In an Era of Uber and Lyft, One City's Taxi Regulations Make No Sense

Santa Monica's dysfunctional rules for cabs

SANTA MONICA, Calif.—When city officials in this prosperous, highly regulated municipality last interfered with its taxi industry, circa 2009, the existing rules were simple. As the Los Angeles Times put it in a contemporaneous article, "anyone with a clean driving record and no criminal history can get permission to operate a cab, provided the vehicle meets set standards." As a result, "anyone looking for a taxi has plenty to choose from, but the fares and quality of service vary."

Lots of choices with varying prices and quality describes Santa Monica's restaurants, bars, dry cleaners, nail salons, clothing boutiques, and cold-pressed juice emporiums. But city officials believed that the taxicab industry should be standardized and that Santa Monica's residents were being afforded too many choices. A study found that a population of 84,000 was served by 454 licensed taxis. "It's just too many," then-Deputy City Manager Elaine Polacheck said at the time.

With that questionable premise, the city decided that the best way to improve transportation going forward was to pass a more thorough regulatory framework. City experts settled on a franchise system: Competition would be limited to five cab companies. The total number of taxis would be fixed at around 200. The biggest losers, besides the Santa Monica residents who had a tougher time finding a taxi, were the single proprietors who'd bought taxis and earned their livings in the city only to be told that they were no longer welcome there.

A little while back, I hired a taxi under the new regulatory regime.

My sister was living in Santa Monica at the time. One of my best friends and I met at her apartment with the intention of walking the length of Sunset Boulevard in one day. To start, we would take a taxi about 20 miles to the eastern terminus of Sunset, near Dodger Stadium. We expected a relatively pricey ride that wouldn't be so bad split three ways. I was shocked, as someone who'd taken a lot of cab rides in New York and Washington, D.C., at how fast the numbers were changing on the meter. Seeing that the total would be outrageous we told the driver that he should either drop us at a bus stop or negotiate a discounted rate. Finally we agreed he'd take us at a substantial discount: $80 for the ride.

I can still hardly believe it.

* * *

I have no expertise in city planning or transportation. But in 2009, at around the same time that municipal experts in Santa Monica decided that the future of taxis in their city should be five companies with fixed fleets and a consistent, expensive fare structure, I was blogging about a different idea: Based on a chance conversation with a friend and a few minutes of speculation, I suggested that GPS technology and credit cards could enable most anyone to act as a taxi driver. One of my colleagues independently suggested that existing taxi fleets should use GPS.

Neither of us knew at the time that some savvy entrepreneurs were already way ahead of us. A couple months prior, Uber was founded in San Francisco. Along with competitors like Sidecar and Lyft, they'd radically improve urban transportation. Right now, if I wanted to be taken from the beach in Santa Monica to the easternmost terminus of Sunset Boulevard, I could do it in a shared Uber for a flat rate of $15 or my own private Uber for a sum significantly less than $80.

To what extent do Santa Monica residents prefer these apps to old-style taxis? According to the most recent available data, the five taxi companies permitted to operate in the city saw more than a quarter of their business evaporate between 2013 and 2014, even as the city's population grew and tourists continued flocking there. If you can find a Santa Monica cab when Uber is surge-pricing—at rush hour or right as the bars are getting out on a Saturday night, for example—it might be the better option. Most times, Santa Monica cabs are harder to find and more expensive.

In other words, city officials locked in an inferior model.

Luckily for residents, Uber and Lyft are regulated at the state level by a regime that limits the restrictions municipalities can impose, so Santa Monica officials weren't able to stymie an innovation that never would've arisen from within its system. In a more rational world, the foregoing events would've caused city officials to recognize the limits of their expertise and the harm regulation can do in this sector.

But right now, they're once again considering how taxis should be regulated in their city, due to problems with their existing model, and while city staff has suggested getting rid of some regulation the old hands-off approach isn't being considered.

The five incumbent taxi firms are predictably self-interested.

Back in 2009, just before Santa Monica destroyed the taxi businesses of all but five firms, including all the single-proprietors operating in the city, the L.A. Times reported:

Husband-and-wife team Wendy and Ayman Radwan started off 14 years ago with a single cab. With their partners, they now run an award-winning fleet of 60 vehicles and 90 drivers called Taxi! Taxi! Although Wendy Radwan agrees with many of the city's recommendations and says their firm already includes 10 hybrid vehicles, she worries that she has never prepared a franchise bid before. "It's nerve-racking," Radwan said. "We don't want to lose everything that we have worked so hard to build."

