Submission: Transportation Network Service Regulations in British Columbia

February 1, 2019

On this page:

1. Introduction
2. About the Bureau
3. The Importance of Competition
4. The Bureau's Experience with Taxi Regulation
5. Answers to the Select Standing Committee's Questions
6. Conclusion and Summary of Recommendations

• Footnotes

I. Introduction

1. Pursuant to section 126 of the Competition Act, the Interim Commissioner of Competition is pleased to submit these comments of the Competition Bureau ("Bureau") in response to the Call for Written Submissions issued by the Legislative Assembly of British Columbia's Select Standing Committee on Crown Corporations("Select Standing Committee") on January 8, 2019.^{Footnote 1}

II. About the Bureau

2. The Bureau ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As an independent law enforcement agency, headed by the Commissioner of Competition, the Bureau is responsible for the administration and enforcement of the Competition Act, Consumer Packaging and Labelling Act (except as it relates to food), Textile Labelling Act and Precious Metals Marking Act.
3. As part of its mandate, the Bureau promotes and advocates for the benefits of a competitive marketplace. Submissions to provincial bodies, such as this Select Standing Committee, form a key part of the Bureau's advocacy strategy. Such submissions are aimed at helping regulators formulate and implement rules that satisfy legitimate policy objectives while respecting competition's central role in the Canadian economy.

III. The Importance of Competition

4. The Bureau's basic operating premise is that competition is good for both business and consumers. Competition strengthens businesses' ability to adapt and provide valuable goods and services to the marketplace. It provides consumers with competitive prices, product choices, and the information they need to make informed purchasing decisions. And it balances the complex interactions of consumers and businesses in a way that serves both the public and private interest.
5. Regulation should be used only where market forces will not achieve legitimate policy objectives and, even then, only to the extent necessary to address those objectives. Otherwise, market forces and competition should be relied on to the maximum extent possible in determining marketplace outcomes. This perspective is based on decades of economic research, and is consistent with international best practices.

IV. The Bureau's Experience with Taxi Regulation

6. In 2015, the Bureau set out to better understand the effect that traditional taxi industry regulations had on competition between taxis and ride-sharing providers. This work culminated in the publication of a White Paper containing a number of recommendations for taxi industry regulators across Canada.^{Footnote 2}
7. The Bureau's White Paper observed a regulatory imbalance between the tightly regulated taxi industry, and (at that time) effectively unregulated ride-sharing providers. This led to the recommendation that regulators reduce their control of the taxi industry, and increase regulatory supervision of ride-sharing providers, in order to establish a level playing field that would allow taxis and ride-sharing providers (collectively, "drivers") to more effectively compete with each other.
8. This recommendation forms part of a broader endorsement of greater reliance on market forces to determine marketplace outcomes in the taxis and ride-sharing space. The Bureau advocates for this because competition between drivers can lead to lower prices, greater availability and convenience, and an overall greater quality of service.^{Footnote 3}
9. Since the time of the Bureau's White Paper, there has been a great deal of international commentary on the effect of ride-sharing business models. In June 2018, the OECD Competition Committee held a roundtable session which brought together representatives from more than 25 countries. This proceeding catalogued international experience with taxi regulation and the emergence of ride-sharing, and compiled this experience into a Background Note.^{Footnote 4} The consensus view expressed in the Background Note similarly endorses greater reliance on market forces and the establishment of a level playing field upon which taxis and ride-sharing providers can compete.
10. This submission reiterates the view that greater reliance on market forces is the best way forward for taxi industry regulation. Regulations should be no more intrusive than necessary, and should not create competitive advantages for one type of driver, so that market forces and competition can determine how the industry evolves and innovates.

V. Answers to the Select Standing Committee's Questions

Question 1: What criteria should be considered when establishing boundaries?

