FCC Examines Early Termination Fees

Federal Communications Commission Devotes Monthly Meeting to ETFs

The Federal Communications Commission was getting an earful at press time on phone and cable company early termination fees (ETFs) at a Thursday hearing on the practice.

Those are the fees charged to long-term customers who want to exit those contracts early -- an issue that has Congress looking at legislation and the FCC listening to the wireless and cable industries, as well as state regulators and consumers, at its monthly meeting Thursday. In fact, the commission cleared its agenda so that the meeting would be devoted solely to the issue.

FCC chairman Kevin Martin said some regulatory oversight is needed.

Daniel Brenner, senior vice president of the National Cable & Telecommunications Association, defended the fees as a way for companies to recoup costs. For example, he said, if a customer was given an HDTV for signing a long-term contract, the company should be able to recoup some of that if the customer cancels one month later.

But Brenner also pointed out that the cable industry offers all customers the option of getting their video, voice and data service on a monthly basis. "Residential offers that that may include ETFs are always optional," he added. In fact, the majority of cable customers do not opt for the long-term contracts with ETFs, and only 5%-7% of subscribers to triple-play (voice, video, data) options have the long-term contracts.

He said subscribers realize cost-savings with the long-term contracts because cable operators do, too. He added that long-term contracts reduce the costs associated with churn (customers who terminate or switch service); ad and marketing costs to retain customers; transactional costs for cancels and sign-ups, including truck rolls to connect or disconnect; and less uncertainty about per-customer revenue flow.

John F. Murphy of DirecTV said the satellite-TV provider’s ETFs policy is consumer-friendly because the long-term contract does not include the upfront equipment costs of direct-broadcast satellite service -- an antenna, receiver and wiring that costs about $700 -- charged for shorter-term agreements.

ETFs help to mitigate the risk of losing that investment, he argued, saying ETFs were "critical to its competitiveness." He also pointed out that the fees were prorated, diminishing to zero over the life of the contract.

Consumer advocate Patrick Pearlman said data suggest that the fees are primarily to reduce customer churn. He added that churn, rather than a bad thing, is a signal to the company about the satisfaction of the customer.

Anne C. Boyle, a Nebraska state regulator, said the fees should be eliminated entirely, adding that competition has been reduced via consolidation and that the savings from that consolidation should result in lower costs to consumers.

H.P. Schroer was there as a class-action-suit claimant in a suit against Verizon Wireless over ETFs. He said his class paid $500 million out-of-pocket for ETFs, seeking a refund of "every penny."

Schroer was angered that the FCC proposed asserting jurisdiction over the fees and potentially pre-empting state consumer laws, saying that it could deny him his day in court. "Don't take any action to interfere with my case and other cases working their way through the courts," he said.

Martin said he thought baseline rules were needed, including that contracts be reasonable; that they be related to covering costs and not for penalizing customers for making a different communications-service choice; and that customers get at least one bill before the fees kick in, essentially giving them a chance to back out first.

Martin added that he was not convinced that a patchwork of different state approaches as the result of lawsuits was thee best answer, saying he favored a "more consistent" regulatory approach.