The couple was fortunate: They won one of the five franchise agreements. Yet now Wendy Radwan is urging steps that would arguably cause other people to lose everything that they have worked so hard to build. The Santa Monica Daily Press reports:

One solution to the looming franchise agreement changes, proposed by Taxi! Taxi!, is to cut the competition among cab drivers. “If the City does not reduce the number of franchises and taxicabs in the City, the drivers cannot financially survive or meaningfully compete with Uber, Lyft and Sidecar,” Radwan said in a letter to council. “Taxi! Taxi! is a small local company that has remained dedicated to serving only the City of Santa Monica, and its operational costs will easily exceed its revenues if the City reduces the number of taxicabs in its fleet. It is simply not economically feasible to reduce the number of taxicabs across the existing five franchises.”

Ultimately, Radwan suggests allowing two taxi franchises with 125-cab maximums. Taxi! Taxi! took more trips than any of the other franchises in 2013 and 2014.

One cannot help but sympathize with someone who built up a business over years of hard work only to see new technology make its future uncertain. Perhaps the husband and wife team thinks this is the only way to save their business in the Uber era. At the same time, I imagine that the Radwans would find it deeply unfair if a member of the city council proposed that, henceforth, Santa Monica would allow only two transportation companies to operate: Uber and Lyft.

The article adds that the other four franchises wrote a separate letter to city council urging it to extend the five existing franchises. "They, too, note the negative impact ride-hailing apps have had on the taxicab industry," the article said. "They claim that Uber and Lyft drivers don’t face the same regulations that cabbies do."

They have a point.

Uber and Lyft are subject to less onerous rules. As the taxi companies put it, "one of the major ways that the TNCs [an acronym for companies like Uber and Lyft] have been able to take business from the taxi industry is by giving away promotional codes... sometimes in large amounts. The TNCs are essentially buying our business. We must have the right to fight back. We need to have the ability to discount fares and give away promo codes just like the TNCs do. This will only benefit the consumers in the City of Santa Monica, and we hope you agree." If business owners have to plead to be allowed to give consumers a better deal it's a pretty sure sign that you've put an extremely dubious regulatory policy into place.

Other legal changes the taxi companies are requesting include renewing their driver permits every two years rather than every year, pro-rating driver fees for new employees, speeding up the driver application and permitting process, and ending the revocation of permits that belong to immigrant drivers when they go on leave to visit their home countries. On the whole, it's an extremely reasonable list of reforms to advocate. But what if instead the city just abandoned the pretense that it needs an artificial cap on the number of cab companies operating there? What if the market determined the number of cabs the city "needs," the appropriate rates that they should charge, and most other questions too?

Taxi! Taxi!, the franchise that's urging a duopoly, began as a one-car enterprise back in the comparatively unregulated era in Santa Monica cabs. It built itself into the industry leader with business practices that earned it local awards. Its rise is an impressive story that reflects well on the company's owners. But ever since 2009 Santa Monica has prevented anyone else from following a similar trajectory.

An ambitious man or woman with a single car and a knack for innovation could never start anything for themselves save a job driving a taxi for an incumbent firm.

Why not admit the weaknesses of the franchise era and go back?

Especially in an era of apps that are superior to traditional taxis, returning to the old, relatively laissez-faire regulations is unlikely to leave Santa Monica overrun with cabs. And if the Uber era has proved anything, it's that residents wanted a lot more drivers than the city imagined, at least if they were offering a superior product. In every era, entrepreneurs relying on market signals prove better than city officials at anticipating future needs and innovating. Santa Monica officials should regulate taxis by making them subject to the same insurance requirements and background checks that exist at the state level and then stay out of the way.

Instead, they're poised to consider incremental changes to the existing regime, as if a taxi industry frozen at a slightly different moment is a sustainable solution. More change is ahead. It will happen more quickly than we can understand it. Uber and Lyft will attract new competitors. Technology will drive new innovation. And Santa Monica will keep finding itself unable to plan its way forward.