What to Do about Ride-Sharing

SOUTH CAROLINA’S REGULATORY REGIME DOESN’T PROTECT CONSUMERS, PLACES UNACCOUNTABLE POWER IN THE HANDS OF A FEW POLITICIANS, AND OUGHT TO BE ROLLED BACK – STARTING WITH THE TAXI INDUSTRY. HERE’S HOW TO DO IT.

The ride-sharing service company Uber began operating in South Carolina in the summer of 2014. As the company usually does when it expands into a new area, it created not only a fleet of drivers but also fierce debate about what regulations should or shouldn’t pertain to the ride-sharing industry. On one side of the Palmetto State’s newest political battle are existing taxi companies and the government agencies that generate and enforce regulations on the taxi industry; on the other side are Uber, its independent drivers, and consumers who enjoy the new service.

The two sides’ differences have so far proven to be intractable. Existing taxi firms insist that Uber is engaging in unfair competition by failing to comply with all South Carolina taxi regulations. While Uber does require its drivers to pass background checks and insures its drivers in case of accident, the company lacks – its critics contend – the required “certificate of public convenience and necessity” required to operate as a taxi company in South Carolina. While Uber has initially denied that it qualifies as a taxi company, and so implicitly argues it shouldn’t be subject to the state’s taxi regulations, the company has recently announced it will seek a South Carolina certification as a Transportation Network Company.

Regardless of whether Uber is successful in its application for legal certification, the question remains whether Uber or any would-be taxi or ride-sharing entrepreneur should have to go through South Carolina’s burdensome and time-consuming certificate application process in the first place. So far most discussions of fairness in taxi competition have centered on the argument that all would-be competitors should have to comply with the same burdensome regulations. But fairness could also be achieved by liberating all competitors from all heavy handed regulation.

So who benefits, and who is harmed by, South Carolina’s existing taxi industry regulations? Once we know that, we’ll understand the right response to the controversy.

The current regulatory structure

Under current law those wishing to carry passengers or goods in a motorized vehicle for profit must comply with a number of both statutory and regulatory requirements on both the state and local level.

All motor vehicle carriers (defined as a company or person owning or operating a “motor propelled vehicle” for the purpose of transporting people on South Carolina public roads) must comply with a number of safety and cleanliness laws and regulations which are fairly standard to most regulated industries.[1] Most of these laws and regulations require conduct that companies – companies wishing to retain customers, anyway – would practice anyway. Because of the nature of the industry, state law also requires that every motor vehicle carrier either carry insurance or a surety bond to cover any possible damages to passengers, cargo, and the public.[2] Requiring insurance is slightly more fiscally burdensome than basic safety regulations; but again, most companies attempting to compete long-term would carry insurance regardless of legal requirement.

Far more controversial are license and certification requirements. Every motor vehicle carrier, as defined by state law, must apply for and receive a state level certificate of either “public convenience or necessity” or a certificate of “fit willing and able.” In the case of taxi companies individuals or businesses must apply for a class C certificate of public convenience and necessity.[3]

To obtain a class C certificate, applicants must first fill out the required application form and submit it to the Public Service Commission (PSC) for evaluation. The application includes the proposed rates to be charged by the aspiring taxi company, and an insurance quote for the company. After the application is received, the PSC will hold a hearing on the merits of the application. Throughout the application process the PSC is required by law to hear any objections from individuals or businesses that may be affected by the issuance of the certificate.[4] The commission can deny the application on the basis of either (a) failure to meet legal requirements or (b) simply by determining that the public is already being served in the new company’s proposed area of service.[5] In the event that an application is approved, the certificate will be issued by the Office of Regulatory Staff (ORS).

These government entities – the entities charged with regulating not just the taxi industry but also all utilities in South Carolina – are largely unaccountable to the public. They are controlled by the General Assembly, and more particularly by legislative leaders. The seven members of the PSC, which approves rates for utilities and taxis, and the Director of the ORS – the state-sponsored “people’s advocate” in utility matters – are nominated by an entity known as the Public Utilities Review Committee (PURC).

