Briefing Report: When Tech Innovations Create Turf Wars, Do Consumers Win?

Will it be Free-market or Regulation Uber Alles?
Wednesday, January 8, 2014

California has been the front line of political battles for decades, and it is considered a truism that whatever happens here will happen in the rest of the country in the decades to come.  This has been true with technological revolutions and political ones.  After all, California is home to the Silicon Valley and it is also the cradle of movements like environmentalism and the regulatory efforts to clean the air and protect endangered habitat and everything in between. 

Enter an innovative business model, Uber, a ride-sharing approach to livery service that has spawned an entire new classification of livery options – companies including Uber, Sidecar and Lyft (famous for the pink mustaches adorning the front of their vehicles) referred to collectively as Transportation Network Companies, or TNCs.  What is important about Uber is that they have sparked a national debate over the nature of the free-market. 

The debate harkens back to a number of deregulation efforts over the years and a long-needed discussion about the nature of our economy:  Do we want to fight for a free market where consumers are free to choose between competing products and services? Or, in the name of protecting consumers from their own decisions, do we want to increase government intrusions in the market and a return to a more mercantilist approach to the economy – where government and certain select companies form a cabal that controls the market in what amounts to an oligopoly?  As the California and global economies transition to a more high-tech, interactive model, is the pressure to reform the system and allow more innovation going to finally overcome the protectionism of government-regulated monopolies?  How we answer these questions could have a dramatic impact on our economy and every aspect of our lives, particularly as we transition to the next generation of technology, whether electric vehicles, hydrogen fuel-cells or autonomous vehicles. 

Republicans may be faced with this Sophie’s Choice in 2014, as business groups from both sides of the debate make their case in Sacramento.  The irony is that many of the players in this and similar debates are not coming out on the sides traditionally associated with their rhetoric.

What is a TNC?

Although jitneys and bandit cabs have been around as long as there have been professional livery services, the advent of the latest generation of ride-sharing was the brain-child of Garrett Camp and Travis Kalanick, who founded UBER in 2010 with the launch of an app for smartphones.  The process uses mobile technology to connect potential riders with all the available drivers in their vicinity.  Users have the ability, through an app on their phone, to view the profile of each driver and details about the vehicle and the rates that will apply for each vehicle.  The consumer receives a text when the car arrives and a receipt by email and can check the proposed routes that the driver will take.  The app stores credit card information and charges the customer at the completion of the ride without requiring any transaction between the driver and the consumer.  What all these TNCs have in common is private drivers offering to share their vehicle with customers for a price, all handled through a transaction on their smartphone. 

You may be wondering why there would be any controversy about letting innovation and the convenience offered by this new approach into the market.  The controversy arises from the fact that the onset of TNCs has seriously impacted the financial viability of traditional taxis in virtually every city where the service has been offered.   Traditional car services have relied on their protected status and government price-setting to profit from a captive market.  They have failed to innovate or take care of the product they are selling, as highlighted in a New York Times article last year: “Last week, when I arrived at LAX, I made my way to the taxi stand and waited ten minutes for a cab…we drove off in a filthy taxi that smelled like cigarette smoke and had suspension so old it felt as if it had square wheels.  This made me think once again: the taxi industry is ripe for disruption.” (Disruption: ride-sharing upstarts challenge taxi industry, Nick Bilton, blogs.nytimes.com, 7/21/13).

Rather than rising to the challenge and improving their product to meet consumer needs, taxi operators around the country have appealed to their government protectors, issuing legal challenges and working with local regulators to try and ban the use of these new approaches in their local markets.  The PR campaign raised by the taxi companies has focused on unfair business practices, the lack of a level playing field: “William Rouse, general manager of Yellow Cab in Los Angeles… said that making sure taxis were officially licensed was a matter of public safety.  ‘Our roadways are a scarce resource.  When you have an oversupply of taxi cabs, you have more congestion, depress driver incomes and poor service…’” (Bilton). 

The Mustache Wars

Following is a partial list of the kinds of opposition that TNCs are facing across the country, and the creative arguments being used to reinforce barriers and prevent these innovations being offered to consumers.

Washington, D.C.

In Washington, D.C., the taxi commission sought to limit the ability of Uber to provide car service by creating a legislative definition of a “sedan” service.  In its findings, the commission created the distinction in order to classify TNCs as a luxury service.  In addition to the new definition, the commission required that any sedan services charge a minimum rate five times that of a standard taxi, thus effectively barring them from entry into the market.  Uber was successful in challenging this definition and getting a reprieve from the legislation until next year.  (Uber secures victory vs. taxi commission fare increase, Charlie Osborne, csnet.com, 7/12/12).

