

In a June 14 MarketWatch article, Jeffry Bartash explained the rationale for ETFs, noting, “Early termination fees have existed since the early 1990s. Customers are offered significant discounts on new wireless phones in exchange for agreeing to a one- or two-year contract. If they want to get out of it, they have to pay a penalty.” The fees are thus a form of subsidy for consumers who might otherwise be unable to afford a cell phone, he notes.

Dangerous Precedent

Though the desire to help consumers during tough economic times may be noble, further regulation could set dangerous precedents, analysts argue.

“The devil will be in the details,” said Stephanie Joyce, counsel with Womble, Carlyle, Sandridge & Rice in Washington, DC. She noted there are several changes FCC could propose regarding early termination fees: “Are they looking to set up a benchmark? To abolish penalties?

“I think what [FCC] Chairman Martin is doing is trying to show sensitivity, and it is a laudable goal,” said Joyce. “I am happy the senior administration is sensitive to economic downturns and consumers being treated fairly.”

Competitive Market

Joyce also noted wireless contracts are less expensive to cancel than, for example, satellite television or broadband service contracts.

“It is important that while we protect consumers from unfair practices, we must remember that the wireless industry has strong competition. There is no evidence the wireless industry suffers from lack of competition,” Joyce said.

The wireless market is the most competitive of all telecommunications markets, said Jerry Ellig, Ph.D., senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia.

Ellig testified before the U.S. Senate Committee on Commerce, Science, and Transportation in October, noting the average consumer has three or more choices of wireless service providers, and despite the number of complaints, subscribership and usage continue to increase each year.

Ellig says the wireless industry would have to make up for FCC restrictions on cancellation fees by charging more for other services.

Congressional Pressure

Some prominent members of Congress are driving the push for expanded regulatory powers. Rep. Edward Markey (D-MA), chairman of the House Subcommittee on Telecommunications and the Internet, has proposed what he characterizes as a wireless consumer protection bill addressing ETF reform. Markey wants the federal government to force wireless carriers to let new customers cancel their phone contracts within 30 days of signing, without being subject to any penalty.

Wireless bills introduced by Markey and Sen. Jay Rockefeller (D-WV) are being revised in committees and could come up for votes in early 2009.

‘Unnecessary’ Interference

Scott Gingold, CEO of Powerfeedback, a market research firm in Easton, Pennsylvania, said he thinks government interference is unnecessary.

“The federal government can’t help itself,” Gingold said. “Consumers are unhappy with their cell phone service, and they want to ditch without paying the $175 termination fee, so the FCC proposes intervention. What happened to filing a complaint with the [Public Utilities Commission] and other governing bodies?”

Industry Self-Policing

Industry group CTIA-The Wireless Association likewise opposes expanded government regulation. It says the industry does a good job of policing itself and that the strong market competition proves that.

Wireless companies are already easing the penalty provisions. Verizon Wireless pro-rates its early termination fees, reducing them as customers’ contracts near expiration.

In March 2008 AT&T Wireless announced a new plan for early termination fees. Each month of the contract, the termination fee is lowered by $5. AT&T also encourages customers concerned about termination fees to avoid long-term contracts and early termination fees altogether by purchasing a phone at full price and paying for service month-to-month.

Celeste Altus ([email protected]) writes from Martinez, California.