FCC Chief Pushes New Rules on Phone Fees

Kevin J. Martin, chairman of the FCC, says, "I have been skeptical that lawsuits are a good way of ensuring protection for all consumers." (By Dennis Brack -- Bloomberg News)

· Fees that would correlate with the cost of a phone, so that a penalty for a $50 phone should be less than a $500 phone, for example.

· Fees that would be prorated, or reduced over the life of a contract. Prorating has been adopted by Verizon Wireless and AT&T. Sprint Nextel has promised to begin prorating by the end of the year, and T-Mobile will begin this month.

· Contracts for a "reasonable" length of time, with no cancellation penalties for consumers who have completed a previous contract with the provider.

· Allowing consumer review of bills before they are subject to cancellation penalty.

Martin said the agency received 3,700 complaints in 2007 on early cancellation fees for cellphone contracts.

FCC member Michael Copps, a Democrat, cautioned that the hearing unearthed questions about the telecom carriers' economic arguments for the penalties. Cable providers Time Warner Cable and Comcast charge early cancellation penalties on longer-term contracts that are offered at a steeper discount. The companies said the fees are charged to recover losses from the discounted rates, can be made up only over the full term of the contract.

Verizon Wireless and Sprint have asserted that the fees recoup costs the carriers incur through subsidies that enable customers to get cheap phones. Yet the carriers also indicated that other costs were associated, including marketing fees.

"There is a lot of consumer outrage on early termination fees, and today a wireless industry representative said more than for phone subsidies, the rates are used to help finance their business plan," Copps said.

Chris Murray, senior counsel for Consumers Union, pointed to testimony by a plaintiff's witness in the Sprint case that the true cost for cellphone subsidies is about $14 -- far below what the company claims. Taylor, the Sprint spokesman, said the witness's math is not supported by figures reported by Sprint to the Securities and Exchange Commission.

Murray said early cancellation fees shouldn't include marketing costs to obtain customers and should not be used as a tactic to lock consumers into long-term contracts to avoid turnover, an important Wall Street measure of a business's health.