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LAS VEGAS--Executives from AT&T and Verizon Communications defended early termination fees for wireless customers Tuesday, but said they wouldn't oppose Federal Communications Commission rules that required these fees to be "reasonable."

Jim Cicconi, AT&T senior executive and vice president for legislative affairs for AT&T, and Tom Tauke, executive vice president of public affairs and policy for Verizon, said following a panel discussion at the NxtComm tradeshow here, that their companies are justified in charging early termination fees for wireless contracts, which often top out at $200.

The battle over early termination fees is heating up as wireless operators face multimillion-dollar class action suits from consumers who say these fees are unfair and deter competition. So far, wireless operators seem to have the upper hand in the battle, as a California state jury ruled in favor of Sprint Nextel last week in the first of these class action lawsuits.

But now, the FCC is considering taking jurisdiction over early termination fees. And the agency is considering a proposal from Chairman Kevin Martin that would require consumers be given a 30-day grace period to cancel their contracts without penalty. After those 30 days, early termination charges would then be prorated or reduced over the duration of the contract. Martin also proposes that fees should be based on the cost of the phone and that they should be "reasonable."

Cicconi and Tauke said that they are confident they could reasonably justify the cost of their fees, despite criticism from consumer advocates who say these fees are not used to recover costs but are merely used to deter customers from switching services. One industry expert who testified at a recent FCC hearing said that the early termination fees wireless operators charge are roughly 12 times higher than the cost of the actual phone subsidy they claim to be recovering.

"The fact is that it costs us hundreds of dollars more than the fees we charge to acquire a customer," Tauke said.

The executives also argued that consumers have many choices when it comes to the phones they buy and the services they subscribe to. Both carriers offer some phones at full price and allow customers to subscribe to month-to-month contracts, they said.

While AT&T and Verizon Wireless might offer some phones at full retail price in exchange for month-to-month service contracts, most of the hottest and most popular phones are not offered in this way. For example, the new 3G version of Apple's iPhone offered exclusively on AT&T's network can only be bought for the subsidized price of $199. AT&T also requires new iPhone users to sign up for a two-year contract. The previous version of the iPhone, which was not subsidized by AT&T, also required customers to sign up for a two-year contract with AT&T.

When asked why AT&T isn't giving consumers the choice of buying the new iPhone for the unsubsidized retail price without the constraints of a contract, AT&T's Cicconi had this to say: "Apple is providing the iPhone on these terms and conditions that it negotiated with AT&T. And if customers don't want to accept these terms, they can buy other devices."

While that's true, consumers still have no other way to buy this particularly innovative phone without agreeing to strict contractual terms from AT&T. This is despite the fact that AT&T said it has found its iPhone users to be among its most loyal customers.

"People have a choice," Cicconi continued. "They make decisions based on a lot of factors, like features and functionality of the phone and the terms and conditions under which that device is offered. Why should the government intercede on a deal that was struck between AT&T and Apple? I don't think the FCC should single out any one device in making policy."

Verizon's Tauke chimed in by saying that other industries also require term contracts.

"My gym requires me to have a year contract," he said. "The lawn service that cuts my grass has a one-year contract. Tivo requires a year service. This isn't unusual, and it's questionable that any government should regulate fees on any service."

This might be true, but there are many goods and services, particularly utility services, which don't require contracts. I've never had to sign a contract to get water or electricity. And I never signed a contract for my landline telephone service. I'm interested to hear what readers think about this issue. So please share your thoughts in the "Talk Back" section below.

Early termination fees for wireless cell phone contracts came under fire during a Federal Communications Commission hearing Thursday as commissioners examined an industry-backed proposal that could soften the blow of these fees for some consumers.

The FCC held the hearing to gather more information as it considers a proposal that would give new cell phone customers a 30-day grace period to cancel their contracts without penalty. After those 30 days, early termination charges would then be prorated or reduced over the duration of the contract.

In exchange for accepting this proposal, wireless operators have asked to be absolved from ongoing lawsuits that could cost them hundreds of millions of dollars.

Wireless operators seem to have won at least the initial battle in their legal wars over early termination fees. Also on Thursday, a California State jury ruled in favor of Sprint Nextel in the first of these class-action lawsuits.

FCC Commissioner Kevin Martin acknowledged that early termination fees, which range from $150 to $225, were problematic, stating that "in practice (it) can leave people locked into a service that they really want to leave." He even joked that his wife, who apparently is unhappy about the fees, had volunteered to testify at the hearing.

But he said he was skeptical that the class-action lawsuits would resolve issues for all consumers. And he offered his own proposal, which was similar to the industry's proposal.

Martin proposes that fees be prorated, as the industry has suggested, but he also said that the fee should be based on the cost of the phone. For example, the fee for a service with a $50 phone would be lower than one for a $500 phone, he said. He also said fees should be reasonable, and that customers should be given a suitable time period to evaluate the service before being penalized for canceling service.

Consumer advocates and state regulatory officials said that even prorating fees is not enough. Anne Boyle, chair of the Nebraska Public Service Commission, called for these fees to be abolished altogether.

