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The PUC and Your Cab Ride

6 September 2010, 9:36 pm

So you move to the US from a foreign country, go to work, save your money, and then decide to strike out on your own to start your own business.  Pretty much the American dream, huh?

Not if you’re the Colorado Public Utilities Commission:

All Colorado cabdriver Edem “Archie” Archibong wants is to fulfill the next stage in his immigrant success story — to start his own business.But Colorado’s heavily regulated taxi industry isn’t cooperating, causing some local politicians to ask why government is getting in the way of the free-market system.

Mr. Archibong, a Nigerian native and married father of two, came to the U.S. legally in 1977. He joined the Army, where he worked as an optical technician and later started driving a cab to support his family. In 2008, he helped lead a group of 150 Denver-area cabdrivers, many of them legal African immigrants, with plans to start a taxi company called Mile High Cab to serve five Denver-area counties.

In July, the Colorado Public Utilities Commission (PUC), which oversees the local taxi industry, ruled that Mr. Archibong’s startup had its financial house in order. The entrepreneurs pooled their collective savings to start the company, eschewing cumbersome bank loans.

But the PUC said Mile High Cab would hurt the public interest.

That’s right.  More cabs and more competition would hurt the public, according to the PUC.  Why it wouldn’t be a simple matter to let the public decide this is apparently beyond the reasoning capacity of the PUC.

In fact, it’s a perfect example of how regulatory bodies often become captive to the industries they’re supposed to be regulating.  Since they establish barriers to entry, they then become overly concerned with the health of the existing entities.

It’s also an example of how regulatory bodies will almost always seek to expand regulation, rather than contract it, in order to solve a problem.  A 2008 report by the PUC to the legislature shows that when the legislature had the opportunity to prevent this situation from arising, it took the opposite fork.

During the discussion and debate at the Legislature, multiple amendments to the original bill were proposed. Each of these amendments sought to balance the nature and scope of taxi regulation in Colorado in various ways. For example, in its early form, the bill stated a legislative declaration that “competition in the motor vehicle carrier industry will benefit Colorado consumers, making for greater choice and convenience.” The introduced version of the bill included a criminal history background check; the requirement that the operator meet certain safety, insurance and service quality standards; and the requirement that the Commission not limit the number of companies authorized to provide taxi service. Amendments were drafted, but not adopted, that required the Commission to conduct a study regarding expanding taxi service in rural areas; mandated the Commission to prescribe taxi rules regarding wheelchair access, refusals of service, taxi hailing without dispatch, reasonable lease rates, and the use of alternative fuels; prohibited unreasonable lease rates and fees to process credit transactions; and required companies to have at least 25 vehicles in populous base areas; required the companies to operate vehicles that are less than eight model years old, and to have a central dispatch open at all times.

Ultimately, after much discussion and debate, House Bill 07-1114 repealed the prohibition that precluded the Commission from regulating the lease rate charged to a driver by a common or contract carrier as found in § 40-3-103, C.R.S.  (emphasis added)

That’s it.  The bill started out with reasonable consumer protections in return for letting as many companies operate as could meet those standards, quickly became a hobby horse for a couple of dozen special cases, at which point the sponsors decided that the best solution was to ditch the deregulation aspect of the bill and add regulatory authority to the PUC.

As the report points out, cab drivers are independent contractors, leasing their vehicles from the cab companies.  Right now, many of the cabbies are charged $800 or $900 a week rental.  To make up this fixed cost, the cabbies often have to drive 12 or 14 hours a day.  The PUC formerly had no oversight of these arrangements, but has for the last three years, and hasn’t seen fit to do anything about them.  It’s obvious why.  Cab companies get to testify about over-capacity, and seek to protect their (literal) rent-seeking by limiting the number of cabs.

This arrangement serves the cab companies just fine.  It may very well be that the number of cabs is optimized for their close-to-extortionist lease agreements.  But for the rider who wants faster service or a lower fare, or for the cabbie who wants negotiating leverage, it’s not such a good deal.

With control over the number of available cabs, the fares, and the lease arrangements, the PUC has done little more than to discredit (once again) the idea of central planning.  The right answer is to remove the PUC’s control of all three elements, and let normal market forces work their magic.  If Yellow Cab or Metro Cab drivers find they can’t make their leases, Yellow Cab and Metro Cab will find themselves with fewer drivers.  Some drivers will leave to join Mile High Cab.  I can certainly see where Mile High Cab could even work with finance companies to help refugees from Yellow and Metro who want to work, but who haven’t yet set aside enough cash to buy a car.

To maintain standards, let fares decide – on the spot – whether they want the cab that pulls up or the next cab in line; no reason anyone should have to ride in an unsanitary vehicle.

