[Senate Hearing 110-1175]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 110-1175

                        CONSUMER WIRELESS ISSUES

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 17, 2007

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation











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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 17, 2007.................................     1
Statement of Senator Cantwell....................................    13
Statement of Senator DeMint......................................     8
Statement of Senator Dorgan......................................     3
Statement of Senator Klobuchar...................................     4
Statement of Senator McCaskill...................................    11
Statement of Senator Pryor.......................................    13
Statement of Senator Rockefeller.................................     1
Statement of Senator Stevens.....................................     8
    Prepared statement...........................................     8
Statement of Senator Sununu......................................    15
Statement of Senator Thune.......................................    15
Statement of Senator Vitter......................................    17

                               Witnesses

Ellig, Dr. Jerry, Senior Research Fellow, Mercatus Center, George 
  Mason University...............................................    56
    Prepared statement...........................................    58
Higgins, Jr., Michael, CEO, Central Texas Telephone Cooperative, 
  Inc., and President and Chairman of the Board, Rural 
  Telecommunications Group.......................................    48
    Prepared statement...........................................    50
McAdam, Lowell C., President and Chief Executive Officer, Verizon 
  Wireless.......................................................    22
    Prepared statement...........................................    23
Murray, Chris, Senior Counsel, Consumers Union on Behalf of 
  Consumer Federation of America, and Free Press.................    43
    Prepared statement...........................................    45
Pearlman, Patrick, Deputy Consumer Advocate, Consumer Advocate 
  Division, Public Service Commission, State of West Virginia....    32
    Prepared statement...........................................    33
Swanson, Hon. Lori, Attorney General, State of Minnesota.........    18
    Prepared statement...........................................    20

                                Appendix

Snowe, Hon. Olympia J., U.S. Senator from Maine, prepared 
  statement......................................................    81
Response to written questions submitted by Hon. Maria Cantwell 
  to:
    Lowell C. McAdam.............................................    82
    Chris Murray.................................................    88
    Patrick Pearlman.............................................    83
    Hon. Lori Swanson............................................    82

 
                        CONSUMER WIRELESS ISSUES

                              ----------                              


                      WEDNESDAY, OCTOBER 17, 2007

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:08 a.m. in 
Room SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Good morning, all. I call this meeting 
to order. I would say two things. One is that I will have to 
leave shortly after my statement in order to do some final work 
on the Children's Health Insurance Program, and I apologize for 
that, but I'm rescued in my pursuit by the presence of Senator 
Amy Klobuchar, who will chair this full Committee hearing. She 
will come sit here. We all have opening statements to make. 
That is why we came here, so that everybody can do that.
    Cell phones have become an indispensable part of our lives. 
I carry one in my pocket. It's often turned off. Families 
routinely use them to keep in touch with loved ones across the 
country. And there is now music downloading, e-mail, browsing, 
everything.
    So it's not really very surprising that during the last 13 
years over 230 million Americans have become mobile phone 
consumers. 230 million is a lot of people. It's about 70 
million short of our total population. It's an astounding 
number. But what's even more amazing is that for over 18 
percent of these people their mobile phone is in fact their 
primary telephone. So there's no question that mobile phones 
have contributed to a revolution in communications.
    As this technology becomes widely available it has also 
resulted in headaches to consumers, who are simply trying to 
make sense of the hodge-podge of charges on their cell phone 
bills or simply deciphering a 10,000-word contract written in 
legal doublespeak. That's in addition to the frustration many 
especially rural Americans have, including this Senator, with 
inaccurate coverage maps. I along with ever other West 
Virginian in existence have experienced that particular 
problem, which means you can't make a telephone call when you 
need to make a telephone call, and you have to memorize the 
interstates and precisely that part of the interstate where you 
can make a phone call, even it's the same site, the same place, 
but it's just a mile further down the road.
    So to combat some of these frustrations, I've worked for 
the last decade in various ways with various people to bring 
truth in billing. I believe that truth in billing as a total 
principle started with the E-Rate and continues, because I 
believe that the relationship between consumers and the 
telephone company has become completely unbalanced.
    I'm deeply grateful to Senator Klobuchar's work on the 
issue and I am very proud to join her as a cosponsor of her 
legislation. In 1993, Congress instituted a minimal regulatory 
regime to spur this nascent, at that time, technology. As one 
of the handful of Senators on this Committee who was there in 
1993, I can say it was the right policy then. But I do not 
believe that this limited regulatory scheme is now working, 
given the industry's size and its domination by four major 
companies, carriers. So I believe it's time to revisit the 
entire regulatory framework that governs wireless 
communication.
    One practice of deep concern to me is the explosion of 
deceptive charges that now appear on wireless bills. I'll be 
specific. In the last few years, traditional wireless carriers 
have concocted a number of line item charges, fees, and 
surcharges. The industry has euphemistically referred to them 
as ``regulatory'' or ``administrative,'' inferring that they 
are, ``government-mandated,'' which is a very bad word to use, 
that that's the kind of fees they are, when most of them are 
most definitely not, when they are most definitely not.
    So let's be clear. The industry is literally passing the 
buck for ordinary operating costs and tax liabilities on to the 
consumer, and that's not right.
    But deceptive line items are just one issue. Consumers are 
frustrated by a number of industry practices. We will hear from 
industry witnesses today that the industry is so competitive 
that Congress should eliminate what limited State authority 
over the wireless industry persists on a present basis. If the 
industry were so competitive, one would expect that these 
deceptive line charges would have evaporated. Instead, when one 
company imposed them on them, the second one got going, the 
others followed. It sounds like more a collusion thing than 
competition to me.
    Again, we went through all of this with the E-Rate and I'm 
very familiar with it, and I don't like it and I'm not amused 
by it.
    We will also hear that consumers love their cell phones and 
that the minuscule percentage of people who file a formal 
complaint to the FCC proves that no further regulation is 
needed. I know that people love the freedom of their mobile 
phones and I'm sure that consumers love or believe that they 
are treated fairly by their wireless provider. We know that the 
FCC only receives 10,000 to 15,000 complaints a year from 
consumers about their wireless providers. But we also know that 
most people don't file formal complaints because they just 
think it's a waste of time, they don't know where to send it, 
and they know they're not going to get an answer. They know 
that filing a formal complaint is meaningless.
    For example, the Department of Transportation received 
1,634 complaints about airlines in October of 2007. Senator 
Dorgan and I do not believe that there were only 1,634 unhappy 
airline passengers in October of 2007.
    The one area where the FCC has been at the forefront of 
protecting consumers is making sure that industry complies with 
emergency communications, that is the E-911 requirements. I can 
think of no more important consumer issue than making sure that 
a call to 9-1-1 reaches an emergency communications center. I'm 
deeply dismayed that, rather than embrace the new FCC rules, 
the industry is looking for ways to weaken these rules, and I 
have written right here that that is shameful.
    We all know that the telecommunications industry is 
changing rapidly. New technologies are being created and 
changing the way we communicate. But we must never forget that, 
regardless of the technology or changes in the industry, 
consumer protection must remain a cornerstone of our regulatory 
policy.
    I would now call on other Senators to speak. Senator 
Dorgan, if you have a statement we would welcome it, sir.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Senator Rockefeller, thank you very much. I 
was sitting here thinking of how wonderful cell phones are and 
one of the most interesting moments I recall on a cell phone 
was not for me, but sitting in the Oval Office of the White 
House with about five people and the President. And one of the 
individuals had his cell phone turned on and the cell phone was 
turned on loud, and it began to ring in the Oval Office, and he 
couldn't figure out which pocket it was in. It took some long 
while. I have never seen someone more embarrassed with a cell 
phone than in the Oval Office.
    But cell phones are remarkable. I mean, all of us carry 
them. You indicate you have one. I carry one. They offer us 
remarkable opportunities. Just coming from, in the last week, a 
retail store with my daughter, who's in college. The contract 
is up, so I'm well familiar now with contracts and locked in 
and so on and shopping for a cell phone, being presented with 
all of the new techniques and opportunities with the cell 
phones. You know, they suggest they'll do almost everything 
except brush your teeth and drive your car. They'll take 
pictures, they'll do video, they'll do almost everything--alarm 
clocks.
    So the hearing today is not about whether this is a 
wonderful device or whether people are attracted to it. The 
American people and the people around the world have voted on 
cell phones. The piece of legislation that Senator Rockefeller 
and Senator Klobuchar have offered and I have cosponsored is a 
good piece of legislation. We need to do something about early 
termination fees that prevent, I think, a competitive market by 
trapping consumers with their provider.
    We need to do something about better data on coverage 
areas, transparency in contracts and billing. And I think the 
practice of locking in phones, which is not done in many other 
countries, locking in phones, making them exclusive to one 
provider, requiring consumers to purchase a new phone when 
changing carriers. I think that's something we need to deal 
with as well.
    But I want to make one other point today. This is an 
opportunity as well to talk about--and I expect you would want 
me to do that--talk about the issue of network neutrality, or 
what I call Internet freedom. I and Senator Snowe have 
introduced legislation on that. There's a story in the 
Wednesday Post, today's Washington Post, an op-ed piece. It's 
titled ``Can You Hear Us Now?'' It's an op-ed piece by Nancy 
Keenan and Roberta Combs, Presidents of NARAL Pro-Choice 
America and the Christian Coalition of America. They are 
talking about something that was done recently at Verizon 
Wireless, where they chose to block a series of text messages 
by NARAL, a pro-choice group, on the grounds the subject matter 
was too controversial.
    To the credit of Verizon Wireless, they very quickly 
corrected that and took action and, as I say, to that company's 
credit, they moved quickly to change that. But it demonstrates, 
as the discussions we've heard and seen before by Mr. Whitaker 
and others, it demonstrates in my judgment the need to have a 
provision, pass legislation, keeping the Internet free, free 
from censorship, free from gatekeepers. I am asking that this 
Committee will hold a hearing on those issues. I just think 
it's very important that we hold a hearing on the issue of 
discrimination, because we have for the development of the 
Internet, as you know, we've had nondiscrimination policies 
right up until a recent period, and action by the FCC has 
changed that. But we should, it seems to me, require the same 
nondiscrimination.
    So I'm asking that we would hold a hearing on that. But I 
thank you for this hearing. I want to make one final point. I 
mentioned Verizon and when it is mentioned in this way it's a 
critical mention. We just had a little town in North Dakota 
devastated by a tornado. A tornado came around, it just 
flattened a town called Northwood, North Dakota. And even 
before the tornado, they had terrible cell phone service. When 
that tornado hit, they desperately needed cell phone service to 
help deal with emergency requirements, and Verizon was the 
company that moved in quickly and put up temporary service.
    So even as I describe Verizon perhaps in a not 
complimentary way, I also want to say the people of Northwood, 
North Dakota, where I toured recently, would want to say thank 
you to Verizon for helping them in times of difficulty.
    Senator Rockefeller. Thank you, Senator Dorgan.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you, Senator. I'd first like to 
welcome Attorney General Swanson from the state of Minnesota. 
We both bring you greetings from Minnesota, where, as Garrison 
Keeler, our poet laureate, says, the women are strong, the men 
are good-looking, and all the cell phone users are above 
average.
    I will say this. 20 years ago when the cell phones first 
hit the market--this was back when it was a niche industry in 
the hands of tycoons and Wall Street people and in the movie 
with Gordon Gekko on Wall Street with his phone--there were 
only a few subscribers. Now, 2 decades later, there are 200 
million cell phone users and the revenues top $100 billion per 
year.
    Cell phones are no longer a luxury, but a necessary part of 
our lives, and for an increasing number of people, especially 
younger people, it is their only phone.
    Despite the explosion in the market, the wireless industry 
continues to operate under the same rules that they had 20 
years ago, when cell phones were this niche market and the 
service was limited to these urban areas. Now it has gone from 
Wall Street to Main Street, middle class people, lower income 
people, and basically the users have changed, but the rules are 
outdated.
    Consumers often feel that wireless providers have the upper 
hand and consumers enter into these restrictive contracts 
without full information. Once they've signed the contract, 
they often find the quality of the service is not what they 
expected, and they face cancellation fees that can total 
hundreds of dollars if they try to find better service before 
the end of their multi-year contract.
    A recent Washington Post article illustrates the anger 
consumers feel toward their wireless providers. The article 
featured a man who was desperate to try to avoid paying his 
early termination fee, to the point that he faked his own death 
by filling out a death certificate, and not even that worked.
    We believe it's time for some new rules in the wireless 
industry. The legislation that Senator Rockefeller and I have 
introduced, A Cell Phone Bill of Rights--and we appreciate 
Senator Dorgan's co-sponsorship--has a very simple goal: to 
enable consumers to make the best choice that fits their 
particular needs. This legislation is narrowly tailored to 
allow consumers to make true market-based decisions. It's not 
rate regulation. It just allows the consumers to decide what's 
the best price they can get and what's the best quality of 
service, which is what the cell phone industry claims that they 
want.
    To do this, you need to be able to change carriers to get 
that better service or better price. That's why our legislation 
places some simple limits on the so-called early termination 
fees, which have been a real sore spot for consumers. Most of 
the more than 200 million cell phone subscribers in this 
country are in long-term contracts with their providers. But 
too often the consumers find out after the fact that they're 
committing to a multi-year contract and then they find out that 
the wireless service doesn't meet their needs. Perhaps the 
quality of service is not what they expected, providing only 
weak signal strength in the locations they need it most. Maybe 
they get sticker shock because they realize that the bill isn't 
quite what they thought they signed up for because of 
regulatory fees and other things that Senator Rockefeller 
identified. Or they move. They move their house, they go to a 
new office, and they find out that their existing cell phone 
service doesn't work at all.
    But these realizations come after it's too late to exit 
without paying excessive penalties. I know that just yesterday 
before this hearing AT&T announced that it would prorate its 
ETF, and that Verizon has done that for some time now. But 
together AT&T and Verizon comprise 55 percent of the market, 
meaning that over 100 million Americans may still be subject to 
these fees.
    Our legislation would require all wireless providers to 
prorate their fees so that at a minimum a consumer who exits a 
2-year contract after the end of the first year would have to 
pay only half of the termination fee.



    Senator Klobuchar. The legislation will also require that 
wireless carriers provide consumers with information on their 
service quality, including maps that are honest and up to date. 
I think in this day and age there must be a way to map this and 
at least show where the dropped calls are. You know, if the 
cell phone providers are advertising who has the least number 
of dropped calls, then the consumer should have the right to 
say by area code or by county, be able to know by comparing the 
cell phone carriers where the dropped calls are.



    Senator Klobuchar. We have a map to show, I think one of 
the carriers' maps. They provide these maps and they actually 
provide language in the small print that says the actual 
coverage area may differ substantially from the map. So this is 
no way for consumers to price compare in a market.



    Senator Klobuchar. Consumers also need to understand their 
bills so they can compare wireless carriers by price. To do 
this, our legislation will require that wireless companies 
refrain from including on their bills charges or fees other 
than those for wireless service or that are expressly 
authorized by Federal, State, or local regulation.
    Finally, this legislation will put a stop to automatic 
secret extensions of cell phone bill contracts. For example, 
some cell phone companies will extend your contract without 
telling you simply when you call up and you add minutes or you 
add a person or a kid. I think Attorney General Swanson has 
some examples of that in the recent lawsuit she filed.
    Competitive markets work best when consumers have access to 
full information, and that is the overriding purpose of this 
legislation, to ensure that cell phone consumers have the 
necessary information that they need to make the best decisions 
for themselves and for their families.
    Thank you very much.
    Senator Rockefeller. Thank you, Senator Klobuchar.
    In order of appearance, Senator DeMint would be next, then 
Senator McCaskill and Senator Pryor. But we have been joined by 
the former Chairman of this Committee, Senator Stevens, and I 
would ask if----
    Senator DeMint. I would certainly yield.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Mr. Chairman, thank you very much. I 
apologize for being late. I just ask that my opening statement 
be printed in the record. Thank you.
    [The prepared statement of Senator Stevens follows:]

    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    Today's hearing presents an important opportunity for the Committee 
to examine the consumer experience relative to mobile phone service.
    The FCC's annual report tells us that mobile service is the most 
competitive sector of communications. The FCC report also found that 
consumers frequently change services and that new services are 
constantly being introduced for consumers.
    I certainly understand and experience the frustration that all 
consumers feel sometimes when dealing with mass products. But, I also 
worry that if Congress acts too rashly, the end result could be that 
consumer prices would go up, or that some consumers would be forced 
into less attractive wireless plans.

    Senator Rockefeller. It was long, but it was cogent.
    Senator DeMint?

                 STATEMENT OF HON. JIM DeMINT, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator DeMint. Thank you, Mr. Chairman. Thank you for 
holding this hearing. We're talking about the wireless 
industry, which is one of the most successful American success 
stories that we have to talk about, one of the I guess most 
competitive and successful in the world, and the one that has 
had the least government regulation. I would like to contend 
that there is a correlation there. If this Government had set 
about trying to get 200 million cell phones in the hands of 
Americans, it would have cost us hundreds of billions of 
dollars and taken many years.
    I'd like us also to think about today that, despite good 
intentions, which I know we have, to protect the consumer and a 
lot of good ideas here in this bill, we do need to be 
reminded--and I'm sure my colleagues will agree--that every 
week in my office in Washington and my offices back in South 
Carolina, we receive hundreds of requests for help dealing with 
the biggest monopoly in our Nation, which is the Federal 
Government. Complaints about passports and food stamps and 
Social Security payments and Social Security disability, 
Medicare reimbursement, veterans benefits, we get them every 
day, because our Government has consistently shown that it 
cannot effectively manage complex functions.
    I think the Chairman even in his opening statement made it 
clear that when many people have a problem with the Government 
or with something like a wireless provider, they don't bother 
to call the Government because they know they're not going to 
get a response. For us to suggest that somehow we are going to 
be able to design a system that more effectively protects 
consumers than a competitive market is well intended, but very 
naive.
    I don't receive calls from my constituents complaining 
about the wireless industry, but I receive hundreds that are 
complaining about government service. So my first question to 
our panel today is, what problems for America's wireless 
consumers require Congress to act? I would like to have the 
wireless industry competing for the best billing system. Once 
we create a format here that everyone has to follow, that's the 
end of competition in best practices.
    So I expect today's hearings will reveal that there is 
actually no compelling reason for government to get more 
involved in one of our most successful industries in this 
country today. To the contrary, I think most of us know and 
hopefully will see more clearly that consumers really benefit 
when government removes itself from their decisions.
    Today there are more than 150 companies competing in the 
U.S. wireless industry. It is the most competitive market, one 
of the most competitive markets in the world, with the most 
choices for consumers. This competition has resulted in lower 
prices and ever-expanding coverage and better customer service 
and consumer satisfaction.
    These low prices enable Americans to use on average 843 
minutes per month, which is over 500 minutes more than the 
closest European country. That disparity likely results from 
European customers paying four times more than Americans in a 
less regulated industry. Why would we even consider praising 
the European model, much less following it, when their wireless 
service is so expensive and usage is so much less? Consumers 
really are empowered through greater choice and competition.
    The wireless industry, as a lot of us know, has committed 
more than $223 billion in capital expenditures to provide 
customers with seamless wireless coverage. Sure it's not 
completely perfect, but it's a lot better than anything 
government could design or implement or enforce, and we're 
moving quickly towards complete coverage throughout the 
country, which has really been an amazing phenomenon.
    The companies that are competing in this industry are 
meeting consumer needs. The average churn rate for the industry 
is less than 2 percent. So wireless complaints at the FCC have 
fallen from 32.9 percent in 2005 and now only 20 complaints per 
one million customers. I wish we had a government service that 
only had 20 complaints per one million service. We can't say 
that about any government service.
    The wireless complaints made to the Better Business Bureau 
have a higher rate of resolution than such industries--other 
industries such as the cable industry that are heavily 
regulated. Companies offer a variety of contract options for 
consumers. We know there are prepaid options, month to month, 
year contracts, 2-year contracts, and more options every day.
    I think one important thing to consider, and it makes a 
point again that government regulation cannot possibly keep up 
with this dynamic industry, that most of what is prescribed in 
this bill has already happened. The bill mandates a 30-day 
trial period for new customers. Yet many companies already 
offer risk-free 30-day trial periods to enable consumers to 
test service availability in the areas they travel. The bill 
also mandates full disclosure of contract terms and plans. But 
the major wireless companies already do this on their websites. 
This bill mandates prorated early termination fees. Of course, 
Verizon already prorates these fees. AT&T has announced that 
they'll soon do the same. So competition is quickly moving 
towards the goals of this bill.
    This bill mandates detailed mapping of service coverage. 
All four major carriers already offer street-level service 
maps.
    The bill mandates that wireless companies allow unlocked 
phones in their networks. AT&T, T-Mobile, Verizon, and Sprint 
all allow the use of unlocked handsets.
    The point is this. The industry is already moving to 
satisfy a lot of concerns and is doing it better than any 
government regulation possibly could. We know that, despite the 
good intentions of this legislation, once the FCC writes up the 
regulations for it is likely to set back the wireless industry 
many years.
    We have to look at an industry that's working and recognize 
that the consumer services and consumer satisfaction is as good 
or better than any industry that we can name. I would just ask 
this committee before we move to get government involved that 
we recognize that first of all there is no track record that we 
can show that government has effectively improved service, 
particularly a service that is so fast-paced, so fast-changing, 
as the wireless industry. If we look at what is actually 
happening in the market, the penetration of services and what 
is happening with innovation in the industry, let's don't try 
to fix something that is doing so well.
    Despite the good intentions, I would just encourage my 
colleagues to just take a step back. Let's let the wireless 
industry solve what problems we think there are and let them 
continue to be the best in the world.
    With that, I yield back.
    Senator Klobuchar [presiding]. Thank you.
    I think Senator Stevens has another Committee hearing.
    Senator Stevens. Yes, I do, I have a conflict. I got here 
late, I'm sorry, but I would like to put the questions in the 
record and have them responded to by the Committee witnesses if 
possible. Thank you.
    Senator Klobuchar. Thank you.
    Senator McCaskill?

              STATEMENT OF HON. CLAIRE McCASKILL, 
                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. Thank you, Madam Chair.
    First, I think that one of the issues that has really 
caused some of the consumer angst on this area is that the 
first goal of a new technology, wireless communication, was to 
acquire new customers. So much of the business models were 
focused on how do we get more of the market share. As the 
industry has matured, customer service becomes a much more 
important part of the equation, because now it's beginning to 
shift from, yes, we need more new customers, but we need to 
hold onto the customers we have.
    That's where I don't think that the wireless industry has 
been particularly nimble. As a well-connected and a well-
informed consumer, I can tell you horror stories about--I have 
had Sprint, I have had Nextel, I have a large multi-family AT&T 
cellular account, and Verizon. I have examples of all of them.
    Perhaps the one that caused the most heartburn for me was 
realizing, even though I did purposely not buy text messaging 
for my three teenagers when I added them to the plan, that 
unbeknownst to me they could receive text messages with me not 
knowing it and I had to pay for every one of them. You say, 
well, it was just one month before you figured it out. Any of 
you who have three teenagers that have text messaging, it was a 
horrendous situation when I realized my kids--even though I 
hadn't paid for text messaging, I was paying for text 
messaging.
    And obviously, I think the technology advances need to be 
made very available to the consumer without trapping them into 
another 2 years. As the technology advances and you want to get 
the new stuff, then there is this trick. You can't get it 
unless you want to pay a whole bunch of money for the phone or 
you've got to sign up for another 2 years. I'm not sure that 
that model, business model, will end up applying.
    I appreciate what Senator DeMint said and I do realize that 
competition will take care of some of these problems and has 
taken care of some of these problems. But I do think we need to 
look and consider about making sure that the playing field is 
level for the consumer.
    If I could right now segue just for a moment into leveling 
the playing field in regards to something that is relevant to 
this hearing this morning, but not particularly to the wireless 
industry specifically. This morning, today I'll be filing a 
bill to prohibit the practice of paying people to stand in line 
for committee hearings. Sometimes new people to Congress take a 
look around and they go: Well, what is that? Why is that going 
on? Well, I did that.
    I was walking down the hall one day and I saw all these 
people standing in line. And I just looked at them, and they 
all were holding signs that had businesses' names on them. I 
thought, well, what's going on there? So I began to look into 
it and I found out that in all the Committee hearings where 
there's real money involved the lobbyists are paying people to 
stand in line for them, and the practice is so commercialized 
that there's a special classified section of The Hill newspaper 
for line-standing companies. And the technology, thanks to the 
wireless industry, is now so good that they will even tell you 
when you need a line-stander. You just tell them your areas of 
interest of your clients and they will inform you by text 
message or e-mail who you need to be hiring to make sure that 
you have a spot at the hearing.
    I am uncomfortable with the fact that everyone in this room 
probably is being paid by somebody. Now, are we going to get a 
lot of average citizens in here if we stop the practice of 
allowing lobbyists to hire line-standers? I don't know how many 
average citizens will get in here, but at least they got a 
shot.
    We shouldn't be selling the seats to Committee hearings, 
whether it's the Finance Committee, the Commerce Committee, the 
Judiciary Committee, or any of the Committees where there are a 
lot of commercial interests at stake. So if we can prohibit you 
from having to buy us meals and prohibit you from buying us 
gifts, we ought to be able to prohibit you from buying somebody 
to secure you a seat at a public hearing.
    I don't honestly believe that the Founding Fathers would be 
pleased with this development. I think they'd be horrified that 
we are selling seats at public hearings. And hopefully we can 
amend--if I had known about this in time, I would have tried to 
get it on the ethics bill. But hopefully we can put this into 
law, and look at all the money you guys are going to be saving. 
No more lunches, no more chartered plane trips, and no more 
paying people to stand in line to own all the seats at 
Committee hearings.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator McCaskill, would you yield on that 
point just to make certain--you don't mean that government is 
involved in selling seats at hearings. What you mean is the 
private sector, as Senator DeMint would suggest, the private 
sector is involved in a market system here and you want to 
interrupt that market system.
    Senator McCaskill. Just as someone buying you lunch, 
Senator Dorgan, who is not buying your vote, I think somebody 
buying a seat at a public hearing by virtue of having the money 
to pay somebody $60 an hour for as long as 24 hours or longer, 
through the dead of the night, to camp out and make sure they 
have the seats, is prohibited.
    Senator Dorgan. I share your point. My only point was that 
the government is not selling seats.
    Senator McCaskill. The Government is not selling seats. The 
lobbyists are buying seats by virtue of hiring people to stand 
in line.
    Senator Klobuchar. She's just trying to regulate the seats.
    Senator McCaskill. I'm making sure the seats are available. 
This isn't a concert.
    Senator Klobuchar. Okay. Thank you, Senator McCaskill.
    Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Madam Chair.
    Yesterday I introduced the Uniform Wireless Consumer 
Protection Act to require the Federal Communications Commission 
to establish uniform national customer service and consumer 
protection rules for wireless customers. In 1993 Congress 
limited State and local regulatory authority on wireless 
carriers to help the fledgling industry get itself established. 
That decision has helped to drive today's market, as Chairman 
Rockefeller said a few moments ago, to drive today's market to 
240 million wireless customers in the United States.
    So we've accomplished the goal of growing the wireless 
industry, but we've yet to establish a uniform set of customer 
service and consumer protection requirements. I think it's time 
for us to establish a national framework for this new era of 
consumer-friendly wireless services.
    The national consumer framework, though, is not without its 
challenges. The ability of the wireless customer to travel 
beyond State boundaries tests our customary approaches to 
customer service and consumer protection standards at a State 
and local level. I want to applaud my colleagues Senator 
Klobuchar, Senator Rockefeller, and Senator Dorgan for offering 
their bill, S. 2033. We have the same goals in mind.
    I would say this about complaints, though. I don't want to 
get too hung up on the number of complaints. My experience as 
Attorney General is that the overall number relative to the 
number of customers was relatively small. But not everybody 
complains to the FCC. Many people don't complain at all. Many 
complain just to the companies. Some complain to the Better 
Business Bureau. Some complain to the State attorney general. 
They complain in different ways and different places. So I 
don't want to get too hung up on the numbers, but the bottom 
line is that there are a number of consumers who are 
dissatisfied with their service for various reasons. Some of 
those things I think we need to address in Federal law.
    Uniform wireless consumer protection rules must be 
comprehensive and they should address in my view a broad range 
of issues, including disclosures of contract terms and 
conditions, service area maps, trial periods, and early 
termination fees. We could add more to the list if you wanted 
to, but I think it's important that we build a uniform and 
comprehensive set of consumer protection rules that are fair, 
that encourage fairness, transparency, and quality of service.
    So I look forward to working with my colleagues in the 
Senate, certainly colleagues on this Committee, and the 
industry and customers all over America to try to get a solid 
Federal system of consumer protection for wireless customers. 
Thank you.
    Senator Klobuchar. Thank you.
    Senator Cantwell?

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Madam Chair, and thank you for 
holding this important hearing. The wireless industry is 
certainly one of, I think, the great innovation and success 
stories in America. In Washington State we know that well, 
being the original home of McCall Cellular, VoiceStream, 
Western Wireless, Nextel Partners, and today headquarters of 
AT&T Wireless, U.S. headquarters of T-Mobile and Clearwire.
    In 1993 America had 11 million cell phones in use and now 
there are over 230 million. The percentage of cord-cutters, 
people who use their cell phones as their only phone, has grown 
to double digits. The growth has been so strong that a few 
years ago the wireless industry told us they needed additional 
spectrum, and this Committee responded and has been working on 
plans to make more wireless spectrum available.
    These are exciting innovations and opportunities in 
business models and development, everything from advanced 
multi-media data services, 3G broadband networks, and I 
certainly look forward to location commerce and mobile commerce 
and the great inventions and opportunities for consumers to 
better identify products and services that they want to 
purchase.
    These are great innovations and I think that Congress in 
the past has had a light touch. At least the 1993 
clarifications for the brand new cellular industry I believe 
were a light touch, prohibiting states from regulating rates 
and terms of market entry, but allowing them to regulate other 
terms and conditions.
    I think the issue is that Americans know that early 
termination fees are not part of their rates. They view them as 
significant penalties and barriers to switching carriers. I was 
heartened by Verizon's 2006 announcement that it would prorate 
early termination fees and yesterday AT&T announced that they 
would do the same. But I'm waiting for other carriers to step 
up to the plate on this issue.
    In our State, year after year consumer complaints about 
wireless service are the most frequent complaints registered at 
our State AG's office. It takes a lot really, I think, for 
consumers to be upset enough to file a complaint with the State 
AG, and I suspect that the complaints the AG's office, as my 
colleague Senator Pryor mentioned, having been a former AG, 
that they're only the tip of the iceberg of a larger problem 
representing the number of people that aren't filing 
complaints.
    The five primary areas of consumer disputes are: 
misrepresentation of plan or service, coverage failures, 
consumer service, billing, and failure to disclose. So I think 
that there are lots of issues that we should discuss and I know 
that the industry probably feels that it has had great efforts 
in self-regulation. I'm not convinced at this point in time 
that that self-regulation is being effective enough for 
consumers.
    I also believe that, Madam Chair, privacy, as we continue 
to look at M-commerce and L-commerce, which hold great promise, 
I believe, for Americans, they have to be balanced with the 
consumer privacy issues that are needed to protect consumers.
    So I look forward to this Committee's continued work on 
this issue and I look forward to hearing the witnesses talk 
about the great opportunities, but also how we give consumers 
the rights and demands that they need for advancing these great 
innovations in America. Thank you.
    Senator Klobuchar. Thank you.
    Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Madam Chair. I, too, want to 
express my appreciation to the Chair for calling the hearing 
today and also for our panelists for being willing to come up 
and to testify. There's no question that wireless 
communications technology continues to change rapidly. It holds 
great potential for the future for our Nation's economy. The 
expansion of investment in new wireless technology is critical 
to our global competitiveness, both our businesses and our 
economy as a whole.
    In June 2007, there were 240 million mobile phone 
subscribers. Mobile revenues are over a billion, or $100 
billion, I should say, and the cost per minute for wireless 
phone service continues to drop and has dropped considerably in 
recent years. I think it's fair to say that consumers have 
benefited enormously from competition in the wireless 
marketplace.
    The challenge I think we have as policymakers is to ensure 
that sustained competition results in lower prices, innovative 
services, and new technologies being made available to 
consumers. As those new technologies come online and existing 
technologies evolve, the public policy is also going to have to 
evolve to ensure that consumers and businesses continue to have 
access to affordable and reliable wireless communications 
technology.
    I look forward to hearing testimony today from our 
panelists about how regulation of new generations of 
communications technology is working, things that we should be 
doing, things that we shouldn't be doing. I think this forum 
today gives us an important opportunity to exchange those 
ideas, and I'm particularly interested in hearing about how 
consolidation in the marketplace has affected the level of 
competition.
    So again, Madam Chair, thank you for holding the hearing 
and I look forward to the testimony that will be provided by 
our panelists. I was interested in, just as I walked in--is $60 
really the going rate? Those are pretty good-paying jobs. Too 
bad we can't get a few of those in South Dakota. But thank you, 
Madam Chair.
    Senator Klobuchar. Thank you.
    Senator Sununu?