"The industry should do away with these contracts and let people purchase the products on their own and pay for service on a month-to-month basis," she said. "It's the most common method for providing products and services in this country."

Boyle and other state regulatory officials also argued that states--and not the FCC--should have authority over carriers and the fees they charge. Martin argued that a single, federal policy is needed to protect all consumers, especially in states where no policies are implemented.

"Don't you think that some kind of federal rules, even if it was a floor, is better off for the consumers who have none?" Martin said to the panel during the hearing.

Operators claim these fees are to recover the cost of cell phones, which they subsidize in exchange for customers signing up for long-term contracts. And they have long argued that without contracts or fees, customers would be required to pay more upfront for phones.

"If we didn't have early termination fees, we would be here today talking about how to lower the barrier to entry for subscribers," Tom Tauke, executive vice president of public affairs for Verizon, said of during the hearing. "(The current model) has proven to be a good business model giving consumers access to the latest devices and allowing wireless companies to offer them at subsidized prices."

But Lee Selwyn, an expert on telecommunications policy and economics, testified at the hearing that the early termination fees carriers charge is roughly 12 times higher than the cost of the actual subsidy. He said that, on average, carriers are only paying about $14.33 for each phone they sell to a consumer.

He also said that carriers have overstated the loss in profit they face when customers terminate contracts early. He said that operators build their level of churn (or customer turnover) into their forecasts for capital and operational spending. Ultimately, carriers only lose about $0.70 of profit per month on customers who terminate contracts early. So for someone who still has 13 months left on a 24 month contract, a wireless operator is only losing roughly $9 in profits, a far cry from the $150 or $200 it charges customers to leave its service early.

In general, wireless operators are reacting to the public outcry over these fees by revising their service plans. AT&T and Verizon Wireless, the two largest operators in the U.S., have already begun prorating cancellation fees. And the other major carriers have said they will do the same. Some operators have also stopped restarting contracts when customers make changes to their service plans. But so far, not one major wireless operator in the U.S. has said it will get rid of early termination fees altogether.

Instead, operators argue that customers who don't want contracts have other options. Most of them offer month-to-month plans for customers who buy their own cell phones. But Boyle and Selwyn pointed out in their testimony Thursday that these month-to-month plans are often more expensive than the plans offered with subsidized handsets.

"Common sense dictates that the customer that buys his phone outright would pay a lower monthly fee," she said. "But they don't. It's the funniest math I've ever seen."

But Verizon's Tauke said consumers have plenty of alternatives to contracts, and he said that his company is moving toward giving customers more freedom and choice.

"Today if you walk into a Wal-Mart, there are lots of options in terms of prepaid phones," he said. "And (at Verizon), we are moving toward an open development system so that you can purchase devices from people not affiliated with our company."

The Federal Communications Commission will discuss a proposal at an open meeting Thursday that could reduce the cost of getting out of your cell phone contract.

The industry-sponsored proposal would give new cell phone customers a 30-day grace period to cancel their contracts without penalty. After those 30 days, early termination charges would then be pro-rated over the life of the contract. This means customers who want out of their contract in month 20 would pay less than those cancelling their service after only four months.

Cell phone operators have argued that they must impose early termination penalties on contracts because they subsidize the cost of the handsets. And to recoup the cost, the operators must be guaranteed a certain amount of service revenue.

AT&T and Apple just announced this week that the new iPhone 3G will be offered in this way. AT&T customers will be required to sign a two-year contract in exchange for the subsidy, which brings the cost of the new 8GB of the phone down to $199.

Customers who bought the first iPhone were also required to have a two-year contract with AT&T despite the fact that the phones were not subsidized.

In the eyes of many consumers these early termination restrictions are unfair and hamper competition. And thousands of them have banded together to file class-action lawsuits.

Check back on Thursday for coverage of the FCC hearing, which begins at 7 a.m. PDT.

The Federal Communications Commission has scheduled a June 12 hearing to debate whether the agency should regulate early termination fees (ETFs) on cell phone contracts. According to The Washington Post, FCC Chairman Kevin Martin hopes to address growing consumer complaints over ETFs, which have become the subject of class action lawsuits in several states.

The FCC already is negotiating with several carriers on how it would assume federal oversight over EFTs, which currently are subject to state laws. The proposals include capping the fees at an undisclosed amount, requiring carriers to prorate ETFs, and prohibiting the providers from charging an ETF in the first 30 days of a customer's contract.

Though many carriers prorate their ETFs already, they are not required to do so. If the FCC assumes ownership of the fees, such policies would become compulsory for carriers. But in exchange, the new federal oversight would preempt the class action lawsuits.

Though Sen. Amy Klobuchar (D-Minn.) has proposed similar rules in her Cell Phone Consumer Empowerment Act, the Post reported that she is against FCC oversight, saying the states are the "best watchdogs" for the industry.

Carriers have long held that ETFs are a way for them to recoup costs for offering free or heavily discounted new phones to customers. The Cellular Telecommunications Industry Association, which represents carriers in Washington, supports ETFs for the same reason.

