Wireless Industry, Consumer Groups Clash Over ETF Regulation

The March CTIA petition raised concern about recent state court claims of jurisdiction in disputes challenging ETFs’ lawfulness and reasonableness under state law. CTIA said many wireless carriers face potential rate regulation if they lose class action cases filed in state courts. Those “lawsuits create uncertainty regarding every long- term wireless contract in the country,” prompting CTIA to ask the FCC to act expeditiously on its petition.

Adding to the problem, some state PUCs and legislatures have voiced interest in regulating the levels of and conditions under which wireless ETFs may be charged, T-Mobile complained. While acknowledging that Sec. 332 bars state regulation of wireless carrier rates, T-Mobile said some courts have found ETFs aren’t “rates” under Sec. 332 but rather are “terms and conditions” of wireless service. That poses “a conflict among the decisions regarding whether ETFs are permissibly regulated by states,” T-Mobile said.

The wireless industry urged the FCC to set a uniform, nationwide policy on the permissibility of ETFs, preempting states from regulating them. Many carriers called ETFs an important part of carrier pricing structures, saying they're needed to recover the cost of acquiring and keeping customers, as well as of providing wireless service. “ETFs play a critical role in [a] rate setting equation by ensuring that a carrier’s costs are covered either through monthly rates during the term of a service contract, or through the ETF if a customer terminates service,” Nextel said.

Avoiding inconsistent state oversight of ETFs would let carriers offer affordable service plans and discounts on a uniform, nationwide basis, wireless carriers said. Such fixed-term plans are “inextricably tied to and not economically viable without ETFs,” Verizon Wireless said. Nextel said any move to let states regulate ETFs would “balkanize the CMRS industry and destroy the ability of CMRS carriers to offer the type of innovative, nationwide service plans that consumers demand.” Sprint said barring ETFs would force carriers to restructure their rates, eliminate handset subsidies and hike per-minute prices, particularly harming young and low-income consumers.

Several carriers said consumers can avoid ETFs by choosing a prepaid service plan. Sprint noted, however, that over 90% of wireless customers -- over 163 million Americans -- have chosen the term/ETF plan, because of the benefits these plans confer, such as discounted handsets and lower per-minute rates. Nextel said prepaid service costs more because “there is no built-in mechanism for the pricing of that service to recover up-front costs over time.”

FCC precedent supports CTIA’s position, carriers agreed. For example, Verizon Wireless said, earlier this year the FCC preempted states from requiring or prohibiting line items on wireless carrier bills.

Wireless carriers also complained about a recent flurry of suits challenging ETFs’ lawfulness and reasonableness. Cingular said while the suits seek to eliminate use of ETFs, their practical effect will be to “eliminate, or reduce substantially, the reductions in handset prices, service activation fees, and monthly charges currently offered by wireless carriers, all to the detriment of consumers, particularly those of modest means.”

Consumer groups dismissed wireless industry arguments, questioning their accuracy. NASUCA called the CTIA petition “the latest effort to whittle away states’ authority to regulate virtually anything that affects” CMRS providers’ operating costs or marketing practices, which it said is contrary to provisions of the Telecom Act. NASUCA said “states may review, regulate or even prohibit” ETFs “pursuant to their authority, preserved in [Sec. 332] of the Act, to regulate ‘other terms and conditions’ of CMRS.” It also said courts must look into ETFs to determine whether, under state law, “particular ETFs constitute unlawful, unreasonable or unconscionable commercial practices.”

NASUCA urged the FCC to deny the CTIA petition and to reexamine economic and policy justifications underlying its 1992 decision approving wireless carriers’ bundling of service and equipment, of which ETFs are a part, as a way to subsidize wireless customers’ equipment. “13 years is a long time” in the telecom industry, NASUCA said.

The Wireless Consumer Alliance (WCA) called most of the carriers’ arguments for the CTIA petition “at best, dubious.” It said ETFs are “liquidated damages” provisions, not “rates charged, and are designed to “prevent or impede subscribers from switching carriers.” It also said there’s “no evidence” that eliminating or restricting ETFs would cause changes to carriers’ rates. But even if the carriers’s arguments are accurate, “it would not matter,” WCA said: “The question [before the FCC] is not whether the existence or absence of ETFs has some effect on rates. Rather, the question is whether ETFs are rates within the meaning of the statute. And they are not.”

“States must continue to have the power to set forth the rules governing the commercial relationship between CMRS providers and the customers,” AARP said. Contrary to CTIA’s contention, AARP said, ETFs aren’t rates under Sec. 332, since they aren’t charges for commercial mobile service: “The disconnect between ETFs and cost recovery for wireless services provided is demonstrated by the fact that ETFs are not prorated over the term of the agreement and are charged anytime the customer elects to change his or her service and/or renew a service contract.” CTIA'S petition is “premised on a number of inappropriate and poorly-reasoned authorities” and should be dismissed “as procedurally defective,” AARP said.

Consumers Union, the National Assn. of State PIRGs and National Consumer Law Center said in joint comments wireless contracts remain one of the top areas of consumer wireless service complaints. “ETFs serve to tie consumers to contracts for less than satisfactory services and run counter to CTIA’s claims of a competitive market,” the groups said.