Verizon Wireless on Friday defended its fee hikes on early cancellations of phone contracts, citing declining prices customers pay for handsets in a letter to regulators.

Earlier this month the Federal Communications Commission launched an inquiry into why the company doubled fees to $350 for ending contracts linked to some smartphones, which are often offered to customers at a reduced or no cost if a contract is signed.

The FCC inquiry is part of a broader consumer protection inquiry the agency launched in August into the disclosure of fees and charges associated with advertisements, point-of-sale and bundling.

This ETF (early termination fee) structure is fair and reasonable, Verizon Wireless said in a letter to the FCC. The company is a joint venture between Verizon Communications Inc and Vodafone Group Plc.

The company said the overall cost for providing and supporting devices to customers at a low upfront price has increased substantially. However, it didn't provide any data to back up the claim.

It said, for example, the loss from an early termination at the 12-month mark is more than double the remaining fee for a smartphone, which would be about $230.

Verizon Wireless still incurs a financial loss from early terminations, even with the $350 ETF, the company said.

An FCC spokesperson said the agency is reviewing the letter.


Verizon Wireless added that the fee is not limited to the recovery of the wholesale cost of the device over the life of the contract. The ETF partially compensates Verizon Wireless for all the costs and risks of providing service, which include advertising, commission, store costs, and network costs.

Free Press, a public interest group, said the letter represents an admission by the company that it is imposing unfair penalty fees to deter consumers from switching carriers.

Verizon is blowing smoke at the FCC's attempts to protect consumers from their unfair billing practices, said Chris Riley, a Free Press policy counsel. The bottom line is that (the) FCC needs to spur some real competition, which will lead to lower device prices and more choices.

In its letter to Verizon Wireless, the FCC wanted to know why a customer had to pay $120 for ending a two-year contract after 23 months with an advanced handset.

Like other wireless providers, Verizon Wireless pro-rates fees over time.

The company said a fee for breaking a contract linked to a smart phone is $350 and it drops by $10 a month; therefore a $120 fee would remain after 23 months. A regular phone carries a $175 early termination fee which costs $10 less each month.

A study by the Government Accountability Office shows early-termination fees as a major reason preventing wireless customers from switching carriers.

That has drawn criticism from some lawmakers who say that with rapidly changing technology, consumers should not be chained to their wireless provider for years through exorbitant early termination fees.

(Reporting by John Poirier; Editing by Richard Chang)