The PURC in turn is composed entirely of legislators and members who are appointed by legislators. The PURC nominates three candidates for each PSC seat, and these candidates are voted on by the entire General Assembly. Only one candidate is nominated by the PURC for the position of Executive Director of the ORS, thereby making the governor’s official appointment power over this position largely meaningless. This convoluted system of legislative control obscures just who is responsible for the actions of the PSC and ORS, making it easier for these agencies to perform poorly or even deliberately cozy up to the businesses they are meant to regulate with little repercussion.

In short: the system almost guarantees corruption.

Although state-level certification already provides significant hurdles to operation, overlapping jurisdiction in existing law means taxi entrepreneurs may also be required to obtain a license from the localities (counties, cities, or towns) in which they propose to operate.[6] This process requires another application, along with fees, of varying sizes.

In August The Nerve reported on the case of Ted Praul, who applied for a certificate of “convenience and necessity” from the city of Myrtle Beach and was charged a $500 non-refundable fee. In addition to requiring application and fees, local bodies can, like the PSC, reject an application based merely on the determination that the service isn’t needed. Ted Praul’s application for local licensure was initially rejected for unspecified reasons but was later approved after Praul obtained a lawyer and appealed his case.

Achieving state and local licensure, however, will not be the end of Mr. Praul’s or any taxi company’s involvement with regulators. Once licensed, taxi companies must begin paying regular fees and assessments to their regulators. All taxi companies with less than 20 vehicles must pay a semi-annual fee of $7.50 for each vehicle under 2,000 pounds and a starting fee of $7.50 for each vehicle over 2,000 pounds with an additional $2.50 for each 500 pounds over 2,000.[7] Localities are also free to charge taxi companies license taxes or fees as they see fit.[8] Most significantly, every utility regulated by the PSC and ORS (and “utility” here includes motor vehicle carriers) must pay annual fees for the support of these two regulating agencies. The fees are assessed by the Department of Revenue based on each company’s proportion of PSC and ORS expenses in proportion to the company’s gross income from operation in South Carolina over the last year.[9]

Finally, in addition to extensive coverage in the state legal code, the South Carolina code of regulations has an article within its PSC chapter devoted to regulations concerning “motor carriers.” These regulations provide further details on requirements laid out in the state code, and they derive their authority from the same source – namely articles 1 to 11 of chapter 23, title 58 of the state code.

To summarize: under current law taxi or “motor vehicle carrier” entrepreneurs must comply with safety and insurance regulations and pay regular fees and assessments to their regulators for the privilege of being regulated. But before a business can legally compete and be charged regular fees for regulation that business must prove to both state and local level regulators that they’ll be providing a needed customer service.

What is Uber?

The company known as Uber was originally created in San Francisco. The idea of a personal transportation service summoned by a smartphone app was conceived in 2008 by Travis Kalanick and Garret Camp. They wanted to fill a market gap caused by what they saw as a terrible taxi service in San Francisco (poor service and a shortage of taxis).

Over time the idea of a timeshare in a full-time luxury personal transportation vehicle evolved into the modern conception of the company that connects a large pool of drivers to ride-seeking customers using a smartphone app. Uber bills itself as a ride-share service, claiming its app is the main service it provides. The app not only allows riders to electronically hail drivers, it also provides for electronic payment of fares and allows rider and drivers to rate each other. Finally, in addition to providing the app Uber also performs background checks on all drivers who use the app and provides insurance for any vehicle during any period a rider is inside.

Since 2008, the service has spread to cities around the United States and even the world. Uber’s popularity with consumers is indicated by both its rapid growth (recent estimates have valued the company as worth over $18 billion) and by dwindling demand in many localities for traditional taxi services (as of July Uber’s home base of San Francisco had seen a 65 percent decrease in traditional taxi use over the preceding 15 months).

Uber has also inspired the creation of other ride-sharing companies such as Lyft and Sidecar, both created in 2012. While Uber is the only major ride-sharing company currently operating in South Carolina, if it’s successful others will follow shortly.

Regulatory approaches in other countries/states/municipalities  

South Carolina is hardly the first state where Uber and other ride-sharing companies have met legal and regulatory barriers to operation. Many states, localities, and foreign countries have certification requirements for taxi services similar to South Carolina’s. Despite these barriers, Uber and regulators in many localities have managed to either amend existing regulation, or create entirely new regulations that allow Uber to legally serve consumers.

