Riding by the Rules

12/1/2014

STATE LEGISLATURES MAGAZINE | december  2014

The astonishing growth of ridesharing networks has policymakers asking how to ensure the road ahead is not only safe, but fair.

By Doug Shinkle

With the advent of Uber and Lyft, hailing a ride has never been easier. The popularity of these relatively new “transportation network companies” (TNCs) is disrupting the transportation status quo in the United States and around the world.

Critics claim ridesharing services have an unfair advantage over taxis by not having to play by the same set of rules, regulations and licensing requirements.

The debate is capturing the attention of lawmakers as well. “Ridesharing companies are meeting a need,” says Illinois Senator Antonio Muñoz (D). “I am in strong support of the entrepreneurial spirit and innovative ways of creating jobs—as long as the service being provided is beneficial and safe for all parties involved.”

Americans’ use of these ridesharing networks has skyrocketed. Lyft and Uber, the two San Francisco-based giants in the transportation network world, along with others such as SideCar, Get Taxi, Hailo, leCab and Taxi Mobility, offer a convenient, low-cost way to get around. Appealing to users is their simplicity. The networks consist of a smartphone app and willing drivers.

From a passenger perspective, catching a ride with one of these services is the peak of convenience. After downloading the free app onto a smartphone and entering your credit card information, all you do to summon a ride is enter your location. Voila! A driver using his or her own car heads your way, monitored in real-time on your phone. When the driver arrives, you climb in, state your destination, sit back and relax. No need to count your cash or worry about tipping—your credit card will be billed at a preset level. You’ll even get the receipt on your phone, via text message.

Drivers for Lyft decorate their vehicles’ front grills with a pink moustache. The business began in 2007 and now operates in more than 68 U.S. cities. Uber followed two years later and has proved to be a fierce competitor with an eye overseas. UberX (its low-cost option) now operates in 45 countries and 117 U.S. markets.

As these ridesharing networks grow, state lawmakers are faced with a billion-dollar question: How do we ensure the safety of passengers and the fairness of regulations without stemming the remarkable growth and convenience of these alternative transportation companies?

Uber, Lyft and others have given millions of rides in the past year, creating a strong, committed customer base that has served them well wherever and whenever a regulatory debate is brewing. Many political and business leaders are eager to embrace them as well, recognizing their benefits and appeal, especially with young professionals and millennials who prefer to have several transportation options. Uber has particularly rallied its customers to action, using positive public opinion to blunt any regulation the network believed could harm its operations.

California Assemblywoman Susan Bonilla (D) notes, however, that “encouraging innovative business models and achieving adequate consumer protection are not mutually exclusive goals.”

The First Test Run

In early June, after some heated debate, Colorado became the first state to pass legislation that legalizes the operation of transportation network companies and creates a regulatory structure for the growing industry. Debate centered on a number of issues, including whether to require background checks of drivers for traffic violations and criminal behavior.

But the main point of contention was deciding what the proper insurance requirements should be for these new transportation networks. Insurance companies argued that the personal insurance drivers carry is not appropriate to cover commercial driving, which includes the “in-between” time when drivers are logged into their app, waiting to be e-hailed.

The final version of the bill requires primary commercial insurance coverage of $1 million from the time the driver is summoned to when the passenger is dropped off, and a lesser amount during the in-between gap time.

Colorado Representative Libby Szabo (R), co-sponsor of the legislation, heard from several concerned constituents during the debate. Many were drivers. “They are a diverse group—from moms who want to use the time when their kids are in school to make extra money to send kids to ballet or soccer camp, to other folks who are making a living driving for a transportation network company.” She believes regulating these companies, as well as taxi cabs, is a work in progress.

“Let’s establish a statutory foundation,” she says, “then later address other concerns.”

Szabo says some of those concerns come from cab companies, who claim the networks don’t have to meet the same standards they do. But, she says, cab companies “wanted to be highly regulated in order to keep out the competition.” Now, that has “come back to bite them.”

The highly regulated environment led to a limited number of cabs on the streets of Denver, in particular. Consumers there were more than willing to try different transportation options when they were offered. Some taxi companies have responded with their own mobile apps that function similarly to TNC apps. And, Colorado’s law does allow cab companies to convert to a transportation network.