New York City

Less than a month after Uber began offering its service in New York City, the company was forced to shut down as a result of the regulatory hurdles thrown up by traditional taxi services.  The Taxi & Limo Commission (TLC) skirted the main issues and instead used a technicality to ban TNCs.  “Soon after the service was announced, TLC took issue with Uber’s offering, saying City regulations prevent Uber from processing credit transactions for taxi services.” (Uber quietly putting end to NYC taxi services, Don Persinger, news.cnet.com, 10/16/12).

Amazingly, the issue of mobile credit card transactions was miraculously resolved when Uber agreed to include standard taxis on the list of available vehicles to be hailed using their application.

Boston

Uber ran into yet another challenge in Boston, where the Division of Standards of the Commonwealth of Massachusetts issued a cease-and-desist order because there was no national guideline for the use of GPS location technology in commercial transportation.  In its ruling, the division concluded that “Massachusetts law does not sanction unapproved devices for use in commercial transactions.”  The ruling was subsequently overturned on a technicality when the Governor issued a statement committing to keeping Uber operational in Boston. (Uber wins reprieve to continue operating in Boston, Steven Musil, news.cnet.com, 8/5/12).

California Dreaming

The story in California thus far has mimicked the response across the country.  In Los Angeles, Uber began offering rides in March, 2012, and by summer the company had received a cease-and-desist order from the city of Los Angeles.  The letter accused the company of “operating an unlicensed commercial transportation service.”  (Bilton) 

In San Francisco, cab drivers filed a class action lawsuit, citing unfair business practices.  The complaint claims that “Uber is acting as a taxicab company while sometimes denying this fact in order to avoid all regulations governing taxicab companies… by ignoring the law, Uber is putting at risk the livelihoods of hardworking men and women who drive safely and follow the rules.” (Uber faces new legal challenges, at home in San Francisco, Michelle Meyers, news.cnet.com, 11/14/12)

In response to the problems local jurisdictions were having developing a consistent response, the Public Utilities Commission (PUC) weighed in with a state perspective.  Initially, the Safety and Enforcement Division of the PUC issued temporary cease-and-desist letters against Uber, Lyft and SideCar, along with $20,000 fines for operating without authority.  However, earlier this year, the Safety and Enforcement Division entered into settlement agreements with each company, allowing them to operate while the PUC took a closer look at this issue in a full rulemaking process (R. 12-12-011). 

The PUC issued a decision in the case earlier this year which attempts to create a level playing field for both the TNCs and the traditional taxi and limo drivers by establishing certain baseline safety and insurance requirements: “…in this decision we require each TNC (not the individual driver) to obtain a permit from the Commission, require criminal background checks for each driver, establish a driver training program, implement a zero-tolerance policy on drugs and alcohol, and require insurance coverage.” (CPUC, Decision adopting rules and regulations to protect public safety while allowing new entrants to transportation industry, page 2).

While this decision seemed to settle the issue, it has generated vehement opposition from the taxi drivers who have challenged the legality of the decision and the process used to reach it: “At the very onset of this proceeding, secretive agreements were signed between the CPUC’s Safety Enforcement Division and two of the companies under question…these agreements predetermined the outcome of this proceeding, opening the floodgates for an unlimited number of unregulated personal vehicles to provide for hire, on demand passenger transportation… Vehicles providing taxi service should be regulated as taxis…on demand, on call local transportation service must, by necessity, fall under the jurisdiction of cities and counties to meet the specific needs of a community.” San Francisco Cab Driver’s Association Letter issued to members of the Senate Transportation Committee.  In addition to the letter and legal challenges at the PUC, the organization is threatening to pursue legislation to overturn the PUC decision.

Conclusion:  Free market, or Regulation uber alles?

The battle over the taxi market is a microcosm of a number of policy debates over how we regulate an increasingly tech-oriented and innovative economy.  As a principle, are we going to allow fast-paced innovation to take place, or are the risks such that it must be regulated and licensing used as a barrier for innovators to enter the market and compete.  How California answers this question, if we are consistent in the application of the principle, will have dramatic impacts on how we do business in the.  In every case deregulation offers a number of potential benefits to the consumer, including lower rates, increased choice and convenience. However, these benefits do not accrue without a potential cost. How Republicans and the Legislature at large choose to address this growing challenge could be a major focus of legislation in 2014.

For more information on this report or other Transportation issues, contact Ted Morley, Senate Republican Office of Policy at 916/651-1501.