Regulatory bodies in Virginia and California and the legislature in Colorado all created new classes of regulations for ride-sharing companies in 2014. The regulatory approach in all these states has been to classify ride-sharing companies as distinct from traditional taxi services. California and Colorado classify ride-sharing firms as “transportation network companies,” and therefore create new regulations specifically for them. In all three cases, regulations have focused on ensuring that ride-sharing companies provide background checks for drivers and insure their drivers. The regulations from these three states differ slightly in other aspects; some require vehicle inspections and driver training programs.

Closer to home, the North Carolina legislature passed a bill in 2013 that prohibited cities from regulating ride-sharing. The bill left open the possibility of state regulation and licensure.

Some city-level regulators have also taken steps towards clearing up regulatory gray areas and allowing ride-sharing companies to operate legally under either new or existing regulations. In D.C. a subcommittee of the city council has passed a bill that would allow ride-sharing companies to operate legally provided they have background checks for drivers, cover their drivers with some form of liability insurance, and pay 1 percent of gross receipts to the D.C. Taxi Commission. Similarly, the regulatory transportation body in London – cutely called Transport for London – has provisionally stated that ride-sharing companies can legally operate in the capital; a court ruling will make a final determination on legality.

Some of the harshest regulatory approaches, by contrast, can be seen in countries in continental Europe. Uber is engaged in a legal fight against an outright ban in Germany and faces a de facto ban in France. It’s unclear, however, just how effective this heavy-handed approach is, even if the only goal of the policy is to drive out ride-sharing companies. Uber reported a massive increase in consumer sign-ups for its app in Germany following the issuance of a ban on the service from a Frankfurt court. Some German cities were said to have over a 500 percent increase in sign-ups the week of the ban compared to the week before.

So far, there is no consistent government policy on ride-sharing. Governments on all levels are still looking for a way to adapt to a new technology in order to benefit as many people as possible.

The economic case for free competition

It’s both true and uncontroversial: competition is superior to monopoly for everyone except the monopolist. A monopoly not only harms the consumer by charging monopoly prices (prices above what a competitive market would charge) but also reduces overall societal welfare by purposefully restricting production.

In a perfectly competitive product or service market, prices tend to average around marginal cost (marginal cost being the cost of producing one additional unit). In other words: each firm will produce as many units of a good or service as it can, as long as the price consumers are willing to pay is sufficient to cover the cost of the last (and therefore most expensive) unit produced. This behavior leads to an average rate of return on investment throughout the competitive industry and helps to ensure that consumers are able to obtain as much of a desired product as the industry can produce within cost constraints.

While perfect competition rarely exists in the real world due to factors such as product differentiation, the structure of a perfectly competitive market is roughly the inverse of a monopolistic market. This is not to say that none of the beneficial aspects of competition exist in the real world. Firms in a reasonably competitive market do not purposefully restrict production in order to increase prices. Thus reasonably competitive markets tend to produce more of desired goods and services than monopolies do.

Competition also prompts firms to serve consumers in ways other than increasing production. Competition encourages firms within an industry to improve services (which can lead to increased demand for one firm’s product) and or engage in cost cutting innovation (which can allow a firm to charge lower prices than rivals and therefore grab a larger portion of market share). Either tactic when successful benefits both consumers (by allowing them access to a new and better product or a cheaper product of the same quality) and the firm (by increasing profits).

In the case of monopoly, as mentioned above, the monopolist benefits at the expense of the consumer and overall societal welfare. In contrast to a firm in a competitive industry, a monopolist will cease production long before price is equal to marginal cost. A monopolist produces less, because price is inversely related to supply: he can increase price by producing less. Although increasing prices also means a reduction in demand, this is less harmful to a monopolist than it would be to a competitive firm, as the monopolist can claim a greater proportion (or all) of the benefits of that demand (greater market share).

