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Archive for Thursday, August 18, 2005

Early exit expensive on phone contracts

August 18, 2005

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Would you switch your cell phone provider if you didn't have to pay that nasty early termination fee the companies charge customers to get out of their contracts?

Nearly half (47 percent) of cell phone users polled said they would most definitely switch or consider switching cell phone service carriers to get a lower rate and better service if they didn't have to pay an average penalty of $170 to cancel their service contract, according to a new survey by U.S. PIRG, the national lobbying office for state Public Interest Research Groups, which are nonprofit, nonpartisan advocacy organizations.

"Early termination penalties prevent consumers from voting with their feet when their cell phone company treats them wrong," said Ed Mierzwinski, the consumer program director for U.S. PIRG. "Since the cell phone companies know the penalties make switching unaffordable for many consumers, the carriers can get away with shoddy overpriced service. Eliminating these unfair penalties will let consumers out of the cells they are locked into."

I've certainly been trapped in a contract with a cell phone company I loathed (for bad billing practices I won't go into). But with a $175 early termination fee, it just wasn't worth it to break the contract with six months to go. But you better believe the moment my term was up, I was so gone.

The vast majority of wireless rate plans involve service agreements in which customers sign up for one- or two-year contracts. The PIRG report found that ETFs, or early termination fees, range from $150 to $240, depending on the company.

The PIRG report also found that three out of four survey respondents indicated that they would support the elimination of the early termination penalties.

But CTIA-The Wireless Assn., an industry trade group, says early termination fees are necessary. Besides if consumers don't want to be subject to an early termination fee, they have the option to sign up with a plan without one, said Joe Farren, director of public affairs for CTIA.

Other options

Of course, the better-priced plans often come with the early termination penalty.

"Without the early termination clause people would be gaming the system," Farren said. "People would walk away with a $500 phone for virtually nothing. An early termination fee allows the wireless provider to recoup the costs of giving a phone to a consumer for a steep discount. Without it, you simply have an economic model that doesn't work."

Farren was adamant that an early termination fee is not intended to prevent a customer from jumping to a competitor.

But a number of consumers disagree. So much so that the industry is facing consumer lawsuits filed in several states challenging the fairness of the fees. In response to the lawsuits, CTIA-The Wireless Assn. petitioned the Federal Communications Commission in March to rule that an ETF is not a penalty but rather an integral part of a customer's rate plan. Thus, CTIA argues, state courts have no jurisdiction in this matter.

The association argues that the costs for acquiring and provisioning new customers are significant, but that most of the rate plans offered do not require customers to pay for these costs at the beginning of the contract term. Instead, carriers recover these "upfront costs gradually from customers through a variety of rate elements.''

"The time has come for the FCC to confirm and reconfirm its precedents - which already establish that state regulation of ETFs is prohibited rate regulation,'' the association said in its petition.

'Not buying' explanation

If you are a cell phone user, I hope you get as incensed as I was when you read this:

"The ETF thus provides a measure of predictability to the revenue stream reasonably expected by wireless carriers, enabling carriers to offer attractive initial discounts and monthly pricing to customers willing to make a minimum service commitment and also ensuring carriers some measure of compensation for lost revenue and otherwise unrecoverable upfront costs caused by early terminations.''

There you have it folks.

If you are not receiving satisfactory service from your cell phone carrier and want to switch, the company feels entitled to be paid nonetheless.

I'm sorry. I just don't buy the industry's explanation. Early termination fees do stop dissatisfied customers from switching to a competitor, which has been made much easier since cell users can now keep their phone numbers when they sign up with another company.

U.S. PIRG as well as 15 members of Congress are urging the FCC to reject the cell phone industry's petition and let state courts determine if these early termination fees are reasonable. You should too.

In a society that promotes free enterprise, cell phone users unhappy with their service ought to be able to freely kick their mobile service company to the curb without being excessively penalized.

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