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you very much. Interesting hearing, 
interesting topic. I appreciate the witnesses being here.
    A couple of points that I think are important to make. That 
is, first of all, if we go back to the legislation that really 
created a preemption and a national regulatory structure for 
wireless back in the early 1990s, 1992, 1993, 1994, the 
motivation for that wasn't that this is a new industry. That's 
not the principle underlying a national regulatory framework. 
The recognition was that this is an interstate and a national 
network that we're setting up. As a new, effectively new 
national telecommunications system, it made sense to have 
clearer, more standardized regulatory structure in order to 
encourage investment and build-out and competition.
    That's an important point to recognize because from that we 
then ask, well, that was the principle behind national 
standards and preemption; did it work? What was the result? 
Well, if we go back to 1992, there were 9 million wireless 
subscribers. Today there are nearly 200--well, there are over 
200 million. So over a 20 times increase in use; nearly 85 
percent penetration and saturation in the marketplace, hundreds 
of millions of users. I think by the measurement of usage, 
growth, consumer demand, you'd have to say it's a pretty 
successful regulatory structure.
    That may not be enough. What about competition? Are 
consumers served by only one competitor? We talk often about 
competition in broadband and in the cable industry, trying to 
find ways to encourage broadband competition in areas that 
might only be served by one or two Internet providers. We want 
that number to be three or four. Well, what is it in the 
wireless industry? I think in most population centers, most 
parts of the country, or for most consumers, there are really 
four or five choices. Even in rural counties, the average is 
3.6 competitors or different providers. That doesn't mean that 
it's a perfect system, but it means that in the area of 
competition this model has served us pretty well.
    What about the consumers? I think there has already been 
some discussion of the level of complaints. That's not the only 
measurement of customer service by any stretch. But people have 
pointed out, I think there are statistics I saw in West 
Virginia, where they do collect consumer complaints, and that's 
certainly appropriate, there were 60 or 70 last year. I've seen 
other statistics that have the rate at well below one-hundredth 
of one percent on a national level.
    Some consumers might not complain about problems they have 
and that may be true. But again, here the question you ask is, 
how does this compare to other areas, other industries, other 
services, or even other products that are sold in the country? 
I certainly haven't seen any indication that the level of 
complaint, the areas where customer service has failed the 
consumer, is significantly higher or at a level that warrants 
significant intervention in the marketplace.
    Another area of consumer satisfaction I think it's fair to 
say is price. What's happened to prices? Over the last couple 
of years, cost per minute has gone down 25 percent. Now, I 
don't know of any other service or product that has seen that 
kind of a reduction in prices over the last 2 or 3 years. I 
don't have the data in front of me, but I imagine that cost per 
minute since 1993 or 1994, 1995, has dropped much more 
dramatically.
    I think we use twice the number of minutes of wireless 
phone users in any other country. I don't know if that's a good 
thing or a bad thing, but I think that's an indication that 
consumers find that price relative to the service or the 
quality that they're getting is a pretty good deal. They're 
obviously using their cell phones a great deal. As a father of 
a 14-year-old son, I can attest to that fact.
    So the system seems to be working. I think we can talk 
about areas where it might be improved. But I look at some of 
the proposals that are out there and I start with the idea of 
regulating rates and regulating prices, and I think that is 
exactly the wrong idea, exactly the wrong idea. When you 
regulate prices, when you set price controls for any component 
of a service, every experience at the Federal level with price 
controls has not worked. It's resulted in some consumers not 
getting service that desperately need service. It's resulted in 
less competition. Sometimes it has the effect of protecting the 
incumbents, and I have no interest in doing this in this case. 
I want as much competition out there as possible. But price 
controls restrict markets' ability to respond to consumers' 
need to innovate and deliver new products and oftentimes 
restrict the very industries where we want to see the most 
competition.
    Additional fragmented regulation, blowing up this system 
and giving all responsibility to 50 different states on the 
regulatory side and the pricing side, I don't think that makes 
a great deal of sense. I think we need to look at the industry. 
If there are specific problems with the industry where it is 
performing significantly below other services or other products 
that are important to consumers, I think that's where we need 
to look to take measured action.
    But I see this largely as a success story and I want to do 
everything possible to make sure that it continues to be that 
success story. Forget about 1993. I think if you had gone back 
just 4 or 5 years and made the statement that in 2007 there 
would be 70 million more cellular phone users, wireless users, 
than wireline telephone users, people would have said, no, 
that's not going to happen; you know, it'll never exceed 
wireline users. But at the same time, if you had told the 
wireline companies that they would be losing 20,000 and 30,000 
subscribers a month, as I did a couple of years ago--they said, 
no, no, the rates will never get that high.
    We don't know where these technologies are going. We need 
to maintain the best, most competitive environment possible. In 
the case of wireless, I think we've struck a pretty good 
balance.
    I look forward to hearing from the witnesses. Perhaps they 
think that some changes are needed, but I say to consumers 
across the country: Always be careful when someone steps up and 
says: I'm from the government and I'm here to help you.
    Thank you very much, Madam Chair.
    Senator Klobuchar. Thank you, Senator Sununu.
    We've now been joined by Senator Vitter. This is one of our 
most well-attended hearings that we've had recently, so this is 
a tribute, I'm sure, to our witnesses.
    Senator Vitter?

                STATEMENT OF HON. DAVID VITTER, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Madam Chair. I'll waive opening 
remarks because I'm also eager to hear from the witnesses.
    Senator Klobuchar. Thank you.
    Now I'm going to introduce our witnesses. We will start 
with Attorney General Lori Swanson, who is the Attorney General 
for the State of Minnesota. Then we have Mr. Lowell McAdam, who 
is the President and CEO of Verizon Wireless. We also have with 
us Mr. Patrick Pearlman, who is a consumer advocate for the 
Public Service Commission of West Virginia. Senator Rockefeller 
told me to thank you for coming and said you do good work.
    We then have Mr. Chris Murray, who's a Senior Counsel with 
the Consumers Union; Mr. Mike Higgins with West Central 
Wireless; and then finally, Dr. Jerry Ellig with George Mason 
University.
    So we will start with Attorney General Swanson. And each 
witness, if you could keep your remarks to 5 minutes so we have 
time for questions, we'd appreciate that.

  STATEMENT OF HON. LORI SWANSON, ATTORNEY GENERAL, STATE OF 
                           MINNESOTA

    Ms. Swanson. Well, good morning. My name is Lori Swanson. 
I'm the Attorney General of the State of Minnesota. Madam 
Chair, Members of the Committee: Thank you for conducting this 
morning this important hearing.
    Every day our office hears from consumers with complaints 
about their cell phones. I recently met with a woman named 
Kelly Effinger who is a sign language interpreter from Brooklyn 
Park, Minnesota. She told me that when she added a third phone 
to her service she was specifically promised by her cell phone 
carrier that she could cancel at any time and that she was not 
extending her service. In fact, when she later tried to cancel 
her cell phone company charged her a $175 early termination 
fee, despite its promises. This was news to her, and 
unfortunately Kelly is far from alone.
    The cell phone industry, through a series of mergers and 
acquisitions, has become much more concentrated in recent 
years. By some estimates, just four companies control 80 
percent of the market. Less competition makes it more difficult 
for consumers to shop around for the best service at the lowest 
rates.
    The companies' contracts, however, also make it more 
difficult for a consumer to move to a competing carrier when a 
company provides poor service. Many cell phone companies 
require their customers to enter into long-term contracts of up 
to 2 years in length and require customers who terminate the 
contract early to pay substantial termination fees, often of 
several hundred dollars. These termination fees often bear 
little or no relation to the actual costs incurred by the 
company when the contract is terminated early. The lengthy 
contracts and early termination penalties have the tendency to 
lock consumers in with one company for extended periods of 
time.
    My office has received complaints from consumers who were 
asked to pay sizable termination fees even when they cancelled 
their contracts for very legitimate reasons, like because their 
phone didn't work, they couldn't get the service that was 
promised in their home area, or because they were military 
personnel deployed to serve this country abroad in Iraq or 
Afghanistan.
    Now, in a fair consumer transaction there's transparency 
and there is a meeting of the minds between the business and 
the consumer. The business agrees to sell the consumer a 
product with disclosed terms for a disclosed price. The 
consumer agrees to pay it. Both sides know what the deal is. 
They both want to enter the deal and they both give their 
knowing consent to the terms. In other words, there is a fair 
agreement.
    Many consumers don't feel this sense of fair dealing when 
it comes to dealing with their cell phone company. Over the 
last 3 years, the Better Business Bureau reports that the cell 
phone industry has received more complaints than any industry 
in America, and that counts 3,600 industries in America. 
Complaints like the one my office recently received from First 
Lieutenant Andrew Malander, who is serving in the United States 
Marine Corps. Lieutenant Malander was charged about $100 a 
month for cell phone service he couldn't use when he was 
deployed to Kuwait recently. He tried to contact his cell phone 
carrier repeatedly, had his family contact the carrier 
repeatedly too, to try to put the service on hold. But they 
wouldn't listen. It finally took the involvement of my office 
to undo hundreds of dollars of fees that this officer had to 
pay for cell phone service he couldn't use when serving the 
United States Government.
    We at first couldn't work it out with the carrier either 
and only did the carrier relent after I filed a lawsuit against 
a competing carrier several days earlier.
    Some companies use even the smallest changes in the 
consumer's phone service, like adding or dropping minutes, 
adding or deleting a family member, or adding a new number, as 
justification to extend the consumer's contract for yet another 
lengthy period of time, often as long as 2 years, with new 
termination penalties of up to $200 when that happens. Consumer 
Reports writes that this is the single biggest nationwide 
complaint that it receives from consumers about their cell 
phone.
    Last month my office filed a lawsuit against one of the top 
carriers in the country alleging that it violated Minnesota's 
consumer protection laws by extending the terms of consumers' 
wireless contracts for up to 2 years without giving adequate 
disclosure or obtaining knowing consent of the customer when 
they made even the smallest change to their plan, like adding 
minutes, dropping minutes, or adding a family member.
    It is a practice that affects small businesses, not just 
individuals. There is a company in Minnesota, in St. Paul 
called Semple Enterprises. It's a family-owned excavating 
business. When the employees went to retail stores to buy 
equipment for their phones, buy batteries, repair their phones, 
their carrier extended the company's contract without its 
knowledge or permission, and now the company is locked into 
service because it would have to pay thousands of dollars in 
early termination fees if it exited early. The owner of the 
small business told me if she ran her business that way she 
wouldn't be in business very long.
    It affects consumers, too. Celina Haselitts, a realtor from 
Apple Valley, Minnesota, called her carrier several times to 
adjust her bill when she was overcharged by about $300. Each 
time she made a call to the carrier, the carrier extended her 
contract without her knowledge. She told my office: ``I found 
it ridiculous. I was forced to remain in a contract with a 
company that had treated me so badly.''
    The burden should not be on the consumer to figure out the 
rules of the cell phone shell game. There needs to be more 
transparency and more fundamental fairness in consumer cell 
phone transactions. The United States Congress should pass 
meaningful consumer protection legislation so that consumers 
are treated fairly and not subjected to a game of hide the ball 
when navigating the cell phone maze.
    Madam Chair, Members, I thank you again for the opportunity 
to be here today.
    [The prepared statement of Ms. Swanson follows:]

      Prepared Statement of Hon. Lori Swanson, Attorney General, 
                           State of Minnesota
    Good morning. My name is Lori Swanson, and I am the Attorney 
General of the State of Minnesota. I thank Chairman Inouye, Vice 
Chairman Stevens, and the Members of the Committee on Commerce, 
Science, and Transportation for conducting these important hearings on 
the topic of consumer protections relating to the cellular phone 
industry.
I. The Cell Phone Industry
    The cell phone industry has undergone big changes since the last 
decade. In 1995, an estimated 33 million Americans had cell phone 
service; last year, an estimated 233 million Americans did. For a 
growing number of Americans, the cell phone is their only phone or 
their primary phone.
    At the same time, the cell phone industry, through numerous mergers 
and acquisitions, has become much more concentrated. By some estimates, 
just four companies control about 80 percent of the market. In some 
smaller markets, there are even fewer carriers with adequate service. 
Less competition makes it more difficult for consumers to shop around 
for the best service at the lowest rates.
    Over the last 3 years, the Better Business Bureau reported that the 
cell phone industry has generated more complaints than any other of the 
3,600 industries in America. According to the American Customer 
Satisfaction Index, the cell phone industry has continually ranked in 
the bottom five industries for customer satisfaction.\1\
---------------------------------------------------------------------------
    \1\ Eleazar David Melendez, I'm About to Lose You, Newsweek, August 
6, 2007, at 36.
---------------------------------------------------------------------------
II. Contracts and Contract Extensions
    Mergers and acquisitions are not the only thing that has reduced 
competition in this industry. The companies' business and contracting 
practices have also impeded consumers' ability to move to a competitor 
when a company provides poor service. Many cell phone companies require 
their customers to enter into long-term contracts of up to 2 years in 
length and require customers who terminate the contract early to pay 
substantial termination fees, often of several hundred dollars. These 
termination fees often bear little or no relation to the actual costs 
incurred by the company in terminating the contract early. The lengthy 
contracts and early termination penalties have the effect of locking 
consumers in with one company for extended periods of time. My office 
has received complaints from consumers who were asked to pay sizable 
termination fees even when they canceled their contracts for very 
legitimate reasons, such as because their phone did not work or they 
couldn't get the service that was promised in their home area.
    In other words, consumers have found themselves trapped in lengthy 
contracts even where, as a practical matter, they could not even use 
their phone. Indeed, after hearing from many men and women in the 
military who were required to pay termination penalties to cancel their 
service when they were deployed to active duty, my office drafted and 
the Minnesota legislature passed this year consumer protections that 
allow men and women in military service to cancel their service without 
penalty when deployed to active duty. The fact that it takes a law to 
stop cell phone companies from penalizing men and women in uniform with 
early termination penalties simply because they needed to cancel their 
phone service while serving their country highlights the problems in 
this industry.
    In a fair consumer transaction, there is transparency and a 
``meeting of the minds'' between the business and the consumer. The 
business agrees to sell the consumer a product with disclosed terms for 
a disclosed price, and the consumer agrees to pay it. Both sides know 
what the deal is, they both want to enter the deal, and they both give 
knowing consent to its terms. In other words, there is a fair 
agreement.
    Many consumers report to our office that their cell phone companies 
didn't treat them that way. Some companies use even the smallest change 
in a customer's phone service--such as adding or dropping minutes, 
adding or deleting a family member, or adding a new number--as 
justification to extend the consumer's contract for yet another lengthy 
period of time, often as long as 2 years. These companies have used 
even the smallest change in a customer's phone service as an 
opportunity to trap the consumer in a new contract of up to 2 years 
with termination penalties of up to $200. Consumer Reports writes that 
the biggest nationwide complaint that consumers have about their cell 
phone is that making minor changes to their service--such as increasing 
minutes or adding a number--can result in lengthy contract extensions. 
Many consumers who complain to my office report that they first learned 
that their contracts were extended after the fact, when they changed to 
a different wireless service or canceled their service and were hit 
with substantial termination penalties.
    The consumers who have complained about these practices range from 
individuals to businesses, rural to metro, elderly to young, and 
include people from all walks of life, ranging from Ph.D.'s and 
business executives to retirees and construction workers. Last month my 
office filed a lawsuit against one large national provider alleging 
that it violated Minnesota consumer protection laws by extending the 
terms of consumers' wireless contracts for up to 2 years without giving 
adequate disclosure or obtaining the knowing consent of the customer 
when they made small changes to their wireless phone service. See State 
of Minnesota v. Sprint Nextel Corporation.
III. Why Federal Legislation Is Important
    In addition to the problems discussed above, consumers have 
complained to our office about a variety of other cell phone problems, 
including that their companies did not provide them with coverage maps 
that adequately described the coverage areas, that they cannot 
understand the convoluted bills sent to them by their carriers, and 
that their carriers changed the terms of the deal without giving them 
adequate notice of the changes.
    To address some of these abuses, in 2004, the Minnesota Legislature 
enacted the ``Consumer Protections for Wireless Customers'' Act. Among 
other things, the statute required providers to give customers 60 days' 
notice before any substantive change in the contract, which would not 
become effective unless the consumer ``opted in'' to the change. The 
cell phone industry challenged the law in Federal court before it was 
set to go in effect, arguing that Federal law preempts states' ability 
to regulate the rates that companies charge and that the Minnesota law 
in effect regulated rates. The district court rejected the industry's 
arguments, but the U.S. Court of Appeals for the Eighth Circuit struck 
down Minnesota's law as being preempted by Federal law. The propensity 
of the cell phone industry to challenge legitimate state consumer 
protection regulations is another reason why Congress should act in 
this area.
    The Eighth Circuit Court of Appeals did recognize that states can 
regulate ``other terms and conditions'' of cell phone service besides 
rates, such as consumer protection, consumer fraud and contract law 
matters. I note that Senate File 2033 by its express terms does not 
preempt state laws. This is an important provision, and I strongly 
encourage the Congress not to preempt state consumer protection laws 
that are more protective of consumers.
    Fair business dealings require transparency so that consumers can 
shop for the best service at the lowest rates. Transparency requires 
that the consumer be armed with information to make an informed, 
knowing decision. That does not occur when companies fail to provide 
adequate coverage maps or fail to adequately inform the consumer that 
even minor changes to their plans will trap them in lengthy contract 
extensions that they can only exit at a steep price.
    The burden should not be on the consumer to figure out the rules of 
the cell phone shell game. There needs to be more transparency and more 
fundamental fairness in consumer cell phone transactions. The U.S. 
Congress should pass meaningful consumer protection legislation so that 
consumers are treated fairly and not subjected to a game of ``hide the 
ball'' when navigating the cell phone maze.
    I thank you again for holding these important hearings.

    Senator Klobuchar. Thank you very much.
    Mr. McAdam?

 STATEMENT OF LOWELL C. McADAM, PRESIDENT AND CHIEF EXECUTIVE 
                   OFFICER, VERIZON WIRELESS

    Mr. McAdam. Thank you, Madam Chair. With your permission, 
what I would like to do is set aside my oral testimony and just 
speak to the Committee here for a few minutes about the 
industry that I am so proud to be here representing today.
    It's been very gratifying to hear what the Senators have 
said. You clearly recognize the vibrance, the competitive 
nature, and the innovative spirit that's alive in the wireless 
industry today. I personally worked starting up wireless 
companies in Europe and in the Far East and I can tell you that 
by any measure we have the most vibrant company and industry 
around wireless of anywhere in the world.
    Now how did we get here? Well, I think we got here through 
the vision and the wisdom of the Clinton Administration in 1993 
by establishing the light touch on this industry that was 
mentioned by several of the Senators. The Administration 
recognized that the best way to take care of customers was to 
let multiple carriers compete for their business and earn it 
every day, and that's what we have created in the industry.
    Now, we've been invited here to talk about what we can do 
better. Let me say for Verizon Wireless, we are always focused 
on what we can do better. We talk to customers every day. We 
don't need interference in talking directly to customers 
because we have to compete to earn their loyalty and keep them 
as customers as we move forward.
    We've also been asked to come and comment on S. 2033. I 
don't believe that this is necessary legislation and in fact I 
think that it could be harmful to the consumer. Now let me say 
what I mean by that. First, I think a set of regulations will 
establish a minimum requirement that when a carrier diverts 
from that minimum requirement they will be questioned by 
regulators across the country. All that will do is slow down a 
very innovative and dynamic industry.
    Second, I think it will create a patchwork of regulation. 
As Senator DeMint said, our industry has evolved long ago from 
a state-by-state industry. We are a national industry. If an 
industry needs to respond on a state-by-state basis, how will 
it serve its customers that today are made up, in our case of 
60 percent of family share plans, where children are scattered 
in schools across the country? We need to be able to service on 
a national basis with a consistent set of rules.
    Finally, I think we have demonstrated the innovative 
nature, the investment we have made in this business. We have a 
lot to be proud of. But I think we have the most to be proud of 
that we have put the ultimate authority and the ultimate power 
in the customers' hands. They can take their service and leave 
and go to one of seven carriers, the one that earns their 
business the most. The carriers are focused on competing every 
day to make sure that they attract as many of those customers 
and retain them as they can.
    So my plea to the Committee is let the industry continue to 
compete.
    [The prepared statement of Mr. McAdam follows:]

 Prepared Statement of Lowell C. McAdam, President and Chief Executive 
                       Officer, Verizon Wireless
    Good morning, Chairman Inouye, Co-Chairman Stevens and Members of 
the Committee. It is a privilege to be here this morning. Thank you for 
affording me this opportunity to share with you the views of Verizon 
Wireless on ``Consumer Practices of the Wireless Industry.''
    I want to make two overall points in my testimony today:
    First, the wireless industry is one of the greatest success stories 
in the history of the American economy. We began in the mid-1980s, 
offering only car phones and then progressing to large, bulky bag and 
brick phones. Coverage was spotty, voice quality was poor, and prices 
were high. The industry mustered only a few hundred thousand customers 
during its early years.
    Look how far we've come in the short 20 years of our existence. The 
wireless industry today serves over 230 million customers. The industry 
has invested tens of billions of dollars, creating millions of well-
paying jobs and building multiple state-of-the-art networks covering 
nearly the entire population of the United States. Twenty years ago we 
offered one service--voice calling--over a small number of devices. 
Today we offer a multitude of futuristic devices and thousands of 
amazing applications, delivered at broadband speeds unimaginable even 5 
years ago.
    Wireless devices today are highly sophisticated consumer 
electronics computers, not mere telephones. Consumers now have a myriad 
of choices among cellphones, PDAs, air cards, and other devices. Yes, 
these devices can make and receive calls, but they're also digital 
cameras and camcorders, Internet access devices, computer modems, video 
and television receivers, tape recorders, and calculators. Bluetooth 
technology has unleashed even more capabilities, allowing customers to 
work more easily while on the go. New and better devices, with faster 
processors, larger memory capacity, and better battery life are 
introduced weekly.
    Today's wireless devices can receive live television broadcasts, 
send and receive e-mails and attachments, check local traffic reports, 
locate the cheapest gas station, send text and picture messages, 
download music both over-the-air and from our library of over 2 million 
songs, download videos, ring-tones, ring-back tones, and hundreds of 
additional applications developed by thousands of entrepreneurs, 
including navigation services, puzzles and games. Customers are 
gobbling up these 21st century applications at astonishing rates. Just 
last month, for example, our customers sent over ten billion text 
messages across our network. We are constantly offering new and 
innovative cellphones and applications to satisfy consumer demand for 
the latest and greatest products and services.
    Perhaps the most amazing aspect of this story is that even as the 
industry has invested tens of billions of dollars, prices have dropped 
dramatically for consumers. More than anywhere else in the world, the 
American consumer has reaped the benefits of lower wireless prices for 
better wireless services. The cost per voice minute, which was about 
one dollar twenty years ago, has dropped to 7 cents today.
    And let us not forget the key role cellphones now play in 
protecting and enhancing public safety. During the terrible hurricane 
seasons of 2004 and 2005, the wildfires in Southern California, and 
other recent emergencies customers and first responders have relied 
increasingly on commercial wireless networks to communicate with each 
other. We and other wireless companies have deployed portable cell 
sites to disaster areas, handed out devices free of charge, donated 
millions of dollars in cash and volunteer labor, and have helped those 
in need in countless other ways. We at Verizon Wireless are also very 
proud of our Hopeline program, which recycles phones and makes 
donations of equipment, cash and services to Domestic Violence 
prevention programs and shelters throughout the Nation. In addition, 
the GPS technology in our phones has also enabled us to help public 
safety officers rescue missing persons and accident victims, and to 
apprehend criminal suspects. We have received countless commendations 
from Federal, state and local law enforcement officers for these 
efforts.
    Why has this industry become such a model of success? I have a one-
word answer--Competition. Back in 1993, when the industry was still 
young, Congress had the foresight to realize that the wireless industry 
is not a monopoly, and should not be regulated like a monopoly, either 
at the state or Federal level. The 1993 legislation removed state 
regulation of wireless rates and market entry, and opened the 
floodgates to competition. New companies entered the market. The 
industry spent billions buying spectrum at auction. Billions more were 
invested in networks, infrastructure, retail stores, and customer care 
centers, creating tens of millions of new jobs and stimulating enormous 
productivity gains for our economy resulting from consumers' ability to 
work on the go, around the country and around the world. Competition 
among carriers caused prices to fall, demand to rise, consumer 
complaints to fall to lower and lower levels (only 11 out of every one 
million customers today, a rate of 0.00001 percent), and spurred still 
more innovation and investment, a highly beneficial cycle that has 
continued to this day. Indeed, just last week The Washington Post 
described our industry as ``intensively competitive.'' The FCC has 
repeatedly reached the same conclusion.
    Much has been made of the iPhone. We think the iPhone is good for 
the industry, even though one of our competitors is offering the device 
and we are not. The iPhone is far from perfect, as we all have seen. 
But it unquestionably has challenged the rest of the industry and the 
handset makers to go back to the drawing board and invent something 
even better. And now Verizon Wireless, less than 4 months after the 
iPhone hit the market, has announced that we will sell the Voyager, an 
amazing phone from LG Electronics that we think will give consumers 
something cooler, faster, and better. That's what Competition is all 
about.
    The state of America's wireless industry today is exactly what 
Congress and President Clinton hoped for when they decided in 1993 to 
treat our industry differently from traditional landline telephony. No 
one can argue that their approach has worked far better than anyone 
envisioned at the time. The enormous economic growth we've spurred and 
the incredible yet affordable technology we have delivered to consumers 
should be celebrated. So why turn the clock back now and risk all 
that's been accomplished by re-regulating the industry?
    The second point I want to make is that Congress should move 
forward to address two problems threatening the consumer benefits the 
wireless industry has generated: the threat of patchwork state utility-
style, economic regulation, and the unfair and discriminatory state and 
local tax burden that has been inflicted on wireless customers.
    State Utility-Style Regulation: The 1993 legislation recognized 
that states should not regulate wireless rates or entry, but it 
permitted states to regulate ``other terms and conditions'' of wireless 
service. As of today 30 states have chosen not to allow their public 
utility commissions to exercise this authority, in recognition that the 
competitive marketplace is working. Moreover, 12 of the remaining 20 
states have chosen not to exercise any regulatory authority over 
wireless companies, even though the laws in those states allow such 
regulation. (I would note that the wireless industry is subject to the 
jurisdiction of the state Attorneys General in all 50 states, as 
evidenced by Attorney General Swanson's recent filing of a lawsuit 
against Sprint alleging violations of Minnesota's consumer protection 
statutes.)
    The issue is not whether states should play a consumer protection 
role regarding the wireless industry. Of course they should. But they 
should exercise that role to the same extent they do for other 
competitive industries, no more and no less. And that means they should 
exercise that authority through their Attorneys General, by enforcing 
generally applicable consumer protection laws, not through the 
promulgation of wireless-specific economic regulations by their public 
utility commissions. Monopoly-style, state public utility regulation 
will not help consumers in a competitive, borderless, national industry 
like wireless. A patchwork of potentially conflicting, inconsistent 
state utility regulations would thwart the investment, innovation, and 
job creation that has brought so much benefit to wireless consumers 
since 1993.
    The vast majority of states have not seen any need to use the 
``other terms and conditions'' loophole to regulate the wireless 
industry. Those states have recognized that such authority is not 
necessary to protect their consumers. Last year, this Committee agreed 
with those states and acted to close the ``other terms and conditions'' 
loophole once and for all by a vote of 15-7. We would urge the 
Committee to do so again. Last year's bill called for one set of 
national rules for all consumers in all states rather than a patchwork 
of multiple, different and potentially inconsistent state rules. At the 
same time, the bill maintained state authority to protect consumers 
against unfair and deceptive practices in the wireless industry, just 
as states do for other competitive industries.
    Discriminatory Taxation: Wireless customers have for years been 
burdened with unfair and discriminatory state and local taxation. On 
average, almost 15 percent of a typical consumer's wireless bill goes 
to pay taxes, fees and surcharges to the Federal and state/local 
governments, shouldering more than twice the taxes assessed on all 
other general business goods and services. Between January 2003 and 
July 2005 the effective tax rate for wireless services has increased 
nine times faster than the tax rate on other taxable goods and 
services.
    The wireless industry and its consumers should pay our fair share 
to support the government but we shouldn't have to pay twice our share. 
Others at the State levels of government share our concerns--numerous 
times over the past 7 years, the National Governors Association and 
National Conference of State Legislatures have urged states to reform 
their telecommunications tax laws.
    Last year, this Committee acted to redress discriminatory wireless 
taxes by passing Senator McCain's bill by an overwhelming 21-1 margin. 
That Bill would have prevented states and localities from enacting any 
new wireless-specific taxes. I urge the Committee to take action once 
again on Senator McCain's bill, and to add a provision that would 
repeal all existing discriminatory taxes.
I. Competition Is Delivering Real Benefits to Wireless Consumers
    Competition is the greatest factor motivating businesses to please 
their customers. We strive every day in Verizon Wireless to make our 
existing customers happy, and to attract new customers from our 
competitors. Verizon Wireless has taken various actions in our 
continuing effort to offer the most customer-friendly experience in the 
industry. For example, our longstanding Worry-Free Guarantee provides 
the following significant consumer protections:

   It allows customers to change to any qualifying calling plan 
        or airtime promotion at any time;

   It promises our customers that we will do our best to 
        resolve any problems with our service or equipment the first 
        time they call;

   It guarantees customer satisfaction for any equipment 
        purchased from us;

   It allows customers to receive a free phone every 2 years 
        with our New Every Two program; and

   Just this month, we expanded the Worry Free Guarantee. Our 
        customers can now change their voice and data plans, selecting 
        different minute allowances or text messaging and data use 
        options, at any time during their contract without changing the 
        end date of their contract or signing up for a new contract 
        term.

    In addition to the Worry Free Guarantee, we have taken additional 
pro-consumer steps in recent months. Two of the most significant are 
the following:

   In March 2007, we rolled out our ``test drive'' program 
        which allows new subscribers to use our service for 30 days, 
        and if they are not satisfied, to take their line to another 
        wireless carrier during the first 30 days. We will then issue a 
        credit for all the calls the customer made, along with the 
        customer's monthly access and activation fees. Verizon Wireless 
        stands behind its claims of network reliability, even to the 
        extent of refunding charges for any dissatisfied customer's use 
        of that network during the ``test drive'' period.

   In November 2006, we replaced the flat early termination fee 
        we charged customers who cancel their service contract early, 
        with a pro-rated fee that declines every month that the 
        customer stays with us.

    Verizon Wireless is not the only wireless company to take pro-
consumer actions to gain a competitive advantage. Other companies have 
marketed programs such as rollover minutes, the ability to make 
unlimited calls to a select group of friends or family regardless of 
network affiliation, and so forth. Why do I mention these actions? 
Because they provide real-world examples of how the wireless industry 
is constantly responding to the needs of their customers. Because they 
show how providers are constantly differentiating their offerings from 
each other as a way to compete in this hyper-competitive business. And 
because they show that companies must listen to and respond to their 
customers--or lose business. This is precisely how Congress intended 
this market to work.
    In 1993, Congress had the forethought to establish a deregulatory 
framework for the wireless industry. This limited regulatory approach 
led to explosive growth in innovation, competition, and investment in 
wireless networks, providing huge benefits to the national economy. The 
1993 amendments Congress made to the Communications Act placed the 
wireless industry on a path toward innovation, expanded service, and 
competition that has well served consumers and the American economy. 
The industry has gone from serving just 11 million customers at the 
beginning of 1993 to more than 233 million Americans at the end of 
2006. An economic study conducted by Ovum, a research firm, indicates 
approximately 3.6 million U.S. jobs were directly or indirectly 
dependent on the U.S. wireless industry, and that an additional 2-3 
million jobs will be created in the next 10 years. The same study shows 
the wireless industry generated $118 billion in revenues in 2004 and 
contributed $92 billion to the U.S. gross domestic product. Ovum 
estimated that, over the next 10 years, the U.S. wireless industry will 
generate gains of more than $600 billion from the use of wireless data 
services, and will add another $450 billion to the GDP.\1\
---------------------------------------------------------------------------
    \1\ Entner, Roger and David Lewin, ``The Impact of the U.S. 
Wireless Telecom Industry on the U.S. Economy,'' Ovum-Indepen, 
September 2005, p. 3.
---------------------------------------------------------------------------
    Wireless companies compete against each other every day to win 
new--and each other's--customers. Wireless customers have benefited 
enormously from this competition. The FCC recently reported that 97 
percent of the U.S. population live in counties with at least three 
service providers, up from 88 percent in 2000,\2\ and an average of 
nearly four carriers provide service in rural U.S. counties.\3\ To 
secure and retain customers, carriers know they must invest in 
networks. Thus by the end of 2006, carriers had invested more than $223 
billion--excluding the cost of spectrum--in building networks to 
deliver an increasing array of wireless services to consumers.\4\
---------------------------------------------------------------------------
    \2\ FCC, ``Annual Report and Analysis of Competitive Market 
Conditions with Respect to Commercial Mobile Service: Eleventh 
Report,''  2, FCC 06-142 (Sept. 29, 2006).
    \3\ Id.,  86.
    \4\ CTIA's Wireless Industry Indices, Semi-Annual Data Survey 
Results: A Comprehensive Report from CTIA Analyzing the U.S. Wireless 
Industry, Year-End 2006 Results, released May 2007, at pages 7, 156.
---------------------------------------------------------------------------
    Let me spend a few moments discussing two key attributes of the 
competitive wireless market--innovation and differentiation.
    Innovation is obvious not only in the hundreds of new devices, 
features and applications that consumers can obtain every year, but 
also in the deployment of new technologies that allow them to send and 
receive data at faster speeds. Verizon Wireless, for example, has 
invested billions of dollars to make not one but two major network 
upgrades in the past 3 years. First, the company spent $1 billion to 
implement EV-DO Revision 0, which offered customers download speeds 
typically at 400-700 kilobits per second. This was in addition to 
significant network investment, which has averaged over $5 billion each 
year since 2000. Just as the investment in Rev 0 was finished, we again 
began upgrading our network to EV-DO Revision A, which further 
increases download speeds and also provides our customers the ability 
to upload files eight to nine times faster than before. With ``Rev A'' 
broadband service, customers can expect average download speeds of 600 
kilobits to 1.4 megabits per second and average upload speeds of 500-
800 kilobits per second. Our network allows downloads at these speeds 
while consumers are in a cab, on a train, or walking down the street, 
completely free of a desk.
    And our competitors are innovating as well, announcing services 
such as Wi-Fi and Wi-Max, and introducing a broad array of new and 
different devices.
    Differentiation is also a hallmark of the industry. Consumers are 
constantly benefiting from carriers' drive to differentiate themselves 
and to win customers. What a carrier chooses to offer depends on its 
assessment of what its own customers want and what it sees as the best 
path to growth. Some companies may focus on low prices but invest less 
in high-speed services. Some may focus on ``all you can eat'' local 
service in competition with landline telephone service as opposed to 
nationwide service. Some may focus on customers who don't want or need 
a month-to-month contract and instead want to prepay for service. Each 
company is making these choices every day as it focuses on how to win 
and retain its customers.
    In addition to our constant focus on network quality and 
reliability, Verizon Wireless has sought to differentiate ourselves 
through our strong consumer and privacy protection actions. For 
example:

   In 2003, Verizon Wireless was the first national carrier to 
        support Local Number Portability, allowing wireless customers 
        to switch carriers while keeping their phone number.

   In 2004, we announced that we would help protect customer 
        privacy by refusing to participate in a national wireless phone 
        directory, effectively halting this project.

   In 2005, in a first of its kind lawsuit, we began 
        prosecuting pretexters who were trying to illegally obtain and 
        sell confidential customer telephone records.

   Beginning in 2005, we have obtained injunctions against 
        spammers who sent text message solicitations to our customers. 
        We have sued several telemarketing companies and individuals 
        who used pre-recorded messages in Spanish as well as techniques 
        and technology to mask the origin of the call, known as 
        ``spoofing.''

    In part due to these efforts, consumer complaints to Federal and 
state regulators are few. During each month in 2006, the rate for 
complaints from our customers to the FCC, state PUCs, or state 
Attorneys General was 11 out of every 1 million customers--a rate of 
0.00001 percent.
    Many other wireless providers have also taken similar pro-consumer 
actions, including adhering to CTIA's Consumer Code, which sets forth 
detailed practices that carriers must follow in marketing their 
services and in billing customers.
    As these examples illustrate, the marketplace, not government 
intervention, has addressed concerns about the wireless industry 
listening to its consumers and providing benefits and features that 
consumers want.