Airports—Hubs of Conflict

Airports have become a flashpoint between taxicab companies and transportation networks. The network companies often don’t have the required permits and use the general passenger lanes, adding to congestion. Citations have been issued to network drivers at airports in Atlanta, Boston, Los Angeles, Houston and others.

In Orlando, the airport authority has warned drivers they may be arrested for trespassing if they continue to operate without proper permits. Taxi and shuttle owners in Orlando are quick to point out that they paid more than $10 million in fees last year, fees TNCs appear to be avoiding. Those fees support airport operations and help keep airline fares down.

And in California, the Public Utilities Commission recently issued a warning to transportation network companies, accusing them of not paying the permit fees to legally operate at airports, as well as using people who don’t have valid driver’s licenses.

 “The bottom line is that all transportation companies, including transportation network companies, should abide by the rules required by California airports,” Bonilla says. “They are designed to protect passengers and create a safe environment for those traveling to and from an airport. No transportation service should avoid the costs to legally operate at California airports. Transportation network companies must pay the costs of doing business in the state. They should not be excluded from the required permits that taxis must already apply for—and pay the fees for.”

Transportation networks are quick to differentiate themselves from taxicabs. Their argument: They don’t hire drivers or purchase vehicles; they merely facilitate transactions between individuals. That doesn’t go down well with established cab and shuttle companies that pay handsomely to operate in a city. Taxis are required to charge flat fares, ensure the safety of their passengers, and serve everyone, including people with disabilities, families without cars, older Americans and people without smartphones, which is around 35 percent of all Americans and 75 percent of those over age 65. Taxis play an important role in helping people get to where they need to be, regardless of location, population density, convenience or wealth.

That’s why Illinois Senator Martin Sandoval (D) is a bit leery of this new way to catch a ride. He expressed his concerns during debate over legislation in Illinois. He accused networks of picking and choosing their customers, saying ridesharing drivers “cherry pick who to pick up. They don’t go to the Southeast Side, The Bush in the 10th Ward … They just stay close to Wicker Park, Wrigleyville.”

Several states have warned or fined transportation network companies and their drivers for operating outside various laws. Nebraska and New Mexico have issued cease and desist orders because the services did not fit under existing rules and were operating outside the law. Pennsylvania and Virginia have slapped fines on them for operating, although Virginia has since agreed on temporary rules that allow the networks to continue to operate. Pennsylvania’s Public Utility Commission is currently considering rules to allow service in portions of the state. Police officers in Pittsburgh are conducting “sting” operations, posing as riders, hailing drivers via the apps and issuing citations when they arrive to pick them up. And in Maryland, cab companies have filed a suit alleging anti-competitive practices by transportation network companies.

Safety for All

Lawmakers in Arizona, California, Georgia, Illinois, Maryland, New Jersey, Oklahoma, Pennsylvania, Rhode Island and the District of Columbia also have considered bills to regulate some aspect of transportation network companies.

Most bills define what a “transportation network company” is, set insurance requirements, require criminal and driving background checks for drivers, set standards and timelines for vehicle safety inspections, require clear communication of estimated and final fares, and restrict passengers from hailing a network driver from the street.

The networks claim they already meet many of these requirements, but questions remain concerning insurance coverage and driver and vehicle safety checks. Lyft’s website describes how the transportation pioneer is “changing the industry with safety front of mind” through liability insurance requirements, in-person driver screenings, vehicle inspections, an in-app rating system and 24/7 support. Likewise, Uber’s website claims it sets “the strictest safety standards possible.”

When Georgia Representative Alan Powell (R) first heard about Uber, he was impressed, saying it was “innovation and technology at its best.” Powell envisioned how the service could benefit his rural district, bereft of public transportation and taxi services, especially for people who have been drinking. When a sheriff informed him that the unregulated transportation services were technically violating state law, he decided to create a “simple regulatory model” to ensure a minimum level of safety. Powell didn’t expect the spirited response he received from Uber and its customers. His legislation, which would have required background checks, insurance coverage and tax collections, ended up failing against intense opposition.

Powell believes regulating ridesharing companies is a public safety issue. “If you’re going to hire a driver, you should be able to expect certain standards, like proper insurance and background checks.”