In short: for a monopolist restricting supply, the increased revenue per unit from a higher price more than offsets the loss from fewer total units sold. Firms in competitive industries can’t employ the same tactics as monopolists because they lack total or near-total market share, and they lack government backing. If a firm in a highly competitive industry decides to reduce output in an attempt to increase prices the price will remain largely unchanged and the firm will only experience a loss in profits.

It’s also worth noting that a monopolist (especially one backed by state-created barriers to entry) lacks much of the incentive to engage in cost cutting or improve service. A monopolist who has a dominant proportion of market share needs not innovate in order to outcompete or simply keep pace with rivals. Products or services supplied by a monopolist will tend to lack quality and affordability. One need only look to South Carolina’s government protected monopolistic utility system to see this principle in action.

In truth, monopolists aren’t much of a threat to gouge consumers in a free market because they are restricted by the mere threat of competition. Any dominant firm in a free market that attempts to achieve monopoly prices and profits will simply induce new competitors into its field looking to take advantage of a highly profitable industry. These entrants will help to restore competitive prices. Thus, a large firm must decide unilaterally to keep its output and prices at competitive levels or it will be forced to do so by new competitors. It is only when the government grants special monopoly privileges (such as barriers to entry) that this self-regulating system breaks down.

Current industry regulation essentially grants licensed taxi companies limited monopoly rights. The PSC and local licensing bodies help to reduce supply (just as a monopoly would) by deciding whether or not to grant potential new entrants into the industry the right to operate. Such artificial reduction of supply would suffice to raise price on its own, but the PSC goes even farther in its attempt to affect prices by directly approving the proposed rates (prices) of any taxi company applying for certification.[10] Admittedly there are multiple taxi companies operating in South Carolina, but it’s safe to say there would be more in the absence of licensure (the case of Uber is a demonstration of this point). While any one existing licensed company could not significantly increase prices by restricting its supply (like a full monopolist) state government is providing this supply reduction and price increase for them. No existing licensed taxi firm is the sole beneficiary of the reduction in supply and increase in prices, but they all receive some share of the monopoly gains resulting from the process.

A large body of evidence suggests furthermore that occupational licensure laws have overall negative effects on economic growth. The public justification for licensure laws is that they ensure quality of service and protect consumers from harm. In fact, however, they benefit licensed businesses at the expense of consumers by allowing licensed businesses to compete in a more limited field. The Policy Council has previously highlighted economic research finding that occupational licensing laws do little to improve quality of service, and that they often result in increased prices (see page 17 of the PDF) in licensed industries.

The state code acknowledges (albeit implicitly) just who these certification/licensure laws are intended to protect. As mentioned earlier, when the PSC is considering an application for certification, it must hear objections from any person or business who will be affected by the issuance of a certificate. No individual consumer will be significantly damaged by the issuance of an additional taxi certificate, and it’s almost impossible to imagine an individual acting purely as a consumer taking the time to complain to the PSC about a pending taxi certification. There is one group that can reasonably expect to be “harmed” by the issuance of an additional certificate: licensed taxi companies. They have plenty of motivation, therefore, to oppose the issuance, and frequently do.

So: what if any benefit do consumers see from the existing certification process? The PSC and local licensing bodies may deny a certificate or licensure if they deem the “public convenience and necessity” are already being served in a new taxi company’s proposed area of service. In reality there is no way a bureaucratic board can make this determination. There is one true and easy test to determine if the market will bear another firm in any industry, and that is allowing the firm to go out and compete. If the new firm serves the “public convenience and necessity,” it will be rewarded with profits. If it does not, it will fail. In the event of failure it’s only the individuals associated with the business who will suffer – not the consumers.

The market already has in place a method of determining if an industry is overcrowded, consumers don’t need any help in this regard from the government. There is every reason to believe certification on the grounds of “public necessity” is more harmful than beneficial to consumers. The only real effect state enforced barriers to entry can have is lessening the number of firms and total output of goods/services that natural demand would support in a free market. The market would naturally weed out the least efficient firms if supply exceeded demand. Any further restriction on the number of firms and products beyond what the market provides is artificial and harms consumers by denying them the quantity of a good or service they would demand at a market price.

