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FCC Looks to Play Terminator on Cell Phone Cancellation Fees

By JR Raphael
Jun 13, 2008 10:58 AM PT

Sky-high cancellation fees for cell phone contracts could soon be a thing of the past, but getting there is proving to be a rocky path. The Federal Communications Commission has put forward a plan to regulate carriers' ability to charge you for ending your agreement early -- but not everyone in the industry agrees it's a good idea.

FCC Looks to Play Terminator on Cell Phone Cancellation Fees

The plan, proposed Thursday by FCC Chairman Kevin Martin, would require carriers to prorate the fees based on the remaining length of the contract. It would also base the fees on the cost of phones, so a cheaper model would result in a lower fee. A final component could include clauses that would limit overall contract lengths to a "reasonable length of time" and would also discourage the termination fee from reappearing in contract extensions.

Industry Change

The move follows a wave of change already overtaking the cell phone industry. Verizon moved to prorated termination fees in 2006. Sprint and T-Mobile introduced similar shifts late last year, and just last month, AT&T got on board as well. The timing, however, may not be a coincidence.

"You'll always find regulations are preceded by self-regulation," Derek Kerton, principal analyst with the Kerton Group, told the E-Commerce Times. "Nothing stimulates self-regulation like the threat of government regulation."

Prior to 2006, Kerton pointed out, every carrier had staggering termination fees. Once Verizon saw the consumer demand for lower rates and took action, he said, the other carriers took notice.

"These other carriers realize that it's something that matters to the market -- the market is aware that Verizon does this -- so now they have to compete," he added.

It's no surprise, then, that the carriers debated the need for a federal policy, saying there is no reason for the extra regulation. The companies claim the contracts and accompanying fees let them provide phones at lower costs. Still, their self-created methods of proration may not be exactly standardized.

"What's happened so far is that every carrier has had a slightly different way they're going about it," Kerton observed.

The rates, he said, might decrease by US$6 each month -- far less than a fully prorated formula would dictate.

"One year and 364 days later, there would still be some fairly substantial fees. It's not truly prorated," he said.

Consumer Complaints

Consumers have been calling for a change in termination fee policies for years. The FCC indicated it had logged more than 3,700 complaints, some of which have even led to class action lawsuits, in the past two years. Martin said he worries the fees may be more of a "means of locking consumers into a service provider" than a "means of recovering legitimate costs." It's a view shared by countless cell phone users whose wallets have been hit hard.

"I didn't really need the cell and thought I could cut it out to save some money every month," Stephanie Hickey, a massage therapist in Tacoma, Wash., told the E-Commerce Times. "I had less than a year left on [my] contract. I was told I'd have to pay a $175 cancellation charge.

"It turned my stomach. I'm glad something is being done about it," she added.

Regulation Questions

The FCC plan does raise questions over what the government's role should be in regulating business. While the change may be seen as an overall positive, it leaves some feeling wary.

"Where you see the market working or kind of working, sometimes the best bet is to stay out of the way," Kerton commented. "There are plenty of areas where the market fails to work, and those sometimes call for regulation. But in this particular case, we've seen the market start to work -- so this isn't necessarily the best place to put up regulations."

Better places to focus, Kerton said, would be on areas like international roaming rates. Since most customers don't compare those rates from carrier to carrier, they haven't become competitive.

"Nobody asks that question, so there's no competition in that area -- and you get gouged when you take that trip to Europe," he said.

One thing's for certain, though: This week's proposal may not be the last we see of these sorts of regulations.

"When you have a group of people whose jobs it is to make laws or rules, they tend to keep doing that," Kerton noted. "There's a definite momentum."


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