Key considerations for regulating ridesharing in Massachusetts

Earlier this month, the most recent piece of legislation to come out of the Massachusetts House of Representatives concerning the regulation of Transportation Network Companies (TNCs), H.4064[1], was referred to the Senate committee on Ways and Means for review. The legislature’s final decision will determine what service limits companies like Uber, Lyft and Fasten will face in the Commonwealth going forward.

The bill delineates a number of significant proposals. One of its core provisions, if passed, would establish within the Department of Public Utilities (DPU) a new ‘Ride for Hire Division’ —this entity would be charged with governing ridesharing firms, overseeing the issuance of removable decals and ensuring TNCs’ compliance with regulatory requirements.  The division would be funded through fees collected from TNCs. In addition to establishing this new division, H.4064 would enact the following provisions:

• TNC vehicles that are not registered as liveries will be restricted from making pick-ups at both the Boston Convention and Exhibition Center (BCEC) and Logan Airport through 2021.
• TNCs will be prohibited from using “excessive minimum rates or base rates”, which suggests there will be restrictions on the degree to which companies like Uber and Lyft can increase fares during periods of high demand for service—a practice known as ‘surge pricing’.
• TNCs must conduct their own background checks for all prospective drivers, to be performed in conjunction with a background check conducted by the new regulatory body. The Ride for Hire Division’s review will include a check with the National Sex Offender Registry, an assessment of the applicant’s driving record to confirm the applicant has no more than three traffic violations over the preceding three years, and a criminal background check to confirm that the applicant has not been convicted of any crimes over the last seven years. Fingerprint checks will not be a component of the employee screening process for TNC drivers.
• All TNC drivers must apply for a “Transportation Network Driver Certificate” through the new regulatory body—this application requires that all operators disclose to their insurance providers that their vehicle will be used for TNC business purposes. Otherwise, the requirements for insurance largely mirror what companies like Uber already employ in coverage for their drivers, including up to $1,000,000 in automobile liability coverage per occurrence for any incident that takes place while a prearranged ride is in progress.[2]

Beyond regulation of ridesharing companies, the bill also proposes that the Massachusetts Growth Capital Corporation (GCC) “provide financial products” to help those taxicab companies that qualify as small businesses modernize their business practices to be more competitive with ridesharing groups. This financial assistance would take several forms, including:

• financial assistance that encourages the adoption of new technologies and advanced capabilities for existing taxicab companies in order to improve taxicab service, safety and operations;
• loan guarantees related to medallion financing, vehicle loans, or other equipment loans;
• low or no interest loans for vehicles and other equipment necessary to the industry;
• working capital and lines of credit at low or no interest;
• financial consulting, managerial consulting and technical assistance consistent with the provisions of section 8;
• economic stabilization measures consistent with the provisions of section 9;
• junior or subordinated loans for taxicab medallions; and
• any other financing or credit enhancing devices, as made by the GCC directly or on its own behalf or in conjunction with other public instrumentalities, private institutions or the federal government.

Under the proposed law, the GCC would also create a ‘Ride for Hire Sustainability Program’ designed to support smaller cab firms with issues related to employment retention and incorporating new technology into their business practices.

The proposals regarding taxicab companies merit a closer look here.  In a September 2015 policy brief, Pioneer urged lawmakers to revisit regulations for taxicabs and develop a new framework that would allow these companies to be more competitive with TNCs. The most recent House bill, while right in trying to ensure that TNCs will be safe and well-insured, takes an approach that would not result in optimal outcomes for consumers and for the transportation services market as a whole.

Restricting TNC drivers from making pick-ups at the BCEC and Logan Airport, for instance, creates a protectionist barrier to market forces that have plainly demonstrated that consumers want to have access to TNCs at these locations.  The bill’s proposal that BCEC and Logan Airport service be opened to Cambridge and Somerville cabs in scenarios where Boston cab availability is limited, while TNCs would be prohibited, signals an inherent bias against the TNC industry. Regulations that restrict consumer choice in order to protect the vested interests of cab companies do a disservice to the general public.

The bill’s provisions concerning the GCC are especially problematic.  Created in 2010, the GCC’s stated mission is to “preserve and create jobs at small businesses, women and minority-owned businesses, and to promote economic development in underserved, gateway municipalities and low and moderate income communities.” The corporation serves as a critical resource to some of the most economically stressed areas of Massachusetts. It is therefore concerning that this legislation mandates that the GCC dedicate annually “not less than 10 percent of the total capital committed by the corporation” to providing financial assistance to cab companies in order to make them more competitive with TNCs.  The bill requires the GCC to provide financial assistance, loans, loan guarantees, working capital, and lines of credit to bolster cab companies in their competition with TNCs, while TNCs would not be eligible for such assistance.