Bonilla also worries about the drivers. She says that, although these companies provide flexible jobs for people who work part-time or have no other job, drivers still need to be aware of the risks, mainly that their personal assets may be on the line if insurance limits are too low.

“I believe that most of the drivers not only are unaware of this, but what’s even more concerning is that the transportation network companies are not informing their drivers of this crucial detail.”

California recently enacted Bonilla’s bill, which requires the companies to carry extra insurance for the in-between times and also inform drivers of the specific insurance coverage they provide.

Illinois’ bills were vetoed amid heavy lobbying and political pressure, with Governor Pat Quinn stating in his veto memo: “To rush into a whole new statewide regulatory network before the need for one is clear would not only stifle innovation, it would be a disservice to consumers who utilize the service while setting a troubling precedent for the future.”

The bills addressed, among other things, chauffeur licenses, fare regulations and service in underserved areas. Illinois’ legislation appears to be the first to attempt to address the practice of “price surging,” which can increase rates two to five times when there is a limited supply of drivers or a high demand from riders. Uber spokesperson Natalia Montalvo defends the practice as a way to ensure the most reliable ride. “When demand outstrips supply,” she says, “surge pricing goes into effect to bring more drivers on the platform to always ensure we’re connecting riders to a transportation option when they need one.”

Illinois Senator Antonio Muñoz (D) wanted to “ensure the safety of our constituents,” and to make sure people weren’t being taken advantage of. “We approved legislation that would allow municipalities to regulate surge pricing, as long as it applies equally to taxis and ridesharing vehicles.”

Elsewhere, Governor Jan Brewer vetoed a bill in Arizona, citing safety and insurance coverage concerns. “Consumer safety must not be sacrificed for the sake of innovation,” she said in her veto memo. Rhode Island created a legislative commission to study transportation networks and review related statutes. In New Jersey and Pennsylvania, legislation is pending.

A Taxing Question

Still not well-understood is how TNCs may affect state and local tax revenue. Do drivers declare and pay income taxes on what they make? Which taxes should the networks pay, and do they?

The legislation that failed in Georgia would have established a study committee to look into the best method of taxation for taxi services, limousine carriers and rideshare drivers. Representative Powell, sponsor of the legislation, believes that TNCs should pay their fair share, just like a taxi service.

Colorado’s Szabo agrees, but believes the current regulatory model for taxis used in most states may be an endangered species, soon to be replaced with a version of the new Colorado law.

As states begin to prepare for 2015 legislative sessions, one thing seems as obvious as a pink moustache on a car: Transportation network companies are popular. They’re here to stay. But figuring out how they fit into the regulatory landscape? That may take some time.

The Details

  • The Centennial State enacted the first-in-the-nation regulatory framework for transportation network companies. It gives the Public Utilities Commission the power to revoke and suspend a transportation network’s permit as the result of a violation, but it prohibits the commission from assessing a penalty against a driver. The law also directs the Division of Insurance to examine whether the levels of insurance coverage required are appropriate. Other provisions in the new law include the following.
  • Transportation networks must carry primary liability insurance of at least $1 million to cover the time from when a driver is connected to a rider through an app until the rider is dropped off, and the company or the driver must also maintain a lesser amount of primary liability insurance for when the driver is logged on to the app but not engaged in a prearranged ride.
  • Drivers must be at least age 21 and have a valid driver’s license, vehicle registration and personal auto liability insurance.
  • Drivers must submit to a criminal history check initially and again every five years, and the network must review the driver’s driving history. Anyone who has been convicted of driving under the influence of alcohol or drugs (along with some other types of offenses) in the past seven years or anyone who has had more than three moving violations or one major moving violation (reckless driving) in the previous three years is prohibited from being a driver.
  • Drivers are limited to working no more than 12 consecutive hours, and they may not provide driving services apart from a network. No “street hailing” is allowed.
  • Networks must have safety inspections of drivers’ vehicles at least yearly, and each vehicle must display an exterior marking that identifies it for hire.
  • The transportation network may not discriminate against riders based on their geographic departure point or destination nor charge additional fees to people with physical or mental disabilities.
  • The transportation network is responsible for communicating how fares are calculated and issuing riders electronic receipts that contain the fare, duration of trip and other information.
  • All networks must offer riders customer support phone service.

Douglas Shinkle is a program principal with NCSL.

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