If you hate paying a fee to end your cell phone contract yearly (and really, who doesn't?), you'll be interested to know that the Federal Communications Commission may just have your back. The Associated Press is reporting today that the FCC is considering proposals to regulate, but not eliminate, the early-termination fees (ETFs) that have become a sore spot for cell phone owners. Currently, wireless carriers charge up to $200 for customers who leave service contracts before their end date.

The FCC is not commenting on the proposal, but according to the AP, the agency is negotiating with carriers on a number of terms. Most importantly, ETFs would be capped at an undisclosed amount and carriers would be required to prorate fees according to how long a customer has stayed with the contract. While most major carriers prorate ETFs already (the longer a customer has been in a contract, the lower the ETF) they are not required to do so. Legislation proposed in the Senate last year also calls for prorating ETFs, but so far the Cell Phone Consumer Empowerment Act of 2007 is not close to passing.

The FCC proposal also would prohibit carriers from charging an ETF to customers who change terms of a contract or end one contract and start another. New customers would be able to end a contract without paying an ETF in the first 30 days of their contract or for up to 10 days after they receive their first bill.

As expected, the government would give carriers some concessions in return for the regulations. The AP says the proposal would prohibit states from regulating ETFs and that carriers could not be held liable in a number of ETF-related class action lawsuits that customers have filed in several states.

Carriers have long held that ETFs are necessary because they sell phones at a loss to their customers. In their view, the fees are a way to recoup the costs for offering free or heavily discounted new phones. The Cellular Telecommunications Industry Association, which counts a lot of carriers in its membership, supports ETFs for the same reason; it contends that ETFs benefit consumers because they allow carriers to offer phones and plans at a lower monthly price.

Verizon Wireless came to its senses last year, AT&T did so just last month, and now T-Mobile and Sprint have grown a little nicer, as well. Both carriers announced this week that they would begin prorating their early-termination fees (ETF) in the first half of next year. You'll still have a to pay a fee for ending your contract early, but the amount will decrease the closer you get to your contract end date. Specific details of the new policies weren't released--those will come next year, as well--but the dual announcements mean that all four major U.S. carriers will prorate the hated ETFs. What's more, Sprint will allow allow you to change your plan without renewing your contract, which is something Verizon did last month. Yes, lawsuits may have pushed them over the edge, but it's about time.

AT&T wants to be more consumer-friendly.

On Tuesday the company said that it will prorate the $175 early termination fee it charges wireless customers who cancel their contracts based upon how much time they have left in their contract. This means that someone who cancels their service 23 months into a two-year contract will pay considerably less than someone who cancels the service after only six months. (All new customers are able to cancel their service with no penalty for up to 30 days after service begins.)

The company also said it will no longer require customers to extend their contracts if they make changes to their plans. AT&T's current policy automatically extends contracts for customers who change their service plans more than halfway through their contract term.

The prorated termination rates are still being worked out, but the new policy for extending contracts will take effect in November, the company said.

AT&T spokesman Mark Siegel said the changes were prompted by customer demand.

"We've been listening to customers," he said. "And they all tell us that they don't like one-size-fits all policies when it comes to early termination fees or service contracts."

These policy changes come at a time when Congress is looking more closely at the industry's consumer practices. After the much hyped launch of Apple's iPhone, which is exclusively available through AT&T, some Congressional leaders expressed concern that the industry has been too restrictive in its policies. The issue has also been highlighted by debates raging in Washington over how the Federal Communications Commission should auction a valuable sliver of wireless spectrum in the upcoming 700Mhz auction.

Last month, Sens. Amy Klobuchar (D-Minn.) and Jay Rockefeller (D-W.Va.) introduced a bill that would give subscribers greater freedom to leave cell phone carrier contracts before the agreements expire. On Wednesday a Senate subcommittee will hold hearings regarding consumer practices of the wireless industry, where the issues of early termination fees and automatic contract extensions will surely be discussed.

Siegel admitted that governmental pressure may have played a part in rethinking the company's policies.

"Our main focus is responding to our customers," he said. "But that's not to say there aren't other forces at work."

Whatever is getting AT&T to lighten its policies doesn't matter to me. I'm just glad that the company is making changes. I've always felt it was anticompetitive and unfair to lock customers into lengthy service contracts. And it made even less sense to me that cell phone operators could penalize good customers by extending their contracts because they upgraded their service plan. I mean does it really make sense that my two-year contract starts over because I am willing to pay more per month for my service? I don't think so.

Sure, mobile operators offer consumers subsidized handsets. I understand that they have to recover that cost. But is it really necessary to force someone who has had the service for almost two years to pay the same termination fee as someone who is canceling the service after only a couple of months?

In a free market, consumers must be able to have choice. And contracts with stiff penalties eliminate this choice and stifle competition.

So good work, AT&T. This is definitely a step in the right direction. Once operators truly compete on their own merits instead of relying on contracts to keep customers hostage on their networks, consumers will see huge improvements in price, quality of service, and the availability of new and cool handsets.