External benefits of ride-sharing and increased transportation competition

Permitting increased competition will have direct economic benefits. Increased competition will help to create lower prices, and innovation in service. A licensed taxi company in Charleston has already implemented an app service in response to the competitive pressure from currently illegal ride-sharing companies. Allowing the entrance of new firms into a currently restricted industry can also help to create jobs and satisfy pent up consumer demand.

All of these benefits from increased legal competition come to mind rather easily, but there are also other possible benefits that may not at first be obvious. For instance, it’s not only the large ride-sharing companies that will benefit from being allowed to legally compete. Citizens in South Carolina who wish to engage in entrepreneurship by starting a taxi or ride-sharing company will now more easily be able to implement their vision, and if successful they will create jobs and satisfy untapped consumer demand. Easing restrictions on entrepreneurs could help to create smaller taxi or ride-sharing companies that cater to smaller, underserved markets.

Increased competition can positively affect other societal problems, too.

Early research has found that the entrance of Uber to a new metropolitan area can decrease the rate of drunk driving in that same area. In mid-summer 2014, Pittsburgh resident and computer scientist Nate Good published a study finding DUIs had decreased by 11.1 percent among the general population and 18.5 percent among those under 30 in Philadelphia since the introduction of Uber and other ride-sharing services in the summer of 2012. While Good’s research didn’t control for every variable that may affect DUI rates, his work was quickly followed up on by Uber itself. Uber published research on the Philadelphia and Pittsburgh markets that found that requests for Uber service from bars was three to five times greater than the share bars make up of all establishments in these cities, and that requests for Uber service in each city spiked at the same times (weekends and between 12 and 3 in the morning) when DUIs are statistically most likely to occur. Uber also published another brief study earlier in the year that used an econometric model to show that Uber had decreased the rate of DUI in Seattle by 10 percent since the company arrived on the market.

Obviously these findings should be double checked through rigorous testing by disinterested third parties (one small third-party test has found similar results in San Francisco), but the initial study results are promising. The findings also make sense intuitively. The more transportation options are available – especially easily accessible ones – the more we would expect people to opt for another method of getting home and avoiding a drunk driving accident.

And while there is less available research on some other possible benefits, it’s reasonable to think that if taxi service and ride-sharing were to become sufficiently popular, aided by legalizing competition, there could be a significant fall in personal vehicle ownership, especially in urban areas. Any decrease in the rate of personal vehicle ownership could have positive effects on multiple variables such as pollution, traffic congestion, and parking availability in urban environments. A proliferation of transportation options in urban areas could also prompt a higher rate of residency in cities, where denser concentration of population can help to reduce an individual’s environmental impact.

There are a large number of possible benefits from increasing transportation options but many can’t be realized or even known in the current regulatory environment.

A fair compromise

To repeat: attempts at regulatory compromise in many other states and cities have worked by creating new legal definitions for ride-sharing companies and new regulations to go along with the newly defined industry. These regulations have often focused on requiring ride-sharing companies to provide both liability insurance and background checks for their drivers. Existing taxi companies have often been unhappy with these compromises and not for entirely unjustified reasons.

On the other hand, regulatory agencies can provide unfair advantages for the ride-sharing companies, too. The approach taken by other states would produce an unequal balance of regulation between taxi and ride-sharing companies in South Carolina.

There is, however, a regulatory approach that can produce a fair and even level of regulation for taxi and ride-sharing companies alike. It’s simple: eliminate existing taxi regulations. Eliminating existing regulations specific to taxis would allow all on-demand personal transportation companies to operate how and where they wish. This approach would make consumers, and not unaccountable boards and agencies, the final determinants of a taxi or ride-sharing company’s success.

To be specific: in order to eliminate existing taxi regulations that inhibit competition in South Carolina, legislators would have to remove (among other select sections of code) all references to class C Certificates (taxi certificates) in the motor vehicle carriers chapter of the state code. To further clarify this point, an exception for taxi and ride-sharing services should be added to the code section requiring certification of motor vehicle carriers.[11]

Legislators could leave intact certain passenger safety and driver and vehicle identification requirements. State law could also further provide for basic safety regulations by amending existing sections of code[12] to make clear that all motor vehicle carriers, whether licensed or not, must provide liability insurance for drivers. And if necessary, a new law could be written requiring all motor vehicle carriers to provide background checks for all their drivers.

