FCC Launches Verizon ETF Probe

Controversy continues to swirl around Verizon Wireless' November decision to double early termination fees for smartphone customers, as the FCC is now seeking answers from Verizon about the policy.

The controversy over Verizon Wireless' early termination fees spread to the Federal Communications Commission Dec. 4, as the regulatory agency is now seeking answers from Verizon about the company's decision to double ETFs for smartphone customers. The FCC's inquiry letter also asks whether consumers are being charged for minimal, inadvertent use of Verizon's Mobile Web service, and what notice is being provided to those consumers.
Verizon Nov. 5 said beginning Nov. 15 the company will double its penalty fees to $350 for certain subscribers who leave their contracts early. Verizon customers purchasing a smartphone with a service agreement will be subject to an ETF of up to $350 if they disconnect service prior to the minimum term. The $350 ETF will decrease $10 for each month of service completed.
"In light of the Commission's ongoing interest in the issues associated with ETFs and its pending proceeding regarding disclosure of billing information to consumers, we seek a more complete understanding of these practices," the FCC wrote in the letter to Verizon. (PDF)
The inquiry seeks a number of answers from Verizon about its ETF policies, including an explanation of the rationale for the ETF increase for advanced devices. "Please explain: (1) the cost differentials that Verizon pays for advanced devices over what it charges its customers; (2) the ETF levels, proration schedules, and other terms and conditions of ETFs; [and] (3) how the levels of ETFs, together with the terms and conditions, relate to these cost differentials," the FCC wrote.
The FCC also asked, "It appears that if a customer cancels a two-year contract after 23 months, the customer would still owe an ETF of $120. Is this correct? If the ETF is meant to recoup the wholesale cost of the phone over the life of the contract, why does a $120 ETF apply?"
The FCC set a Dec. 17 deadline for Verizon to reply to the letter.
Verizon in a Dec. 4 statement said the ETFs make it "possible for a broad array of Americans who might not otherwise be able to afford broadband connections to be active participants in the online world. Too many people still can't afford to buy a PC for Internet access, and a subsidized handset option can be a great option."
The statement from Jeffrey Nelson, Verizon's executive director of Corporate Communications, also noted that subsidized smartphone sales are optional and that customers who comply with their one- or two-year contracts face no ETFs.
The FCC inquiry follows a Nov. 10 letter from Sen. Amy Klobuchar to Verizon Wireless President and CEO Lowell C. McAdam and the FCC, criticizing the company's ETF decision.

"Changing your wireless provider shouldn't break the bank," Klobuchar said in a Dec. 3 statement. "Forcing consumers to pay outrageous fees bearing little to no relation to the cost of their handset devices is anti-consumer and anti-competitive."

Klobuchar and four other Democratic senators introduced legislation Dec. 3 to set limits on ETFs.

The Cell Phone Early Termination Fee, Transparency and Fairness Act would prevent wireless carriers from charging an ETF that is higher than the discount on the cell phone that the company offers consumers for entering into a multiyear contract. For example, if a wireless consumer enters into a two-year contract and receives a $150 discount with the contract, the ETF cannot exceed $150.

The legislation would also require wireless carriers to prorate their ETFs for consumers who leave their contracts early so that the ETF for a two-year contract would be reduced by half after one year and prorated down to zero by the end of the contract term. In addition, the bill would mandate that wireless carriers provide "clear and conspicuous disclosure" of the ETF at the time of purchase.