    Despite wireless companies' constant efforts to win and retain 
customers by meeting their needs, some states are renewing efforts to 
turn back the clock and regulate wireless service as a public utility. 
State utility-style regulation is both unnecessary and harmful--
unnecessary because the competitive market is already driving the 
prices, value and services consumers want; harmful because it 
discourages innovation and competition. Regulation can never respond to 
customers' demands in the flexible, constantly evolving way that the 
market does. In fact, it undercuts incentives to innovate and 
differentiate by establishing a ``lowest common denominator'' of 
required practices.
    State-by-state wireless regulation is particularly harmful. Because 
it imposes fixed rules, but only on the carriers in one state, it 
forces those carriers to follow the same practices as they compete in 
that state, harming innovation and customer choice. But because state 
regulation is limited to one state, it imposes costs on carriers who 
seek to offer customers a unified experience wherever their customers 
live, work or travel. The FCC has repeatedly documented the many 
benefits that customers enjoy from the growth of national services and 
rate plans. But these services and plans succeed because companies are 
able to offer them consistently to all their customers, wherever they 
are. Left unchecked, these re-regulatory efforts will force wireless 
providers to follow different rules in different states and undo the 
benefits of deregulation.
    The wireless industry long ago shed any vestige of monopoly, on 
which PUC-imposed regulation was based. We are an intensely 
competitive, 21st century consumer electronics business, far more like 
Apple and Dell and other high-tech businesses than we are like the 
telephone companies of 20 years ago. Yet state PUCs do not regulate 
companies like Apple and Dell. So why should they regulate us, as if we 
were a 20th century wireline telephone monopoly? We are not asking for 
special treatment, only the same treatment accorded other competitive 
businesses. States can and do act against high-tech companies, 
retailers and other firms when they believe those businesses engage in 
unfair consumer practices, without the need for utility-type 
regulation. Wireless should be no different.
II. Congress Should Close the ``Other Terms and Conditions'' Loophole 
        and Eliminate State Utility-Style Economic Regulation of the 
        Competitive Wireless Industry
    Verizon Wireless believes that state public utility regulation is 
not appropriate or needed for the wireless industry. We also believe 
that the FCC's policy--first adopted during the Clinton 
Administration--of treating the wireless industry with a ``light 
regulatory touch'' is the appropriate model. The market is working and 
evolving in ways that no inherently rigid and static regulations can. 
We thus have serious concerns with S. 2033, which was introduced last 
month. The Bill contains highly prescriptive, detailed regulations that 
would deeply intrude into carriers' operating practices and interfere 
with carriers' ability to innovate and differentiate, essentially 
placing the FCC and state utility commissions in an operational role 
inside every wireless company. Moreover, the Bill would do nothing to 
control the potential for a patchwork of conflicting and inconsistent 
state regulation that could be imposed on top of the detailed Federal 
rules; indeed, section 12 of the Bill makes clear that states can 
impose additional regulations. But even if section 12 were eliminated, 
section 11(b)(1)(B) would still allow state public utility commissions 
to engage in their own independent interpretations of the Federal 
rules, raising the specter of 52 different interpretations of the same 
set of rules (50 State Commissions, the District of Columbia 
Commission, and the FCC). This sort of model cannot possibly be viewed 
as beneficial to consumers in a competitive marketplace.
    The Committee should reject S. 2033, and instead complete the 
national, deregulatory structure for the wireless industry it began in 
1993, by closing the ``other terms and conditions'' loophole and 
adopting a national framework for wireless oversight. This is exactly 
what this Committee did in June 2006 in the legislation it adopted by a 
15-7, bipartisan vote. Section 1006 of the Senate substitute for H.R. 
5252 set forth a national framework of consumer protection, while not 
discouraging the innovation and carrier differentiation that have been 
the hallmarks of wireless service. That framework would allow for the 
adoption of a set of comprehensive, national consumer protection 
standards for the industry that would be sufficiently flexible not to 
frustrate carriers' pro-competitive efforts to offer different 
products, services, contract terms and calling plans. State PUCs would 
no longer have authority to impose utility-style regulation on a 
competitive industry that is nothing like a utility. But the states 
would retain all of their power through their Attorneys General to 
protect against unfair and deceptive consumer practices if and when 
they determine such practices exist, under their generally applicable 
consumer protection statutes. Wireless companies would thus be subject 
to no less state oversight than other competitive businesses.
    Only a national framework could serve the public interest because:

   It benefits all consumers in all states by setting uniform 
        protection and service quality standards for wireless 
        consumers. Individual state-by-state regulation cannot do that.

   It avoids disparate state requirements that raise 
        operational costs and cause uncertainties for companies; create 
        confusion and inconvenience for consumers; delay new services 
        or options that consumers would otherwise enjoy; and discourage 
        investment in new wireless jobs and technology.

    The states would not lose power to address unfair and deceptive 
practices. Under the national framework, states would continue to 
enforce their consumer protection statutes of general applicability, 
but would not be able impose state-specific wireless regulations. State 
Attorneys General would thereby lose none of their authority to go 
after practices that they believe are unfair or deceptive. Our previous 
CEO made this point in a letter last year to Senator Lautenberg, which 
is attached to my testimony. States may also adopt consumer education 
programs, refer complaints to carriers for resolution, bring formal 
complaints to the FCC against carriers they believe are acting 
unlawfully, investigate wireless practices, and of course participate 
in the FCC's national consumer protection rulemaking. This new 
framework will maximize protections to consumers while avoiding the 
harms of patchwork state-by-state regulation.
    The national framework would not grant any wireless carrier 
something different from other businesses. Instead, it would harmonize 
regulation. And, it would otherwise rely on market forces--consumers 
deciding which providers deserve their business and which do not--to 
compel providers to excel more effectively than patchwork state PUC 
regulation, and to drive providers to be more innovative and 
accountable.
Conclusion
    We are at a crucial juncture in the development of the Nation's 
wireless industry. Over the past decade and a half, wireless consumers 
have come to expect--and rely on--their wireless phones, first as a 
safety device, then as a convenience, and increasingly an integral part 
of more than 230 million Americans' daily lives. It may seem like 
magic, but the work of thousands of dedicated men and women every day 
helps build, maintain and expand robust and secure wireless networks--
and provide the customer service enabling two hundred and thirty 
million consumers to use our products and services every day. The 
innovation we see every day, from new products to new and more robust 
services to consumer friendly initiatives such as the Worry Free 
Guarantee, has brought more benefits to the American consumer than any 
government mandate could deliver. Verizon Wireless urges the Committee 
to avoid the temptation to impose burdensome regulation on a 
competitive, innovative and robust industry. We call upon the Committee 
to vote once again to free our customers from the unfair burden of 
discriminatory state and local taxation. All we ask for ourselves, Mr. 
Chairman, is to LET US COMPETE.
    Thank you for the opportunity to appear before you today and I look 
forward to answering any questions you may have.
                                 ______
                                 
                                           Verizon Wireless
                                   Basking Ridge, NJ, June 27, 2006
Hon. Frank R. Lautenberg,
U.S. Senate,
Hart Senate Office Building,
Washington, DC.
Re: Wireless Telecommunications Legislation

Dear Senator Lautenberg:

    I am writing to follow up on our telephone conversation this 
morning concerning the wireless provisions (section 1005) in the 
Commerce Committee's telecom bill.
    Verizon Wireless, one of New Jersey's largest employers, strongly 
supports section 1005, and we ask for your support. You expressed 
concerns about the Bill's impact on protecting New Jersey consumers. As 
you know, the Bill specifically preserves the role of the states in 
protecting consumers, by guaranteeing States the power to continue 
enforcing against wireless carriers the same consumer protection laws 
that are ``generally applicable to businesses in the state.'' Attorney 
General Farber will have exactly the same powers under the Bill as she 
does today to enforce New Jersey's consumer protection laws against 
wireless carriers.
    The only change the Bill makes is to protect consumers from 
backward-looking, monopoly style economic regulation. State utility 
regulators want to treat the wireless business as if it were a 
monopoly, controlling the font size in our advertising, the prices we 
charge, the services we offer, and the investments we make. The 
prospect of fifty different sets of such rules would harm consumers by 
driving costs up and investment down. But wireless companies are not 
monopolies, and they should not be regulated as such. As you know, the 
wireless business is a fiercely competitive, nationwide industry. 
Wireless companies fight each other every day to win each other's 
customers. And wireless customers have benefited enormously from this 
competition. Wireless prices have fallen over eighty percent in the 
last 10 years. Employment and capital investment in New Jersey has 
skyrocketed. Innovation has delivered amazing new products and services 
to New Jersey consumers.
    Verizon Wireless has competed successfully and become the leader in 
the wireless industry by focusing on consumer issues. We were the first 
carrier to support local number portability. We were the first carrier 
to announce we would not list our customers' numbers in a wireless 
telephone directory. We were the first carrier to fight spam and 
pretexting. We didn't need utility regulators to tell us to do these 
things. We did them to beat the competition, win new customers and keep 
our current customers happy. And tomorrow we'll do more of the same--in 
a major speech at the Yankee Group Conference in New York City, I will 
announce that Verizon Wireless will become the first carrier to pro-
rate early termination fees nationwide, because that is something our 
customers want.
    Senator, I ask for your support for this important legislation. We 
are at a crucial juncture in the development of the Nation's wireless 
industry. The choice is stark and simple: do we want state utility 
regulators to stunt the progress of the wireless industry with 20th 
century style economic regulation, or do we want to see this 21st 
century engine of economic growth generate more jobs, more investment, 
more innovation, and lower prices for New Jersey's wireless consumers, 
all the while under the watchful eye of the New Jersey Attorney 
General?
    We hope you opt for the latter.
            Very truly yours,
                                          Dennis F. Strigl,
                             President and Chief Executive Officer,
                                                      Verizon Wireless.

    Senator Klobuchar. Thank you.
    Mr. Pearlman?

        STATEMENT OF PATRICK PEARLMAN, DEPUTY CONSUMER 
         ADVOCATE, CONSUMER ADVOCATE DIVISION, PUBLIC 
           SERVICE COMMISSION, STATE OF WEST VIRGINIA

    Mr. Pearlman. Thank you, Madam Chair and Members of the 
Committee. Thank you for inviting me to testify today regarding 
wireless consumer protection as well as the Cell Phone 
Empowerment Act. My name again is Patrick Pearlman. I'm a 
Deputy Consumer Advocate with the Consumer Advocate Division of 
the West Virginia Public Service Commission, and my office's 
charge is to represent the interests of residential and small 
business consumers of utility services, and those include 
telephone service, which obviously also includes landline and 
wireless issues. Our office has taken a very active interest in 
matters relating to wireless consumer protection as well as 
matters regarding line items, truth in billing, early 
termination fees, and, as a member of the National Association 
of State Utility Consumer Advocates, or NASUCA, as we like to 
call it, my office has participated in Federal proceedings 
before the FCC as well as in Federal court dealing exactly with 
those issues.
    I'm here to basically provide both my office's perspective 
on this legislation, the Cell Phone Empowerment Act, as well as 
appear on behalf of NASUCA and render at least some opinions of 
the organization as a whole, and also answer the Committee's 
questions.
    At the outset, we'd like to commend Senator Klobuchar, 
Senator Dorgan, and Senator Rockefeller for sponsoring this 
legislation. I think it's fair to say that our experience is 
that consumers would say it's about time. For years consumers 
have been subject to a number of practices, all of which are 
identified in the proposed legislation, that have left 
consumers feeling like they're on the losing side of an unequal 
battle against the cell phone companies.
    We're excited about the proposed legislation and we look 
forward to working with the Committee and the Committee's staff 
in the future to address specific provisions of the bill, as 
well as specific examples of problematic practices within the 
industry.
    In the brief time that I have for an opening statement, I'd 
like to go ahead and address the most important points for the 
Senators to consider in addressing wireless practices, both in 
this bill and apparently in other bills that have been 
introduced recently. First, it's our belief that the wireless 
industry, as everyone has pointed out in this room, has grown 
to a very, very large industry indeed, with over 233 million 
customers. Since 1993 when there were approximately 11,000 cell 
sites, we now have over 195,000 cell sites. The industry makes 
over $100 billion in revenues a year.
    One aspect that has not been addressed in our opening 
statements is the fact that wireless is indeed holding itself 
out as a substitute for landline service. We do have consumers 
who are cutting the cord. The exact percentage of those 
consumers is somewhat open to debate. But I think the best 
evidence that the wireless industry considers itself a 
substitute for landline is the number of wireless companies 
that have applied to states and to the FCC for designation as 
eligible telecommunication carriers. Such designation, as the 
Committee knows, entitles those carriers to receive Federal 
support from the Federal Universal Service Fund. In most 
States, conditions are associated with that status that are 
akin to the sorts of conditions that are imposed on incumbent 
landline carriers.
    Second, the market alone historically has not been a 
sufficient constraint on unreasonable wireless practices. That 
is the same experience that we have seen on the landline side 
as well. Examples of such market failures are instances where 
regulation was required to be implemented in order to deal with 
slamming complaints, with cramming complaints, the number of 
unauthorized charges appearing on landline customers' bills. 
Truth in billing issues had to be finally addressed by 
regulation, as did wireless number portability. The list goes 
on. There is also E-911.
    These services, these issues, were not addressed by the 
market alone and in fact regulation was necessary in order to 
step in and constrain some of those practices.
    Third, the FCC and Federal law has not been adequate in 
acting as a restraint on abusive carrier practices. We point 
out the fact that, in the Truth- in-Billing context, in the 8 
years since the rules went into effect, there has been one FCC 
enforcement action dealing with Truth-in-Billing.
    Fourth, we support the principle of national standards to 
serve as a floor so long as those are vigorously enforced, but 
we believe that it would be a serious mistake to preempt State 
law and enforcement of other terms and conditions altogether.
    Thank you.
    [The prepared statement of Mr. Pearlman follows:]

   Prepared Statement of Patrick Pearlman, Deputy Consumer Advocate, 
 Consumer Advocate Division, Public Service Commission, State of West 
                                Virginia
    My name is Patrick Pearlman. I am a Deputy Consumer Advocate with 
West Virginia Consumer Advocate Division. My office is charged with the 
responsibility of representing West Virginia's residential and small 
business utility ratepayers in state and Federal proceedings that may 
affect such consumers' rates for electricity, gas, telephone and water 
service. My office is also a member of the National Association of 
State Utility Consumer Advocates (NASUCA), an organization of state 
utility consumer advocate offices from more than 40 states and the 
District of Columbia, charged with representing utility consumers 
before state and Federal utility commissions and before state and 
Federal courts.\1\ I have been a Deputy Consumer Advocate since May 
2003 and have represented NASUCA in proceedings before the Federal 
Communications Commission (``FCC'') and in Federal courts involving 
both wireless and landline carriers' billing practices, as well as 
proceedings involving wireless carriers' early termination fees 
(``ETFs'') and related contractual issues. I have previously addressed 
the FCC's Consumer Advisory Committee and the National Association of 
Regulatory Utility Commissioners (``NARUC'') regarding such matters. I 
greatly appreciate the opportunity to testify at this hearing regarding 
issues that affect wireless consumers and S. 2033, the Cell Phone 
Empowerment Act.
I. Introduction
    For nearly twenty years, commercial mobile radio service (``CMRS'') 
providers' (i.e., wireless carriers) billing and contractual practices 
have been largely unregulated. This ``hands off'' approach may have 
made sense back in the day when a nascent wireless industry was 
struggling to establish itself as an alternative form of 
telecommunications service, subscribed to by a small minority of 
Americans, and needed protection from the monopoly-based regulatory 
regimes that applied to traditional landline service. That approach--
specifically with respect to the wireless industry--no longer makes 
sense in today's telecommunications market. And that approach makes no 
sense where, as here, market forces have failed to protect wireless 
consumers against various practices that, in other markets, would 
historically have been characterized as ``unconscionable'' or in 
violation of fundamental principles of contract law.
II. Background
    Prior to 1993, land mobile radio services (as wireless was then 
called) were subject to two inconsistent regulatory schemes depending 
on whether the services were ``public'' or ``private.'' Providers of 
``public mobile services'' were treated as common carriers, subject to 
regulation by both the FCC and States. ``Private land mobile 
services,'' in contrast, were exempt from common carrier regulation 
altogether.\2\
    In 1993, Congress altered this framework by amending Section 332(c) 
of the Federal Communications Act (``Act'').\3\ Among other things, 
Congress: (1) eliminated the disparate regulatory treatment of 
``private'' and ``public'' mobile services by introducing the concept 
of ``commercial mobile radio service;'' (2) amended Section 
332(c)(3)(A) of the Act to prohibit State and local governments from 
regulating ``the entry of or the rates charged by any commercial mobile 
service or any private mobile service,'' but expressly preserved 
States' authority to regulate ``other terms and conditions'' of CMRS; 
(3) authorized States to petition the FCC for authority to regulate 
CMRS rates where the service is a replacement for landline service and 
the market fails to protect consumers from unjust and unreasonable 
rates; and (4) authorized the FCC to forbear from applying most 
provisions in Title II of the Act to CMRS and CMRS providers, which the 
FCC promptly did in 1994.\4\ Congress made clear, however, that the 
amendments were intended to give the nascent wireless industry time and 
space to grow, by eliminating the disparate regulatory treatment of 
``private mobile'' and ``public mobile'' wireless services, while 
providing consumers with needed consumer protections.\5\
    Yet in the wake of Congress' 1993 amendments, and the FCC's orders 
implementing those amendments, many States ceased utility regulation 
over wireless carriers' ``other terms and conditions'' of service. In 
other States, some commissions adopted exemptions or greatly relaxed 
standards for, among other things, wireless billing and other business 
practices. Despite these actions, however, generally applicable State 
consumer protection laws and laws regulating the formation and 
enforcement of contracts continued to apply to wireless carriers. Since 
1993, such laws have become a significant source of State efforts to 
restrain unfair billing and other, unreasonable non-rate practices of 
wireless carriers. As a result, the wireless industry has enjoyed huge 
Federal financial support based on technology-neutral rules governing 
universal service, while at the same time enjoying relative freedom 
from regulation based solely on their particular (wireless) technology.
III. Wireless Industry's Efforts To Preempt State Law
    Even the minimal oversight States retain under the Act has been too 
much for the wireless industry. Over the past two decades, the wireless 
industry has vigorously sought to avoid virtually any State regulation 
of carriers' contractual, billing and related business practices on the 
theory that such laws are preempted ``rate'' regulation. Wireless 
carriers have sought to invalidate State laws governing:

   Late payment penalties/fees.\6\

   Municipal right-of-way and other assessments.\7\

   State universal service fund assessments.\8\

   Unilateral contractual provisions (e.g., pre-printed 
        contract terms limiting the carrier's liability, allowing 
        carriers to change material terms without notice, requiring 
        arbitration).\9\

   Deceptive advertising of rates and charges.\10\

   Early termination fees.\11\

   Regulatory fees and assessments.\12\

    While wireless carriers have often failed to convince State and 
Federal courts that virtually any State law regulating their billing, 
contractual and related practices is preempted, the industry has been 
more successful selling this argument to the FCC. For example, 
purportedly in reaction to NASUCA's March 2004 petition for declaratory 
ruling that various ``regulatory'' line item charges imposed by 
wireless and landline carriers violated the FCC's Truth-in-Billing and 
other orders, the FCC in a 2005 order declared all State laws requiring 
or prohibiting line items included on wireless carriers' monthly bills 
to be preempted ``rate'' regulation.\13\ I say ``purportedly'' because 
neither NASUCA's petition, nor the FCC's public notice regarding that 
petition, ever suggested preemption was an issue. In fact, the FCC's 
2005 order candidly acknowledged that preemption arose in wireless 
carriers' reply comments or ex parte presentations after comment 
closed.\14\ Moreover, in that same order the FCC initiated a rulemaking 
and sought comment regarding its proposal to adopt more stringent 
Truth-in-Billing regulations in response to evidence of significant 
consumer complaints and confusion regarding carriers' bills, but then, 
paradoxically, sought comment regarding its tentative conclusion to 
preempt all State non-rate regulation of carrier billing practices.\15\ 
The FCC has not yet adopted final rules or adopted its tentative 
conclusions regarding such preemption.
    Nor has the FCC ruled on two petitions, filed by the wireless 
industry's trade association and a wireless carrier, seeking a 
declaratory ruling that early termination fees (``ETFs'') are ``rates'' 
that States cannot regulate. However, press reports suggest Chairman 
Martin is leaning toward preemption.\16\
IV. Continued State Regulation of Wireless Practices Is Needed
    Consumer advocates are concerned that the wireless industry will 
use S. 2033 to achieve ends counter to the bill's goals, much like the 
wireless industry used NASUCA's petition to tighten up the FCC's Truth-
in-Billing rules as an opportunity to further its effort to preempt 
State laws. We hope that will not be the direction in which the Senate 
moves because State consumer protection laws need to continue to apply 
to the wireless industry.
A. Wireless Carriers' Unreasonable, Anti-Consumer Practices
    About the only thing that keeps pace with the rapid changes and 
developments in wireless services and technologies is the ingenuity and 
creativity of wireless carriers in adopting a variety anti-consumer 
billing, contractual and related practices, including but not limited 
to those discussed below.
1. Line Item Charges
    Wireless carriers continue to include a variety of line item 
charges and fees on consumers' monthly bills that primarily recover 
ordinary costs of doing business, such as complying with government 
laws and regulations. While some carriers pass along their cost of 
complying with State and Federal laws in their rates, others have 
adopted numerous line item charges in addition to their rates for 
service, often denominated in such a way as to suggest that the charge 
is imposed by the government rather than the carrier, and which are 
typically not advertised and disclosed, if at all, in the very fine 
print of the carrier's service agreement or other materials. Such line 
item charges are nothing more than hidden rate increases. In this era 
of mergers and consolidations, wireless carriers have often simply 
continued the line item charges of the carriers they have acquired. For 
example, AT&T Mobility (formerly Cingular) charges either pre-merger 
Cingular's ``Regulatory Cost Recovery Charge of up to $1.25'' \17\ or 
pre-merger AT&T Wireless' Regulatory Programs Charge of $1.75. 
Potential customers have no way of knowing which charge applies, and in 
areas served by both carriers pre-merger, either charge could apply. 
Nor are customers likely to find out what costs each charge recovers, 
since both purportedly serve the same ends despite originating with 
different carriers and different networks.\18\
    Likewise, Sprint Nextel continues imposing line item charges 
adopted by the pre-merger carriers, Sprint and Nextel. Customers will 
find it difficult to determine what those charges will be since Sprint 
Nextel's ``Terms and Conditions of Service'' simply advise customers 
that their ``[r]ates exclude taxes and Sprint Fees, such as a USF 
charge, cost recovery fees, and state/local fees that vary by area.'' 
\19\ Much further into Sprint's Nextel's contract, the carrier 
describes surcharges (``Sprint Fees'') that may apply to customers as 
``including, but not limited to: Universal Service Fund, E-911, Federal 
Programs Cost Recovery, Federal Wireless Number Pooling and 
Portability, and gross receipts charges.'' \20\ Customer bills, 
however, do not provide any itemization of these surcharges but rather 
simply provide a single line for ``Taxes, Surcharges and Fees.''
2. Descriptions of Service Coverage
    Consumers continue to have difficulty determining whether and where 
they will have wireless service. It is generally understood that ``dead 
spots'' exist where a wireless signal may be lost, such as when a high 
hill or mountain blocks a driver's signal and indeed, the FCC's rules 
do not consider this a lack of service. However, it has been my 
experience in West Virginia that some ``dead spots'' are very large and 
never appear on the coverage maps provided by carriers in their 
marketing or sales materials. Another deficiency in coverage maps 
provided by carriers is the general lack of any information showing 
county boundaries, which is the sort of information that allows 
consumers to gain an accurate understanding of where they are likely to 
have service. We know that carriers have very detailed signal coverage 
maps but refuse to share them with customers, some going so far as to 
claim that the areas they actually serve constitutes competitively 
sensitive information. This is but one practice that deprives consumers 
of vital information they need to make an informed, intelligent choice 
among wireless carriers--and to avoid the costs that flow from choosing 
a carrier who cannot provide adequate service at the price advertised.
    More troubling, however, are those instances in which a wireless 
carrier targets its marketing efforts at consumers who are located in 
areas that the carrier does not, and cannot, serve. Such efforts led 
the California Public Utilities Commission (``CPUC'') to fine Cingular 
$12.14 million, and to require the carrier to issue at least $18.5 
million in refunds for ETFs collected from former customers who 
terminated their service from January 2000 through April 2002.\21\ 
Similarly, wireless carriers' exaggerated representations regarding 
coverage led the Attorneys General of 33 states to investigate the 
three largest wireless carriers (at that time)--Cingular, Sprint and 
Verizon Wireless--and to ultimately enter into settlement agreements 
(called ``Assurance of Voluntary Compliance'') in 2004 that required 
the carriers to provide more accurate maps, disclaimers and to pay 
$1.66 million each to the States. In NASUCA's opinion, the AVC 
provisions regarding representations concerning service area would be a 
good model for either Congress or the FCC to build upon in addressing 
this issue.
3. Early Termination Fees
    Another issue that has generated considerable heat, if not light, 
is the widespread use of ETFs by wireless carriers in conjunction with 
one- or two-year service contracts. The wireless industry asserts that 
ETFs are necessary in order to reduce, or subsidize, customers' costs 
of wireless products (i.e., handsets) and services (rate plans) and to 
ensure that the carriers fully recover customer-acquisition costs, and 
claims consumers ``prefer'' long-term contracts coupled with ETFs in 
order to obtain lower cost service and equipment.\22\ Such evidence as 
there is strongly contradicts these assertions.
    For one thing, evidence supporting the wireless industry's claims 
about the extent to which equipment or customer acquisition costs are 
subsidized by ETFs is sorely lacking. No independent authority has ever 
reviewed the cost of equipment in order to verify, let alone quantify, 
the wireless industry's claims. For its part, the FCC has not 
considered the issue since its 1992 determination that ``subsidizing 
wireless phones'' via ETFs, coupled with fixed term contracts ``is an 
efficient promotional device which reduces barriers to new customers.'' 
\23\ That determination itself was not based on a thorough review of 
such costs. NASUCA called upon the FCC to revisit the issue in its 
comments in response to CTIA's petition for a declaratory ruling 
preempting State regulation of ETFs,\24\ and recently adopted a 
resolution repeating that call.\25\ To-date, the FCC has not responded.
    In any event, the manner in which wireless carriers apply ETFs 
appears to undercut their assertions regarding the degree to which ETFs 
subsidize equipment and other costs. Most ETFs range from $150 to $200 
per line/handset and, except for Verizon Wireless, no major wireless 
carrier prorates the ETF over the life of the contract or any other 
period.\26\ Thus, a customer with a two-year contract who cancels 
service in the twenty-third month of the contract pays the same ETF as 
a customer with a similar contract who cancels service in the first 
month. Nor do the ETFs vary by wireless rate plan or by equipment 
purchased by the customer. If ETFs truly served to lower equipment 
prices and reduce customer acquisition costs rather than penalize 
customers for terminating service, one would expect ETFs to be prorated 
or to vary according to the equipment purchased or rate plan selected. 
The fact that they do not strongly suggests something other than the 
discounting of service is at play and, again, the evidence appears to 
bear this out.
    In fact, ETFs are decidedly anticompetitive since they appear to be 
primarily aimed at tying customers to their carriers and reducing 
customer ``churn.'' An August 2005 report issued by the Massachusetts 
Public Interest Research Group (``MASSPIRG'') estimated that ETFs cost 
consumers $4.6 billion from 2002 through 2004 in penalties paid or 
foregone opportunities to obtain lower-cost services.\27\ Moreover, a 
survey conducted on behalf of MASSPIRG found that, of the 775 wireless 
customers surveyed, 36 percent responded that ETFs had prevented them 
from switching carriers, while 47 percent indicated that they would 
``switch cell phone companies as soon as possible'' or ``consider 
switching cell phone companies'' if ETFs were eliminated.\28\ Only 10 
percent of wireless customers surveyed responded that they had 
terminated service early at least once in the preceding 3 years (or 
roughly 3 percent per year) and had chosen to pay the ETF in order to 
switch, typically for either lower rates or better service.\29\
    Finally, even if equipment prices are lowered by ETFs and long 
service contracts, such measures reduce potential competition because 
such restraints on customer choice are coupled with carriers' and 
manufacturers' practice of physically locking handsets to the carrier's 
service. Thus, in addition to any ETF liability a customer is willing 
to incur in order to obtain cheaper or better service, the customer is 
forced to also incur the cost of a new handset as well as service 
activation or number porting charges. Such practices are a dead-weight 
waste of resources and a brake on more vibrant competition.
4. Independent Sales Agents' ETFs
    Another problem with ETFs, and the justification for them, is the 
fact that independent sales agents for wireless service and equipment 
also charge ETFs, oftentimes much higher than those charged by wireless 
carriers. This problem was highlighted in the Utility Consumer Action 
Network's (``UCAN'') comments to the FCC in response to the wireless 
industry's petition to preempt State regulation of ETFs. According to 
UCAN--and as found by the CPUC in the proceeding that led to the $12.14 
million fine assessed against Cingular--independent sales agents in 
California tacked on additional ETFs of up to $550 per handset, in 
addition to Cingular's ETF.\30\ Since sales agents do not provide 
either the service or the equipment, there is no reasonable 
justification for such ETFs; the fees simply ensure the agents will be 
paid--either their commission if the customer remains with the carrier 
for the allotted time, or their ETFs if the customer terminates service 
before the allotted time has lapsed. Independent sales agents' ETFs 
also benefit the wireless carrier, by providing a strong disincentive 
to terminating service early.\31\ Significantly, independent sales 
agents are not subject to regulation by the FCC, though State consumer 
protection laws might apply--if they are not preempted.
5. Contracts of Adhesion
    Under most wireless contracts, all the benefits flow in one 
direction (i.e., to the carrier), and for residential and small 
business customers there is no real prospect of negotiating over these 
terms. Such contracts are adhesionary, especially when one considers 
that virtually all wireless carriers make use of such terms and 
conditions.
a. Unilateral modification of material terms
    Most contracts allow carriers to unilaterally modify the material 
terms of service, with little or no notice. For example, AT&T 
Mobility's contract provides that the carrier ``may change any terms, 
conditions, rates, fees, expenses, or charges regarding your service at 
any time,'' merely by providing notice to the customer. However, 
``changes to governmental fees, proportional charges for governmental 
mandates, roaming rates or administrative charges'' require no notice 
whatsoever.\32\ Customers can only terminate their contracts, without 
incurring ETFs, only for changes that ``increase the price of any 
services . . . beyond the limits set forth in [the customer's] rate 
plan brochure'' or that ``materially decrease the geographical area in 
which your airtime rate applies.'' \33\
    Similarly, Sprint Nextel's contract provides that it ``may change 
any part of the Agreement at any time, including, but not limited to, 
rates, charges, how we calculate charges, or your terms of Service,'' 
commits to provide notice of ``material changes'' but only ``may'' 
provide notice of ``non-material changes.'' \34\ What constitutes a 
``material change that has a material adverse effect'' on the customer, 
however, is solely within Sprint Nextel's discretion. Indeed, the 
inherently arbitrary power Sprint Nextel has in deciding what changes 
are ``material and adverse'' was highlighted twice in the past year 
when the carrier increased its text messaging charges. When it first 
increased its text messaging charge (from $0.10 to $0.15/message) in 
October 2006, Sprint Nextel declared the change to be ``material'' and 
allowed customers to terminate service without incurring an ETF.\35\ 
Yet when Sprint Nextel increased the same charge (from $0.15 to $0.20/
message) again just 10 months later, it declared the increase to be 
``non-material'' and that customers who terminated service in response 
would be subject to its $200 ETF.\36\ Verizon Wireless' contract 
likewise permits the carrier to make any changes it deems non-
material.\37\
b. Limits on legal remedies
    Wireless carriers make extensive terms limiting customers' legal 
remedies for any cause of action, again to the carriers' benefit. For 
example, AT&T Mobility's contract requires customers to submit any 
dispute (``whether based on contract, tort, statute, fraud, 
misrepresentation or any other legal theory'' and regardless of whether 
the dispute predates the contract) to binding arbitration. Further, by 
signing up for service with AT&T Mobility, customers ``waive their 
right to a trial by jury or to participate in a class action'' and the 
carrier's liability is limited to $5,000 or the maximum amount allowed 
in small claims court.\38\ Sprint Nextel likewise requires customers to 
agree to settle any disputes by binding arbitration, to waive their 
right to trial or arbitration by jury, or to participate in a class 
action suit.\39\ Verizon Wireless' contract similarly requires 
customers to submit all claims to binding arbitration.\40\
6. Other Practices
    Another wireless carrier practice merits consideration. In July 
2006, after its acquisition of AT&T Wireless, Cingular began notifying 
roughly 4.7 million former AT&T customers using older, TDMA technology 
that, effective October 1, 2006, Cingular would begin charging $5/month 
for each handset.\41\ Customers could avoid the surcharge by upgrading 
their service to Cingular's digital Global System for Mobile (``GSM'') 
service. The surcharge came on the heels of a class action lawsuit, 
filed in Washington, alleging Cingular violated its merger commitment 
to maintain service to former AT&T customers by degrading their service 
to force them to move to Cingular's GSM service. According to that 
complaint, many of the 20 million former AT&T Wireless customers 
acquired by Cingular ended up paying $18 fees to switch service and 
were required to buy new phones and pay other fees to initiate 
service.\42\ It appears Cingular did not consider the additional 
surcharge to be a service modification entitling customers to terminate 
service without incurring ETFs. At roughly the same time, Cingular 
began terminating customers who roamed (i.e., made wireless calls 
carried on another carrier's network) for more than 50 percent of their 
monthly usage. The kicker here is that the coverage area for GSM 
service is typically smaller than that for analog or TDMA service, 
meaning that those former AT&T Wireless customers forced over to 
Cingular's GSM service could end up either no longer having service (in 
which case they were probably locked in by Cingular's ETF) or roaming 
more often (subjecting them to possible termination by Cingular, after 
spending the money to upgrade to GSM service).
B. The FCC's Response Has Been Neither Timely Nor Adequate
    The FCC has not responded to complaints involving wireless 
carriers' billing and other practices, despite having ample authority 
to investigate and address unreasonable carrier practices under the 
Act. It is not as though the FCC is unaware of consumer dissatisfaction 
or complaints regarding the wireless industry's more egregious 
practices. According to the FCC's quarterly reports summarizing 
consumer complaints and inquiries received by its Consumer and 
Government Affairs Bureau, complaints regarding wireless carriers' 
billing and rates, early termination fees, marketing and advertising 
practices (including alleged misrepresentations) have consistently been 
in the top five categories of complaints received regarding wireless 
service since the first quarter of 2002.\43\
    Despite the relatively high proportion of complaints involving 
wireless billing and rates (including line item fees and charges), ETFs 
and marketing practices, the FCC has not undertaken a single 
enforcement action against any wireless carrier involving such 
complaints. This is not surprising, given the similar lack of FCC 
enforcement against landline carriers for violations of its Truth-in-
Billing rules. The lack of FCC action was cited by none other than 
Commissioner Michael J. Copps in his dissent criticizing the agency's 
2005 decision to preempt state laws affecting wireless line items:

        The majority says that with the states preempted, the 
        Commission will not hesitate to enforce its truth-in-billing 
        requirements. But to date all the Commission has done is 
        hesitate. In the 6 years since adoption of our truth-in-billing 
        requirements, I cannot find a single Notice of Apparent 
        Liability concerning the kind of misleading billing we are 
        talking about today--the only ones I find involve slamming. Yet 
        in the last year alone, the Commission received over 29,000 
        non-slamming consumer complaints about phone bills.\44\