Another provision that raises concern would mandate that GCC provide loan guarantees for the purchase of cab medallions.  As revealed by the Boston Globe Spotlight team in its comprehensive investigative series of reports on the Boston taxicab industry, taxi medallions were trading privately among cab owners at prices up to $625,000 apiece in 2013. As the Globe notes, taxi riders in Boston paid some of the highest fares in major cities across the U.S. that year.  Owing to the fact that medallions provide an exclusive right to conduct business in a commercial market where government controls and limits supply, medallion owners have profited enormously.  With the introduction of TNCs into the marketplace, the supply of transportation vendors has increased, thereby diminishing the value of taxi medallions.  The proposed bill seeks to bolster the value of taxi medallions by providing government loan guarantees for the purchase of existing medallions, as well as for vehicle loans.  This raises serious concern that taxpayers will be left on the hook for these loans if the current trend of broadening use of TNCs continues.  When the government guarantees a loan, taxpayers are made responsible for paying off the debt if the company awarded the loan goes under.  The bill requires that the GCC establish a loan guarantee program that would effectuate a public assumption of risk in the purchase of privately-owned taxi medallions.

Another troubling element of the bill concerns “potential methods for allowing taxicabs and other ride for hire vehicles to engage in ‘surge pricing’”.  The legislation calls for a commission to study this proposal.  Under the current system of taxi cab regulation in Massachusetts, maximum meter rates for operators with government-issued cab medallions are set by municipalities. The bill’s suggestion of surge pricing for cabs considers increasing government-regulated charges to consumers for cab rides.  In effect, this suggests that government-controlled cab rates should potentially be increased in order to sustain the economic viability of cab operators in the face of competition from TNCs.  This proposal, along with the bill’s proposal for government-funded financial assistance to cab owners and prohibition of TNC pick-ups at Logan and BCEC, would inevitably increase the cost of cab transportation to consumers. This seems antithetical to the goal of making such transportation more affordable for Massachusetts residents.  These proposals seek to protect the existing industry from market competition brought on by lower-cost, innovative suppliers.

Another problem with the bill concerns limits on surge pricing by TNCs.  Assuming that the restriction on TNC fare hikes is well-defined and within reasonable limits, this measure would help protect consumers from financial shocks in transactions during periods of high demand.  Fare hikes can be egregious—one Uber passenger disclosed he was charged $1,110 for a ride he took on New Year’s Eve, when many others reported paying almost 10 times the normal fare.  The bill’s language about TNC surge pricing should be clarified to make legislative intent more clear.

As the Senate reviews the regulations proposed in H.4064, it should consider the following:

• The success of companies like Uber and Lyft demonstrates that rigid systems like medallion-based models, which limit service options, are an outdated approach to transportation services. Instead of employing funds through the GCC to back loans and provide interest free loans to prospective cab drivers, the state should instead consider moving away from medallions and towards a brand new class of low-permits that would provide new entrants flexibility and low start-up costs, like what was introduced in New York City several years ago.

• While it is reasonable to put limits on fare hikes to ensure consumers don’t face excessive financial shock, lawmakers need to ensure that these limits are well-defined and clearly stated in legislation. Policymakers should determine what minimum rate is considered “excessive” and also give consideration to specific caps on surge pricing during a “state of emergency”. The proposal to eliminate surge pricing outright during “a state of emergency” should be examined with a few important considerations in mind. In theory this prohibition would ensure that passengers won’t face exorbitant fares during events such as snowstorms when other transit options are limited. In practice, however, the absence of a premium for driving in hazardous conditions may reduce the number of drivers willing to work during such periods. Lawmakers should consider how this restriction might generate a disincentive to work during dangerous conditions that would limit service options and ensure the rate they determine to be “excessive” during a “state of emergency” factors in this consideration.

• The restrictions on TNC pick-ups at the BCEC and Logan Airport do not produce more optimal public safety outcomes, and they prohibit service options that consumers have demonstrated they prefer. The push to make these service areas exclusive to taxicabs and liveries represents an effort to implement a protectionist policy, which is at odds with the notion of establishing a “level playing field”. Lawmakers must give more consideration to consumer preferences in these high volume areas and carefully weigh how these limits could limit supply and drive up the cost of transportation services available at these locations.

 

 

[1] As mentioned on the MA legislature’s website, House bill No. 4049 was “changed by the House committee on Bills in the Third Reading”, and was “amended and passed to be engrossed by the House” on March 9 as bill H.4064.

[2] The legislation would also mandate that all TNC drivers carry a plan offering $50,000 of coverage per individual for bodily injury, $100,000 of total coverage for bodily injury, and $30,000 of coverage for property damage.