Verizon Wireless has replied to the Federal Communications Commission's letter of inquiry about its super-sized early termination fees for smart phones. The bottom line: $350 ETFs are good and good for you.

"This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price," the telco's 13-page statement (with 64 pages of documents) explains. "By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices. It thus enables many more consumers, including those of more limited means, access to a range of exciting, state of-the art broadband services and capabilities."

Budget busters?

Verizon is responding not just to the FCC's probe, but to the Senator on Capitol Hill who's been raising a ruckus about this issue since 2007. Earlier this month Amy Klobuchar (D-MN) introduced a bill to put the kibosh on "budget-busting" ETFs, as she calls them. The proposed law would ban early fees that exceed the cost of the handset to the provider minus the purchase price paid by the consumer at the start of the contract.

No surprise then that Klobuchar hit the roof when Verizon announced in November that its early fees for the termination of "Advanced Devices" (smart phone) contracts would double from $175 to $350. These gadgets include the BlackBerry Curve, Storm, and Pearl, the Motorola Droid, LG Dare, Palm Centro, and various netbooks made by Hewlett Packard and Gateway.

The new ETFs comes with a new pro-rating system—ten dollars sliced off the fee each month—that still leaves quitters paying over 100 bucks, even if they terminate at the very end of the two-year deal. Klobuchar sent a letter to Verizon president and CEO Lowell C. McAdam calling the hike "anti-consumer and anti-competitive," and asked the FCC to probe the telco about the move.

And so the agency did. The Commission appears to like sending out these sort of letters, having just completed an inquiry of Apple's rejection of Google Voice for the iPhone. Much of Verizon's response details how it lets consumers know that they're staring at a $350 ETF in the face (store disclosures, receipts, the sale confirmation letter, etc). But a big chunk of the statement is a defense of the practice in general.

Mobile service companies have long argued that early fees subsidize the difference in cost between what the company pays the manufacturer of a phone, and the retail price for the device that it offers consumers. Verizon says that this "cost differential"—"the difference between the amount Verizon Wireless pays manufacturers for the device and the price it charges to customers on term contracts"—is double for "advanced devices" than what it is for "basic devices."

Verizon also had to hike its advanced device ETFs, the letter claims, because it costs more to advertise and sell them. "It takes more time (and hence increases the cost to Verizon Wireless) for sales and customer care representatives to handle customer inquiries regarding the complex advanced features and functionalities of Advanced Devices," the company explains.

And then there's Verizon operating expenses and investments in broadband networks: "The $350 ETF does not fully compensate Verizon Wireless for all these costs, particularly for customers who terminate at a relatively early point in the contract term, but it helps the company recover at least a portion of them."

Browser bait?

The FCC letter of inquiry also expressed concern about a feature prominent in some of these Verizon networked devices: the company's Mobile Web browser, for which Verizon charges a usage fee. The service offers more or less what you can expect from a free Yahoo! account —e-mail, news, weather, sports—except at a usage rate. If you don't subscribe to a prepaid or unlimited data bundle, the cost is $1.99 per megabyte or a "fraction thereof," as VZ puts it, of monthly data use.

"Is there a minimum data amount or level of access that triggers charges, and if so, what is that amount or level?" the FCC letter asked. "Is it correct that customers are charged for minimal, accidental usage by customers using these phones?"

Verizon says the answer to the second question is no—or at least sort of no. Non-prepaid or data plan customers who navigate to Mobile Web's home page are not tithed. "If the browsing session ends there without the customer navigating to another webpage," the response explains, "the customer will not incur charges for Mobile Web browsing."

So presumably some wanderers will get dinged for clicking those "another webpage" links. But the statement doesn't really answer that first question about the minimum data charge, so we still don't know how much. The FCC's letter referenced a column by New York Times tech writer David Pogue, which includes a complaint from a Verizon customer about the feature.

"The phone is designed in such a way that you can almost never avoid getting $1.99 charge on the bill," the consumer wrote. "If you open the flip and accidentally press the up arrow key, you see that the phone starts to connect to the web. So you hit END right away. Well, too late. You will be charged $1.99 for that 0.02 kilobytes of data. NOT COOL."

Verizon responds that some of these mobiles can be configured to avoid that Web-connection feature, "but this option is not available on all Mobile Web capable devices."

When all is said and done, it is unclear where this goes now. Do Verizon's pricey new ETFs exceed Klobuchar's cost-of-handset minus purchase price formula? And behind the scenes of this discussion is a debate about whether the FCC should take the regulation of ETFs away from state governments and courts—a move that the telcos have supported and consumer advocates opposed.

Klobuchar's bill would not override any state level regulations affecting early fees. It's currently awaiting discussion in the Senate Commerce, Science, and Transportation commiittee.