    Since Commissioner Copps wrote that dissent, the FCC has 
dramatically increased its enforcement tally--from 0 to 1.\45\
    The wireless industry often cites the relatively low rate of 
complaints, as a percentage of total customers, received by the FCC as 
an indicator that there is no problem with its billing or other 
practices. However, this is more likely due to consumers' understanding 
that lodging a complaint with the FCC is largely a fruitless exercise. 
For one thing, customer satisfaction surveys typically show that the 
wireless industry generally experiences high rates of customer 
dissatisfaction, yet customers switch carriers ``surprisingly 
infrequently.'' \46\ Moreover, States' experience suggests that 
consumers often do not register complaints unless they know regulators 
are investigating wireless carriers' activities and the number of 
complaints lodged with State regulators is vastly outweighed by the 
number of complaints lodged with the carriers themselves. For example, 
while only a few thousand consumers lodged complaints with the CPUC 
regarding the fraudulent service claims and marketing efforts that led 
to the $12 million fine against Cingular, the record showed that nearly 
144,000 ``trouble tickets'' regarding such claims were opened by the 
carrier during the same period.\47\
    Similarly, a March 2007 report submitted by the Connecticut utility 
commission to the State's legislature noted that its toll-free wireless 
complaint hotline registered over 19,000 calls in 2006 alone (more than 
the total number of informal wireless complaints received by the FCC 
during the same time period). However, the report lamented the fact 
that only 507 callers registered their complaint--most callers aborting 
the process when they learned the agency had little ability to resolve 
their complaints.\48\ Wireless carriers, naturally, disagreed with the 
State agency's request for authority to enforce wireless consumer 
rights and service quality, and instead suggested that the competitive 
market, combined with state and Federal consumer laws and FCC 
regulations (the same state laws wireless carriers have been trying to 
preempt), protects consumers sufficiently.
    Consumers are not stupid. They are unlikely to bother agencies to 
register complaints that they know the agencies cannot, or will not, 
take meaningful action to address. NASUCA's members understand this 
practical limitation on consumer complaint statistics very well. It is 
also something a FCC Commissioner understands as well:

        [NASUCA's] petition was the ideal vehicle for the Commission to 
        initiate a fresh dialogue on how to make bills more honest, 
        readable and easy to understand. . . . Yet we forge ahead [by 
        preempting State laws], bypassing the opportunity NASUCA gave 
        us to rein in incomprehensible bills. I'm afraid consumers will 
        remember that when they called this Commission for help 
        understanding their phone bills, we hung up.\49\
V. Preemption Is Unnecessary and Will Harm Consumers
    No doubt Congress will be told by the wireless industry that it 
must have preemption in order to flourish, that the cost of complying 
with 50 States' laws increases the cost of wireless service, and that 
that it cannot innovate or offer customers lower rates or better 
quality services without eliminating State laws that apply to it. 
Congress has heard this story before, and it is just that--a story.
    When Congress amended the Act in 1993, wireless service was 
primarily a novelty, subscribed to by relatively few Americans (16 
million customers) and with a limited footprint (11,550 cell 
sites).\50\ Conditions have changed radically since then. According to 
the wireless industry's trade association's semi-annual survey, there 
were over 233 million wireless subscribers in the United States at the 
end of 2006, and 195,613 cell sites.\51\ The wireless industry has 
experienced spectacular growth, posting double-digit growth in 
subscribership, revenues and usage virtually every year since 1993, all 
despite the application of the State laws wireless carriers are likely 
to claim must be preempted were in effect.\52\ Moreover, while the 
wireless industry has experienced tremendous growth since 1993, it has 
also become increasingly concentrated. According to the FCC's most 
recent data, as of the end of 2005, the top four wireless carriers 
(AT&T Mobility, Verizon Wireless, Sprint Nextel and T-Mobile) held 86 
percent of the wireless market. If the fifth largest carrier, Alltel, 
is included then the top five carriers held over 92 percent of the 
market.\53\ Two of these carriers--AT&T Mobility and Verizon Wireless--
are subsidiaries of the two largest landline carriers nationally as 
well. In other words, State laws that constrain wireless carriers' 
billing or other business practices are unlikely to jeopardize such 
large carriers' ability to provide service in the United States, or 
their relative profitability.
    Finally, wireless service has become, more and more, a true 
substitute for landline service. While estimates vary, there is no 
doubt that a substantial number of traditional landline customers--
especially those who are younger or with lower incomes--have ``cut the 
cord,'' terminating their landline service and relying purely on 
wireless to serve their telecommunications needs. Moreover, wireless 
carriers themselves increasingly regard themselves in the same role as 
traditional landline carriers. Wireless carriers have sought--and 
obtained--designation as ``eligible telecommunications carriers'' 
(``ETCs'') under Section 214 of the Act, thereby entitling them to 
subsidies from the Federal Universal Service Fund (``USF''), allowing 
them to collect over $1 billion in USF subsidies. In fact, over 99 
percent of the growth in Federal USF subsidies is associated with 
subsidies to wireless carriers who have been designated as competitive 
ETCs.
    The wireless industry is no longer a nascent industry that needs 
``kid glove'' treatment in order to succeed, and wireless service has 
become, for all intents and purposes, a substitute for traditional 
landline service. Nor is the wireless industry's oft-cited evil of 
``Balkanized'' regulation a legitimate basis for preempting long-
standing State laws involving consumer protection, unfair trade 
practices, taxation, or other exercises of their historic police power. 
Many national industries are similarly subject to dual state and 
Federal regulation. For example, automobile manufacturers, oil and gas 
producers and refiners, and other manufacturers must comply with both 
State and Federal environmental and workplace safety laws. Similarly, 
insurers and lending institutions are heavily regulated through 
disclosure laws, agent licensing, bond requirements and other state-
specific requirements. Even so-called ``borderless'' industries like 
telemarketers and mail order houses must comply with State and Federal 
regulations on the time, place and manner of their contacts with 
consumers.
    Traditional landline carriers have long been subject to State laws 
of general applicability and regulation as utilities, at least with 
respect to their intrastate services. As wireless carriers become more 
and more a substitute for traditional landline service, and hold 
themselves out to consumers and regulators as such, the argument for 
broad State preemption makes less and less sense. In fact, the 
preemption the wireless industry seeks violates notions of competitive 
neutrality and may very well upset the balance between wireless and 
landline service as they become increasingly competitive with one 
another.
    The preemption the wireless industry seeks makes no sense from a 
public policy perspective either. For one thing, States have often 
taken the lead in protecting consumers or establishing fair business 
practices along with the Federal Government following suit and 
establishing laws governing interstate service based on models 
previously established by States--usually years later. This has proven 
to be the case time and again in telecommunications regulation. For 
example, Congress amended Section 258 of the Act to address 
``slamming'' and ``cramming'' practices by carriers in 1996, long after 
States enacted laws or adopted regulations prohibiting such 
unreasonable carrier practices. Likewise, States were years ahead of 
the FCC and Federal Trade Commission in establishing ``Do-Not-Call'' 
registries to combat harassing telemarketing calls plaguing consumers. 
Similarly, States led the way in addressing carriers' misuse of 
customer proprietary network information, years before similar 
protections were enacted by Congress and implemented by the FCC. With 
all due respect, State legislators and regulators are far more 
accessible to their citizens, can more readily understand and address 
relevant local considerations (e.g., geography and topography), and 
tend to respond more quickly to their citizens' needs, than the Federal 
Government.
    The idea that a Federal regulator in Washington, D.C. can be the 
same advocate for a consumer in Wailuku, Hawaii; Brainerd, Minnesota; 
Eagle River, Alaska; or Mabie, West Virginia, or any of the myriad 
communities that State regulators call home is simply not credible. 
Even when Federal regulators want to help, studies show that consumers 
in locales far-removed from Washington, D.C. typically contact local 
regulators and officials with their complaints and are far less likely 
to turn to Federal regulators for help.\54\
    Not preempting State laws governing wireless carriers' non-rate 
practices makes sense from an economic standpoint as well. Having State 
regulators and courts protect consumers from unreasonable business 
practices by wireless carriers or other utilities does not cost the 
Federal Government a penny--and that strikes NASUCA as a pretty good 
deal for the Federal Government. If Congress preempts State laws in 
conjunction with enacting the sort of consumer protections envisioned 
in S. 2033, such action will require the allocation and expenditure of 
substantial resources (money, time, personnel) to implement a purely 
Federal response to the sort of wireless consumer issues that States 
can provide themselves--if consumer protection is to be anything more 
than a hollow promise.
    Finally, preempting State laws in favor of a single, one-size-fits-
all Federal program overlooks the valuable role ordinary citizens play 
as private attorneys general in bringing to government's attention, 
through actions seeking legal and equitable relief in State courts, 
business practices that are unreasonable, deceptive, misleading or 
fraudulent. If Federal legislation deprives consumers of this role 
altogether, or forces them to seek redress only in Federal courts that 
are more expensive and more intimidating to consumers than state courts 
because they are more removed from the local community and citizens' 
experience, then this valuable tool of government is lost.
    As Justice O'Connor noted, the Republic's Founders fully 
appreciated these realities:

        This Federalist structure of joint sovereigns preserves to the 
        people numerous advantages. It assures a decentralized 
        government that will be more sensitive to the diverse needs of 
        a heterogenous society; it increases opportunity for citizen 
        involvement in democratic processes; it allows for more 
        innovation and experimentation in government; and it makes 
        government more responsive by putting the States in competition 
        for a mobile citizenry.\55\

    Preempting State laws as industry is likely to urge is analogous to 
combating rising crime by taking the local cop off the beat and makes 
about as much sense.
VI. Conclusion
    NASUCA certainly supports the goals and objectives embodied in S. 
2033. The bill represents a good first step toward reining in a host of 
anti-consumer, anti-competitive practices that have been allowed to 
flourish in the wireless industry, and makes it clear that State laws 
that are more protective of consumers are not preempted. NASUCA hopes 
the goals and objectives of S. 2033 will not be subverted by arguments 
that preempting State laws is the price that must be paid to give 
consumers greater protection from such practices.
Endnotes
    \1\ In most respects, my testimony reflects positions taken by 
NASUCA, although there are some areas where NASUCA has not yet reached 
a consensus position.
    \2\ See Pub. L. 97-259, 96 Stat. 1087, 1096,  120(a) (1982).
    \3\ See Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, 
107 Stat. 312,  6002(b)(2)(A) (1993).
    \4\ See In re Implementation of Sections 3(n) and 332 of the 
Communications Act, Regulatory Treatment of Mobile Services, Second 
Report and Order, 9 F.C.C.R. 1411, 1418, 1478,  14 & 174 (1994); see 
also 47 C.F.R.  20.15(a) & (c).
    \5\ H.R. Rep. No. 103-111, 103d Cong., 1st Sess. (1993) reprinted 
in 1993 U.S.C.C.A.N. 378, 587 (emphasis added).
    \6\ See Brown v. Washington/Baltimore Cellular, Inc., 109 F.Supp.2d 
421 (D. Md. 2000).
    \7\ See AT&T Communications of the Pac. NW v. City of Eugene, 35 
P.3d 1029, 1048-51 (Ore. Ct. App. 2001).
    \8\ See In re Pittencrieff Communications, Memorandum, Opinion and 
Order, 13 F.C.C.R. 1735, 1742-43  16-17 (1997), aff'd sub nom. CTIA 
v. FCC, 168 F.3d. 1332 (D.C. Cir. 1999); see also Mountain Solutions, 
Inc. v. State of Kansas, 966 F.Supp. 1043, 1048 (D. Kan. 1997), aff'd 
sub nom. Sprint Spectrum v. State of Kansas, 140 F.3d 1058 (10th Cir. 
1998); Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th 
Cir. 1999).
    \9\ See, e.g., Moriconi v. AT&T Wireless PCS, 280 F.Supp.2d 867, 
873-78 (E.D. Ark. 2003).
    \10\ See State ex rel. Nixon v. Nextel West Corp., 248 F.Supp.2d 
885, 890-93 (E.D. Mo. 2003); Fedor v. Cingular Wireless, 355 F.3d 1069 
(7th Cir. 2004); see also In re Wireless Consumers Alliance Petition 
for Declaratory Ruling, Memorandum, Opinion and Order, 15 F.C.C.R. 
17021 (2000).
    \11\ See Esquivel v. Southwestern Bell Mobile Systems, Inc., 920 F. 
Supp. 713 (S.D. Texas 1996); Iowa v. U.S. Cellular Corp., 2000 U.S. 
Dist. LEXIS 21656 at * 4-6 (S.D. Iowa 2000); Cedar Rapids Cellular 
Telephone, L.P. v. Miller, 2000 U.S. Dist. LEXIS 22624 (N.D. Iowa 
2000); Phillips v. AT&T Wireless, 2004 U.S. Dist. LEXIS 14544 (S.D. 
Iowa 2004).
    \12\ See In re Wireless Telephone Federal Cost Recovery Fees 
Litigation, 343 F.Supp.2d 838 (W.D. Mo. 2004); NASUCA v. FCC, 457 F.3d 
1238 (11th Cir. 2006), pet. for cert. pending sub nom. Sprint Nextel v. 
NASUCA, No. 06-1184 (U.S., filed Feb. 27, 2007).
    \13\ In re Truth-in-Billing and Billing Format: NASUCA Petition for 
Declaratory Ruling, 2nd Report & Order, Declaratory Ruling, and 2nd 
Further Notice of Proposed Rulemaking, 20 F.C.C.R. 6448, 6462  30 
(2005).
    \14\ At least two FCC commissioners filed strong dissents to the 
preemption determination, pointing out the lack of notice that 
preemption was afoot, as well as the harm the order did to the 
successful Federal-state cooperation in consumer protection efforts. 
See 20 F.C.C.R. at 6500-04 (dissenting comments of Commissioners 
Michael J. Copps and Jonathan S. Adelstein). The FCC's order was 
vacated on appeal by the Eleventh Circuit, though a petition for review 
by the U.S. Supreme Court is still pending. See NASUCA v. FCC, n. 12, 
supra.
    \15\ See 20 F.C.C.R. at 6473-74,  49-51.
    \16\ See, e.g., TechLawJournal, ``Martin Discusses FCC 
Activities,'' TLJ News from Jan. 16-20, 2007 (Jan. 17, 2007), available 
at http://www.techlawjournal.com/home/newsbriefs/2007/01d.asp; 
Telecommunications Reports--TR State Newswire, ``Martin Hopeful That 
Talks on ETFs Produce Agreement'' (March 28, 2007), available at 
www.tr.com/insight2/content/2007/in032807/In032807-02.htm.
    \17\ The ``up to'' language is misleading itself since, in NASUCA's 
experience, this charge is never less than $1.25.
    \18\ AT&T Mobility claims the charges ``help defray costs incurred 
to comply with State and Federal telecommunications regulations, such 
as E-911 deployment, State and Federal Universal Service, and other 
government mandates on AT&T Mobility.'' See http://
www.wireless.att.com/learn/articles-resources/wireless-terms.jsp. State 
and Federal universal service costs are not the costs of the Federal 
universal service program; those costs are recovered through separate, 
specifically authorized surcharges. Moreover, whether a charge imposed 
on customers nationwide should recover State-specific universal service 
costs is also open to question.
    \19\ See http://www.wireless.att.com/learn/articles-resources/
wireless-terms.jsp.
    \20\ Id. The Federal Programs Cost Recovery Fee was Nextel's $1.75 
line item charge. Sprint imposed a line item charge for number 
portability, E-911 and number pooling that originally was $1.10/month 
but was later, after NASUCA filed its Truth-in-Billing petition with 
the FCC, reduced to $0.40 and then $0.25/month, in June and November 
2004, respectively. See http://www.washingtonpost.com/wp-dyn/articles/
A52986-2004Nov15.html.
    \21\ See Jeff Silva, ``AT&T settles CPUC claims, agrees to pay 
$30M,'' RCR Wireless News (March 16, 2007).
    \22\ See ``Early Termination Fees--CTIA Position,'' http://
ctia.org/industry_topics/topic.cfm/TID/41/CTID/12 (accessed Feb. 5, 
2007); see also In re CTIA Petition for Declaratory Ruling, WT Docket 
No. 05-194, Petition of CTIA, Executive Summary 1 & pp. 1-2 (March 15, 
2005).
    \23\ See In re Bundling of Cellular Customer Premises Equipment and 
Cellular Service, Report and Order, 7 F.C.C.R. 4028-30 (1992).
    \24\ See In re CTIA Petition for Declaratory Ruling, WT Docket No. 
05-194, NASUCA Comments, pp. 32-33 (Aug. 5, 2005); available at http://
fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?
native_or_pdf=pdf&id_document=6518135277.
    \25\ NASUCA Resolution 2007-03, ``Calling for FCC Reexamination of 
Wireless Carriers' Early Termination Fees'' (June 12, 2007); available 
at http://www.nasuca.org/res/#tele.
    \26\ According to their websites, the major wireless carriers' 
impose the following ETFs: AT&T Mobility ($175); Verizon Wireless 
($175, with ETFs prorated for service initiated after Nov. 16, 2006); 
Sprint Nextel ($150 for service initiated before May 21, 2006 and $200 
for service initiated thereafter); Alltel ($200); T-Mobile ($200).
    \27\ See Edmund Mierzwinski, ``Locked in a Cell: How Cell Phone 
Early Termination Fees Hurt Consumers,'' MASSPIRG Education Fund, pp. 
20-21 (Aug. 2005); http://www.uspirg.org/uploads/6K/L1/
6KL1e4XLElQZgyFz7hpKKQ/lockedinacell05.pdf.
    \28\ Id. at 13-16, 24-27.
    \29\ Id. at 14, 24-25.
    \30\ See In re CTIA Petition for Declaratory Ruling, WT Docket No. 
05-194, UCAN Comments, pp. 15-19 (Aug. 4, 2005); available at: http://
fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?native_
or_pdf=pdf&id_document=6518129555.
    \31\ Id. at 15.
    \32\ See AT&T Mobility Wireless Service Agreement, Changes to Terms 
and Rates; http://www.wireless.att.com/learn/articles-resources/
wireless-terms.jsp (accessed October 12, 2007).
    \33\ Id.
    \34\ Sprint Nextel Terms and Conditions, ``Our Right To Change The 
Agreement & Your Related Rights;'' http://nextelonline.nextel.com/
NASApp/onlinestore/en/Action/DisplayPlans?filter
String=Individual_Plans_Filter&id12=UHP_PlansTab_Link_IndividualPlans. 
Sprint Nextel's contract further provides that customers may terminate 
service, without liability for the carrier's $200 ETF, only if ``a 
change . . . is material and has a material adverse effect on you,'' 
and only if the customer calls Sprint Nextel within 30 days of the 
change's effective date (regardless of when the bill is received) and 
``specifically advise[s] that you wish to cancel Services because of a 
material change to the Agreement that we have made.'' Most customers 
are not lawyers and are unlikely to jump through all the hoops 
necessary to effectively terminate service without incurring the ETF, 
even where such action would be allowed under the contract.
    \35\ Kelly Hill, ``Sprint ups text messages to 15 cents,'' RCR 
Wireless News (Oct. 16, 2006).
    \36\ Kelly Hill, ``Sprint Nextel hikes text fee again, ETF remains 
in effect,'' RCR Wireless News (Aug. 21, 2007).
    \37\ Verizon Wireless, Customer Agreement, ``Our Rights to Make 
Changes''; http://www.verizonwireless.com/b2c/
globalText?textName=CUSTOMER_AGREEMENT&jspName=
footer/customerAgreement.jsp (accessed Oct. 12, 2007).
    \38\ AT&T Mobility, Wireless Service Agreement, ``Arbitration 
Agreement,'' n. 33, supra.
    \39\ Sprint Nextel, Terms and Conditions, ``Instead Of Suing In 
Court, We Each Agree To Arbitrate Disputes;'' ``No Class Actions;'' 
``No Trial By Jury.''
    \40\ Verizon Wireless, Customer Agreement, ``Dispute Resolution and 
Mandatory Arbitration.''
    \41\ Bruce Meyerson, ``Cingular to impose $5 surcharge on customers 
with older phones,'' USA Today (July 31, 2006); http://
www.usatoday.com/tech/news/2006-07-31-cingular-surcharge
_x.htm.
    \42\ ``Cingular Adds Surcharge For Old Phones,'' CBS News (Aug. 1, 
2006); http://www.cbsnews.com/stories/2006/08/01/business/
main1854442.shtml.
    \43\ The FCC's quarterly reports on informal complaints and 
inquiries, going back to 2002, are published on the agency's website at 
http://www.fcc.gov/cgb/quarter/welcome.html. The FCC's reports provide 
only aggregate totals and do not identify carrier-specific information, 
nor do the FCC's report provide any information regarding the 
resolution of informal complaints submitted to it.
    \44\ 20 F.C.C.R. at 6499.
    \45\ See In re TalkAmerica, Inc., Order, 21 F.C.C.R. 15148 (2006). 
Ironically, TalkAmerica's misleading surcharges were brought to the 
FCC's attention in NASUCA's petition for declaratory ruling, which the 
FCC denied in conjunction with its preemption decision.
    \46\ Vivian Witkind Davis, ``Consumer Utility Benchmark Survey: 
Consumer Satisfaction and Effective Choice for Cellular Customers,'' 
National Regulatory Research Institute, NRRI 03-15, pp. iii and 1 (Nov. 
2003); see also, e.g., Christopher A. Baker and Kellie K. Kim-Sung, 
``Understanding Consumer Concerns About the Quality of Wireless 
Telephone Service,'' AARP Public Policy Institute Data Digest No. 89, 
p. 4 (July 2003); ``Attorney General Cox Announces 2004 Top 10 Consumer 
Protection Issues,'' U.S. State News (Feb. 3, 2005) (telecommunications 
category which includes cell phones was 2nd from the top); Rick 
Barrett, ``Cell phones ring up more complaints: Airlines, hospitals 
also at bottom of survey,'' Milwaukee Journal Sentinel (June 13, 2005) 
(Am. Soc. For Quality in Milwaukee survey); Kimberly Morrison, ``Group 
lists top 10 consumer grips,'' Detroit Free Press (Feb. 12, 2005) 
(National Assoc. of Consumer Agency Administrators survey found 
complaints about cell phone contracts and solicitations are rising 
quickly).
    \47\ Investigation to Determine Whether Cingular Has Violated the 
Laws, Rules and Regulations of this State in Its Sale of Cellular 
Telephone Equipment and Service and its Collection of an Early 
Termination Fee and Other Penalties From Consumers, 2004 Cal. PUC LEXIS 
453, slip op. at 53-65, 69 (2004).
    \48\ DPUC Implementation of Public Act 05-241, Docket No. 05-08-11, 
Decision, pp. 4-5 (March 7, 2007); available at http://
www.dpuc.state.ct.us/dockhist.nsf/f5c4efacb773316a8525664e0049
ea32/9b49d442637ad4b3852572d700510499?OpenDocument&Highlight=0,05-241.
    \49\ 20 F.C.C.R. at 2499.
    \50\ See CTIA Semi-Annual Wireless Industry Survey; http://
files.ctia.org/pdf/CTIA_Survey
_Year_End_2006_Graphics.pdf.
    \51\ Id.
    \52\ The FCC order preempting state laws affecting wireless line 
items, and the Eleventh Circuit's subsequent vacatur of that order, not 
surprisingly, did not have any impact on the wireless industry's 
growth. From March 2005, when the FCC's preemption order was released, 
until July 2006, when it was vacated, wireless subscribership grew 12.8 
percent (adding 25 million subscribers) and revenues grew 9 percent ($5 
million). Since the Eleventh Circuit's decision in July 2006, wireless 
subscribership grew at an annualized rate of 11.9 percent (13 million 
subscribers over 6 months), while revenues grew at an annualized rate 
of 8.3 percent ($5 million over 6 months).
    \53\ See 11th Annual CMRS Report, FCC Wireless Telecommunications 
Bureau, Table 4, p. 102 (Sept. 29, 2006). In calculating the carriers' 
share of the market, NASUCA included the number of subscribers served 
by separately listed carriers acquired by Sprint Nextel and Alltel 
(Nextel Partners, Alamosa PCS, and Ubiquitel for Sprint Nextel; Midwest 
Wireless for Alltel). NASUCA did not include in its calculation 
subscribers associated with iPCS, which is a Sprint affiliate. Id. at 
103, Notes.
    \54\ A nationwide survey of wireless customers indicated that only 
4 percent of survey respondents indicated that they would contact the 
FCC with service complaints. Baker & Kim-Sun, 
``Understanding Consumer Concerns About the Quality of Wireless 
Telephone Service'' AARP Public Policy Institute (June 2003); available 
at http://research.aarp.org/consume/dd89
_wireless.html.
    \55\ Gregory v. Ashcroft, 501 U.S. 452, 458 (1991) (citations 
omitted).

    Senator Klobuchar. Thank you very much, Mr. Pearlman.
    Mr. Murray?

           STATEMENT OF CHRIS MURRAY, SENIOR COUNSEL,

 CONSUMERS UNION, ON BEHALF OF CONSUMER FEDERATION OF AMERICA, 
                         AND FREE PRESS

    Mr. Murray. Good morning, Senators. Thank you for the 
opportunity to testify again before this Committee.
    I've got good news and bad news today. The good news is 
that the pressure that policymakers are exerting in this 
marketplace actually appears to be working. While I'm sure that 
AT&T's announcement yesterday was completely disconnected from 
the timing of this hearing this morning, that is an 
announcement that I'm excited to hear. I'm glad to hear that 
two of the four carriers in this marketplace are now prorating 
early termination fees.
    But there is some bad news in this marketplace as well. 
Consumers just aren't as happy as they ought to be. The 
magazine that we publish, Consumer Reports, does a survey of a 
basket of about 20 industries every year and what we see, 
unfortunately, is that the wireless industry is ranking near 
the bottom of that list rather than near the top. We see online 
electronics retailers up there. These are in our mind, this is 
what a vigorously competitive marketplace looks like, where 
you've got dozens and dozens of people competing.
    We've heard a lot of numbers this morning about prices per 
minute of use going down. I like to look at the overall cost 
that consumers are paying in this industry. We see from the 
Organization of Economic Cooperation and Development in their 
2007 report on the wireless marketplace, they said that U.S. 
subscribers are paying on average about $506 per year, 
significantly more than their counterparts in the OECD, who are 
paying an average of about $439 per year, and almost double 
what their counterparts are paying in very cell phone-forward 
countries like Sweden and Germany, where they're paying in the 
$200 and $300 range per year.
    So yes, U.S. consumers may be getting a lot of value for 
what they're paying, but they're still paying more than 
consumers around the world.
    This morning I want to just raise four quick pocketbook 
issues, and I'll summarize my remarks since you've got my full 
statement for the record. The first concern I want to raise is 
early termination fees. We see consumers paying about $175 for 
the privilege of voting with their feet, even when they're not 
getting a subsidy on a particular phone. This is the head-
scratcher for me. The justification that we were getting from 
the cell phone industry was that it's subsidy, subsidy, 
subsidy, that's why we're charging these early termination 
fees. Yet we see the iPhone, which does not give one thin dime 
of subsidy to consumers, yet consumers still get locked into 
that 2-year deal with a $175 early termination fee. I just 
don't understand that.
    I think it's great that companies are prorating these fees, 
but if they're prorating an already unreasonable fee in the 
first place it still raises concerns.
    The second pocketbook issue I want to raise is the practice 
of handset locking, or forcing consumers to throw mobile phones 
in the trash when they switch carriers or only activating 
affiliated phones with the network. We see in the U.S. about 90 
to 95 percent of the cell phones that are sold are sold through 
the carriers themselves. In the rest of the world it's the 
converse. In some Asian markets we see about 80 percent of 
phones are sold through an independent market. We also see 
there's a lot more innovation, there's a lot more phones coming 
to market, and the choices seem to be better for consumers. I 
just don't see at all why Asian and European consumers should 
have better choices than U.S. consumers.
    The third question I've got is of great concern, which is 
the practice of application blocking. We see companies like 
BlackBerry who want to offer a mapping service, for instance, 
to consumers for free. They want to just give it away on their 
phones so that people will buy their phones. But AT&T has said, 
``You know, I've got my own mapping program; I want to charge 
consumers ten dollars a month for that mapping program, so 
Blackberry, I want you to turn your mapping program off on your 
phones.'' Perfectly good electronics that aren't working as 
they were designed to work.
    The other issue that I want to raise is the free speech 
issue that Senator Dorgan flagged earlier. We saw this flap a 
few weeks ago between Verizon and NARAL over the blocking of 
text messages, political text messages. In the rest of the 
world, SMS, or text messaging, has become probably the most 
important political organizing tool of the last 5 years. People 
are keeping elections straight in Nigeria. We see people 
organizing social protests in other countries. In the U.S., if 
you made a phone call it would be protected. There's no way 
that a network operator could interfere. I don't see any reason 
why data should have any less protection. Consumers expect 
their phone calls to work without interference from the network 
operator. They should have the same expectation of their cell 
phones.
    So I'm here this morning to challenge the cell phone 
industry to begin to stop throwing switching costs at 
consumers. If they're saying that, look, we're so competitive 
that we don't need any oversight, they can't also say, well, 
here's a $200 switching cost, here's--for an early termination 
fee--here's a $400 switching cost for a new phone. These are 
just throwing gravel in the gears of competition, and 
competition isn't working because of these switching costs.
    So I thank you for your time today and I'll answer any 
questions that you may have.
    [The prepared statement of Mr. Murray follows:]

Prepared Statement of Chris Murray, Senior Counsel, Consumers Union, on 
        Behalf of Consumer Federation of America, and Free Press
    Chairman Inouye, Vice Chairman Stevens, and esteemed Members of the 
Committee, thank you for the opportunity to testify again before you on 
behalf of Consumers Union (CU) \1\ (non-profit publisher of Consumer 
Reports), Free Press, and the Consumer Federation of America.
---------------------------------------------------------------------------
    \1\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about goods, 
services, health, and personal finance. Consumers Union's income is 
solely derived from the sale of Consumer Reports, its other 
publications and from noncommercial contributions, grants and fees. In 
addition to reports on Consumers Union's own product testing, Consumer 
Reports (with approximately 4.5 million paid circulation) regularly 
carries articles on health, product safety, marketplace economics and 
legislative, judicial and regulatory actions that affect consumer 
welfare. Consumers Union's publications carry no advertising and 
receive no commercial support.
---------------------------------------------------------------------------
    Consumers are not as satisfied as they should be with the wireless 
industry as a whole. In an annual consumer satisfaction survey \2\ of 
20 industries conducted by our magazine, Consumer Reports, we see that 
``cell-phone service'' ranks near the bottom of the list (18 of 20), 
with only ``computer makers' tech support'' and ``digital cable TV 
service'' receiving lower marks.
---------------------------------------------------------------------------
    \2\ Consumer Reports, ``Upfront: News, Trends, Advice,'' p. 8 
(October 2007).
---------------------------------------------------------------------------
    According to the OECD,\3\ U.S. subscribers also pay more per month 
than wireless subscribers in other countries.\4\ The average U.S. 
subscriber pays $506/year, well above the OECD average of $439/year, 
and significantly above countries such as Sweden ($246) and Germany 
($317).
---------------------------------------------------------------------------
    \3\ Organization for Economic Co-operation and Development, ``OECD 
Communications Outlook 2007.''
    \4\ The industry is quick to note that on a per minute of use 
basis, U.S. consumers are better off, because U.S. wireless subscribers 
use 800 minutes/month on average, and their European counterparts, only 
200 minutes/month. But if this is a high fixed-cost industry as the 
companies have claimed elsewhere, metrics based on minutes of use 
should matter less and aggregate numbers matter more.
---------------------------------------------------------------------------
    Consumers Union endorses the legislation proposed by Senator 
Rockefeller and Senator Klobuchar, the Cell Phone Consumer Empowerment 
Act of 2007. We think that the aim of this bill is on target--to 
provide consumers more fairness in the marketplace and to provide them 
with better information about the cell phone service they are buying. 
Markets work best with good information, and this bill aims to get real 
information into consumers' hands while also prohibiting some of the 
more egregious practices of the wireless industry. Disclosure alone is 
rarely sufficient to protect consumers, particularly if carriers engage 
in the same practices--consumers can't vote with their feet when they 
have no alternatives.
    Today I would like to raise three pocketbook concerns with the 
wireless industry:

        1. Early Termination Fees that companies are charging consumers 
        (especially when subscribers are not receiving any subsidy for 
        new phones);

        2. The pernicious practice of handset locking, causing 
        consumers to throw perfectly good phones in the trash if they 
        want to switch carriers (or causing them to pay extra for 
        phones ``affiliated'' with the network); and

        3. The tight control wireless companies are exercising over 
        applications development (such as mapping applications, 
        ringtones, etc.), which causes consumers to pay higher prices 
        for services and stops innovation from reaching the market.

