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Regulators consider terminating the frustration with early-termination fees

Wireless trap illustration Aside from the wireless companies, nobody seems to like those early termination fees, ranging from $150 to $225, that you have to pay to get out of a cellphone contract before it ends. Customers complain about them. Consumer groups rail against them. And lawyers have filed class-action lawsuits, including two pending in California, claiming the fees are unfair.

When there's that much noise, lawmakers and regulators start paying attention. And the Federal Communications Commission paid a whole lot of attention today, holding a five-hour hearing on the issue.

The commissioners are trying to decide whether they should regulate early termination fees. Wireless companies say the fees are needed to offset the discounts they give customers on the purchase of phones and the costs of the calls they make on them. But FCC Chairman Kevin J. Martin and other commissioners are skeptical.

"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 today. "Early termination fees shouldn’t function as a hindrance to consumers’ ability to choose, or switch to, the service or provider they want."

Martin said he's considering five steps ...

.... to protect consumers. They include:

  • requiring that early termination fees be pro-rated, so canceling a two-year contract after a year would result in half the charge;
  • basing the termination fee on the cost of the phone, so a person who buys a $50 handset wouldn't face the same fee as someone who buys an expensive smartphone;
  • having the fee apply only after customers receive their first bill, in case they want to cancel because the service and charges turn out to be different than they expected.

You can download a copy of Martin's comments as a PDF here.

Consumer groups support the FCC chairman's ideas. But Martin also is considering granting a request by wireless companies to take state governments and courts out of the equation. The wireless companies say that there should be one federal rule on early termination fees, not a bunch of state ones.

"The prospect of 50 different rules would be confusing and add costs that would be passed on to consumers," said Tom Tauke, the top lobbyist for Verizon Communications.

Martin was sympathetic to their concerns. But consumer groups and state regulators cried foul.

They said state officials were much closer to consumers than regulators in Washington and could act more quickly when problems occur. They also said that class-action cases filed in state courts are a big reason why Verizon and other wireless companies have started pro-rating their early termination fees or have announced plans to do so. If the FCC grants what the wireless companies have asked for, those ongoing lawsuits would be voided.

"Any federal approach should not take the state cops off the beat,'' said Larry S. Landis, commissioner of the Indiana Utility Regulatory Commission.

Martin said he hoped the FCC could consider new early termination rules by the end of the summer. But Congress is also looking into the issue. Amy Klobuchar is a Democratic senator from Minnesota who has co-sponsored a cellphone bill of rights that would require pro-rated early termination fees. She warned the FCC not to write states out of the game.

"Today, too many consumers feel that the cellphone companies have the upper hand in a confusing and unfair market," she said. "Our responsibility in government is to make sure that average people don’t get trampled at a time of rapid change -- that the market works for consumers, not against them."

-- Jim Puzzanghera

Puzzanghera, a Times staff writer, covers tech and media policy from Washington, D.C.

Illustration: Alex Nabaum / For The Times

 
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