11. Drivers should be given the flexibility to choose the geographic areas that they wish to serve. Doing so ensures that market forces can deliver the outcomes associated with a competitive marketplace: lower prices, increased choice and convenience, and greater levels of innovation.
12. A fundamental feature of competitive markets is that of "free entry". Free entry means that drivers have the liberty to provide services in the manner that they judge is best for their own commercial ends. In the context of geographic boundaries, free entry guarantees that, when potential opportunities exist, drivers can react dynamically in a way that ensures that the needs of the marketplace are served.^{Footnote 5}
13. Placing geographic boundaries on drivers violates the principle of free entry, thereby diminishing the positive effects that competition can bring about. Geographic boundaries have at least two negative effects on competition:^{Footnote 6}
    1. Preventing excess supply in one geographic area from serving consumer demand in another. This means that some consumers in high demand areas could experience longer waiting times and higher prices, even if there are idle drivers available in an adjacent part of a city.
    2. Creating "deadhead" trips, where drivers in one geographic region provide a trip to another region and cannot pick up a return trip in that second region. This reduces the profitability of that driver's day, and reduces the incentive for drivers to serve passengers whose trip crosses geographic boundaries.
14. The Bureau understands the concern that eliminating geographic boundaries could result in reduced service levels in less desirable areas. Some jurisdictions have relied on this justification to establish or maintain geographic restrictions;^{Footnote 7} however, this is not a universal state of the world. Several European countries, including Denmark and Finland, have eliminated geographic restrictions on drivers.^{Footnote 8} Furthermore, the City of New York historically did not impose geographic restrictions on its taxi services.^{Footnote 9},^{Footnote 10}
15. If some form of geographic restriction is necessary to achieve legitimate policy objectives, then the Bureau encourages regulators to: (1) limit regulatory touch to the areas where market forces cannot deliver acceptable outcomes; and (2) be flexible in the choice of regulatory instruments.
16. With respect to regulatory touch, it is an internationally-recognized best practice to ensure that regulation is proportional to the harm that it is intended to cure.^{Footnote 11} If a concern exists that market forces will not deliver adequate service levels to a particular area, then regulatory relief should be focused on, and limited to, delivering services to that particular area. Otherwise, the negative effects that regulation can have on competition would permeate beyond the area of need, and affect competition across a larger area.
17. Relatedly, the choice of regulatory instrument is critical to ensuring that any negative effects on competition are minimized. For example, if there is a concern that outlying areas will be poorly served by a free market, regulators could explore the feasibility of subsidized rates for travelers in less profitable areas. Doing so targets regulatory relief at an underlying policy objective. However, a regulatory solution which limits the number of drivers in another, unrelated part of the city (e.g., the downtown area) would likely be overly broad. Regulators should rely on the narrowest possible instruments for achieving policy goals.
18. To maximize the beneficial effects of competition, regulators should abolish geographic boundaries for drivers, and allow them to adjust their serving areas based on what is best for their own interests. If regulators wish to ensure particular service levels in less attractive areas, then they should rely on targeted and minimally intrusive regulatory remedies to achieve this outcome. Doing so will ensure that competitive forces can deliver an industry that best serves both passengers and drivers.

Question 2: How should regulations balance the supply of service with consumer demand, including the application of the Passenger Transportation Board's current public convenience and necessity regime as it pertains to transportation network services? 

19. Market forces should be relied on to balance supply and demand to the maximum extent possible. Greater reliance on market forces results in the lower prices, increased choice and convenience, and higher levels of innovation that are characteristic of competitive markets. Market forces are the organizing principle behind the vast majority of Canadian economic activity and should not be deviated from lightly.
20. Regulation of drivers typically involves policies that have the effect of controlling the number of drivers available for hire. When a limit is placed upon the number of drivers, consumers have fewer service providers from which to choose. This may lead to higher prices and poorer quality of service, including long waiting times. Services may be particularly difficult to obtain during times of high demand, including evenings and weekends, or periods of bad weather.^{Footnote 12}
21. Some groups believe that, without limits on the number of cars for hire, drivers will be less able to cover their costs of operating, and will need to charge higher rates to passengers in response. However, an international review of taxi regulation performed by the OECD found "little evidence" to support this assertion.^{Footnote 13} This argument is also weakened by the fact that greater capacity generates shorter waiting times and higher passenger satisfaction, which may increase demand for car for hire services generally.^{Footnote 14}
22. Other regulatory restrictions can also reduce the incentives of drivers to find innovative ways to improve service for passengers. When municipalities have enacted regulations designed to ensure prescribed fare schedules and quality standards, the price and quality of taxi service has been the subject of numerous complaints from passengers over the years.^{Footnote 15} Relatedly, some research finds that the number of such complaints falls in jurisdictions where ride-sharing services operate.^{Footnote 16}
23. Greater reliance on market forces will ensure that both passengers and drivers benefit from a competitive marketplace. When regulatory restrictions are removed, prices and wait times can be lower, quality of service can be higher, the quantity of complaints can fall, and the entire industry can benefit from greater levels of innovation.