Code sections granting counties and cities the power to license and require insurance of taxis[13] will also have to be repealed, and a new section of code may need to be enacted explicitly prohibiting counties and cities from requiring licensure or certification of taxis.

Other sections of code need to be amended as well. Laws assessing fees to public utilities regulated by the PSC and ORS[14] should be amended to state that to the extent these fees apply to “motor vehicle carriers” they only apply to motor vehicle carriers that are certified by the PSC or ORS. On a similar note, the code section permitting the PSC to fix “rates, fares, and charges” for motor vehicle carriers[15] should be amended to make clear this power only applies to certified motor vehicle carriers.

Finally, code sections permitting cities, towns, or counties to charge license fees to taxis should be amended to remove this authority.[16]

As for regulations, most if not all regulations restricting competition in the taxi/ride-sharing market should lose their statutory authority with the repeal of the laws discussed above. Any regulations to this effect that remain (or any other unwanted regulations) would best be addressed by the passage of a sunset law requiring regulations to be reapproved by the legislature once in a term of years or else cease to exist. Vestigial regulations with unclear statutory authority would stand a good chance of being eliminated by such a process.

This approach will have some negative effect on currently licensed taxi companies due to the fact that it will eliminate the monopoly rents they earn from existing certification requirements. It’s difficult to justify denying this reform on this basis alone. Current certification requirements help licensed firms at the expense of consumers. Removing certification requirements will help to eliminate the deadweight loss resulting from restricted production, and restore the natural market balance of consumer and producer surplus in the taxi/ride-sharing market.

On a more positive note: for currently certified taxi companies, some of their losses from increased competition will be offset by the fact that they will no longer have to pay fees and assessments to the PSC, ORS, or local government bodies. Drivers for certified taxi companies who are not also owners may also benefit from the lifting of certification requirements. Removing certification requirements will make it easier for current taxi drivers (or any other enterprising citizen) to engage in entrepreneurship by starting their own taxi or ride-sharing companies. The current regulatory environment incentives working for an already certified company over attempting to start and gain certification for a new business.

Since the regulated market clearly isn’t producing the level of service demanded by the market, a deregulated industry will likely create new (driver) jobs as well.

For ride-sharing companies, removing certification requirements and local licensing power from the code will allow these businesses and their drivers to operate without fear of legal reprisal. And of course consumers will benefit from the increased competition in the form of both lower prices and increased provision of a desired service.

Conclusion

The primary beneficiaries of existing taxi certification requirements and related regulations are certified taxi companies. Current law written in an attempt to protect consumers is actually harming consumers by denying them the benefits of unrestrained competition. Widely accepted economic theory as well as empirical evidence and many economic studiesdemonstrate that competitive markets vastly outperform – from a consumer standpoint – government enforced monopolies and oligopolies.

There is every reason to believe that the state can provide for basic safety standards while still allowing all taxi and ride-sharing entrepreneurs to attempt to satisfy customers to the best of their ability. Accordingly, legislators should repeal certification requirements and other laws that have the primary effect of restricting competition in the taxi/ride-sharing industry.

_________________

[1] SC Code Sections 58-23-110 through 58-23-1140; 58-23-1270 through 58-23-1350; SC Code of Regulations 103-150(4)

[2] SC Code Sections 58-23-910 through 58-23-930; 58-23-1220 through 58-23-1230; SC Code of Regulations 103-170 through 103-180

[3] SC Code Section 58-23-240

[4] SC Code Section 58-23-210

[5] SC Code Section 58-23-330

[6] SC Code Section 58-23-1210

[7] SC Code Section 58-23-560

[8] SC Code Section 58-23-620

[9] SC Code Section 58-3-100 and 58-4-60(B)

[10] SC Code Section 58-23-1010

[11] SC Code Section 58-23-40

[12] SC Code Section 58-23-910

[13] SC Code Sections 58-23-1210, 58-23-1220, 58-23-1230

[14] SC Code Section 58-3-100 and 58-4-60(B)

[15] SC Code Section 58-23-1010

[16] SC Code Section 58-23-620

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