Termination fees hang up cell users

Customers complain about high cost of ending phone contracts

July 11, 2008|By Liz F. Kay | Liz F. Kay,Sun reporter

When she moved to Baltimore to work at the Johns Hopkins University, Ivy Greene discovered a problem: She couldn't get cell phone reception in her Mount Vernon apartment.

But when she tried to switch carriers, it cost her $150 - the price of freedom from a contract that came with a hefty early termination fee.

"It's just ridiculous," said Greene, 31.

Cancellation penalties have long been a frustrating and confusing "gotcha" for cell phone subscribers. The chorus of complaints is likely to swell again today as Apple's long-awaited iPhone 3G goes on sale and thousands of potential customers learn how much it will cost them to switch from their carriers to AT&T, the only company that services the popular Apple handset.

But there are signs that the outlook is improving for customers. This week, Verizon Wireless agreed to pay $21 million to settle a lawsuit by California subscribers angry about the carrier's termination fees.

Although the settlement does not affect similar California suits filed against carriers, or actions filed in other states, lawyers in the case said the settlement shows that the company was worried that it would lose at trial.

Consumers have long hated early termination fees, but no one knows exactly what to do about them.

Even critics of the fees say that industry-backed efforts to regulate them at the federal level may make a bad situation worse.

Cell phone service providers say the fees help them recoup their subsidies of cell phone handsets and service plans.

All four major carriers have announced plans to gradually pro-rate these fees, if they haven't begun already, so the cancellation penalties will decline over time. But none disappears entirely.

AT&T and Verizon have plans in place to reduce penalties by $5 every month for the life of the contract. Sprint says it will develop a plan by the end of the year. T-Mobile recently announced that its $175 fee would decrease - but only in the last six months of the contract.

Consumer groups say the fees still discourage consumers from walking away from bad service.

"It's exponentially, by far, the biggest complaint we get," said Bob Williams, director of hearusnow.org, the Consumers Union telecommunications site. Worse yet, critics say, providers of other electronic services, such as broadband Internet and cable TV, are starting to adopt the practice.

"The marketplace really isn't able to function very well if they're locked into contracts by this big financial penalty," Williams said. "You shouldn't have to pay to vote with your feet, and that's what this is all about."

But consumers seem to be willing to pay, however grudgingly. Wireless carriers generated $138.9 billion in revenue in 2007, according to industry statistics.

More than 255 million people subscribed to wireless service as of December, according to CTIA, a wireless industry organization. Only 45 million people choose pre-paid service, which requires neither a contract nor a cancellation fee.

Still, the fees have generated class-action lawsuits around the country, and the Federal Communications Commission recently held a hearing on the issue.

Chairman Kevin J. Martin suggested five ways the penalties could be changed to benefit consumers - including pro-rating services, correlating the cost of a fee with the cost of the handset and tying contract extensions to the purchase of new hardware.

The commission would prefer federal oversight. "Now we're hoping we're able to move forward on this issue and create more flexibility and choices for consumers," FCC spokesman Robert Kenny said.

Joseph Farren of CTIA said early termination fees guarantee consumers a competitive marketplace from which to choose a variety of handsets and mobile plans - including pre-paid services without minimum-term contracts.

"When a consumer voluntarily signs a two-year agreement, they get a discounted or in some cases a free phone, and they get an affordable, predictable monthly rate," Farren said.

"And what the carriers get in return is an understanding they'll get the money back that they've put into the deal."

Federal regulations would create uniform rules for the companies to abide by in every state, rather than a patchwork of conflicting strictures.

"We think it would be harmful to consumers and generally harmful to wireless service in America if the industry was regulated on a state-by-state basis much like phone service used to be regulated 20 or 30 years ago," Farren said.

But Williams said consumer groups fear that federal regulation will actually harm customers. The reason: Although the FCC regulates the rates consumers pay, individual states regulate the terms and conditions of the contracts.

Some states have stronger protections in place for their residents than the federal government is proposing, and those rules would be pre-empted by FCC action.

"In many cases the state regulators are closer to the problems," Williams said. "They have better expertise of what's going on with consumers in their area."

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