    But looking beyond these consumer cost issues, I also want to 
highlight some very serious free speech issues raised by an incident a 
few weeks ago between Verizon and NARAL, where political messages were 
prevented from reaching subscribers by actions of the network operator. 
Outside the U.S., text messaging (also called SMS, for ``Short Message 
Service'') has been called the most important technological development 
for political advocacy in the last 5 years,\5\ with activists using 
text messaging to monitor elections (e.g., Nigeria), and encourage 
political change (Phillipines and Ukraine). We have even seen 
allegations of governments blocking text messages (Belarus, Cambodia 
and Albania) to thwart political protest or ensure activists did not 
have ``improper'' influence over elections.
---------------------------------------------------------------------------
    \5\ Ethan Zuckerman, ``Mobile Phones and Social Activism: Why cell 
phones may be the most important technical innovation of the decade,'' 
white paper available at Mobile
Active.org: http://mobileactive.org/mobile-phones-and-social-activism-
ethan-zuckerman-white-paper (May 9, 2007).
---------------------------------------------------------------------------
    Surely blocking political messages would not be tolerated from the 
U.S. government--but do we have any enforceable protections against a 
wireless network operator? If this were a phone call being blocked, the 
non-discrimination provisions of the Communications Act would prevent 
this practice \6\--why should we abandon this policy for data?
---------------------------------------------------------------------------
    \6\ Either blocking data is a violation of the communications act, 
or it is not. The idea that this issue can live in some sort of 
regulatory limbo forever is folly. The industry would have us believe 
that we do not require enforceable non-discrimination because of a 
vague notion that ``consumers will never stand for blocking.'' Perhaps 
what they mean is that as long as it is a story for The Wall Street 
Journal, New York Times, or Washington Post, then there is some form on 
discipline on this kind of conduct. However, at a certain point if 
blocking data is not declared to be a violation of the Communications 
Act, it ceases to be remarkable and therefore ceases to be a story. But 
if it would be a clear violation of the Act for a company to block a 
phone call on political grounds, there is no reason it should be 
acceptable for that company to block our political messages or any 
other legal data.
---------------------------------------------------------------------------
    While I am glad that Verizon changed its policy rapidly to ensure 
no further blocking would occur, why did this require a policy shift in 
the first place? Is the new policy permanent, or can it change as 
rapidly as their Terms of Service, with little or no notice to 
subscribers? Does this new policy have the force of law, or the 
enforceability of a pinkie swear? The FCC has told the policy community 
that if any kind of blocking incident occurs they will deal with it 
rapidly. Yet so far the response from the Commission has been radio 
silence.
    Consumers have an expectation that their phone calls will not be 
tampered with by the phone company, and an expectation that text and 
data should be protected in the same manner as a voice call. The 
details of the Verizon text message blocking incident are not clear; 
what is clear is that this warrants further scrutiny and we encourage 
this Committee to hold hearings on this important matter.
    While the wireless industry will argue that non-discrimination with 
the force of law is unnecessary because policymakers should rely on the 
force of competition to police bad behavior in this arena--yet at every 
turn the industry is operating to throw gravel in the gears of 
competition, with Early Termination Fees, handset locking and other 
practices that increase switching costs. They cannot have it both ways.
    Early Termination Fees (ETFs) are ubiquitous in the wireless 
industry, with some carriers charging as much as $200 if a customer 
would like to leave before their (generally two-year) contract is 
completed. Verizon (and as of yesterday, AT&T) should be lauded for 
adopting a policy of pro-rating \7\ these fees, but the other carriers 
have not taken this common sense, pro-consumer step. And let us be 
clear, it was ``encouragement'' from policymakers and lawsuits 
regarding these unseemly and unfair contracts in certain states that 
are helping pressure the carriers into pro-rating ETFs. That is why we 
applaud Senator Rockefeller's and Senator Klobuchar's bill which would 
require all carriers to pro-rate ETFs.
---------------------------------------------------------------------------
    \7\ Verizon's ETF discount is not exactly a ``pro-rate,'' which by 
definition would mean a fee reduction proportionate to the amount of 
time a subscriber has spent with the company--i.e. halfway through the 
contract should be a 50 percent reduction in ETF. Verizon reduces its 
$175 ETF by $6/month, resulting in a $72 ETF discount at the end of the 
contract's first year; the subscriber would still pay more than 50 
percent of the ETF halfway through the contract.
---------------------------------------------------------------------------
    Early Termination Fees make it expensive for a wireless subscriber 
to vote with her pocketbook and switch carriers--and the justification 
for charging these penalties seems to be evaporating. The iPhone offers 
the clearest example--AT&T subscribers who want the iPhone will receive 
not one thin dime of subsidy, yet they will be charged a full $175 
penalty if they want to leave before their contract is up. The story 
the wireless industry had been telling us about ETFs used to be 
``subsidy, subsidy, subsidy.'' We have yet to hear a convincing new 
story.
    Imagine the shock of a consumer who buys a family share plan from a 
wireless company and then tries to terminate that plan--the account 
holder will be liable for an ETF for each line in the plan. For 
instance, let's say a family of five wanted to leave for another 
carrier with better service. That family could face $1,000 or more in 
termination penalties if they haven't completed their two-year 
contract. This is certainly a strong deterrent to competition.
    Another problematic practice--and the practice our survey results 
\8\ tell us users hate the most--is when carriers extend contracts for 
any change in service plan--whether the change benefits the wireless 
carrier or not. In other words, if I am a wireless customer and I 
decide to increase my bucket of minutes, my carrier may automatically 
extend my contract for another year or two, and saddle me with another 
Early Termination Fee if I decide to leave before the contract is up.
---------------------------------------------------------------------------
    \8\ Consumer Reports, ``Annual Cell Phone Survey'' (Dec. 2007).
---------------------------------------------------------------------------
    Mobile phone ``locking'' is another area of concern for consumers. 
In Europe, phones work seamlessly between networks and carriers do not 
exercise control over which phones subscribers can use. This has 
created a robust, independent market for mobile phones where users have 
far greater choice than U.S. subscribers. In the U.S., analysts 
estimate that 90 to 95 percent of handsets are sold by the wireless 
carriers, whereas in some Asian markets approximately 80 percent are 
sold independently from the carrier.\9\
---------------------------------------------------------------------------
    \9\ Marguerite Reardon, ``Will `unlocked cell phones' free 
consumers?'' CNET News.com, January 24, 2007, available at: http://
news.com.com/Will+unlocked+cell+phones+free+consumers/2100-1039_3-
6152735.html?tag=st.prev.
---------------------------------------------------------------------------
    There are two basic kinds of mobile phone locking: \10\ software 
locks (which actually disable the phone when the user leaves), and 
``approved phones only'' policies (which do not allow users to activate 
phones they purchase through the network operator, even when 
independent phones are technologically compatible with the network).
---------------------------------------------------------------------------
    \10\ For more information on mobile phone locking, see Professor 
Wu's paper, ``Wireless Net Neutrality: Cellular Carterfone and Consumer 
Choice in Mobile Broadband.'' New America Foundation Working Paper #17, 
Wireless Future Program (February 17, 2007).
---------------------------------------------------------------------------
    Imagine that a consumer purchased an expensive new television set 
and decided to switch cable or satellite providers, but the provider 
said ``I'm sorry, your new TV will not work on our cable system, you'll 
have to purchase a new one.'' Policymakers would not tolerate this 
behavior for long, yet this practice has been pervasive in the wireless 
industry for several years now. CU is grateful to Senator Klobuchar and 
Senator Rockefeller for requiring in their proposed legislation that 
the FCC study this issue of mobile phone locking.
    Application and functionality blocking is another practice that 
costs consumers money, and denies our economy the dynamic benefits of 
innovation. As a recent Wall Street Journal article \11\ notes, handset 
manufacturers have been trying to offer consumers services for free on 
new handsets, but network operators such as AT&T and Verizon have said 
``no'' to those free services because they compete with services that 
the wireless carriers want to charge for.
---------------------------------------------------------------------------
    \11\ Jessica Vascellaro, ``Air War: A Fight Over What You Can Do on 
a Cell Phone--Handset Makers Push Free Features for Which the Carriers 
Want to Charge.'' Wall Street Journal (June 14, 2007).
---------------------------------------------------------------------------
    According to the article, RIM (manufacturer of the BlackBerry) 
wanted to offer a free mapping service to customers who buy the 
BlackBerry, but AT&T said no, because they had a service that they 
wanted to charge users $10 a month for.
    Another example is Verizon's Worldphone by RIM, which has the 
capability built in to work on cellular networks in Europe, as well as 
to work on other GSM networks here in the States. Yet Verizon locks 
down the device so that they can charge users extra fees for the 
privilege of phones working as they were actually designed to work. 
That is, the GSM capability built into the $600 handset simply won't 
work unless a user pays Verizon for a more expensive ``international 
plan.'' As a user who does a lot of international travel, I don't need 
their international service plan--I just need my phone to work as it 
was designed.
    Yet another instance of troubling conduct is the slow rollout of 
mobile phones that also do Wi-Fi--these phones allow consumers to use 
the Internet when they are near a Wi-Fi Internet ``Hotspot.'' Most U.S. 
carriers are not making these phones available to consumers, although 
T-Mobile is currently offering them. But as the Chairman of the FCC 
noted in a recent USA Today article,\12\ ``[i]nternationally, Wi-Fi 
handsets have been available for some time, . . . but they are just 
beginning to roll out here. . . . I am concerned that we are seeing 
some innovations being rolled out more slowly here than we are in other 
parts of the world.''
---------------------------------------------------------------------------
    \12\ Leslie Cauley, ``New Rules Could Rock Wireless World: 
Consumers, not carriers, may get to choose devices.'' USA Today, (July 
10, 2007).
---------------------------------------------------------------------------
    We can do better. It's not that consumers have no choices in this 
market; the issue is that they have fewer choices without openness and 
they would have more choices with it.
     Today, Consumers Union would like to issue three broad challenges 
to the wireless industry:

        1. Stop charging consumers undue Early Termination Penalties. 
        Early Termination Penalties should be eliminated or pro-rated 
        across the industry immediately, and the fees should be 
        reasonable in the first instance. Pro-rating an already 
        unreasonable fee doesn't address the underlying concern that 
        the fees are excessive and unrelated to any damages the carrier 
        may incur from early cancellation.

        2. Stop crippling mobile phones. Consumers who pay hundreds of 
        dollars for a new phone should fully expect that phone to do 
        all the things the manufacturer designed it to do. Network 
        operators who lock down the functionality of mobile phones to 
        better suit their business interests should be scrutinized by 
        the FCC and Congress.

        3. Stop preventing new applications from reaching consumers. 
        Wireless carriers are locking out competitive applications 
        because they don't want ``revenue leakage.'' This kind of anti-
        innovation protectionism flies in the face of a century of open 
        communications policymaking.

    Wireless Internet services will increasingly become the way that 
consumers connect to the Internet. If we allow anti-innovation 
practices to continue, we should expect our international broadband 
rankings to continue to slide, innovation to be less robust, and our 
mobile phone markets to continue to lag behind Europe and Asia.
    In contrast, by embracing openness, policymakers have an 
opportunity to save consumers money, get exciting new applications to 
market, regain our standing as a world leader in broadband, and provide 
citizens with a new wireless ``town square'' that is open and 
democratic. Consumers Union fervently hopes that policymakers will 
choose the latter.
    Mr. Chairman and Mr. Vice Chairman, I'm grateful for the 
opportunity to testify before your Committee today. Thank you.

    Senator Klobuchar. Thank you, Mr. Murray.
    Mr. Higgins?

STATEMENT OF MICHAEL HIGGINS, JR., CEO, CENTRAL TEXAS TELEPHONE 
  COOPERATIVE, INC. AND PRESIDENT AND CHAIRMAN OF THE BOARD, 
                 RURAL TELECOMMUNICATIONS GROUP

    Mr. Higgins. Good morning. Thank you for the invitation to 
be here. My name is Mike Higgins and I am the CEO of Central 
Texas Telephone Cooperative, and I'm also the President and 
Chairman of the Board of the Rural Telecommunications Group, a 
trade association representing rural wireless companies. 
Central Texas is a member of the National Telecommunications 
Cooperative Association, a trade association representing rural 
telecom companies.
    Central Texas provides wireline telephone service and 
through its affiliates and subsidiaries it provides cellular 
service, PCS service, as well as video, Internet, and broadband 
wireless services in rural areas of central Texas. We hold 
cellular PCS, BRS, and AWS spectrum licenses throughout central 
Texas.
    I'm here today to talk to you about some of the challenges 
rural consumers face in obtaining quality wireless service. 
Very often rural consumers are at the mercy of large nationwide 
carriers that for various reasons focus the build-out of their 
networks in urban areas and along highways connecting urban and 
secondary markets. When the choice is between building a site 
in or near a metropolitan area which will do millions of 
minutes a month or a rural site connecting two rural towns, 
which will log only 50,000 minutes a month, the nationwide 
carrier is not going to build the rural site.
    Accordingly, for most rural consumers living outside of 
urban areas and highway corridors, where coverage is available, 
it's going to be--excuse me--it is going to be from a local 
rural wireless carrier. Rural wireless carriers provide 
critical coverage in rural and remote areas. While the cost of 
providing service in rural areas is generally higher, rural 
carriers work hard to provide service on the same prices, 
terms, and conditions as their urban counterparts in order to 
stay competitive.
    In doing so, however, rural carriers must operate in very 
small margins and must continually look for ways to innovate 
and cut costs. Accordingly, they're especially sensitive to the 
costs of complying with new regulations and mandates. And 
Congress for its part should be especially sensitive to 
regulations that would increase the cost for small and rural 
carriers to provide wireless service in rural areas.
    Senate bill 2033, which is currently under consideration, 
is admirable in its effort to help consumers receive fair terms 
and conditions by prohibiting certain carrier practices and 
requiring the investigation of a large carrier practice known 
as handset locking. The bill, however, will impose additional 
unfunded government mandates that would increase the cost of 
service to rural consumers.
    Rural carriers have had to comply with an ever-increasing 
array of unfunded government mandates and regulatory 
requirements in the past, such as CALEA, CPNI, E-911, and 
hearing aid compatibility. Bill 2033 would further increase 
costs that will have to be passed on to rural carriers and to 
rural consumers. This is simply not going in the right 
direction for the rural consumer.
    While the mandates are well intentioned, the actual benefit 
to the public is significantly less than the substantial cost 
of compliance, particularly if these mandates are to be applied 
with one-size-fits-all blinders. Rural wireless carriers lack a 
large customer base over which to spread the cost of compliance 
and accordingly the impact on rural carriers and their 
customers is greater.
    In general, rural carriers are more flexible in dealing 
with customers than some nationwide counterparts and do not 
lock handsets or impose surprise contract extensions. Our 
relationship with our customers is a close one. We have an 
incentive to make sure our rural customers are pleased with the 
quality and terms of service. In most cases, we live and work 
in the communities we serve, and in many cases our customers 
are our owners. When a customer is not happy, we hear about it 
immediately and bend over backwards to make sure we accommodate 
them because we cannot afford to lose the support of our 
community stakeholders.
    There's no need to impose additional burdens on small 
carriers in order to protect consumers. To the extent that 
Congress finds that there is a need for additional rules to 
protect consumers, the rules should be developed by the FCC and 
applied on a national basis. In adopting such rules, the FCC 
must recognize the differences between large and small carriers 
and must take seriously its obligations under the Regulatory 
Flexibility Act to determine whether the requirements that 
apply to large carriers are necessary and appropriate to apply 
to small carriers.
    While our general goal is to have fewer regulations, 
Congress could help both rural and urban consumers by focusing 
its attention on roaming practices of the large carriers. The 
customers of rural wireless carriers must be able to roam on 
networks of the large nationwide carriers at fair and 
reasonable rates. Unfortunately, the FCC's August 16 roaming 
order severely restricts the obligations of some large carriers 
to provide roaming to small carriers at just and reasonable 
rates by not requiring a large carrier to provide roaming at 
reasonable rates if a small carrier holds any wireless license 
in a particular area that could be used to provide CMRS. This 
exclusion of so-called in-market roaming applies even if a 
small carrier has not built out a market or has partially built 
out a market, or even if the small carrier is using the license 
to provide a completely different service, such as fixed 
wireless Internet access.
    This creates significant barriers to entry, weakens 
competition, and deters the very facilities-based competition 
the FCC is seeking.
    Handset locking is another practice that potentially harms 
consumers and one area in which this bill does not go far 
enough. By merely requiring the FCC to develop a report to 
Congress on the practice of handset locking and its impact on 
consumers and portability, the legislation fails to address the 
broader issue of the exclusive relationships between handset 
vendors and large carriers. Apple is not going to make an 
iPhone for Central Texas Telephone. Typically, small----
    Senator Klobuchar. Mr. Higgins, you're about a minute over. 
If you could finish up in the next 30 seconds. Thanks.
    Mr. Higgins. I will, thank you.
    In summary, we as rural wireless carriers with close 
contact to rural consumers in our service areas respond quickly 
to problems and have a track record of--and have a track record 
of service innovation. There is no need to impose the 
requirements of this bill on rural carriers. We do need help, 
however, in two main areas, handset locking and unfair roaming 
practices, in which the dominant nationwide carriers can thwart 
our ability to serve our customers. These are the areas the 
Senate should focus on with respect to helping rural consumers.
    I thank you for the opportunity to speak today.
    [The prepared statement of Mr. Higgins follows:]

    Prepared Statement of Michael Higgins, Jr., CEO, Central Texas 
 Telephone Cooperative, Inc., and President and Chairman of the Board, 
                                 Rural 
                        Telecommunications Group
    Hello, and thank you for the invitation to speak here today. My 
name is Michael Higgins, Jr. and I am the Chief Executive Officer of 
Central Texas Telephone Cooperative, Inc. (Central Texas) in 
Goldthwaite, Texas, and the President of its subsidiary, CTCube, L.P. 
d/b/a West Central Wireless (West Central Wireless) in San Angelo, 
Texas. Central Texas, through its subsidiaries, holds spectrum licenses 
in and provides various wireless services, including mobile voice, high 
speed data, and wireless video, to rural regions of the central part of 
the state of Texas. I am also the President and Chairman of the Board 
of the Rural Telecommunications Group, Inc. (RTG),\1\ and Central Texas 
is a member of the National Telecommunications Cooperative Association 
(NTCA).\2\
---------------------------------------------------------------------------
    \1\ RTG is a Section 501(c)(6) trade association dedicated to 
promoting wireless opportunities for rural telecommunications companies 
through advocacy and education in a manner that best represents the 
interests of its membership. RTG's members have joined together to 
speed the delivery of new, efficient, and innovative telecommunications 
technologies to the populations of remote and underserved sections of 
the country. RTG's members provide wireless telecommunications 
services, such as cellular telephone service and Personal 
Communications Services, among others, to their subscribers. RTG's 
members are small businesses serving or seeking to serve secondary, 
tertiary, and rural markets. RTG's members are comprised of both 
independent wireless carriers and wireless carriers that are affiliated 
with rural telephone companies.
    \2\ NTCA is a 501(c)(6) industry association representing rural 
telecommunications providers. Established in 1954 by eight rural 
telephone companies, today NTCA represents 575 rural rate-of-return 
regulated incumbent local exchange carriers (ILECs). All of its members 
are full service local exchange carriers, and many members provide 
wireless, cable, Internet, satellite and long distance services to 
their communities. Each member is a ``rural telephone company'' as 
defined in the Communications Act of 1934, as amended. NTCA members are 
dedicated to providing competitive modern telecommunications services 
and ensuring the economic future of their rural communities.
---------------------------------------------------------------------------
    I am here today to talk to you about some of the challenges rural 
consumers face in obtaining quality wireless services. Very often, 
rural consumers are at the mercy of large nationwide carriers that 
choose to focus the build out of their networks in urban areas and 
along highways connecting urban and secondary markets. For most rural 
consumers living outside these highway corridors, coverage is reliable 
only if they obtain their service from a local rural wireless carrier. 
Rural wireless carriers provide critical coverage in rural and remote 
areas. While the cost of providing service in rural areas is generally 
higher, rural carriers work hard to provide service on the same prices, 
terms and conditions as their urban counterparts in order to stay 
competitive. However, in doing so, rural carriers must operate on very 
small margins and must continually look for ways to cut costs and be 
innovative with technology. The cost per subscriber of providing 
reliable wireless service for small carriers is much higher than that 
of nationwide carriers.
    Recently, the Honorable Senator Klobuchar and the Honorable Senator 
Rockefeller introduced a consumer protection bill (S. 2033). S. 2033 is 
admirable in its effort to help consumers receive fairer terms and 
conditions by prohibiting certain carrier practices like onerous early 
termination fees and extensions of contracts without prior 
notification--as well as investigating a large carrier practice known 
as ``handset locking.'' However, there are certain unfunded government 
mandates in the form of regulatory reporting requirements and changes 
to billing software that would cause undue hardship on rural carriers 
by increasing costs that would ultimately have to be passed on to rural 
consumers. I think the last thing we want to do in enacting legislation 
is to increase the cost to the consumer when there are other means of 
approaching the problems identified in the proposed legislation.
    Small and rural companies have an incentive to make sure their 
rural customers are pleased with the quality and terms of their 
service. In most cases, we live and work in the communities we serve. 
As a result, we hear immediately when our customers are not happy about 
our service coverage or any of our billing practices. When a customer 
is not happy, we bend over backward to make sure we accommodate them 
because we cannot afford to lose the support of our community 
stakeholders. We also make sure that the communities we serve have good 
quality coverage. Without good quality coverage, our rural consumers 
and small businesses suffer and in turn harm rural economic development 
in our rural communities. Central Texas and West Central Wireless are 
deeply concerned with and devoted to the economic development of the 
rural communities we serve. If they do not flourish, we cannot 
flourish. In today's interconnected global village, advanced wireless 
services are a must for rural consumers and our rural communities.
    Rather than heaping more regulations and requirements on wireless 
companies, I have a number of recommendations for encouraging companies 
to deploy broadband wireless service to rural areas and to ensure that 
rural carriers and small rural businesses--major sources of innovation 
and competition--are able to play a role. As CEO of a small business 
serving rural communities, I understand the challenges of bringing 
broadband and innovative wireless services to those communities. I also 
understand how critical it is to the economic and social lives of such 
communities that they have the same access, through wireless services, 
to an interconnected world as urban communities. I believe that it is 
small and rural companies that are the most willing and able to provide 
service to their rural communities.
    The large carriers will not build rural sites. The large carriers 
have to maximize stock prices, so if they have a choice to build a site 
in or near a metropolitan area which will do a million minutes a month 
or a rural site connecting two rural towns which will log only 50,000 
minutes a month, the rural site will not get built. Rural carriers do 
and will continue to build those sites because our few customers need 
them, and we will find a way to live off the crumbs the large carriers 
will pass up. In the heart of Texas, Brady Texas, there is no CDMA 
coverage today. Verizon and Sprint customers can't talk there driving 
from San Antonio to Abilene. GSM coverage, however, is provided all 
over counties in central Texas even though the customer counts are 
small and the operating profits even smaller. We provide the service 
because these are our neighbors and this is our trade area and home.
    Rural telecommunications carriers serve less densely populated 
areas and work to provide service throughout their entire license 
areas. These rural carriers already have the basic telecommunications 
infrastructure in place, the local expertise, and trained employees to 
make serving high cost rural areas economically feasible. As residents 
of the regions they serve, small rural wireless carriers are also 
motivated by the public interest and not just profit when deciding 
where to provide service.
    Rural wireless carriers also are a major source of innovation 
because they are nimble and responsive to local demand. At West Central 
Wireless, we have had to become innovative in lowering our costs to 
provide high quality service to our customers. With all of the unfunded 
government mandates such as CALEA, CPNI, E-911, as well as the high 
cost of switching equipment--we don't get the volume discounts larger 
carriers get--we have pooled our resources to provide services to other 
smaller rural carriers and offer switching to them as well as CALEA, 
CPNI and E-911 solutions. But West Central Wireless and Central Texas 
are not alone in this. Rural wireless carriers in general are a major 
source of innovation and the carriers willing to serve otherwise 
difficult to serve areas.
    Accordingly, in order to encourage the deployment of wireless 
services to rural areas, and to promote innovation and competition, 
Congress and the FCC should ensure that small and rural companies have 
a meaningful chance to participate in such services. As I will discuss 
below, the government can do this by making sure that wireless 
customers are able to roam as widely as possible on the technically 
compatible networks of other carriers at reasonable rates. In addition, 
small companies must have access to the spectrum and equipment 
necessary to provide services, and the government (the gate-keeper of 
spectrum) must ensure that this public resource is not hoarded by a few 
large companies. Finally, in general, Congress and the FCC must ensure 
that regulations, however well intentioned, do not unduly burden and 
pull small carriers under.
    I'll begin by addressing the latter concern--that of the cost and 
burden of complying with an ever increasing array of unfunded 
government mandates and regulatory requirements such as those contained 
in S. 2033. Rural wireless carriers are already required to comply with 
such mandates as CALEA, CPNI, E-911, and hearing aid compatibility; 
yet, rural wireless carriers lack a huge customer base over which to 
spread the cost of these mandates. Heaping the additional unfunded 
government mandates contained in S. 2033 such as: (1) a specially 
itemized and formatted invoice (that will require extensive and 
expensive billing software changes); (2) the production and delivery to 
consumers of updated quarterly maps that show each customer whether 
there is service currently available at their residence; and (3) the 
filing of semi-annual reports detailing lost calls, coverage gaps and 
dead zones, is simply not going in the right direction. While the 
mandates are well intentioned, the actual benefit to the public is 
significantly less than the substantial cost of compliance. Moreover, 
these mandates are often applied with one size fits all blinders. We 
estimate that the cost of complying with the legislation's mandates 
will raise prices to consumers in rural areas by $1.50-$3.50 per month 
based on recurring and non-recurring costs (spread out over a five-year 
period) depending on the customer base of the rural carrier.
    Now, in addition to Federal mandates, the threat of state and local 
regulation of wireless services is a growing concern. Up to now, 
Congress, largely and wisely has allowed wireless services to develop 
under a single regulatory framework. This has lead to explosive growth 
of wireless services and lower costs to customers. We are concerned, 
however, that increasing state regulation of wireless services will 
lead to a maze of conflicting regulations without corresponding benefit 
to the public. In general, rural carriers are more flexible in dealing 
with subscribers than their nationwide counterparts and do not resort 
to unfair early termination fees and sneaky contract extensions. Our 
relationship with our customers is a close one. We work to resolve 
issues. There is no need to impose additional burdens on small 
carriers, particularly inconsistent and conflicting regulations, to 
protect consumers. Congress should be careful in its efforts to protect 
consumers from the questionable practices of large, wireless carriers 
not to unfairly and unnecessarily burden small carriers. To the extent 
that there is a need for additional rules to protect consumers, the 
rules should be developed on a national basis under the auspices of the 
FCC, with recognition of the differences between small and large 
carriers and the economic realities of the former, and not by 
individual states. In developing any such rules, the FCC must be 
mindful of it obligations under the Regulatory Flexibility Act (RFA) 
that the requirements that apply to large carriers may not be necessary 
or appropriate to apply to small carriers. All of the regulations 
designed to benefit wireless customers are meaningless if those 
customers can't get coverage.
    While it is our goal to have fewer regulations, there is one area 
where consumer regulation is sorely lacking. If Congress is really 
interested in helping both rural and urban consumers then it should 
focus its attention on existing large carrier roaming practices. 
Customers of rural carriers need fair, low cost roaming when they leave 
their home-based rural carrier. Likewise, urban consumers need to be 
able to roam on the networks of rural carriers who have coverage 
instead of being ``locked out'' by their national carrier. 
Specifically, the customers of rural wireless carriers must be able to 
roam on the networks of the large nationwide carriers at reasonable 
rates. The FCC's August 16, Roaming Order, FCC 07-143, although well 
intentioned, severely restricts the obligations of large carriers to 
provide roaming to smaller carriers at just and reasonable rates. Under 
the FCC order, a large carrier is not required to provide roaming at 
reasonable rates in a particular area if a small carrier holds any 
wireless license in that area that ``could be used to provide CMRS 
[commercial mobile radio services].'' The FCC refers to this as ``in-
market roaming.'' While this might make some sense if two carriers have 
fully built-out competing networks in the given market, the FCC order 
limits a large carrier's obligation to provide roaming even if the 
small carrier has not built out a market, or even if the small carrier 
is using its license to provide a completely different service, such as 
fixed wireless Internet access. This exception to the obligation to 
provide reasonable roaming deters innovation and creates a strong 
disincentive for small carriers to attempt to acquire wireless licenses 
to deploy various services. The prohibition on in-market roaming 
creates significant barriers to entry and deters the very facilities-
based competition the FCC is seeking to create.
    Even where a small carrier is building out a network to offer 
competitive service, in-market roaming must be allowed when such a 
small carrier licensee is just getting started. A small carrier cannot 
instantaneously build-out a network throughout its license area or 
areas. Accordingly, at a minimum, even where a small carrier is 
constructing a network to provide a competing service, in-market 
roaming should be allowed during a ramp up period of at least 5 years 
from the date its license is issued.
    Urban consumers also are being harmed by the FCC's lack of 
regulation of roaming practices. Larger carriers often prevent their 
customers from roaming in rural areas by implementing various 
restrictions, such as restrictions on Location Area Codes (LACs), so 
called LAC restrictions. This often denies service to their customers 
even if though a rural carrier may be operating a technically 
compatible network on which the customer could otherwise roam. Denying 
customers roaming service prevents the consumer from having access to 
ubiquitous nationwide service thereby harming both the consumer trying 
to access the available service and the rural carrier who is ready, 
willing and able to provide it. Accordingly, the FCC should not permit 
large carriers to block their customers from roaming in rural areas on 
the technically compatible networks of rural carriers that offer 
reasonable roaming rates.
    As long as customers are allowed to leave their home areas and roam 
on other compatible networks at just and reasonable rates, wireless 
services, including broadband applications, will be available to all 
citizens at all times and will develop and thrive. Thus, requiring 
unfettered roaming, including data and high speed application roaming, 
will broaden consumer choice and open up the wireless broadband market 
to new and unforeseen possibilities.
    While reducing regulatory burdens and facilitating unfettered 
roaming are extremely important, the single most critical action to 
promote the deployment of wireless services in rural areas is ensuring 
that small and rural companies have reasonable access to spectrum. 
Section 309(j) of the Communications Act, as amended, directs the FCC 
to adopt rules that promote the deployment of service to rural areas 
and disseminate licenses to a wide variety of applicants including 
small businesses and rural telephone companies. See 47 U.S.C.  
309(j)(3)(A) & (B). It also directs the FCC to adopt performance 
requirements ``to ensure prompt delivery of service to rural areas, 
[and] to prevent stockpiling or warehousing of spectrum by licensees or 
permittees. . . .'' 47 U.S.C.  309(j)(4)(B).
    The FCC, however, typically licenses spectrum in gigantic 
geographic areas which small companies have no chance of acquiring. 
Central Texas cannot possibly hope to acquire a license for the entire 
southwest region of the U.S. Similarly, the FCC's performance 
requirements and service rules do not require large companies to deploy 
service in rural areas or to work with small companies that are willing 
to deploy in rural areas. Large companies can meet population-based 
performance benchmarks by serving only the urban and densely populated 
areas, leaving rural and secondary markets unserved. Accordingly, we 
typically see large, nationwide telecommunications carriers winning 
most of the licenses at auction and then overlooking rural towns and 
their outlying areas, and instead deploying service to the most 
profitable, highly populated pockets of their vast license areas.



    Unfortunately, I fear that we are about to see the upcoming 700 MHz 
auction roll down this well rutted track. This is particularly 
unfortunate because 700 MHz spectrum is ideally suited to provide 
service to rural areas. Because of its favorable propagation 
characteristics--it can go out a long way--and capability of delivering 
large amounts of data at high speeds, I believe it will be economical 
to deploy wireless broadband services to many rural areas that would 
otherwise be uneconomical to serve with other spectrum bands. But I am 
afraid that this wonderful opportunity to serve rural areas will be 
lost since the FCC's 700 MHz rules present only limited opportunities 
for small businesses to participate.
    The Upper 700 MHz spectrum will be auctioned in huge areas or on a 
nationwide basis. Moreover, the Upper 700 MHz C block licensee will be 
able to meet the applicable population-based benchmark by serving urban 
and dense areas. Accordingly, small and rural carriers have virtually 
no opportunity to participate in the provision of the anticipated high 
speed (e.g., 4th Generation) services to be offered on the Upper 700 
MHz C block spectrum. Since the ``open platform'' requirements apply 
only to the C block licenses, the open platform requirements may be of 
little benefit to small carriers.
    Even the Lower 700 MHz licenses present little meaningful 
opportunity for rural carriers. Only one paired block of spectrum will 
be auctioned on the basis of cellular market areas (CMAs), and one 
paired block on the basis of Economic Areas (EAs). Because only a 
handful of applicants will be able to compete for the huge Upper 700 
MHz licenses, the myriad of large, medium, small and regional bidders 
will be competing for the CMA and EA licenses. In addition, with AT&T's 
announced purchase of Aloha--the largest holder of the previously 
auctioned Lower 700 MHz C block licenses--AT&T undoubtedly will be 
acquiring the adjacent Lower 700 MHz B block licenses. Accordingly, 
small companies will have little opportunity to acquire licenses in the 
upcoming 700 MHz auction.
    AT&T's acquisition of Aloha also illustrates the increasing 
concentration of spectrum in the hands of a few companies and problems 
with the overall consolidation of wireless providers. Because of a 
variety of factors, not the least of which was uncertainty about when 
and if the DTV transition would ever occur, many small companies were 
able to acquire 700 MHz C block licenses in Auctions 44 or 49 at the 
time that Aloha acquired its vast 700 MHz holdings. Unlike Aloha, 
however, AT&T will not work with small carrier licensees. Small 
carriers have little chance of partnering with AT&T, for example, in 
the provision of mobile video or multimedia services. AT&T also has the 
weight to disregard contracts and the legal muscle to stiff-arm small 
companies into capitulation. For example, Neatt Wireless, LLC, a 
minority owned and managed wireless operator in Arkansas has filed a 
complaint against AT&T with the FCC and DOJ alleging that AT&T engaged 
in illegal conduct and behavior that resulted in Neatt's failure to 
compete in the markets it acquired from AT&T in Northeastern Arkansas 
in connection with AT&T's merger and divestiture of certain wireless 
assets. Neatt has alleged that AT&T's actions resulted in Neatt being 
forced to sell back to AT&T, at distressed prices, all of the 
subscribers Neatt acquired from AT&T in Northeastern Arkansas. Neatt 
alleges that AT&T's actions violate public policy, good business 
practices, the intent of Congress, and the antitrust provisions of the 
laws of the U.S., as well as the order of the FCC allowing the merger 
of AT&T Mobility and AWS. In addition, several of RTG's and NTCA's 
members who had been long standing partners of AT&T have had their 
agreements ignored leaving these carriers with huge operating losses on 
businesses that at best operated on slim margins.
    But it is not just AT&T. The bottom line remains, fewer and fewer 
large companies hold increasingly large concentrations of spectrum. 
Fewer companies means fewer competitors, and fewer carrier partners 
with which small carriers can work. It also means less innovation and 
fewer opportunities. If the government wants to foster competition, 
encourage innovation and promote the deployment of services to rural 
areas, it should limit the amount of spectrum that the nationwide 
companies can hold in any one geographic area. This is particularly the 
case with spectrum below 1 GHz that is prime for providing service to 
rural and difficult to serve areas.
    Handset locking is another component of S. 2033. In this instance 
the proposed legislation does not go far enough. It merely requires the 
FCC to develop a report to Congress on the practice of handset locking 
and its impact on consumers and portability. Locking a handset to a 
particular network may be practical if the handset is subsidized by the 
carrier, but what would be far better is for Congress to study the 
tying of the handset to the carrier through the relationship the 
carrier has with the handset vendor. It is common practice for handset 
vendors to cut special exclusive deals with large nationwide carriers. 
Steve Jobs is not going to make an iPhone just for West Central 
Wireless. This practice puts rural carriers (and rural consumers) at an 
extreme disadvantage because they are unable to gain access to the 
popular handsets. Rural consumers have to decide between a low end 
handset and good rural coverage or a high end handset and little 
coverage. Typically, small carriers have access to a much more limited 
choice of handsets and devices and typically must wait up to 2 years to 
get newer models. The lack of access to new devices harms consumers in 
rural areas and dampens competition. Accordingly, there is a need for 
requirements to enable the customers of small and rural carriers to 
acquire the latest handsets and devices.
    Finally, while implementing the above suggestions will go a long 
way to getting wireless deployment and handsets to rural areas, there 
still may be some areas that need extra help. Unquestionably, it is 
more expensive to deploy services in rural areas. As the Federal-State 
Joint Board on Universal Service has recognized, there may be some 
areas where a support mechanism will be necessary in order for mobile 
broadband services to be viable.
    As I have discussed here today, small and rural companies play a 
vital role in driving innovation and providing service to rural and 
otherwise underserved areas. To enable small and innovative companies 
to continue to provide wireless services, policymakers should: (1) 
license spectrum in smaller geographic areas; (2) limit the amount of 
spectrum that the nationwide carriers may hold, particularly in rural 
areas; (3) adopt performance requirements that promote deployment to 
rural areas and encourage partnering with small companies; (4) adopt 
rules to foster nationwide roaming on reasonable rates; (5) adopt 
requirements so that individuals residing in rural areas have access to 
the latest devices and technologies; (6) seriously assess the impact of 
prospective regulation on small businesses under the RFA; (7) where 
necessary, support rural wireless services with universal support 
mechanisms; and, (8) use innovative and targeted licensing approaches, 
such as the licensing of TV White space for fixed backhaul applications 
in rural areas.\3\
---------------------------------------------------------------------------
    \3\ In a recent White Paper, RTG noted that there may be 50 
megahertz or more of TV white space spectrum in rural areas that could 
be used for licensed backhaul services without creating interference 
problems. See Ex Parte Filing by FiberTower Corporation and the Rural 
Telecommunications Group, Inc., ET Docket Nos. 04-186, 02-380, 
``Optimizing the TV Bands White Spaces: A Licensed, Fixed-Use Model for 
Interference-Free Television and Increased Broadband Deployment in 
Rural and Urban Areas.''
---------------------------------------------------------------------------
    In closing, I want to circle back to where I began with the need to 
avoid and eliminate regulations that burden small companies without 
corresponding benefit to the public. It is critical that the FCC and 
other government agencies take seriously their obligations to assess 
the impact of proposed regulations on small businesses under the 
Regulatory Flexibility Act. The FCC virtually always merely ``cuts and 
pastes'' boiler plate language in its rulemaking proceedings that finds 
no disproportionate impact on small businesses. Instead of rubber 
stamping regulations and discouraging small businesses, the FCC and 
other government bodies should carefully study the impact of their 
regulations on small businesses, and should ensure that their rules and 
policies encourage small and rural businesses to deploy innovative 
wireless services.
    By instituting the suggestions I have outlined today, I am 
confident that policymakers can encourage the deployment of innovative 
wireless services, including wireless broadband connectivity, to rural 
citizens and rural businesses, supporting the economic and social 
health of such communities. Thank you for your time today.