Question 3: What criteria should be considered when establishing price and fare regimes that balance affordability with reasonable business rates of return for service providers?

24. Similarly, the Bureau recommends that market forces should be relied on to determine price levels to the maximum extent possible. Again, reliance on market forces balances the complex interactions between passengers and drivers, and ensures the best outcomes for the economy.
25. The Bureau is aware that some groups wish to prioritize "reasonable business rates of return" as a key feature of driver regulation. However, when prices are raised above the level that market forces would naturally deliver, this results in real harm to the economy. Those passengers with the lowest willingness to pay for the service are pushed out of the market, and forced to go without the transportation choice that is right for them. This results in what economists call "deadweight loss", which is a real resource loss to the economy that generally cannot be recouped through other policy means.^{Footnote 17}
26. It can be similarly harmful to the economy when prices are pushed below the rate prescribed by market forces. In this situation, fewer drivers will be willing to supply their services to the marketplace, which also results in a deadweight loss, and can have the effect of increasing waiting times, resulting in less satisfied passengers.
27. Accordingly, the Bureau recommends that market forces be relied on to determine pricing to the maximum extent possible. It has long been understood that deviation from market-based pricing is generally detrimental to economic well-being, and results in a variety of negative effects, including higher prices, less choice and convenience, and decreased levels of innovation.^{Footnote 18}

Question 4: What class of drivers' licence should be required for ride-hailing drivers to ensure a robust safety regime without creating an undue barrier for drivers?

28. The Bureau is not well-positioned to provide specific advice about the particular class of driver's licence that any driver should possess.
29. However, differential treatment of taxi and ride-sharing drivers can have negative effects on the marketplace. If licence requirements are materially different for one type of driver, this can create a competitive imbalance by making it easier or more difficult for one type of driver to provide services. In this respect, the Bureau advocates that similar licence requirements be established for all types of drivers, regardless of their business model.^{Footnote 19}

VI. Conclusion and Summary of Recommendations

30. The Bureau supports the development of taxi and ride-sharing regulations that place market forces and competition at the centre of resulting policy. Doing so can lead to lower prices, greater availability and convenience, better quality of service, and increased innovation.
31. Marketplace regulation should be used only where market forces will not achieve legitimate policy objectives and, even then, only to the extent necessary to address those objectives. The Bureau advocates that regulation should be competitively neutral, so as not to favour any one type of provider over another. And regulation should be minimally intrusive to ensure that any negative effects on competition are minimized.
32. In response to the Select Standing Committee's four questions, the Bureau advocates as follows:
    1. In respect of geographic boundaries: regulators should abolish geographic boundaries for drivers, and allow them to adjust their serving areas based on what is best for their own interests.
    2. In respect of balancing supply and demand: regulators should allow market forces to determine the appropriate levels of supply and demand for the services offered by drivers.
    3. In respect of establishing pricing: regulators should allow pricing to be determined in the marketplace to ensure the best outcomes for both drivers and passengers.
    4. In respect of driver's licences: regulators should ensure that resulting regulations do not favour either taxi providers or ride-sharing platforms so that each type of driver can equally participate across the industry.
33. The Bureau is grateful for the opportunity to provide these comments, and would be pleased to provider further assistance to the Select Standing Committee, or any other body, on this important matter.