Wednesday, June 04, 2008

Early Termination Fees

The virtues of deregulation, free markets, customer sovereignty, and choice of provider are constantly extolled by advocates of utility competition. Yet it seems that one of the first things these new industry entrants do is try to "lock up" customers and deter their switching to another provider for better prices or service. And, they try to enlist the help of regulators to provide regulation friendly to them and hostile to consumer interests.

This effort of the utility industry to obtain friendly regulation is not new, and is not really surprising. The nature of the competitive utility service is pretty much the same, no matter who provides it. In a really competitive commodity market with undifferentiated products, when there is surplus capacity, prices tend to drop down toward marginal cost, reducing profits. To prevent that, these "competitive" companies may
  • conduct huge advertising campaigns to "brand" their service in order to attract customers based on non-price factors,
  • use ever-changing and confusing pricing plans that make apples-to-apples price comparisons difficult if not impossible to make,
  • merge, reducing supply options and the number of major providers to less than a handful, increasing the opportunities for oligopolistic pricing and gaming behavior so that without overt collusion, all major providers arrive at similar prices and practices that benefit them, and
  • try to retain customers by imposing financial penalties if they switch providers.
A favorite tool used to deter switching is the early termination fee (ETF), often foisted upon consumers in the take-it-or-leave-it boilerplate long term contracts of competitive energy and telecom service providers. Another is the automatic renewal clause, by which a customer must affirmatively cancel service within a short time frame. If the window of opportunity to stop the service is missed, the customer again finds herself in a long term contract for another year or more.

Consumer groups are resisting ETFs. For example, in California class action litigation, plaintiffs are challenging the rationales offered by wireless phone providers for their ETFs:
[I]n the first of a series of class-action lawsuits in California state court against national cellular carriers, plaintiffs suing Sprint Nextel Corp. are attempting to undercut industry's long-held argument that ETFs levied on subscribers who break contracts early are necessary to recoup costs associated with subsidized handsets.

In his opening statement in the trial of the class-action lawsuit against Sprint Nextel, plaintiffs' lawyer Scott Bursor outlined to the jury how he intended to show that ETFs have another purpose altogether.

"We will prove that the early termination fee was marketing based, marketing created, and marketing driven," said Bursor, according to a court transcript. "We will prove that the ETF had nothing to do with the cost of any phone. We will prove that the ETF had nothing to do with the cost of any promotions. We will prove that the ETF had nothing to do with the cost of acquiring new customers. We will prove that the ETF had nothing do with any cost at all."

Bursor then proceeded to say plaintiffs would show the ETF was embraced as an arbitrary penalty "just to try to stop people from leaving. We will prove that Sprint never expected that it would be able to collect these terminations fees."

Bursor and other plaintiffs' lawyers will likely press the same line of argument in pending class actions against Verizon Wireless (which could have to shell out nearly $1 billion in ETF refunds), AT&T Mobility and T-Mobile USA Inc. in the Alameda County Superior Court. At least one other major ETF lawsuit is said to be advancing in the New York court system.

This should be an interesting case!

In litigation brought by NASUCA, the National Association of State Utility Consumer Advocates, of which PULP is a member, telecom companies and the FCC lost their bid to preclude states from exercising their statutory powers to exercise jurisdiction over "other terms and conditions" of telecom services such as wireless and interstate long distance, rates for which are under FCC jurisdiction. See the 1996 opinion of the Court of Appeals for the Eleventh Circuit in NASUCA v FCC. Although New York could exercise jurisdiction over non-rate terms and conditions of wireless telecom providers, it has not yet done so. See PULP's web page on wireless issues.

What is the response of the devotees of deregulation and competition to the growing pressure from states and consumers to curb ETFS and other overreaching by the new telecom and energy utilities?

They demand utility-friendly regulation!

These advocates of deregulation and free markets are now asking regulators to fix rates for ETFs -- without addressing reasonableness of any other terms, conditions or rates.

Such single-issue ratemaking, it were allowed, would shield ETF rules from judicial scrutiny under the "filed rate doctrine," which limits court review when rates have been approved by regulators. For example, Verizon Wireless recently asked the FCC to approve ETF rates in an apparent effort to preempt any state regulation of ETFs and to head off court action. See Consumer Groups Fight Verizon Early Termination Plan.

Similarly, in a case pending at the New York PSC, the PSC recently proposed to set rates for ETFs in ESCO contracts, suggesting @200, and asked parties to comment on this question:
3. Should early termination fees for residential
customers be limited to: (a) a flat amount (e.g.
$200); (b) an amount based upon a set fee per
month multiplied by the number of months
remaining on the contract (e.g. $8 x 20 months =
$160); or (c) some other variation?
See March 8, 2008 PSC Notice Inviting Comment, and ESCO Marketing Practices Subject of New PSC Proceeding.

PULP opposed this proposal to give ESCOs a filed rate ETF "club" without any evidentiary hearing on costs or reasonableness of the ETF charges, and without regard to reasonableness of rates and other terms and conditions of ESCO service. See PULP Files Reply Comments on the PSC’s Proposed ESCO Marketing Standards.

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