    Senator Klobuchar. Thank you, Mr. Higgins.
    Dr. Ellig?

STATEMENT OF DR. JERRY ELLIG, SENIOR RESEARCH FELLOW, MERCATUS 
                CENTER, GEORGE MASON UNIVERSITY

    Dr. Ellig. Thank you, Madam Chair. My name is Jerry Ellig. 
I'm a Senior Research Fellow at the Mercatus Center at George 
Mason University. The Mercatus Center is a research, education, 
and outreach center. Basically, I study regulation for a 
living. I'm an academic, but I've also worked for the U.S. 
Senate, and worked with the Federal Trade Commission, so I 
think I've got an understanding of the practical policy end of 
it that you have to deal with, as well as the academic theory.
    I'm also a cell phone customer and, as you can probably 
tell from the size and the appearance of this thing, I've been 
with the same company for a long time, mostly because they keep 
giving my wife free telephones, so we sign up every couple of 
years. There are terms in our cell phone contract that I don't 
like. There are probably terms in our cell phone contract that 
I don't even know about that I don't like, because it's been a 
long time since I've read it and it's a long thing and I don't 
really have time to mess with it.
    I've also spent some frustrating times on the phone trying 
to deal with billing issues or trying to deal with other kinds 
of informational issues. I wish they'd stop sending me a text 
message every month trying to get me to use text messaging, 
because I don't want to use it. I've been in West Virginia just 
this past weekend and couldn't use the phone to call the house 
50 feet away. I've also been to my own home and can't use it in 
the house because our neighborhood inside the Beltway is shaped 
like a bowl and the coverage in the neighborhood is lousy, as 
seems to be the case with most of the carriers.
    But none of these things mean necessarily that new 
regulation of contract terms or new regulation of disclosures 
will necessarily solve my problems as a consumer in a way that 
would make me better off on net. Regulation might do that, but 
the mere fact that I have these problems does not necessarily 
guarantee that Congress can craft regulation that will solve 
those problems for me in a way that makes me better off.
    To figure that out, we have to do more homework. What would 
you expect an academic to say, right? More homework. That's the 
challenge whenever a problem arises and new regulation is 
proposed: How can we know that the regulation will actually 
accomplish its intended purpose with a minimum of negative side 
effects?
    Now, people who study regulation for a living will tell you 
that the way to figure this out is to answer at least three key 
questions. The first one: Is there a systemic problem here that 
regulation could solve? Secondly, how effective are the 
alternative solutions? What are the different ways of solving 
the problem and which one's likely to be most effective? And 
finally, what are the likely unintended consequences associated 
with the proposed new regulation? What other things are likely 
to happen when the regulated industry adjusts to the change in 
the rules of the game?
    Let me address each of these briefly in the context of 
wireless markets. Is there a systemic problem? A systemic 
problem is some type of widespread problem that could actually 
be addressed by a change in the rules of the game, and that's 
different from a problem that occurs because it's a new 
technology and it hasn't been perfected yet or simple 
incompetence and human error. A lot of the consumer problems 
with wireless are endemic to almost any type of dealing with a 
company or with the Federal Government. I actually spent more 
time trying to straighten out my daughter's name on her Social 
Security card because I was given the wrong information over 
the phone on what kind of ID I had to bring to the Social 
Security office than I have ever spent dealing with my wireless 
company. So consumer complaints and problems are kind of 
endemic. But is there a systemic problem regulation can solve?
    I'm skeptical that regulation of specific contract terms 
can do much to solve any type of a systemic problem here, 
because most of the evidence shows us that the wireless market 
is fairly competitive. Even in the Senators' opening 
statements, we heard numbers quoted anywhere from 3.6 to 50 or 
more competitors. If you look at the FCC's wireless report, 
they conclude the market's effectively competitive. This is 
consistent with most academic research on competition that 
finds that when you have three or four major competitors you're 
usually going to get a fairly competitive result.
    So I'm skeptical about regulation of contract terms. Does 
competition always drive companies to disclose accurately and 
correctly? Many times yes, not always. There may be a strong 
argument for some type of regulation looking at disclosure. It 
has to be very carefully crafted so the consumers actually 
understand what the regulation is meant to accomplish, though.
    Alternative solutions? One of the most significant 
solutions if there is a problem is more competition through 
greater allocation of spectrum to wireless service.
    Finally, unintended consequences. The single most important 
unintended consequence we have to think about is this. Wireless 
contracts are not comprehensively regulated and that means if 
we regulate some terms of the contract the companies can simply 
change other terms of the contract to make up for it. This is 
true whether you think the industry is competitive or even if 
it were a monopoly. Regulatory commissions discovered a long 
time ago through 100 years of experience that if you don't 
comprehensively regulate something, like the terms of an 
agreement with a consumer, you often find that it's basically 
playing whack-a-mole. You regulate one term, but the company 
changes something else.
    Unless we are willing to actually look at comprehensive 
regulation of all of the terms of the cell phone contract, 
which I don't think is very wise, I'm skeptical that regulation 
of particular terms like termination fees is actually in the 
long run going to benefit consumers, because other terms in the 
contract will change to substitute for things the companies can 
no longer do.
    [The prepared statement of Dr. Ellig follows:]

   Prepared Statement of Dr. Jerry Ellig,\1\ Senior Research Fellow, 
                Mercatus Center, George Mason University
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are solely my own and are 
not official positions of the Mercatus Center or of George Mason 
University.
---------------------------------------------------------------------------
    Mr. Chairman and Distinguished Members:

    Thank you for the opportunity to appear here today and testify on 
consumer wireless issues. I am a senior research fellow at the Mercatus 
Center, a research, education, and outreach organization affiliated 
with George Mason University and located a short Metro ride away on the 
Arlington, Virginia campus. The Mercatus Center's mission is to bridge 
academics and policy: we conduct interdisciplinary research in the 
social sciences that integrates practice and theory.
    My own research focuses primarily on the causes and consequences of 
regulation, primarily ``economic'' regulation of network industries 
like telecommunications. During the past several years, I have 
published several studies examining consumer issues in wireless 
telecommunications--particularly the itemized ``add-on'' charges that 
appear on consumers' wireless bills. The two most relevant studies I 
have attached as appendices to this testimony.\2\ Between 2001 and 
2003, I also served as deputy director of the Office of Policy Planning 
at the Federal Trade Commission. While the FTC does not exercise 
jurisdiction over telecommunications, this experience familiarized me 
with the general economic concepts used to analyze the kinds of 
consumer protection issues under discussion today.
---------------------------------------------------------------------------
    \2\ Jerry Ellig and James N. Taylor, ``The Irony of Transparency: 
Unintended Consequences of Wireless Truth-in-Billing'' Loyola Consumer 
Law Review 19, 43 (2006), available at http://www.mercatus.org/
publications/pubID.2494/pub_detail.asp; Jerry Ellig, ``Costs and 
Consequences of Federal Telecommunications Regulation,'' Federal 
Communications Law Journal 58, 37 (2006), available at http://
www.mercatus.org/publications/pubID.1229/pub_detail.asp.
---------------------------------------------------------------------------
    Consumer wireless issues involve two types of proposals that are 
conceptually distinct: regulation of specific contract terms and 
regulation of disclosures. To understand the effects of regulations 
mandating specific contract terms or disclosures, three questions need 
to be answered:

        1. Is there a systemic problem that regulation might solve?

        2. How effective are alternative solutions?

        3. What are the likely unintended consequences of new 
        regulation?

1. Is there a systemic problem that regulation might solve?
    A systemic problem is a widespread problem created by the existing 
``rules of the game'' under which wireless companies compete. This kind 
of problem should be distinguished from other sources of consumer 
complaints that cannot be readily remedied by new regulation, such as 
ordinary misjudgment or human error, misunderstanding, sloppy execution 
of corporate policy, technology that does not quite yet do what people 
would like it to do, or bad-faith actions that are already prohibited 
under existing rules. These other types of problems are either self-
penalizing in competitive markets or can be dealt with via enforcement 
of existing regulations.
Contract Terms
    In competitive markets, the bundle of contract terms offered to 
consumers tends to be the combination that consumers are most willing 
to accept, given all the relevant costs and tradeoffs. That does not 
mean some consumers will not wish that some contract terms were 
different. As consumers, we always want more for our money, and since 
we are all different, a standardized contract will not always please 
everyone. But when competition exists, competitors have strong 
incentives to find out what combination of contract terms will best 
satisfy most consumers, and offer tailored contracts when they can 
identify substantial groups of consumers who prefer something else.
    The wireless market is undoubtedly the most competitive of all 
telecommunications markets. The Federal Communications Commission's 
annual wireless reports amply demonstrate this.\3\ There are multiple 
competitors, the vast majority of Americans have a choice of three or 
more, average revenue per minute of use has steadily declined, 
subscribership and usage have steadily increased. ``Churn'' rates 
between 1.5 percent and 3.0 percent per month imply that the typical 
wireless carrier can expect to lose about one-third of its customers 
every year.\4\ Given the extent of competition, it is unlikely that 
regulation of specific contract terms can significantly increase 
consumer welfare.
---------------------------------------------------------------------------
    \3\ See, e.g., Federal Communications Commission, Annual Report and 
Analysis of Competitive Market Conditions with Respect to Commercial 
Mobile Services, WT Docket No. 06-17 (Adopted Sept. 26, 2006), 
available at http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-06-
142A1.pdf. [Hereinafter ``FCC Wireless Report.'']
    \4\ Id. at 65.
---------------------------------------------------------------------------
    A critic seeking to dispute this contention might characterize 
wireless communication as an oligopoly--that is, a market with a small 
number of competitors. Despite the fact that it ends in ``-poly,'' the 
term implies nothing about the relationship between the number of 
competitors and consumer welfare. The relationship between the number 
of competitors, their market shares, and the competitiveness of markets 
has been studied extensively by scholars for 50 years. This research 
reveals that there is no simple rule of thumb that tells us how many 
competitors, or what level of concentration, makes a market 
``competitive.''
    Recent studies on the relationship between concentration and prices 
have produced a wide variety of results that depend on the facts and 
circumstances in the industry studied. Some empirical research on 
railroads, for example, finds that two competitors are sufficient to 
produce the results one would expect in a competitive market.\5\ Across 
a variety of industries, a number of studies find a positive 
relationship between concentration and prices, but not all do.\6\ 
Laboratory experiments find that four sellers are usually enough to 
produce a competitive market outcome.\7\ In general, the results seem 
to vary across industries and with the type of information buyers and 
sellers have.
---------------------------------------------------------------------------
    \5\ Paul A. Pautler, ``Evidence on Mergers and Acquisitions,'' 
Antitrust Bulletin 48, 1 (Spring 2003), pp. 181-82, and references 
cited therein.
    \6\ Id. at 189-95.
    \7\ Id. at 200-01.
---------------------------------------------------------------------------
    The DOJ/FTC Merger Guidelines reflect the fact that there is no 
simple or mechanical relationship between the number of competitors and 
the competitiveness of the market. The guidelines indicate that mergers 
in more concentrated markets face a heightened level of review, but 
such mergers can still be legal.\8\ Similarly, the FCC states in its 
2006 wireless report, ``We note that market structure is only a 
starting point for a broader analysis of the status of competition 
based on the totality of the circumstances, including the pattern of 
carrier conduct, consumer behavior, and market performance. . . .'' \9\ 
Examining the totality of the circumstances, the FCC concluded that 
wireless is effectively competitive in both urban and rural areas.\10\
---------------------------------------------------------------------------
    \8\ See Section 1.5, Concentration and Market Shares. A copy of the 
guidelines is available at http://www.usdoj.gov/atr/public/guidelines/
horiz_book/toc.html.
    \9\ FCC Wireless Report, at 40.
    \10\ Id. at 4, 40.
---------------------------------------------------------------------------
Disclosures
    Economists like to say that well-functioning markets require well-
informed consumers. This shorthand statement can generate significant 
misunderstandings. Information, like anything else, is a scarce 
commodity that requires resources to produce and disseminate. Expecting 
all consumers to have perfect information is an ideal that neither 
competitive markets nor enlightened government regulation can achieve. 
Fortunately, that is not necessary for competition to work reasonably 
well.
    For competition to function well, it is sufficient that enough 
consumers have sufficiently good information to understand the material 
contract terms that are important to them. Under those conditions, a 
wireless firm that offers an inferior set of contract terms will find 
that it loses current and prospective customers to competitors. Indeed, 
the well-informed consumers who comparison shop create significant 
benefits for the consumers who are not very well-informed or who do not 
want to bother with comparison shopping. A firm whose contract terms 
are difficult to understand will find itself at a competitive 
disadvantage versus firms that clearly disclose contract terms. 
Information disclosure can facilitate competition, but competition also 
drives companies to disclose information.
    For this reason, new disclosure regulations can only be justified 
if accompanied by a coherent theory explaining why competition 
systematically fails to produce clear disclosure, along with strong 
evidence that this is a significant systemic problem. Mandated 
disclosures should seek to ensure that enough consumers have 
sufficiently good information to understand the material contract terms 
that are important to them. Before mandating disclosures, 
decisionmakers must understand three key facts that require empirical 
research on consumer behavior:

        1. How many well-informed consumers are ``enough'' to make 
        competition effective? The answer to this question helps 
        determine what percentage of consumers actually need to 
        understand the mandated disclosures.

        2. How much information is enough? The answer to this question 
        helps determine the extent of the required disclosure.

        3. What material contract terms are actually important to many 
        or most consumers? This is different from asking what contract 
        terms the legislator, regulator, or small group of vocal 
        consumers thinks is important.
2. How effective are different alternatives?
    When there is a systemic problem, there are usually alternative 
solutions available. Common sense suggests that decisionmakers should 
evaluate the pros and cons of each alternative before deciding which 
one to pursue.
    Scholars affiliated with the Mercatus Center frequently offer 
comments to regulatory agencies when they propose new regulations. We 
find that agencies often feel that the scope of the alternatives they 
can consider has been severely limited by legislation--either because 
Congress ordered them to issue a specific regulation, or because 
Congress ordered them to issue some kind of proscriptive regulation, 
even though the agency might have been able to identify other, more 
effective approaches. For this reason, it is especially important that 
decisionmakers in Congress consider alternative solutions.
Contract Terms
    Competitive markets tend to produce the bundle of contract terms 
that most consumers are most likely to want. The proposed legislation, 
S. 2033, reflects a belief that wireless markets have failed to do 
this, and so it mandates specific contract terms. But if competition is 
insufficient to produce the blend of contract terms consumers are most 
willing to accept and pay for, policymakers could address the root 
cause of the problem through competition policy, rather than 
regulation.
    More competition in wireless requires more spectrum for wireless. 
As part of the Mercatus Center's ongoing program to assess the costs 
and outcomes associated with regulation, I recently examined the costs 
of major Federal telecommunications regulations.\11\ Out of all Federal 
telecommunications regulations, spectrum policy has by far the biggest 
effect on consumer welfare. The costs of the current spectrum policy 
are large in an absolute sense--in the neighborhood of $77 billion or 
more annually. Spectrum allocation is by far the costliest aspect of 
U.S. Federal telecommunications regulation, and it represents a very 
large share of the total. Even if the actual costs of U.S. spectrum 
allocation policy were only one-tenth the size that scholars estimate, 
they would still account for more than 20 percent of the total consumer 
cost of telecommunications regulation.\12\
---------------------------------------------------------------------------
    \11\ See Ellig, supra note 2.
    \12\ Jerry Ellig, ``The Economic Costs of Spectrum Misallocation: 
Evidence from the United States,'' presented to the conference on 
Spectrum Policy in Guatemala and Latin America, Universidad Francisco 
Marroquin, Guatemala City, Guatemala, June 9-10, 2005, available at 
http://cadep.ufm.edu.gt/telecom/lecturas/JerryEllig.pdf.
---------------------------------------------------------------------------
    During the past two decades, U.S. spectrum policy has gradually 
become more market oriented. In 1993, Congress directed the FCC to 
auction an additional 120 MHz of spectrum for wireless communications. 
Consumers have reaped significant benefits as a result.\13\ The 
upcoming 700 MhZ auction will eventually make more spectrum available 
for commercial use. But doling out a few more slices of spectrum is not 
the same thing as a comprehensive, market-based policy. Current policy 
still generates large inefficiencies by preventing reallocation of 
additional spectrum to its most highly-valued uses--most likely 
wireless voice and data communications. At a minimum, Congress could 
facilitate wireless competition by directing the administration to 
identify additional spectrum for auction that is currently unused or 
under-utilized by Federal agencies.
---------------------------------------------------------------------------
    \13\ The results are documented succinctly in Robert W. Crandall 
and Jerry A. Hausman, ``Competition in U.S. Telecommunications: Effects 
of the 1996 Legislation,'' in Sam Peltzman and Clifford Winston (eds.), 
Deregulation of Network Industries: What's Next? (AEI-Brookings Joint 
Center for Regulatory Studies, 2000), at 102-07.
---------------------------------------------------------------------------
Disclosures
    If the goal is truthful and accurate disclosure of material 
information that consumers want to know, there are several possible 
alternative approaches. One option is specific, mandated billing 
formats that require certain types of disclosures and prohibit others, 
but this is hardly the only possible approach. Self-regulation via 
industry codes of conduct is another possibility. Another regulatory 
approach would be to require accurate disclosure of all material 
contract terms and charges without mandating the disclosure or billing 
format.
    One particular regulation affecting disclosure required by S. 2033 
involves a specific issue I have researched: wireless add-on charges. 
The language of the bill might prevent carriers from adding charges 
that recover regulatory costs or universal service assessments, though 
they could still treat taxes as an add-on charge.
    Wireless add-on charges can be substantial, but most of them are in 
fact taxes. Using 2004 data, James N. Taylor and I estimated that total 
wireless add-on charges amounted to $110 per subscriber per year, or 
$9.20 per month, for a total of $18.8 billion. Add-on charges accounted 
for about 15.5 percent of the average wireless bill. Three-quarters of 
these charges, however, were Federal, state, and local taxes--which 
even S. 2033 would permit as a separate line item on the bill. About 16 
percent of wireless add-on charges consisted of regulatory fees 
(averaging $1.43 per subscriber per month), and about 9 percent was 
Federal universal service contributions (averaging 83 cents per 
subscriber per month).\14\
---------------------------------------------------------------------------
    \14\ See Ellig and Taylor, supra note 2, at 52-59.
---------------------------------------------------------------------------
    Essentially, then, the legislation affects $2.00-$3.00 per month of 
add-on charges on the subscriber's bill. A naive observer might think 
that the legislation's prohibition would therefore save every wireless 
consumer several dollars a month, since these add-on charges would be 
prohibited. But since the price of wireless service is not regulated, 
the carriers could simply roll these charges into the advertised 
contract price--either by raising the price, or by refraining from 
price reductions they would otherwise have offered.
    The problem with this approach is that regulatory costs and 
universal service assessments behave pretty much like taxes. Companies 
have little control over these costs; the costs are imposed as a result 
of government decisions. Federal universal service assessments are 
adjusted quarterly, and state universal service assessments are also 
adjusted at various intervals. New regulatory mandates could appear at 
any time. Yet most wireless contracts guarantee the consumer a fixed 
price for at least 2 years. If the carrier must recover the regulatory 
and universal service costs in the contract price, then the carrier 
bears the risk that these costs might change over the life of the 
contract. If the carrier bears this risk, it will insist on a higher 
price or a change in some other contract term to compensate it for 
bearing this risk. There is no reason to believe that this new blend of 
contract terms will make consumers better off.
    The FCC seems to have struck a reasonable balance in its current 
treatment of regulatory and universal service charges on wireless 
bills. Companies can add these charges to the bill if they choose, but 
they must disclose an estimate of these charges before the customer 
signs the contract. For regulatory charges, different carriers have 
actually taken different approaches. In 2004, some imposed minimal 
regulatory charges, while others imposed charges in the $1.55-$1.75 
range.\15\ The FCC's current approach addresses the core consumer 
protection concern--ensuring that consumers are informed of possible 
add-on charges before they commit to a contract--without getting the 
FCC into the business of regulating the size of the charges.
---------------------------------------------------------------------------
    \15\ See Ellig and Taylor, supra note 2, at 58.
---------------------------------------------------------------------------
3. What are the unintended consequences?
    Even when decisionmakers select the most effective means of 
accomplishing the desired outcome, regulation can have unintended (and 
undesirable) consequences for consumers. The challenge is to regulate 
only in those situations where the intended, desirable consequences 
outweigh the unintended, undesirable consequences.
Contract Terms
    Wireless service has a variety of dimensions, such as coverage 
areas, roaming, call clarity, dropped calls, whether the phone can be 
used as a computer modem without additional charges, quality of 9-1-1 
service, and availability and responsiveness of customer service. 
Wireless contracts have many dimensions, such as the monthly fee, 
treatment of add-on charges, charge per minute over the monthly 
allowance, pricing of international calls, definition of free 
``evening'' times, roaming charges, early termination fees, free or 
discounted telephones, and renewal clauses.
    Terms of wireless contracts are not comprehensively regulated. As a 
result, carriers are free to alter any unregulated contract term--or 
even invent new ones--in response to new mandated contract terms. One 
specific example is the tradeoff between free telephones and early 
termination fees. S. 2033 requires companies to pro-rate early 
termination fees, apparently in the belief that such a ``reasonable'' 
requirement could induce carriers to continue offering free telephones. 
But there is a more general point here that should not be lost in the 
debate over one particular contract term. With dozens of unregulated 
contract terms and hundreds of contract terms that have not yet been 
invented, the carrier can always alter something else in the contract 
to make up for any revenue lost due to a mandate. Even a carefully 
crafted mandate cannot give consumers the proverbial ``free lunch.''
    Mandated contract terms are unlikely to improve consumer welfare 
unless decisionmakers have evidence that the new bundle of contract 
terms, including both the mandates and other changes the carriers would 
likely make in response to the mandates, is better for consumers than 
the current bundle of terms.
Disclosures
    Even disclosure requirements can have unintended negative 
consequences for consumers. One problem occurs when so much disclosure 
is required that consumers experience ``information overload''; they 
simply ignore or only partially process all the information the company 
is required to give them. Another problem occurs when decisionmakers 
attempt to design disclosures without knowledge of how consumers 
interpret them. A recent FTC study, for example, found that significant 
percentages of both prime and subprime borrowers could not correctly 
identify various mortgage loan costs using information that lenders are 
currently required to supply, but redesigned disclosures substantially 
increased consumer understanding.\16\ The point is not that mandated 
disclosures are never appropriate, but rather that decisionmakers need 
to do a substantial amount of homework in order to design mandated 
disclosures that actually convey information accurately to consumers. 
The FTC mortgage study is an excellent example of the type of homework 
that should be undertaken before new disclosures are mandated.
---------------------------------------------------------------------------
    \16\ James M. Lacko and Janis K. Pappalardo, Improving Consumer 
Mortgage Disclosures: An Empirical Assessment of Current and Prototype 
Disclosure Forms, Federal Trade Commission Bureau of Economics Staff 
Report (June 2007), available at http://www.ftc.gov/be/econrpt.shtm.
---------------------------------------------------------------------------
    One aspect of S. 2033 would actually reduce, rather than increase, 
transparency and disclosure on wireless bills. A well-functioning 
democracy, like a well-functioning market, requires transparent 
transmission of information that allows citizens to evaluate the pros 
and cons of various policies. But if carriers cannot break out 
universal service and regulatory charges separately, then the 
substantial costs arising from these regulatory mandates will be 
concealed. Unfortunately, these are precisely the types of costs that 
consumers are least likely to be aware of or inform themselves about. 
If these costs are concealed, consumers have little or no ability to 
assess whether the benefits they receive from the mandates are worth 
the cost. Deprived of such information, consumers will be less 
effective participants in the public policy debate over regulation of 
wireless service.
    Note that I am not saying that regulatory mandates are unwise 
because they create costs. I suspect, for example, that many wireless 
customers would say that an additional dollar or so per month for 9-1-1 
service is a good deal. But if the cost information is concealed, 
consumers will never get to make that assessment.
Conclusion
    This Committee is considering proposals that would alter the terms 
of wireless contracts and mandate the content and form of certain 
disclosures. To determine which proposals will actually benefit 
consumers, decisionmakers need to answer three questions:

        1. Is there a systemic problem that regulation might solve?

        2. How effective are alternative solutions?

        3. What are the likely unintended consequences of new 
        regulation?

    Given the substantial evidence on the competitiveness of the 
wireless market, I am skeptical that there is a systemic problem that 
regulation can solve. If there is a problem, I suspect Congress can 
more effectively solve it by requiring the administration to free up 
underutilized government spectrum for auction, to enhance competition 
in wireless services. Any new regulatory mandates should also be 
evaluated for unintended consequences, and I would like to emphasize 
two: (1) Since wireless contracts are not comprehensively regulated, 
companies could compensate for any mandates by altering other contract 
terms; consumers would likely be worse off as a result. (2) Preventing 
wireless companies from itemizing regulatory and universal service 
costs would reduce transparency and disclosure, or precisely the kind 
of information citizens need to make their own assessments of Federal 
policies affecting their wireless bills.
    Even if you do not agree with all of my conclusions, I hope you 
will ask these three questions and demand rigorous answers. Without 
those answers, new regulatory mandates for wireless are just a faith-
based initiative.
    Thank you for your time.