The members of the PUC are appointed by the Governor and approved by the Senate.  All terms of the current Commissioners will expire during the term of the next governor.  As a member of the House, I won’t have any say in the matter.  But I’d certainly encourage my colleagues in the Senate to ask about new nominees’ positions on regulation the markets.  And I’d happily sponsor legislation similar to the original HB07-1114.

Filed under Issues, Regulation.
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A Bad Week For Regulation

31 August 2010, 11:22 pm

Nobody reasonably doubts the need for responsible regulation.  It’s for that reason that we need to understand the limits of reasonable regulations, and the risks that come from the temptation to exceed them.

Last week as a bad week for bad regulation.  First, this example of entrenched industries using regulators to further their own interests at the expense of their customers:

The National Association of Broadcasters is lobbying Congress to stipulate that FM radio technology be included in future cell phones.

In exchange, the NAB has agreed that member stations would pay about $100 million in so-called performance fees to music labels and artists. Radio stations would be required to pay performance royalties on a tiered schedule with larger commercial stations paying more than smaller and non-profit stations.

FM radio now has to compete not only with AM, but with all manner of streaming media.  So of course, they want the government to force their competition to pay the freight to expand FM’s market.  The irony is that the regulators writing these rules are just as clueless: my smartphone already includes an app where I can listen to any local FM radio station.

The other lesson is in the risk of politicizing well-established rules.  BP was browbeaten, if you recall, into putting $20 billion into escrow for the executive branch to dispose of as it wishes.  Some of us argued at the time that there were rules for how to deal with liability, and that the courts were a better, non-political venue for doing so.  Even assuming that Kenneth Feinberg were completely incorruptible personally, he would find himself buffeted by political pressures he – or his administration employers – might feel the need to respond to.

The first, most obvious pressure, is to be lenient in disposing of BP’s money.  Feinberg has tried to make it clear that he will, in fact, be far more lenient and timely than the courts would be:

Appearing … before about 300 people in Houma, La., Feinberg lectured, cajoled and asserted that once he takes over Monday, the process will be accessible, fast and fair.

“I will be extremely lenient in documentation,” Feinberg said. “I don’t need reams and reams of stuff. I don’t need a tax return. Do you have something you can show me? Well, the ship captain will vouch for me — fine. Well, my priest will — fine.”

But this hasn’t mollified those who want more:

Kenneth Feinberg’s effort to set the terms for handing out BP PLC’s money to Gulf oil spill victims came under fresh attack Monday from state officials and private lawyers who said he planned to be too restrictive in deciding who gets paid.

“Mr. Feinberg seems to be completely tone-deaf to the concerns of people along the Gulf Coast,” said Alabama Attorney General Troy King, who blasted Mr. Feinberg as a “corporate shill” of the oil giant.

The point here isn’t who’s right.  I certainly don’t know.  The point is that the suspension of normal, well-established processes for recovering economic damages have been suspended in favor of the judgment of a single bureaucrat.  Many will pile on and try to pressure the system in their direction, often through the media, which can’t help but erode public confidence in the system.

The temptation to help a client group, or to solve a problem now is dangerous, and often, if not usually, makes thing worse rather than better.

Filed under Issues, Regulation.
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Budget Lessons from the Old Dominion

31 August 2010, 10:36 pm

This, from the Wall Street Journal, describes how Virginia managed to close its budget gap:

Here’s something you don’t see often these days: a government running a budget surplus. Governor Robert McDonnell announced last week that Virginia closed fiscal 2010 some $400 million in the black. That’s a radically improved financial picture from a year ago when the state faced a $4.2 billion two-year budget hole.

The usual suspects—the big business lobbies, the Washington Post—thought a major tax increase was needed. So did the previous Governor, Democrat Tim Kaine, who proposed a $2 billion tax hike before he left town, on top of two major Virginia tax increases in the previous eight years.

Mr. McDonnell has proved otherwise. The newly elected Republican put a freeze on hiring and took the knife even to such politically sensitive programs as school aid, police and Medicaid to cut hundreds of millions of dollars. Total state spending has been reset more or less to 2007 levels. If Congress were to do that, the federal deficit could fall by more than $900 billion, or two-thirds.

It’s true that Richmond used too many budget tricks to make the surplus appear larger than it really is. Sales tax payments were accelerated by one month to count in 2010 rather than 2011. Several hundred million dollars were borrowed from the public-employee pension reserve—money the Governor promises to repay by 2013. Most fiscal experts think the real surplus is closer to $87 million. But given the lousy economy, Virginia’s budget achievement is laudable. (Emphasis added)

Virginia does biennial budgeting, so they’ve passed their FY11 and FY12 budgets already.  Virginia’s general fund is about $15.5 billion, and its total budget is about $38 billion, so either way, it’s about twice Colorado’s.  Virginia was facing a $4.2 billion deficit over two years, so it was also roughly proportional to the $1 billion hole we face in FY11-12.