    Senator Klobuchar. Thank you very much, Dr. Ellig, and 
thank you to all of our witnesses.
    I'm going to start out here with some questions and then I 
think we'll be able to do another round of questions as well. I 
wanted to sort of address what you were talking about, Mr. 
McAdam, about letting the industry compete, I think you said, 
in your testimony. I think in that way we have the same goals, 
because I believe you can have a competitive industry when 
people have full knowledge and they're able to make decisions 
based on price comparison, like if you go to gas stations and 
you're trying to find out what the cheapest gas is, or based on 
the service quality comparisons.
    I appreciate the fact that Verizon has been out front in 
doing some of the things that we're asking in this legislation, 
which I feel is very tailored. On the consumer complaints, 
we've heard from Attorney General Swanson, Mr. Pearlman and 
others regarding the early termination fee abuses, with regard 
to the cancellation issues and the transparency of contracts, 
and the issue I first wanted to talk about today, the service 
quality, because I think it's very difficult for my middle 
class people in Minnesota who don't have a lot of money, 
disposable income, to make their decisions if they don't have 
full information.
    I think anyone who has turned on the TV, which my people do 
in Minnesota, or read a newspaper, is likely to see more than a 
few wireless company advertisements, and this is how they are 
getting their information, with slogans such as ``Fewest number 
of dropped calls'' or ``More bars in more places'' or ``Can you 
hear me now?'' or ``Most reliable service'' in a particular 
city.
    The legislation that Senator Rockefeller and I have 
introduced would simply require that cell phone companies 
disclose to the FCC the number of dropped calls, if you're 
making these claims, within a geographic area, so that my 
consumers can best decide which service is better for their 
area. This must be the way you have determined that people are 
making decisions on whom to choose. Yet our people are unable 
to evaluate whether these claims are true.
    I would like to know whether you support this measure in 
our bill or whether you oppose it, and why.
    Mr. McAdam. Senator, coverage is obviously a very important 
issue to our customers and we have established our brand as the 
Nation's most reliable wireless service and coverage is key to 
that. We are very, very focused on not only measuring what our 
performance is--we drive millions of miles a year testing our 
network to make sure we know where the issues are, and then we 
do publish our coverage maps, not only online but also in our 
comprehensive collateral package that we show to customers when 
we first provide service.
    We have dealt with the technical vagaries of predicting 
coverage by allowing customers to do what we call the 30-day 
test drive. You can put whatever map you want on a website. You 
can do your best to predict what the coverage would be. But the 
proof of the pudding is really in does the customer use the 
device that they have chosen--and by the way, there are lots of 
variations between device performance--but can they use the 
device they have chosen where they live, work, and play.
    So our offer to customers is to take the device, use it 
wherever you want for 30 days, and not only can you return it 
without any ETF, but you can--we will also not charge you for 
one call----
    Senator Klobuchar. And Mr. McAdam, do all the carriers 
provide that kind of service?
    Mr. McAdam. Well, I think this is a perfect example of 
competition, Senator, because we have led the industry----
    Senator Klobuchar. Mr. McAdam, though, could you just 
answer my question? Do the other carriers also allow you to get 
out of your contract in 30 days?
    Mr. McAdam. At this time, some are at 30, some are at 14 
days.
    Senator Klobuchar. Mr. McAdam, what I asked you basically, 
though, when you're advertising about these dropped calls, why 
you cannot disclose that information to the FCC?
    Mr. McAdam. Well, I think we do, we do disclose in a number 
of ways what our performance is.
    Senator Klobuchar. Do you disclose the number of dropped 
calls by region, where my people--let me just give you an 
example of this. Let us give out these things--I was driving 
to--no, I just wanted to hand those things out so he could look 
at it.
    I was driving to Fosston, Minnesota, going around to visit 
all 87 of my counties, and one of the legislators brought this 
to my attention. It's the, I believe the second page in your 
packet there, that you have a billboard up for Verizon right 
near Fosston that says ``Count on Verizon Wireless to keep you 
connected,'' and the phone service--and you can see the road 
that we were on--didn't work for Verizon while you could see 
the billboard. We just checked it out yesterday. The guy who is 
in my Moorehead office checked it out and his Verizon phone 
service didn't work within yards of that billboard.
    So you can imagine that it's difficult for customers to 
make a decision like this when you actually have a billboard up 
telling them to get your service and then it doesn't work.
    I'd say the other piece of this, which we identified 
earlier, is they're stuck in a 2-year contract and then people 
move and then they are not able to get out of the contract. So 
your 30-day deal doesn't help them.
    Mr. McAdam. Well, you brought up a number of important 
issues, Senator. First, I think the 30-day test drive does 
allow the customer to try this in any one of the locations to 
see if it works and then we do take it back.
    But I think, secondly and an area where this committee can 
really help, is around streamlining site requirements. This is 
one that we have left to the States and the municipalities to 
set their own rules. I personally live in a town that it has 
taken us nine and a half years of legal battles in order to get 
a site approved. The largest number of complaints that I get 
when I'm out in town is, why can't I make a call at the local 
King's grocery store?
    So we can listen to customers, we can upgrade our network, 
but if the regulatory bodies continue to get in the way of the 
industry we cannot meet customers' needs.
    Senator Klobuchar. Mr. McAdam, I'm going to give you a map 
of all the cell phone towers around this little town of Fosston 
and I think Attorney General Swanson would attest that they 
would not have legal battles over having a cell phone tower 
there. We have talked to people in the area and I don't believe 
that's the problem. They're not concerned about the aesthetics 
of it. They just want to get phone service.
    Mr. McAdam. Well, I'd certainly be happy to investigate 
that particular issue. We do work very hard and we spend about 
$4.6 billion a year on improving our cell coverage. But 
Senator, I certainly wouldn't stand here and tell you that 
every part of the country is perfectly covered.
    Senator Klobuchar. And I understand that, and I really 
appreciate actually how you've expanded your coverage. I can 
get my coverage in the Roslyn Metro Station, which is I don't 
know how many hundreds of feet underground and it's amazing. 
But my constituents can't get it. And I understand that it will 
take time to expand. My issue is, if they're not getting 
correct information to make their decisions, and that's all 
we're trying to do. We're not forcing you to put up towers. 
We're not trying to rate regulate you. We're just simply saying 
give the people the correct information.
    Just with today's technology, when all of these carriers 
are advertising lowest number of dropped calls, I don't 
understand how they can do that and then not give the consumers 
that information by zip code or by county about who competes 
with the dropped calls. I've heard it could be because of 
foliage and, as you can see, there's not a lot of foliage in 
that map in Fosston, Minnesota, and other things. But they're 
all dealing with the same foliage and the same hills, and so if 
they were able to compare the cell phone service by an area 
then they could better decide. That's all we're trying to do.
    Mr. McAdam. Like any consumer product, Senator, I think the 
best thing to do is ask your friends and neighbors and to try 
the service yourself.
    Just one last point around the predictability of coverage. 
One example that I use is the most popular cell phone that 
customers have demanded is the Motorola Razr. It is also one of 
the products that, because it is so thin, because it is so 
fashionable, it has one of the poorer propagation 
characteristics and dropped call characteristics. I have had 
many customers tell me directly: I wish this phone would 
perform better from a dropped call perspective, but I sure love 
the way it looks when I pull it out of my pocket, and therefore 
I'm willing to take it.
    Senator Klobuchar. Do customers know that the Razr phone 
has a higher rate of dropped calls?
    Mr. McAdam. As I said, I've had many customers tell me 
exactly that as they were purchasing the device.
    Senator Klobuchar. But that's the kind of information we're 
talking about that would be helpful if we could evaluate the 
number of dropped calls by equipment and area.
    Mr. McAdam. And I think that opens up the issue of having 
again States involved and highly regulating the industry. In 
California, one of the PUC commissioners said exactly that, 
that he should have a chance to look at every device before we 
launched it and decide if that device was up to the 
requirements of the State. Is that really giving customers 
choice and does that really not slow down the industry and 
stifle innovation? I think it does.
    Senator Klobuchar. Again, Mr. McAdam, and I'll turn this 
over to Senator Thune, but our legislation doesn't require that 
a commissioner in California look at the coverage area. Our 
legislation simply asks the FCC to develop some reasonable 
rules about how we could best geographically give the consumer 
information on dropped calls.
    Mr. McAdam. My understanding is, though, that the States 
would be allowed to add additional features over and above 
what's been established by the legislation here. Our view is 
that if we want a national framework we need a national 
framework, not 51 national frameworks.
    Senator Klobuchar. And as you know, Mr. McAdam, because the 
FCC has said that the States can't regulate rates, a lot of 
their efforts, as Ms. Swanson knows, to do this have been 
stymied, and that's why we're introducing this legislation.
    Senator Thune?
    Senator Thune. Thank you, Madam Chair.
    I represent a State, of course, that's very rural as well 
and doesn't have much foliage, so that's not generally a 
problem we have to contend with. We name our trees in western 
South Dakota.
    But I am interested in the access that people have in rural 
areas. Amazingly, South Dakota has 500,000 wireless customers, 
which I think is a remarkable figure considering we have a 
population of 760,000. I remember a couple years ago, my 
father, who will be 88 in December, we got him a cell phone. He 
lives in a town of about 600 people. I initially was a little 
skeptical that he'd ever be able to use it out there, but 
actually it works very, very well. So whatever is happening out 
there is working--extending coverage to more areas of the 
country, I think the quality continues to improve, and prices 
have come down substantially.
    I know there are some things that are being addressed here 
in the form of the legislation that is before--that you are 
testifying about today and those are questions I guess to ask 
of you to see how that legislation would impact the service 
that you deliver and how it would impact prices and that sort 
of thing.
    But I guess I'm interested in knowing just as a general 
kind of question with regard to the consolidation that has 
occurred in the industry, whether or not there's enough 
competition out there. How has that affected you, Mr. McAdam, 
with the number of players, and particularly I guess 
competition in rural areas of the country and how does what's 
happening in the industry generally affect--Google's been 
talking about going wireless. You've got folks who are looking 
at getting into this industry, but I suspect that the barriers 
to entry are pretty high.
    In my area we have a lot of smaller providers, 
cooperatives, independent telephone companies, that deliver 
services. But what is just the overall general state of 
competition in the wireless industry and how does that impact 
the consumer? And if other members of the panel would like to 
speak to that issue I would welcome your answers as well.
    Mr. McAdam. Would you like me to start, then, Senator?
    Senator Thune. That would be great if you could, yes.
    Mr. McAdam. I think that having four strong national 
carriers and seven really major carriers and, as was indicated 
in many of the testimonies, even in rural markets more than 
three on average carriers to choose from, has really put the 
power in the customer's hands.
    Now, on the four carriers, I don't believe that means they 
can dominate the market, because we're all in the roughly 25 
percent or less network--I'm sorry--customer share. So what we 
have to do is work very hard as we approach 80 percent of the 
population having coverage already. We have to work extremely 
hard to hold our customers as well as attract as many other 
customers from our competition as we can.
    That's why you see the constant ratcheting up of 
applications that are available and services that are 
available. One that came about just recently that got a lot of 
press was the Apple iPhone. I applaud Steve Jobs and I applaud 
Stan Sigmund for bringing that product to market. We had the 
chance to do it, but we weren't regulated and told that we had 
to bring that product to market. In fact, we decided not to, 
and in the next 30 days we will launch a phone that we believe 
takes the competitive market up to the next level so that we 
can compete against AT&T and Apple.
    So I think it's very healthy, and you hear a lot about the 
Yahoos and the Googles and the Intels joining the market, 
either through a Wi-Fi or a WiMax application or actually 
joining in the 700 megaHertz. That says to me that it is a 
healthy industry, that other competitors are willing to come 
in, and when they do they will take the competition to a 
further level yet. I don't think that is indicative of an 
industry that needs regulation.
    Senator Thune. Mr. Murray?
    Mr. Murray. Senator Thune, if I could also address that. I 
think you raise an excellent question, which is where is 
consolidation taking us. We should remember where this industry 
came from. The reason that there are as many players in each 
marketplace is not just the result of competition. It's 
actually the result of a policy the FCC had in place on 
spectrum caps, where that policy ensured that there was at 
least four players in every market. That was how we allocated 
spectrum. Spectrum again is the public's resource. The public 
owns it. We let companies use that resource, but with the 
rights that come along with that spectrum there are also some 
responsibilities.
    If we use as a baseline the landline telephone market, this 
market looks competitive because we have about 90 to 95 percent 
plus residential sort of market domination by the major phone 
companies in those markets. But again, if we use the consumer 
electronics marketplace--I'm not saying the industry is not 
competitive, but it's not as competitive. And we've gone from 
six major national carriers to really two dominant national 
carriers with four carriers.
    But what we miss sometimes is the power of the bundle, 
where if I've got a local telephone service where I'm dominant 
in my region, I'm the only carrier who can also offer the local 
and wireless bundle plus high-speed Internet, that's really 
hard to compete with if you're a player who doesn't have all 
those assets.
    So we used to have these plans for $20 where consumers--3 
and 4 years ago, I remember Sprint was offering a $20 plan and 
there were these great deals where companies were trying to get 
each other. I don't see those plans out there any more. There 
are some plans that are better deals than others. But again, we 
see most U.S. cell phone subscribers paying more than $500 a 
year for their service. That's a lot of money.
    Senator Thune. Madam Chair, I have to get to another, to 
something else. I have to be--I have to excuse myself here. But 
I would like to have a question, if I could, directed to Mr. 
Pearlman, maybe have you answer, and if not now for the record, 
but dealing with complaints. We had in South Dakota I think 
over the past 3 years 970 complaints about wireless service, 
which to me doesn't seem like, if you have 500,000 users, a 
lot.
    But I'm interested in knowing, because you've mentioned the 
high rates of customer dissatisfaction, do those rates of 
satisfaction vary significantly between areas where you've got 
a greater number of providers versus those with a fewer number 
of providers, or are those low approval ratings primarily a 
function of what you describe as unfair charges and prices and 
that sort of thing? But if you could compare, I guess, the 
areas of the country where you've got more providers, more 
competition, and those with fewer. Does that affect the level 
of dissatisfaction and therefore the number of complaints?
    Mr. Pearlman. Sure. I think West Virginia has been lucky in 
one sense in that we actually have a fairly large number of 
wireless customers who are served by smaller carriers. 
Easterbrook Cellular, Highland Cellular are two that come to 
mind. West Virginia Wireless is another. These are much more 
focused on the West Virginia market. They are in my experience, 
our experience, much more focused on customer satisfaction and 
quality of service. They have typically been much more 
responsive to our inquiries and raising issues of interest and 
concern.
    For example, Easterbrook Cellular, Highland Cellular, in 
response to our prodding rolled out very, very advantageous low 
income customer lifeline plans. This was a condition of their 
receiving ETC status.
    So I think that's had an impact, frankly, on the number of 
complaints that we get from consumers and also the number of 
complaints that come in to our public service commission. I 
should point out, because we're an independent division of our 
commission, we don't handle, if you will, the intake of 
customer complaints. So we're dependent, if you will, on the 
public service commission's tracking of those.
    I will say that the number that Senator Sununu pointed out 
for West Virginia is about accurate, although we have a legacy 
system that doesn't really do a particularly good job, and I 
think the staff member that oversees the informal complaint 
process would back me up on this, doesn't do a very good job of 
actually identifying what the complaints are, what type of--
what those are in terms of billing. If it's a billing 
complaint, is it a line item? Is it an early termination fee? 
There's really no granularity in that data.
    What it does seem to our experience--and this I think I can 
also speak on behalf of NASUCA--is it seems like the complaints 
tick up rather dramatically in areas where the larger carriers 
are present and competing with one another. The example that I 
give in my written testimony dealt with Cingular and the 
California Public Utility Commission's actions with regard to 
Cingular aggressively marketing its coverage when in fact it 
didn't serve areas in which it was aggressively marketing its 
service.
    There I think the number of complaints that were actually 
filed or submitted--and this includes informal and formal 
complaints--was something in the neighborhood of a thousand, 
2,000 complaints to the Commission, when at the same time the 
number of trouble tickets opened by Cingular relating to these 
types of issues was in the neighborhood of 144,000 over the 
same period of time. So clearly customers contact different 
entities when they have service problems. So the number that 
are actually coming into the carriers versus the number that 
are coming into the Commission, you're going to have 
significant mismatch in various areas.
    I think the State of Illinois sent me some figures on their 
complaints and generally over the past 3 years wireless 
complaints exceeded long distance and local service complaints. 
So you're going to have a different experience in each area and 
it is going to be driven I think to some extent by who the 
carriers are, the customer quality orientation of the carriers, 
and also to some degree by what the response of the public 
service commissions or public utility commissions are to those 
complaints.
    Quite honestly, in West Virginia if a consumer makes an 
informal complaint about wireless to our commission, in most 
cases I think the answer is: We don't regulate wireless; go to 
the FCC. And after a period of time, folks get the message.
    Senator Thune. Thank you, Madam Chair.
    Thank you.
    Senator Klobuchar. Thank you. Thank you, Senator Thune.
    I want to get to some other issues as we explore how we can 
best make this a transparent market so consumers can make the 
best decisions so that we can then have true competition. I 
wanted to ask you, Attorney General Swanson--and I want to 
clarify here this area, where we talk about the contract 
extensions, is something where Verizon, Mr. McAdam's company, 
has been good in terms of their policy and they are not going 
to extend without having clear direction from a customer. I 
want to make that clear because Mr. McAdam is the brave one to 
come before our Committee today representing a company that has 
been a leader in trying to put some of these consumer 
protections in place.
    Of course, for me this just shows that if people can do it 
then we can get the legislation passed so that we can make sure 
that people aren't getting ripped off.
    But Attorney General Swanson, do you want to talk a little 
bit about this issue and the contract extensions? You used a 
few examples, about the lawsuit that you have against a 
different company and why you think this is such a problem?
    Ms. Swanson. Madam Chair, yes. I think it also goes to the 
competitive issue. You may have multiple carriers in any 
particular market, but if the consumer is in a long-term 2-year 
contract and they have to pay a $200 termination penalty to 
exit early, they effectively can't shop around. For most of the 
people that you and I represent, those middle income people, 
they're not going to be able to pay or not want to pay a $200 
fee to exit based on bad customer service.
    The lawsuit I filed is against Sprint Nextel Corporation 
and essentially what the company did is enroll people into very 
long-term contracts--1-year, 2-year contracts--and then, 
unbeknownst to the consumers, when they would go to the store 
or call up the company and make a very small change in their 
plan, add minutes, drop minutes, add a family member, fix a 
broken phone, unbeknownst to them Sprint Nextel extended their 
contract for a year, 2 years, again starting those sizable 
termination penalties over.
    We filed a lawsuit alleging that the company engaged in a 
deceptive practice, a form of consumer fraud, because it was 
not adequately disclosing to the consumer that it was going to 
take these steps.
    The early termination penalty issue even in the best of 
circumstances does hit people hard. We've received contact from 
many consumers who have very legitimate reasons for wanting to 
exit the carrier. They bought a phone and maybe it worked in 
the particular locale, but then the kid goes off to college and 
it doesn't work where the kid's going to college and they want 
to get out, and the termination penalties really hit ordinary 
consumers hard and hit them in the pocketbook.
    So it is a significant issue and I applaud you, Senator 
Klobuchar, for your leadership in proposing Senate Bill 2033 
which would address it on a nationwide basis.
    Senator Klobuchar. Thank you.
    Mr. Murray, would the FCC be able to bring an action like 
Ms. Swanson did and they've just chosen not to?
    Mr. Murray. Well, it seems they've chosen to not do a lot 
of things, and that's my main concern here, is that this is the 
agency that brought us media consolidation, they brought us the 
consolidation of the ISP marketplace from 6,000 down to just a 
handful of independent Internet service providers. So I'm a 
little bit loathe to just hand over the keys to the kingdom to 
the FCC and trust them to enact a comprehensive set of rules 
that will protect consumers.
    One thing that we don't have at the Federal level that we 
do have at the State level is unconscionability standards. 
These are the contract law provisions that basically say you 
can charge damages from consumers, but you can't charge them 
penalties. Well, there's no Federal equivalent of that, so what 
do we do? Are consumers just sort of out of luck and the entire 
body of law that rests at the State level just evaporates? I 
don't know.
    I guess I want to be candid: I don't trust the FCC to come 
up with a comprehensive set of regulations. I think that what 
you've done here is a rather mildly targeted set of things. As 
you know, we actually were fairly aggressive in asking you to 
do more than you did here. But I think this is a modest 
proposal. It's a good place to start a discussion and we're 
quite grateful for you introducing this bill.
    Senator Klobuchar. Thank you.
    Mr. McAdam. Madam Chairwoman.
    Senator Klobuchar. Yes, Mr. McAdam.
    Mr. McAdam. Something brief here. I want to be very clear. 
What we are suggesting would not at all preempt the state from 
taking those kinds of actions. I would argue that this system 
is actually working. The fact that Attorney General Swanson 
could file that lawsuit has gotten a lot of publicity. I think 
it's important that that continue as we move forward.
    I would also say that the competitive markets punish bad 
behavior. And if you take a look at the results that are 
published each quarter by the various wireless companies, there 
are clearly winners and losers, and I would say there are 
clearly winners and losers based on how friendly they are for 
customers to do business with.
    Senator Klobuchar. Thank you.
    Attorney General Swanson, do you want to follow up?
    Ms. Swanson. Senator Klobuchar, if I may. I would strongly 
urge the United States Congress not to preempt the states' 
ability to do better for their consumers. Often states are the 
laboratory of democracy. They're the ones who are with their 
constituents and do better and do pass laws, and I think it's 
very important, as your bill does, to recognize the ability of 
the States to pass more protective consumer protection 
legislation.
    Let me give you an example. I had heard in the Minnesota 
Attorney General's office from many veterans, people serving 
our country, as I mentioned in my opening statement, in Iraq, 
in Afghanistan, they were in a long-term, 2-year contract, they 
were deployed overseas to serve this country and do what the 
government asked them to do, and they were told by their cell 
phone carrier: Okay, we can terminate your contract, but you're 
going to have to pay a $200 termination fee to serve your 
country.
    In Minnesota we were able to get a bill passed this session 
that says carriers can't do that. We extended the provisions of 
the Federal Service Member Civil Relief Act to disallow 
carriers from doing that and saying if you're deployed to 
active duty you can get out and you can get out without a 
termination penalty. That kind of law--our constituents are now 
protected. If one of our Minnesota constituents is sent 
overseas, they're protected and they don't have to pay 
additional sacrifice to serve the country. That kind of law 
ought not to be preempted by Congress.
    Senator Klobuchar. Thank you, Attorney General. I know we 
are--this is a piece of our bill and it's also on another bill 
pending in Congress. But I think sometimes it's easier for the 
States to act more quickly.
    I wanted to get to another area where we've talked about 
how we can have more transparency so consumers can make better 
choices, and that's the billing. One of the things that's hard 
for me as a member of this Commerce Committee, I can't really 
evaluate my bill or compare it to other bills. I wondered--one 
of the things that's most concerning me, what I've seen in some 
of the consumer complaints I've looked at is this regulatory 
fee issue. I'm used to, from having worked in this area before, 
seen States or Federal Government require parts of bills that 
show if it's a Federal tax or whatever it is. But there's this 
vague regulatory fee that seems to differ between carriers, or 
regulatory charges.
    I just wondered. Maybe, Mr. Murray, you want to take a stab 
at this first. Who determines that fee and what is the amount 
determined? Is it something that the government says, this is 
your regulatory fee?
    Mr. Murray. Sure. Well, this is a great example of where 
it's difficult for competition to work. It's difficult for me 
to vote with my feet as a consumer if the choices are the same 
with every carrier. If every carrier is charging the same junk 
fee, how do I vote with my dollars and feet?
    What we see in this particular instance is fees where we'll 
call it a regulatory fee even though it's not mandated by any 
Federal, State, or local government authority, nor is it 
authorized by those authorities. What that seems to be a 
mechanism for is to allow carriers to advertise a lower price 
to consumers, so that they say, hey, this plan is $35 a month, 
but then when you get your bill at the end of the month it 
comes with a few surprises.
    I think that the approach that you set out in the bill is 
the right one, which is if you have express authorization to 
charge this from a State, local, or Federal authority, great, 
include it on the bill; but if it's not authorized and it's not 
required under some particular regulation, then it needs to be 
separated.
    Senator Klobuchar. So in other words, one carrier could say 
it was two dollars and another carrier could say it's three 
dollars?
    Mr. Murray. Sure.
    Senator Klobuchar. And that's just added to your bill, when 
you're just as a consumer trying to decide between types of 
carriers based on what the monthly charge is?
    Mr. Murray. Right, and it's not clear to me what they're 
charging it for, because if its for E-911 cost recovery, 
there's another fee for that. If it's for number portability, 
they were already supposed to have recovered that in the first 
5 years. So it just seems to me like this is overhead. It's the 
``we can charge it'' fee, so here you go.
    Senator Klobuchar. Mr. Pearlman, you wanted to add 
something?
    Mr. Pearlman. Yes. And this has been an area in which I 
think NASUCA and my office has been very active, is in dealing 
with the so-called regulatory line item charges that crop up. 
It's a problem across the telecommunications industry. We're 
not talking just about wireless carriers, but also landline 
long distance carriers who have with increasing frequency 
adopted this sort of government-sounding line item charges. 
They all seem to be in around the same ballpark range.
    But one of the concerns that we have with those charges is 
not just the name, Federal Program Cost Recovery fee and so 
forth, but the fact that oftentimes on consumer bills the 
charges are aggregated into one lump sum, one line item on your 
bill. So $3.50 will show up or $4 or $5 will show up under the 
line item ``Taxes, fees, and surcharges.'' Figuring out what 
those are--and even if you go to the terms and conditions that 
the carriers have on their websites or in their sales material, 
oftentimes it will simply give you the potpourri of charges 
that they may impose on your bill. So actually figuring out 
which charge is actually showing up on your bill and what that 
charge is for is next to impossible.
    Frankly, that's the experience that my wife, who is a 
telecommunications manager for her company and contacts----
    Senator Klobuchar. That's an interesting marriage.
    Mr. Pearlman. Pardon?
    Senator Klobuchar. That's an interesting marriage.
    Mr. Pearlman. Well, it's not James Carville and Mary 
Matalin, but we have some interesting conversations.
    But she is constantly told when she contacts her carrier, 
wireless or long distance, that: The Government makes us put 
this charge on your bill. That is what she's told. So I hear 
about it all the time in that regard.
    Senator Klobuchar. Mr. McAdam or Mr. Higgins, would you 
like to add anything?
    Mr. McAdam. I would be happy to. Madam Chairwoman, we spend 
a lot of time making sure that our bills are very clear with 
customers. In fact, since Verizon Wireless was formed 8 years 
ago we've gone through five total bill redesigns, where we 
invite the customers and we talk about what's clear and what's 
not clear and we make actual changes.
    Now, when a customer comes into our store we clearly call 
out what a 2-year contract will charge, what a 1-year contract 
will charge. And when they purchase, on the back of their 
receipt they get what we call a first bill estimate, which lays 
out the detail of the bill as much as we can estimate.
    Now, to the specific issue of regulatory fees. I know you 
know this: We have the lowest regulatory fee in the industry 
right now. But it's an example of where a national framework 
would be useful, because every municipality is able to layer on 
additional fees and in some ways tax the wireless user. A lot 
of them don't want us to show that on the bill. Our view is 
that it should be; a bright light should be shined on that so 
that every customer understands what government fees and 
mandates are costing them on their bill.
    These are pass-throughs for us. We don't make a penny on 
any of it. There's no advantage for us to put these fees on a 
bill.
    Senator Klobuchar. Mr. Higgins.
    Mr. Higgins. Yes, I agree with Mr. McAdam from the 
standpoint that we don't add additional surcharges just to pad 
our profit. Any regulatory requirements that we do have, 
whether it be USF, 9-1-1, whatever it is, we try to aggregate 
that and then equally put that on the bill, so that we're 
recovering that cost, but certainly it's a pass-through to the 
consumer. In my comments that's what I was trying to say, in 
that when you only have a few thousand consumers to pass that 
over it's usually more expensive to do that in a rural network 
than it might be in a network that's a national network.
    Senator Klobuchar. So is there a national competitor in the 
area that you serve?
    Mr. Higgins. Yes, there is.
    Senator Klobuchar. Do they have the exact same regulatory 
fee that you do?
    Mr. Higgins. Not exactly, and I would agree from the 
standpoint--we have phones with all of our competitors so that 
we can look at the bills and see exactly who's charging what. 
And it is difficult at times to determine exactly what that is. 
But what we do also find is that in a lot of cases from a 
competitive standpoint it is expensive as a rural carrier to be 
able to try to take some of these mandates and fund them, spend 
the money. Then in a lot of cases we can't charge the customer 
for that. We just have to eat that cost.
    That hits into the margins that we're trying to survive on, 
which is difficult to do, which in effect can decrease 
competition. There are probably almost half of the rural 
carriers 5 years ago that were around that have either been 
bought up or have gone out of business. But I think you heard 
testimony today that those are the carriers that will build, as 
I said in my testimony, the cell site out in the middle of 
nowhere, perhaps in the area where your constituent was driving 
that they didn't have service there. Those aren't very 
profitable, those aren't very profitable cell sites. But we 
will build them because we live there and we'll spend that 
money even though it may be questionable.
    Certainly national carriers, they've got shareholders to 
report to. They're going to build cell sites where they're 
going to have--I'm not saying they're never going to build in a 
questionable area, but certainly they have a capital budget; 
they're going to have to build in areas where they get the most 
minutes. And I would do the same thing if I were them.
    But it's important that the rural carrier have a place in 
this marketplace because they're going to build those less 
profitable sites and give better quality service to the rural 
constituent.
    Senator Klobuchar. Thank you.
    Dr. Ellig, you look like you really want to talk.
    Dr. Ellig. Yes. This is one of the rare occasions where I 
can walk into a committee meeting and actually say I've got a 
study on this.
    Senator Klobuchar. Oh, very good.
    Dr. Ellig. And I'm sure the Committee staff was delighted 
when the courier lugged in the copies of the 30-page law review 
article prior to the hearing. But we looked at this a couple of 
years ago, at all of the add-on charges on wireless bills that 
are on top of the actual published price that the companies 
advertise. If you break that down, about three-quarters of 
those charges are actually taxes, and I don't mean that as a 
euphemism. I mean the things that actually are: the Federal 
excise tax on telecommunications, which is now gone on wireless 
bills; and then State and local taxes that apply to 
telecommunications or to wireless. So about three-quarters of 
the add-on charges are things that governments themselves call 
taxes, and as best I can tell from looking at your bill, the 
intention is that those things could still be added onto the 
bill, the wireless bill.
    Of the remainder, the remaining 25 percent, about 16 
percent of what is left are these things labeled regulatory 
fees in various ways. Then the other piece of it is the 
universal service assessment. I'm not sure from the language of 
your bill if the intention is to prevent companies from adding 
the universal service charge and the regulatory fee to the 
phone bill.
    If that is the intention, though, it seems to me that 
actually significantly reduces disclosure and transparency in a 
way that's especially harmful because it deprives the consumer 
of information the consumer would probably not otherwise get. 
If a consumer as citizen wants to make an intelligent decision 
about, do I like what the Federal Universal Service Fund is 
doing or not, do I think that these regulatory charges are a 
good deal or not, you would certainly want the consumer to have 
that kind of information on their bill.
    That doesn't mean that some of the regulations that these 
things pay for are a bad idea. I suspect a lot of consumers 
would say, okay, if it costs me an extra buck or two a month to 
get E-911 service, that's a pretty good deal, I'm willing to 
pay for that. So I'm not saying that it needs to be on there 
because these things are a bad thing, but simply in the 
interest of transparency and letting the consumer know how much 
some of these things cost it would be a good idea to at least 
avoid preventing the companies from breaking those kind of 
things out separately on the phone bill.
    Senator Klobuchar. Okay, quick, Mr. Murray.
    Mr. Murray. I think the bill's language is actually clear 
both in intent and the actual language of the bill that that's 
not what it's designed to do. What it's designed to do is to 
take any charges that are bona fide charges, as you mentioned 
USF, E-911. These are clear requirements that municipalities 
and localities have put on the companies; no problem including 
those in the bills.
    The question is these sort of muddy charges, which are 
regulatory, but it's a little fuzzy as to exactly what it 
covers. Maybe it covers property tax, maybe it covers something 
else. But there's no requirement for the company to actually 
charge that to consumers. There's no pass-through. It's not 
like USF or E-911, where there's a clear pass-through; there's 
a requirement, the company passes it on to the subscriber.
    You know, you buy a box of cereal, you don't get to the 
register and have to pay property tax on top of what you 
bought. You have a price, you pay that price at the end. And if 
there's a clear additional charge, it would be okay under the 
clear language of the Klobuchar bill for the companies to go 
ahead and pass through anything that is required by a local 
authority.
    Senator Klobuchar. Thank you.
    The last area I wanted to touch on--and by the way, Mr. 
Higgins, I appreciated your comments on the locking and 
unlocking, which in our bill we've asked for a study because we 
really wanted to get a sense of where the competitive 
marketplace could go. But maybe we can talk about that later, 
at another time.
    But I wanted to just end here with talking a little bit 
about the ETF, the early termination fees. Attorney General 
Swanson, I think back to my days when I was involved in this 
industry and understanding the local and long distance services 
were under some requirements that their rates be just and 
reasonable. Again, here we know that, because of this different 
type of market, that there has been preemption on the rate 
issue and nothing in our legislation is trying to change that.
    But it started me thinking about how now when we have for 
so many customers the cell phone is their only phone and yet 
they have chosen to do that, but there is no requirement that 
these rates be just and reasonable, understandably because of 
this FCC preemption. So I was wondering if you look at the ETF 
issue, the early termination fee issue, that there should be 
some justification that it should be just and reasonable. 
That's all we're trying to do in this bill, that there's some 
analogy there, where you even look at the car industry; when a 
consumer leases a car, Federal law requires that any fee for 
turning in the car before the end of the lease term must be 
reasonable in light of the anticipated or actual harm caused by 
the early termination. A first year law student knows that 
contracts can't contain a penalty clause, that it must be based 
like a liquidated damages clause. That's what I realize this 
whole ETF thing makes me think of, that it must be reasonable 
damages and a reasonable estimate on damages.
    So here you have a situation--and I appreciate the fact 
that Verizon is now starting to prorate, although not on an 
equal monthly basis, and AT&T has announced that they're going 
to, but we don't know what it is yet. It seems to me that if 
you apply any of those other legal principles with cars or 
liquidated damages, that you wouldn't be allowing this ETF to 
basically charge excessive amounts.
    So could you address that?
    Ms. Swanson. Yes, Senator Klobuchar, I'd be happy to. I 
think the bill is very narrowly tailored and reasonable in that 
respect. It simply says that there has to be some correlation 
between the company's cost and the fee. Companies historically 
have tried to justify the cost of the early termination fees by 
saying, well, we're giving you discounts on the phone and we're 
trying to recoup the phone. But in my experience, many times 
these early termination fees are charged where the company has 
little or no cost at all if the customer walks early, 
particularly in the cases that I mentioned where the companies 
are automatically renewing or automatically extending the 
contracts. They long ago recouped the cost of the phone or 
recouped whatever costs they as a company have, and it simply 
becomes punitive for the consumer, punishing them for shopping 
around.
    I believe those early termination fees, as well as the 
long-term contracts, simply are anti-competitive, and if you 
want to encourage competition in this industry in a way that 
makes sense for consumers and allows consumers simply to shop 
and compare, have transparency, and be able to vote with their 
feet, then the regulation of the early termination fee is very 
reasonable and makes a lot of sense for consumers.
    Senator Klobuchar. Anyone else want to respond? Mr. 
Pearlman?
    Mr. Pearlman. Sure, I'll take a quick stab at that one. I 
think one thing that relates to this question of early 
termination fees and the subsidies for equipment and customer 
acquisition costs--and we certainly agree with Attorney General 
Swanson that, certainly in the case of a contract being 
extended, whatever rationale there was for an early termination 
fee has evaporated. Whatever those costs were presumably were 
recovered in the first year or 2 years, what have you.
    But one of the concerns that we raised with the FCC 
previously was the fact that the last time anyone looked at the 
actual costs associated, what the subsidy was, what the cost of 
the handset was, what the cost of the customer acquisition was, 
was 1992. And certainly a lot of things have changed since 
1992. The telecommunications industry is generally a decreasing 
cost industry. That's the general understanding. But no one has 
looked and apparently, despite our urging, no one is inclined 
to take a look at what that actual cost justification is that 
early termination fees are supposedly based on. We would like 
to see some effort made in that regard.
    If the phones really cost that, if the customer acquisition 
costs are so great, prove it. Show us that the early 
termination fees are even justified.
    The other point that I just want to make sure I get out on 
the record is our contention has always been that early 
termination fees are not rates, that they are indeed penalties. 
They are other terms and conditions that under the 1993 
amendments to the Communications Act remain within the purview 
of States to review and deal with, and indeed many of the State 
laws, many of the State court actions that we discuss in our 
testimony, were not preempted on that basis alone. So I just 
wanted to point that out.
    Mr. McAdam. Madam Chairwoman.
    Senator Klobuchar. Yes, Mr. McAdam.
    Mr. McAdam. As a placeholder, since it's come up a number 
of times, I would like, if you would approve, the opportunity 
to speak about NARAL. But let me just address the early 
termination fee here.
    Senator Klobuchar. I just thought people were getting 
hungry, but we are more than happy to go on to that topic.
    Mr. McAdam. I just want to go, make sure the record 
reflects that we do not charge early termination fees for 
military, we do not charge early termination fees if someone 
moves out of our coverage area. We let them out of our service.
    Typically, a customer acquisition costs us between $300 and 
$400. We only charge a blended rate to reflect, as Attorney 
General Swanson said, some customers cost us less. So the $175 
we believe is reasonable. And we do have a consistent monthly 
reduction.
    Now, I would say again that competition is working because, 
as you pointed out, AT&T followed suit yesterday, and I don't 
believe it will be long before the rest of the industry does, 
because customers will vote with their feet. I would encourage 
other members of the panel when an industry member moves in the 
direction that the panel is advocating to please be a bit more 
vocal about it because it will highlight the pressure and make 
other carriers move.
    Senator Klobuchar. Thank you, Mr. McAdam. We also note they 
did it the day before this hearing.
    Okay, Dr. Ellig.
    Dr. Ellig. Well, I think this discussion underscores the 
importance of the point I made earlier about substitution of 
one term in a contract for another term, that when we have a 
complex contract with a lot of terms and some terms that 
haven't even been invented yet, that could be invented, I don't 
think we can analyze this just by looking at the size of the 
early termination fee versus whether there's some sort of a 
cost-based justification for that fee. In a reasonably 
competitive market, which wireless pretty likely is, if the 
companies are earning a stream of revenues from the early 
termination fee, either because people are paying it when they 
leave or because they stay so they don't have to pay the fee 
and so instead they're paying a higher price than they 
otherwise would for phone service until the contract is up, if 
there is a stream of revenue associated with that early 
termination fee and the companies are now told, well, you can't 
charge that or you have to reduce that, if other terms of the 
contract are not regulated they can adjust the other terms of 
the contract to make up for that.
    So that it's basically, as I said, like playing whack-a-
mole or like pushing in one side of a balloon and the other 
side pops out. So it's not clear to me that regulations or even 
jawboning that reduces early termination fees necessarily makes 
consumers better on net. What I want to know is what else is 
changing in the contract at the same time or what else might 
have changed that now won't change because the companies 
decided to reduce the early termination fee instead of, say 
introducing a new rate plan that's five bucks cheaper next year 
as costs went down or something.
    It's the foregone alternative that we have to be aware of. 
We simply can't look at one contract term and say, well, we're 
going to whack this one down and so we know consumers are 
better off, because something else will change.
    Senator Klobuchar. We get the point.
    Mr. Murray and then we'll go back to Mr. McAdam, and then 
you can respond to that, Mr. Murray, what he's talked about.
    Mr. Murray. What's different if you reduce the ETF is that 
competition really works better. This is not your ordinary 
contract clause. This is not some little privacy thing in your 
terms of service, not to diminish the value of privacy. But 
this is the primary thing that prevents competition from 
working in this marketplace. If you get rid of it--and I guess 
I would like to challenge AT&T today. If the justification for 
this is some revenue stream, they're not giving any money to 
those iPhone subscribers. I challenge AT&T today to get rid of 
that ETF for all those iPhone subscribers.
    But I'll put that to the side. What's changing if you 
improve competition in the marketplace is that then it is much 
harder for those companies to raise prices. It puts downward 
pressure on prices and it puts upward pressure on quality.
    Senator Klobuchar. Okay. Mr. McAdam, you wanted one point 
that you wanted to make about the NARAL issue, and then we'll 
let Mr. Murray or Ms. Swanson, whoever, respond to it.
    Mr. McAdam. Thank you, Madam Chairwoman. I want to make 
sure the Committee knows how important we believe this issue 
is. It goes to the foundation and the core values of our 
company and that's why I want to make sure you understand what 
happened in this particular instance.
    When text messaging was introduced several years ago, it 
became obvious that there were a lot of bad actors out in the 
community that would send unwanted messages to our customers. 
And we listened to our customers and they said: We don't want 
unsolicited messages. So we did put a policy in place that 
blocked controversial text messages.
    Unfortunately, we didn't update that policy as life moved 
on. And then short codes were introduced, that gives customers 
the ability to opt in to get that information. Once this was 
brought to our attention, we realized that--we call it, not too 
affectionately, dumb policies in our company that outlive their 
usefulness. It took about 15 minutes of discussion to realize 
this was one of those dumb policies and we turned very quickly.
    Now, I also want to state for the record that we found out 
about this controversy when a New York Times reporter called 
us. We asked them to fax the letter over to us because we did 
not receive the letter, and we actually changed this policy and 
fixed it before we received the letter from NARAL. So it's a 
slightly different story than you may hear in the press and I 
wanted to set the record straight, and thank you very much.
    Senator Klobuchar. Thank you, Mr. McAdam.
    Mr. Murray?
    Mr. Murray. Well, I would say I do believe Verizon's 
response was the right one to this incident. But this is a 
really, really serious incident. In today's op-ed in the Post, 
we've got both the head of the Christian Coalition and the head 
of NARAL Pro-Choice America writing on the same side of this 
issue. When we have strange bedfellows like that it raises some 
questions: Why is this, that this would capture people's 
attention?
    Yes, it was in The New York Times and that generated a 
response. But the question is what if The New York Times story 
hadn't emerged, or what if we find ourselves where we have 
actually formalized this sort of informal understanding of this 
marketplace and say, you know, it's not a problem for network 
operators to block political speech. At that point it ceases to 
be news and it ceases to be remarkable, and therefore it ceases 
to be a story.
    So my concern here is that without enforceable 
protections--we know that the company cannot interfere with 
your phone call. Why should consumers have a different 
expectation for text? The wireless Internet marketplace is 
increasingly going to be the way that consumers communicate 
with each other, that the market reaches consumers, as we move 
into the 21st century. And the open Internet model worked 
really well because of the nondiscrimination protections of 
Title II. I don't see why we should accept anything less in the 
wireless marketplace, and I think that this issue deserves 
further scrutiny.
    Senator Klobuchar. All right. Well, I want to thank all of 
our witnesses and just conclude by saying that we are working 
very hard on this bill and will continue to work with all of 
you. I was listening to you, Mr. McAdam, as you talked about 
your policies and looking at them again and talking about life 
moving on and outdated policies. This is sort of how we look at 
the cell phone rules right now, that life has moved on, we've 
gone from a few customers to 200 million, we've gone to $100 
billion a year in revenues, and we think we need to do some 
fixing of the regulations without interfering with the great 
growth that we've seen with cell phones.
    So I want to thank you all for coming. We look forward to 
working with you in the future, and the hearing is adjourned 
and everyone can turn on their cell phones.
    [Whereupon, at 12:28 p.m., the hearing was adjourned.]
                            A P P E N D I X

  Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator from Maine
    Thank you, Mr. Chairman, for holding this hearing on consumer 
wireless issues.
    The wireless industry has seen explosive growth and amazing 
innovation over the past decade. Currently, there are more than 245 
million wireless customers in the U.S.--in 1997 there were only 55 
million. Cell phones continue to be packed with additional features and 
applications, and in doing so bring more value to consumers--just look 
at the evolution from the ``old'' Motorola flip phone to the new Apple 
iPhone.
    This growth and innovation has been realized in part due to the 
light regulatory environment that exists. The industry hasn't been 
bogged down by the traditional regulatory regime, which has immersed 
the wireline industry. Greater flexibility has been given to the 
wireless industry in exploring business practices and service offerings 
that have resulted in impressive benefits to the consumers--lower per 
minute charges, more functionality, and more tiered services.
    Despite this exponential growth and innovation, there are still 
many areas in America, including my state of Maine, where there is 
spotty cell phone reception--or worse, no reception at all. In fact, a 
2006 study in Maine identified over 2,000 dead zones where wireless 
coverage is not available. This is very concerning given the testimony 
this committee heard in June from Chief Deputy Everett Flannery of 
Kennebec County about this ``wireless gap'' in rural areas and its 
impact on public safety and the ability of first responders to 
communicate in critical and sometime life threatening situations. So 
having ubiquitous wireless coverage for all Americans is paramount and 
should be the main goal of any policy initiative.
    Certainly we must monitor industry's business practices regarding 
customer service because there have been significant lapses. The 
industry was initially very resistant to wireless local number 
portability or ``WLNP.'' But now industry has a voluntary standard of 
two and half hours to complete these porting requests, and have 
ultimately benefited from WLNP as more and more Americans go completely 
wireless by migrating their landline numbers to cell phones.
    We're also all aware of the recent incident where a large wireless 
carrier blocked text messages sent among members of a prominent women's 
rights organization. This was a significant error on the part of the 
carrier and shouldn't have occurred. While the carrier involved did 
reverse its policy within several hours of the dispute being 
publicized, would this have been resolved as quickly for a consumer 
with fewer resources at their disposal? In response to this, Senator 
Dorgan and I have sent a letter to the FCC requesting the Commission 
look into this further since this seems to parallel concerns raised 
with the issue of net neutrality.
    Out of more than 230 million wireless customers, the Better 
Business Bureau received approximately 28,800 wireless complaints in 
2006, the highest number of complaints for an industry. Yet the Bureau 
further reported that wireless had a 91.7 percent complaint settlement 
rate while the across industry average was only 73 percent--this 
demonstrates that the industry is taking the initiative and working 
with consumers to resolve problems that do arise. Carriers are also 
making positive consumer offerings such as introducing innovative 
pricing plans and service offerings, and upgrading their networks to 
accommodate new communications and data applications that are being 
added to phones bringing more functionality to customers.
    There is no question of the amazing innovation and growth that the 
wireless industry has witnessed over the past decade. We're continuing 
to see significant advancements in wireless devices, applications, and 
services--some of which we would have never even thought of a few years 
ago. With this growth and innovation, the market is competitive and 
being responsive to issues that arise. Possibly unfair business 
practices have occurred which must be investigated fully. We should 
continue to monitor this but also focus effort on working with industry 
to accelerate deployment efforts so there is ubiquitous wireless 
coverage throughout the U.S. and all Americans can reap the amazing 
benefits that wireless communications has to offer.
    Thank you, Mr. Chairman, for holding this hearing today. I look 
forward to the witnesses' testimony.
                                 ______
                                 
   Response to Written Question Submitted by Hon. Maria Cantwell to 
                           Hon. Lori Swanson
    Question. In preparation for the hearing, I had the opportunity to 
read a number of unfiltered wireless complaints received by my State's 
Attorney General's office. While a few of the complaints involved a 
significant amount of money, for the most part, these complaints appear 
to be of relatively small dollar value. Based on what I read, my sense 
is that consumers first attempt to resolve these outstanding issues 
with the wireless companies. If their problem can't be resolved, at 
some point, either they figure it is more trouble or time than it's 
worth and give up, or they get angry and file a complaint. Is that your 
experience in Minnesota? Do you think that there are many more 
consumers with unresolved disputes with their wireless carriers than 
the number of complaints may indicate?
    Answer. Senator Maria Cantwell, I thank you for your question 
following my testimony on consumer wireless issues. It is my 
observation that there are far more consumers with unresolved disputes 
with their wireless carriers than the number of complaints received by 
government or non-profit agencies, such as the Better Business Bureau. 
In fact, it has been my Office's experience that generally less than 1 
percent of the aggrieved population will actually take the time to 
complain to a third party, such as a state or Federal regulatory 
agency, about a company with which they are having a dispute.
    As you indicate, most consumers try first to resolve their dispute 
directly with their wireless provider. This Office has observed first 
hand that the wireless industry takes the attitude that it is their way 
or the highway, thus leaving the consumer feeling powerless to try to 
do anything against their wireless provider. Many consumers simply drop 
the issue, as they feel that they are left with no option but to stay 
with their current wireless provider or pay a huge termination fee to 
change providers or cancel their service. As I testified, the wireless 
providers routinely charge a contract termination fee that ranges from 
$150 to $250 to terminate the contract before the wireless company 
believes it ends. Further, the wireless industry has extended some 
consumer contracts by 2 years without the consumers' knowledge when the 
consumer makes a small change to their plan, thus locking some 
consumers in for years. These contract termination fees are a 
significant block to the consumer's ability to change carriers. To the 
vast majority of Americans, $100 is still a significant amount of money 
and may constitute their weekly grocery budget. Consumers should not be 
locked into a long term wireless contract with prohibitive early 
termination fees simply because the wireless industry exerts its power 
over the consumers. It is important that there be legislative 
initiatives to protect consumers from the unfair trade practices of the 
wireless industry. The need for protection is demonstrated by the fact 
that of the 3,600 industries surveyed, the wireless industry has been 
the most complained about industry in the United States for several 
years running.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                            Lowell C. McAdam
    Question 1. An article in the October 16 edition of The Wall Street 
Journal discussed a specialized form of direct mail referred to as 
trans-promotional marketing, where ads and promotional offers are 
placed directly on a consumer's bill or statement. Does Verizon 
Wireless currently place any advertisements or promotional offers on 
consumers' bills? Does Verizon Wireless have plans to place 
advertisements or promotional offers on consumers' bills in the future? 
Do you see any potential harm to consumers if advertisements or 
promotional offers are placed on consumers' bills?
    Answer. Verizon Wireless does not as a general practice place third 
party advertising in bills, either in paper or online, and Verizon 
Wireless has no plans to include such advertising in its bills. Verizon 
Wireless does place promotional messages related to Verizon Wireless 
service in its bills. We do not see any potential harm to consumers 
from these promotional offers being placed on consumers' bills.

    Question 2. In Dr. Ellig's testimony, he cited FCC data that the 
wireless churn rate is between one and one half percent and 3 percent 
per month. Without divulging any proprietary information, have you seen 
any noticeable change in the churn rate since your company has 
implemented its new policy on early termination fees? If so, can any of 
the change be attributed to the pro-rating of early termination fees?
    Answer. Verizon Wireless has the lowest churn/highest customer 
loyalty (total, retail and retail postpaid) in the wireless industry. 
Our churn rates have improved or remained basically flat every quarter 
since the ETF pro-ration was introduced in November 2006. We do not 
believe the pro-rated ETF has had any noticeable impact on our retail 
postpaid churn rate.

    Question 3. While I am very excited about the potential of wireless 
location-based services, I am very conscious about its privacy 
implications. Last year, when this committee took up legislation to 
address the practice of pre-texting, my colleagues and I learned a 
considerable amount about cell phone records and, more generally, the 
data surrounding a call. Recently, your company announced its new 
policy about sharing customer information within the Verizon family of 
companies and giving customers the option of opting-out. Why not have 
consumers affirmatively opt-in?
    Answer. First, to clarify, Verizon Wireless does seek opt-in 
consent from its customers prior to enabling commercial location-based 
services. The opt-out policy that you are referencing does not relate 
to location-based services. The opt-out consent process makes it easier 
for our customers to receive information about the ``family'' of other 
Verizon products--landline local and long distance, such as VoIP, DSL, 
FiOS, etc. Because the FCC requires a wireless company's customer to 
consent through not exercising the opt-out right before the customer's 
CPNI can be shared with the company's wireline affiliates, we needed to 
take this step.

    Question 4. Do you believe that there will ever be a commercial 
wireless directory? And what is Verizon Wireless's current position on 
the creation of a wireless directory?
    Answer. My predecessor at Verizon Wireless, Denny Strigl, testified 
on this very issue before the Senate Commerce Committee in 2004. His 
remarks were straightforward and delineated Verizon Wireless as the 
leading opponent to a wireless directory. In fact, I would say that our 
opposition killed this idea. We continue to oppose the establishment of 
such a directory, and I will repeat some of Mr. Strigl's testimony, 
which continues to be our policy at Verizon Wireless.
    We at Verizon Wireless think a Wireless Telephone Directory would 
be a terrible idea, and we will not publish our customers cell phone 
numbers or otherwise participate in a wireless directory plan.
    Here's why we will not participate in a directory assistance 
program: Since we started this business, we have not published our 
customers' wireless phone numbers. We did this consciously, for the 
sake of preserving customers' privacy and control over their bill and 
discouraging interruptions from unwanted calls. We do not believe those 
basic reasons have changed.
    In fact, we see more reason today than ever to protect customers' 
privacy. The floodgates are open to spam, viruses, telemarketing and 
other unwanted, unsolicited messages on landline phones, computers and 
in mailboxes. We think our customers view their cell phones as one 
place where they don't face these intrusions, where they have control 
over their communications.
    And if there's any doubt, our customers--and some of your 
constituents--are reiterating loudly and clearly that they don't want 
their wireless phone numbers published.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                            Patrick Pearlman
    Question 1. Recently, Verizon Wireless announced its new policy 
about sharing customer information within the Verizon family of 
companies and giving customers the option of opting-out. Mr. Pearlman, 
do you see any potential dangers to consumers by requiring consumers to 
opt-out rather than permit them to opt-in?
    Answer. Yes, we \1\ certainly believe that forcing consumers to 
affirmatively ``opt-out'' of a carrier's policy of sharing 
confidential, personal information about that customer within the 
carrier's corporate family presents potential dangers to consumers. The 
harms flowing from the disclosure of consumers' confidential 
information have been well documented by, among others, Congress and 
the Federal Communications Commission (``FCC''). Moreover, the glaring 
shortcomings of ``opt-out'' procedures in protecting consumers' 
sensitive information have been recognized by many, including the FCC, 
consumer advocates, and state law enforcement officials and regulators. 
As recently as April 2007, those shortcomings prompted the FCC to 
reverse its rules utilizing an ``opt-out'' mechanism for carriers 
wishing to share such information with joint venturers and independent 
contractors and to instead adopt an ``opt-in'' mechanism prohibiting 
such disclosures unless consumers gave express, informed consent to the 
disclosure. The same concerns that warranted the FCC's policy reversal 
regarding carriers' disclosure of sensitive customer information to 
joint venturers and independent contractors apply with equal vigor to 
carriers' disclosure of such information to myriad affiliates--many of 
whom may not be subject to the Communications Act at all.
---------------------------------------------------------------------------
    \1\ As I noted in my oral testimony to the Committee, my responses 
are provided on behalf of my office, the Consumer Advocate Division of 
the Public Service Commission of West Virginia, and also on behalf of 
the National Association of State Utility Consumer Advocates 
(``NASUCA''), of which my office is a member.
---------------------------------------------------------------------------
    It goes without saying that customer proprietary network 
information (``CPNI'') \2\ is commercially valuable. Indeed, the 
practice of ``pretexting,'' \3\ which both Congress \4\ and the FCC \5\ 
have taken pains to address, highlights the value of CPNI and the 
lengths to which businesses and individuals will go to obtain it. In 
enacting the Telephone Records and Privacy Enforcement Act, Congress 
recognized that the unauthorized disclosure of telephone records is a 
serious problem, declaring that such a disclosure ``not only assaults 
individual privacy but, in some instances, may further acts of domestic 
violence or stalking, compromise the personal safety of law enforcement 
officers, their families, victims of crime, witnesses, or confidential 
informants, and undermine the integrity of law enforcement 
investigations.'' \6\
---------------------------------------------------------------------------
    \2\ The Communications Act defines CPNI as:

    (A) Information that relates to the quantity, technical 
configuration, type, destination, location, and amount of use of a 
telecommunications service subscribed to by any customer of a 
telecommunications carrier, and that is made available to the carrier 
by the customer solely by virtue of the carrier-customer relationship; 
and

    (B) Information contained in the bills pertaining to telephone 
exchange service or telephone toll service received by a customer of a 
carrier; except that such term does not include subscriber list 
information.

    47 U.S.C.  222(h)(1).
    \3\ ``Pretexting'' is the practice of pretending to be a particular 
customer or other authorized person in order to obtain access to that 
customer's call detail or other private communications records. See In 
re Implementation of the Telecommunications Act of 1996: 
Telecommunications Carriers' Use of Customer Proprietary Network 
Information and Other Customer Information; IP-Enabled Services, Report 
and Order and Further Notice of Proposed Rulemaking, 22 F.C.C.R. 6927, 
2007 FCC LEXIS 2679,  1 n. 1 (2007).
    \4\ See Telephone Records and Privacy Protection Act of 2006, Pub. 
L. 109-476, 120 Stat. 3568, (2007), codified at 18 U.S.C.  1039.
    \5\ See n. 3, supra.
    \6\ 120 Stat. 3568,  2(5).
---------------------------------------------------------------------------
    Likewise, in its April 2007 rulemaking dealing with pretexting, the 
FCC detailed the record of consumer harms stemming from the 
unauthorized disclosure of CPNI. The FCC noted that, since February 
2005, more than 150 major security breaches had been reported, 
resulting in the personal information of over 54 million Americans 
being compromised.\7\ Likewise, the record before the FCC identified 
numerous lawsuits having been brought by telecommunications carriers 
seeking to enjoin pretexting activities, clearly indicating that 
pretexters had been successful in gaining unauthorized access to CPNI--
despite carriers' statutory obligation to vouchsafe such sensitive 
information. In such cases, defendants or their agents sometimes posed 
as an employee/agent of the carrier, or as a customer of the carrier, 
to induce customer service representatives to provide such persons with 
call records of a targeted customer.\8\ Customer service 
representatives appeared to be an all-too-easy mark for such 
unscrupulous persons. The FCC noted that the Federal Trade Commission 
had also filed suits against several pretexters under laws barring 
unfair and deceptive trade practices, and that numerous states, 
including California, Florida, Illinois, Missouri, and Texas had sued 
data brokers for pretexting phone records.\9\
---------------------------------------------------------------------------
    \7\ 22 F.C.C.R. at  41 n. 131, citing National Association of 
Attorneys General Comments, pp. 7-9.
    \8\ 22 F.C.C.R. at  12 (citations omitted).
    \9\ Id. (citations omitted).
---------------------------------------------------------------------------
    Nor is the unauthorized disclosure of customers' private network 
information limited to the context of ``pretexting''--in the past, 
persons have not had to resort to pretexting in order to obtain 
customers' private network information. Unauthorized disclosures can be 
the result of simple negligence by telecommunications carriers. For 
example, in its rulemaking, the FCC noted that AT&T had ``recently 
notified'' the agency that it had failed to send CPNI ``opt-out'' 
notices to 1.2 million customers, and that this failure resulted in the 
marketing to customers who may have otherwise opted out.\10\ It is 
worth noting that AT&T's ``notification'' was not entirely voluntary. 
Instead, the carrier confessed its omission only after the FCC issued a 
forfeiture order against AT&T (and other carriers) for failing to file 
its annual certification averring that it was maintaining CPNI in 
compliance with the FCC's rules.\11\ Likewise, the FCC noted recent law 
enforcement investigations documenting the ease with which persons 
could obtain the confidential calling records of consumers without 
having to engage in pretexting.\12\
---------------------------------------------------------------------------
    \10\ 22 F.C.C.R. at  12 n. 31.
    \11\ See AT&T, Inc., Notice of Apparent Liability for Forfeiture, 
21 F.C.C.R. 751 (2006); see also 47 C.F.R.  64.2009(e).
    \12\ 22 F.C.C.R. at  12 n. 31, citing Law Enforcement and Phone 
Privacy Protection Act of 2006, H.R. Rep. No. 109-395, 109th Cong. 2d 
Sess. 2 (2006) (citing Frank Main, ``Anyone Can Buy Cell Phone Records: 
Online Services Raise Security Concerns for Law Enforcement,'' Chicago 
Sun-Times, A3 (Jan. 5, 2006). For instance, a Chicago police official 
obtained call records of an undercover narcotics officer's telephone 
number, and received accurate call records within 4 hours of the 
request. Id. Similarly, in 1999, law enforcement authorities discovered 
that an information broker sold a Los Angeles detective's pager number 
to an Israeli mafia member who was trying to determine the identity of 
the detective's confidential information. Id., citing Frank Main, 
``Cell Call Lists Reveal Your Location: Anybody Can Pay to Track Where 
You Used Phone,'' Chicago Sun-Times, A3 (Jan. 19, 2006). The FCC also 
noted that a political Internet blogger purchased the cell phone 
records of former Presidential candidate General Wesley Clark. Id., 
citing Frank Main, ``Blogger Buys Presidential Candidate's Call List: 
Nobody's Records Are Untouchable, as $90 Purchase Online Shows,'' 
Chicago Sun-Times, A10 (Jan. 13, 2006).
---------------------------------------------------------------------------
    The harms to consumers reflected in the record before the FCC were 
sufficiently compelling to warrant a reversal of the agency's policies 
with regard to the sharing of CPNI by carriers with joint venturers and 
independent contractors. Under the FCC's prior rules, carriers could 
disclose CPNI to persons in joint ventures with the carrier, or the 
carrier's independent contractors, so long as the affected customer had 
not ``opted-out'' of such practice, i.e., affirmatively requesting the 
carrier to not disclose the customer's CPNI. In its 2007 rulemaking, 
the FCC reversed itself, and modified its rules to require 
telecommunications carriers to obtain ``opt-in'' consent from a 
customer before disclosing that customer's CPNI to a carrier's joint 
venture partner or independent contractor for the purpose of marketing 
communications-related services to that customer, based on ``new 
circumstances'' that forced it ``to reassess [its] existing 
regulations.'' \13\ Specifically, the FCC concluded that:
---------------------------------------------------------------------------
    \13\ 22 F.C.C.R. at  37.

        [T]here is a substantial need to limit the sharing of CPNI with 
        others outside a customer's carrier to protect a customer's 
        privacy. The black market for CPNI has grown exponentially with 
        an increased market value placed on obtaining this data, and 
        there is concrete evidence that the dissemination of this 
        private information does inflict specific and significant harm 
        on individuals, including harassment and the use of the data to 
        assume a customer's identity. The reality of this private 
        information being disseminated is well-documented and has 
        already resulted in irrevocable damage to customers. While 
        there are safeguards in our current rules for sharing CPNI with 
        joint venture partners and independent contractors, we believe 
        that these safeguards do not adequately protect a customer's 
        CPNI in today's environment. Specifically, we find that once 
        the CPNI is shared with a joint venture partner or independent 
        contractor, the carrier no longer has control over it and thus 
        the potential for loss of this data is heightened. We find that 
        a carrier's section 222 duty to protect CPNI extends to 
        situations where a carrier shares CPNI with its joint venture 
        partners and independent contractors. However, because a 
        carrier is no longer in a position to personally protect the 
        CPNI once it is shared--and section 222's duties may not extend 
        to joint venture partners or independent contractors themselves 
        in all cases--we find that this sharing of data, while still 
        permitted, warrants a requirement of express prior customer 
        authorization.\14\
---------------------------------------------------------------------------
    \14\ Id. At  39 (emphasis added).

    In abandoning the ``opt-out'' mechanism for joint venturers and 
independent contractors, the FCC relied not only on the well-documented 
harms resulting from the unauthorized disclosure of customers' 
proprietary information discussed above, but also relied on abundant 
evidence in the record demonstrating that ``opt-out'' regimes fail to 
give consumers an adequate opportunity to give ``informed'' consent to 
the disclosure of their CPNI. The FCC noted that the average consumer 
would often find the ``opt-out'' notices provided by carriers, which 
allowed them to share information with joint venture partners and 
independent contractors unless otherwise directed, vague and 
incomprehensible. In addition, the agency noted that many studies of 
opt-out regimes reflected this consumer confusion and cited evidence in 
the record reflecting that consumers overwhelmingly prefer ``opt-in'' 
mechanisms to protect their confidential, private information.\15\ The 
FCC agreed--sensibly in our opinion--with the National Association of 
Attorneys General's (``NAAG'') assessment, that such studies ``serve as 
confirmation of what common sense tells us: that in this harried 
country of multitaskers, most consumers are unlikely to read extra 
notices that arrived in today's or last week's mail and thus, will not 
understand that failure to act will be treated as an affirmative 
consent to share his or her information.'' \16\
---------------------------------------------------------------------------
    \15\ Id. At  40 & n. 129. The studies noted by the FCC are 
telling. For example, the Electronic Privacy Information Center 
(``EPIC'') cited numerous studies in which consumers expressed 
overwhelming support for ``opt-in'' procedures to maintain the privacy 
of their personal information. Thus, an April 2001 study by the 
American Society of Newspaper Editors and the First Amendment Center 
showed that 76 percent of respondents supported opt-in as a standard 
for sharing of driver's license information. A September 1999 study by 
Forrester Research found that 90 percent of Internet users wanted to be 
able to control how their personal information is used after its 
collection. An August 2000 survey conducted by Pew Internet and 
American Life Project found that 86 percent of Internet users favor 
opt-in privacy policies, results virtually identical to those obtained 
in a March 2000 BusinessWeek/Harris poll. See In re Implementation of 
the Telecommunications Act of 1996: Telecommunications Carriers' Use of 
Customer Proprietary Network Information and Other Customer 
Information; IP-Enabled Services, Docket No. 96-115, EPIC Comments at 
9-10 (April 14, 2006). Nor do consumers limit their preferences to 
academic studies--as EPIC noted in its comments to the FCC--when 
consumers are given a chance to express their preference at the voting 
booth, they overwhelmingly prefer ``opt-in'' as the way to safeguard 
their private information, despite heavy industry lobbying to convince 
them to vote otherwise. Id. at 10 (discussing a 2002 North Dakota 
referendum in which an opt-in measure was approved by 73 percent of 
voters, despite industry outspending proponents of greater privacy 
protection by 7:1).
    \16\ Id. at  44 & n. 146.
---------------------------------------------------------------------------
    The same rationale, and concerns, warranting the FCC's abandonment 
of its prior ``opt-out'' regime in favor of an ``opt-in'' regulatory 
framework for joint venturers and independent contractors, justifies 
eliminating the ``opt-out'' regime that applies to carriers' sharing of 
CPNI to affiliates.\17\ The mergers and consolidation experienced in 
the telecommunications industry since the 1996 amendments to the 
Communications Act (think of the torturous path taken by Southwest Bell 
in its evolution into AT&T) have resulted in carriers with myriads of 
affiliates that leave consumers, and even regulators, in the dark 
regarding those affiliate relationships. A Verizon customer, for 
example, may know that MCI is now a Verizon affiliate, but few know 
that Southernnet, Brooks Fiber, or Intermedia Communications (MCI 
affiliates) are now part of Verizon. The idea that a consumer 
``expects'' or ``accepts'' the Verizon local carrier to share his or 
her CPNI with such affiliates is simply not credible. Likewise, the 
notion that a Verizon local service provider can exercise control over 
consumers' CPNI once it has been disclosed to its affiliates is far-
fetched. Many affiliates--such as Internet Service Providers, cable 
operators, providers of Voice-over-Internet Protocol (``VoIP'') 
service--may not be telecommunications carriers that are subject to the 
restrictions on disclosure of CPNI applicable to such entities under 47 
U.S.C.  222, and thus, once disclosed, the obligation to protect such 
information quickly dissipates. Finally, there is another harm 
associated with carriers freely sharing CPNI with their affiliates, 
absent a customer's exercise of his or her ``opt-out'' ability, namely 
the competitive advantages derived by affiliates against non-affiliated 
competitors. I see no reason why both consumers and potential 
competitors should be placed at a disadvantage by allowing the free 
flow of CPNI within a carrier's family of affiliates.
---------------------------------------------------------------------------
    \17\ It must be noted that, in its rulemaking, the FCC drew a 
distinction between joint venturers/independent contractors and 
affiliates, observing that ``many customers accept and understand that 
carriers will share their information with affiliates and agents--as 
provided in our existing opt-out rules--there is less customer 
willingness for their information to be shared without their express 
authorization with others outside the carrier-customer relationship.'' 
Id. at 40. There was no basis in the record, however, for the FCC's 
distinction. In its rulemaking order, the FCC failed to cite any 
evidence, in the record or otherwise, in support of its ``observation'' 
that ``many consumers accept and understand that carriers will share 
their information with affiliates and agents.'' In fact, the only 
evidence cited by the FCC in support of its observation actually 
contradicted that observation, since it consisted of comments submitted 
by consumer advocates noting that studies demonstrated consumers 
``generally'' support opt-in mechanisms that provide ``better 
protection'' of their privacy and give them ``more control'' over the 
sharing of such information. Id. at 40 n. 129.
---------------------------------------------------------------------------
    Finally, limiting the flow of CPNI within the extended corporate 
family by requiring an ``opt-in'' mechanism is consistent with other 
laws enacted by Congress to protect citizens' expectation of privacy. 
Indeed, most privacy laws enacted by Congress, such as the Family 
Educational Rights and Privacy Act,\18\ Cable Communications Policy 
Act,\19\ Electronic Communications Privacy Act,\20\ Video Privacy 
Protection Act,\21\ Driver's Privacy Protection Act,\22\ and Children's 
Online Privacy Protection Act,\23\ do not employ an opt-out approach 
but rather require an individual's explicit consent before private 
information is disclosed or employed for secondary purposes. Moreover, 
even the FCC has noted that ``the use of opt-in approval methods appear 
to have become increasingly common, such as in the mobile wireless 
context.'' \24\
---------------------------------------------------------------------------
    \18\ 20 U.S.C.  1232g.
    \19\ 47 U.S.C.  551.
    \20\ 18 U.S.C.  2510 et seq.
    \21\ 18 U.S.C.  2710.
    \22\ 18 U.S.C.  2721.
    \23\ 15 U.S.C.  6501.
    \24\ 22 F.C.C.R. at  45 n. 148, citing, e.g., ``The Mobile 
Revolution Will Be Advertised,'' Wireless Business Forecast, 2006 WLNR 
4911016 (Mar. 23, 2006) (discussing the use of opt-in approval 
processes in mobile wireless marketing); Betsy Spethmann, Next-Tech., 
Promo, 2005 WLNR 10551271 (July 1, 2005) (discussing the use of an opt-
in approval process by Verizon Wireless).

    Question 2. As mobile-based commerce and location-based commerce 
grows, are there specific consumer protection issues that you believe 
Congress should keep its eye on?
    Answer. Yes, there a host of consumer protection issues that our 
experiences at the state and local level lead us to believe Congress 
should consider addressing at this time, or at least monitoring 
closely. Congress should consider these issues in the context of not 
just traditional voice telephone service, but as technologies continue 
to converge in an evolving and disparately regulated marketplace, these 
issues should be considered in the context of cable, wireless, 
broadband and VoIP services.
    At a minimum, we believe that Congress should remain focused on 
providing all consumers with the following minimum protections 
regardless of their telecommunications service or provider:

        1. Clear and consistent disclosure of service-related rates and 
        other terms and conditions of service, including additional 
        fees, surcharges, and taxes imposed or collected by the service 
        provider, provided before the customer signs up for service.

        2. The provision of adequate, prior notice of disconnection and 
        conditions under which disconnection can be avoided.

        3. The provision of adequate, prior notice of material changes 
        in the service-related rates and other terms and conditions of 
        service, including additional fees, surcharges and taxes 
        imposed or collected by the service provider.

        4. The provision of adequate billing detail and the provision 
        of sufficient time and opportunity to pay the bill. Moreover, 
        Congress should make it clear that a customer should not be 
        subject to a fee or surcharge in order to receive a monthly 
        bill, paper or otherwise, that adequately itemizes the services 
        for which the customer is being billed. Carriers have often 
        sought to impose ``paper billing fees'' or ``bill itemization 
        fees'' in connection with the rendition of a monthly bill. The 
        FCC and state agencies have recognized that the monthly bill 
        customers receive is the most important source of information 
        for most consumers regarding their service or rates and 
        charges. Consumers should not be forced to pay extra in order 
        to obtain this information. Moreover, carriers have often 
        sought to implement billing on less-than-monthly frequency. 
        Such billing is acceptable so long as consumers retain the 
        option to choose such billing intervals and are not penalized 
        if they retain monthly billing.

        5. The ability to contact a ``live'' customer service 
        representative of the service provider(s) in a timely manner, 
        at no cost. In our experience, consumers are extremely unhappy 
        with automated voice recognition and other automated answering 
        processes adopted by carriers and other providers to respond to 
        customers' service-related questions or problems. Moreover, 
        Congress should monitor carriers' and providers' efforts to 
        terminate ``problem'' customers (i.e., customers who contact 
        customer service frequently) in order to ensure that consumers 
        are not being penalized for being provided with inadequate 
        service by the carrier or provider.

        6. The ability to cancel service without penalty, especially if 
        the consumer experiences inadequate service (in terms of 
        coverage, quality, dropped calls, unavailability of provider 
        facilities), or if the service conditions materially change 
        (such as technology conversions that adversely affect a 
        consumer's existing service--such as requiring wireless CDMA 
        customers to convert to GSM service). We have observed, with 
        increasing concern, the spread of ``early termination fees'' 
        from the wireless market into other, communications-related 
        fields--such as broadband or VoIP service. In connection with 
        this issue, Congress should also consider the degree to which 
        carriers and providers of similar services rely on long-term 
        contracts that constrain consumers' ability to freely shop 
        among providers based on the cost and quality of service.

        7. The issuance of reasonable credits for out-of-service 
        conditions that is consistent with the duration of the service 
        outage.

        8. The provision of adequate protections against slamming 
        (unauthorized changes in service or provider) and cramming 
        (inclusion of unauthorized charges on the customer's monthly 
        bill).

        9. The ability to transfer telephone numbers when changing 
        carriers or service providers, known as number portability.

        10. The ability to use communications devices (phone, modem, 
        etc.), also known as customer premise equipment, of the 
        customer's choosing and the ability to use that equipment with 
        other providers' services. Handset locking is the most well-
        known example of such practice today.

        11. The ability to access Enhanced 911.\25\
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    \25\ E-911 is the technology needed to send the location of a 
caller to the emergency operator.

        12. Encouragement and support for programs (e.g., Lifeline) 
        that assist low-income consumers to utilize all modes of 
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        telecommunications and similar services.

        13. There must be a uniform and clear source of information to 
        allow consumers to objectively compare their various choices.

        14. Appropriate provision of service and equipment suitable for 
        consumers with disabilities.

        15. Limiting consumers' liability for purportedly unauthorized 
        usage charges to an objectively reasonable amount (e.g., $50). 
        It is our experience that many carriers subscribe to anti-fraud 
        services, such as FairIsaac, that allow them to engage in real-
        time monitoring of customers' accounts. For example, Toward 
        Utility Reform Network (another NASUCA member) is aware of one 
        instance in which a wireless carrier notified a customer of 
        unusual calling in real time, was advised that the customer's 
        cell-phone had been stolen, and then billed the customer for 
        thousands of dollars in unauthorized calls anyway. Since 
        carriers have access to technology permitting them to see, in 
        real-time, unusual account activity to monitor and prevent 
        fraud, it is reasonable to require them to mitigate their 
        damages prior to holding the customer responsible for the 
        monetary consequences of such fraudulent activity.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                              Chris Murray
    Question 1. An article in the October 16th edition of The Wall 
Street Journal discussed a specialized form of direct mail referred to 
as trans-promotional marketing, where ads and promotional offers are 
placed directly on a consumer's bill or statement. Do you see any 
potential harm to consumers if advertisements or promotional offers are 
placed on consumers' bills?
    Answer. This raises several questions. First, why should consumers 
have to tolerate their bills being turned into junk mail, when the 
trend has been toward clear and understandable bills? Advertising on 
bills seems directly at odds with this goal, and consumers are already 
confused enough with their bills. More advertising on bills would 
potentially have the effect of less careful reading of bills, resulting 
in missed charges.
    Furthermore, what benefit would consumers receive for the privilege 
of being bombarded with more junk mail? One question here is who will 
benefit from the advertising revenue? Generally, advertising revenue is 
an offset to services that customers receive for free (such as free 
television or radio). Here, there is no such benefit, as the customer 
is already paying for the wireless service they are receiving. The 
entire benefit inures to the wireless company.

    Question 2. In Dr. Ellig's testimony, he cites FCC data that the 
wireless churn rate is between one and one half percent and 3 percent 
per month. Based on that rate, the typical wireless carrier can expect 
to lose about one-third of its customers every year. Do you expect the 
churn rate to increase with a pro-rated early termination fee? And what 
does the high churn rate indicate about overall consumer satisfaction 
with their wireless provider?
    Answer. In a Jan. 2008 Consumer Reports survey of 20 different 
industries, wireless subscribers' satisfaction was near the bottom of 
the list. Wireless churn is indeed significant, and likely based on low 
customer satisfaction. Keeping customers should be about better prices 
and quality of service, as opposed to locking them in with high 
switching costs, such as Early Termination Penalties and handset 
locking. For carriers who improve their quality of service and price, 
churn will unquestionably be lower than for carriers with poor service 
quality and high prices.
    The wireless industry has a history of fighting reduced switching 
costs at every turn, such as their opposition to the number portability 
mandate--it was only when one carrier with high marks on service 
quality realized they could capture more customers with number 
portability that they reversed course and supported the mandate. The 
result in the marketplace was that carrier captured more customers with 
number portability. ETF pro-rating is not only a matter of basic 
fairness, it will result in carriers with better service quality 
winning more customers.

    Question 3. Do you believe there is ever going to be a commercial 
wireless directory? If so, do you believe consumers would be permitted 
to opt-in or be required to opt out?
    Answer. Whether a commercial wireless directory will ever exist is 
a matter for policymakers to decide; it is difficult to speculate on 
the political feasibility of such a directory. However, it is clear 
that were such a directory to exist, it should be opt-in. An opt-out 
directory will result in wireless numbers being far more available to 
both the general public and marketers, and would place an undue burden 
on consumers to keep their wireless numbers private. The concern here 
stems from the fact that wireless calls are billed for both calling out 
and receiving a call. Aside from the annoyance of answering calls on a 
private cell phone from unexpected sources, there is also a material 
cost to the consumer to receive such calls.

    Question 4. As mobile-based commerce and location-based commerce 
grows, are there specific consumer protection issues that you believe 
Congress should keep its eye on?
    Answer. The Location Based Services (LBS) marketplace will indeed 
raise some thorny challenges even as it delivers significant value to 
consumers. Privacy concerns are paramount--can consumers' location be 
tracked through these new tools? Will their location be transparent to 
family and friends? Random strangers? Will the data from LBS be used by 
third parties in an aggregated fashion? In a disaggregated fashion? Do 
current statutory protections for electronic communications apply to 
geolocation data, e.g., ECPA (Electronic Communications Privacy Act), 
etc?
    LBS services are clearly going to figure prominently in the economy 
of the 21st century, but before policymakers permit broad and perhaps 
unintended uses of LBS, further inquiry is needed to highlight 
potentially anti-consumer problems with these services. This is a 
perfect topic for hearings within the Senate Commerce Committee.

                                  
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