We could begin with a meaningful hiring freeze ourselves.  Despite the Democrats’ claim of a hiring freeze, the Bureau of Labor Statistics tells a different story:

It also makes the urgency of converting PERA from a defined-benefit to a defined-contribution plan even more plain.  (For the basics on public pensions, see this primer.)

In the past, I’ve posted on the difficulty of forecasting, how despite the best intentions and best information, the folks at Legislative Council have a hard time seeing revenue crises before they hit.  Bloomberg  has a fine posting on why this is so:

How do economists fare when it comes to real forecasting, to predicting GDP growth and inflation one year out? About as good as a coin toss, according to Bryan’s research. Less than half the economists did better than the “naive” forecast, which is based on no understanding of the economy and merely assumes next year’s outcome will be the same as this year’s. It’s what you’d expect if the results were purely random….

I want to hear a plausible scenario, based on what we know and what we expect, for how things are going to play out in the U.S. and on the global stage. Getting the number right is a job for an accountant. Putting that number in the context of a larger trend is a job for an economist.

We don’t know when revenue will recover, and we don’t know when the next drop will hit.  As a result, we need to be careful not to build in additional structural spending when times are good.

Unfortunately, we’ve already used up all those gimmicks that make the Virginia surplus look larger than it is.  For us, it’s going to be even more painful, which means it’s going to call for a seriousness that’s been lacking.  It’s going to call for the guts to make difficult cuts, and the courage to defend them before the voters – even in odd-numbered years.

Filed under Issues, PERA, State Spending, Taxes.
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The Wrong Way on Pensions

24 August 2010, 12:56 pm

Via this morning’s Denver Post:

The city and the fire department union were at odds over how pension benefits are paid. The city wanted to continue the current pension plan, similar to a 401(k).

The union wanted to have the Fire and Police Pension Association of Colorado take over management of its pensions. The city feared losing control of the pension process.

An outside arbitrator recently sided with the fire union.

But this month, the City Council rejected that recommendation, which would have forced the issue onto the November ballot.

After meeting in executive session Monday afternoon, council members changed their mind, although even those who supported it said it could cost the city more money down the road, based on the future unpredictability of financial markets.

…

The resolution passed by an 8-2 vote. Another matter to put the issue before voters in November was tabled indefinitely, killing it.

This is a terrible development, taking one, relatively small public pension (although not to the people of Aurora) entirely in the wrong direction.

PERA is underfunded by at least $20 billion.  It’s underfunded because it’s a defined benefit plan, and because politicians have traditionally found it easier to vote new benefits, listening to rosy return estimates and aggressive discounting.  There is enormous default risk associated with these pensions, and it’s sad to see the City of Aurora going down the same path with its firemens’ pension.

Filed under Issues, PERA.
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Colorado’s Contribution to Health Care Endangered

4 August 2010, 10:21 am

This, from this morning’s Wall Street Journal:

The Food and Drug Administration proposed shoring up medical-device approval rules that have been criticized as lax and inconsistent by consumer advocates and the agency itself.

The FDA aims to better define what devices can use an approval pathway known as 510(k), under which companies can get an accelerated decision on whether they can market a new product if they can show it is similar to an already approved device. The proposals, which will be open for public comment, will be closely watched by the device industry because more-stringent rules would raise development costs.

Since in politics, anything you say can and will be used against you, let’s start by saying that medical devices that are supposed to help us shouldn’t kill us, and the FDA plays a useful – although an exclusive – role in making sure that doesn’t happen.

That said, this is bad news for health care and bad news for Colorado.  Medical innovation is the single, surest way of bringing down costs.  New technologies cost more, sure, but they bring down the relative desireability, and thus the relative price, of existing technologies. 

Think about your cell phone.  Everything about it, from the signal to the network to the phone itself, is in a relentless drive towards being commoditized.  Which means that you can get an iPhone for about 1/2 the real cost of a cell phone ten years ago, and pay only slightly more for the network access.  The same factors are at work in every market.

And bad news for Colorado?  Well, we’re home to some of the best, most innovative biotech companies around, which up until last year, attracted a lot of venture capital money.

Here’s an opportunity for our state and federal representatives to stand up for Colorado jobs, and to promote something that everyone says they’re for: lowering health care prices.

Filed under Health Care, Issues, Regulation.
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