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Modernizing Regulation in the Canadian taxi industry

November 26, 2015

On this page

  1. Introduction
  2. Canada’s taxi industry
  3. Regulatory responses to TNCs
  4. Principles for regulating transportation services
  5. Avoiding overregulation of TNCs and taxis
  6. Conclusion

1. IntroductionFootnote *

The “check engine” light is glowing on the dashboard of the Canadian taxi industry. What has traditionally been a tightly controlled business is now threatened by ride‑sharing services that operate outside existing regulations. These new services, like Uber and Lyft, use technology to deliver advanced offerings that can sometimes provide cheaper, higher‑quality services for Canadian consumers. Much‑maligned taxi operators, bound by existing regulatory rules, are calling on cities to do something about these entrants. Regulators need to make sure that their rules get the overhaul they desperately need, before the whole taxi system seizes up.

The source of the current friction in the Canadian taxi industry is the lack of an even playing field. Traditional taxi operators are constrained by regulations. In many jurisdictions, they cannot vary their prices in response to consumer demand. They must operate certain types of vehicles. Only a limited number of them can be on the road. The list goes on. But then you have new providers who do not follow similar rules.

This leaves the regulators, Canadian municipalities and provinces, in a tough spot. They are trapped between maintaining their existing systems, which severely restrict competition but provide for oversight and public safety, and the demands of consumers, who are attracted to the low prices and high service levels of innovative new providers. Some regulators have tried to use law enforcement and the court system to bring everyone up to the existing standard of regulated taxis, with mixed results for businesses and more negative results for consumers.

The good news is that developments to date point to a clear way forward: If the old ways cannot bring about a satisfactory solution, then all that is left is to embrace change.

Regulators need to allow the forces of competition to shape how the industry will move forward. This demands a re‑think of existing regulations to provide an even playing field upon which ride providers can compete. Ultimately, regulations on taxis need to be relaxed, and regulations on new providers may need to be increased to ensure that legitimate policy objectives like public safety are met. What is central to this exercise is ensuring that regulations are no more intrusive than necessary, so the competitive forces can influence how the industry evolves and innovates.

2. Canada’s taxi industry

Governments have traditionally regulated taxi services so that they are provided in a safe, predictable, and straightforward manner. To fulfill this public interest role, regulators generally create rules that govern taxi price levels, vehicle safety and insurance requirements, minimum quality standards for service, and entry restrictions in the form of limits on the number of taxi licences (also known as “plates” or “medallions”) that are available within a jurisdiction.

Most municipalities do not issue new taxi plates every year, but rather conduct periodic reviews and issue them based on population growth or other policy considerations. While some taxi drivers may own their plate, others must rent from a taxi brokerage or other private party. In some cities, a substantial share of the available plates are held by owners who do not drive taxis themselves, but instead hold them for rental income or investment purposes.

The release of new plates has rarely kept pace with demand for taxi services,Footnote 1 resulting in a situation whereby plate owners may accrue significant economic rentsFootnote 2 from artificial scarcity. These rents are reflected in the high prices that have traditionally been paid for plates both domestically and abroad; for example, when prices were at their peak, the cost of a single standard taxi plate could reportedly be as high as CDN $360,000 in Toronto,Footnote 3  AUD $390,000Footnote 4 in New South Wales, and over USD $1 million in New York City.Footnote 5 These high prices are of benefit to plate owners but not drivers.

When a limit is placed upon the number of taxis operating in a city, consumers of taxi services have fewer service providers from which to choose. This may lead to higher pricesFootnote 6 and poorer quality of service, including long waiting times, unkempt cars, and unpleasant service from drivers. Taxis may be particularly difficult to obtain at certain times of high demand,Footnote 7 including evenings and weekends, or periods of bad weather. Regulatory restrictions also reduce the incentives of taxi companies and drivers to find innovative ways to improve service for passengers. While municipalities have enacted regulations to address these difficulties, including prescribed rates and quality standards, the price and quality of taxi service has been the subject of numerous complaints from passengers over the years.Footnote 8

After decades of relatively little change, recently, new technology has permitted the development of innovative platforms and software applications that enable ride‑sharing by their users. These applications match passengers with ordinary drivers that do not hold taxi licenses and operate their own private vehicles outside of existing regulations. Providers of these ride‑sharing applications, which include companies such as UberFootnote 9 and Lyft, are generally referred to in U.S. jurisdictions as Transportation Network Companies (“TNCs”).Footnote 10 TNCs form part of the emerging sharing economy, in which peer‑to‑peer  platforms connect people who own certain goods or skills (e.g. private vehicles) with those that wish to make use of them (e.g. passengers).Footnote 11 As with many sharing economy business models, TNCs generally employ reputational ranking systems that allow passengers and drivers to rate each other after a ride.Footnote 12

Entry by TNCs into municipalities can represent a meaningful source of competitive pressure on traditional taxi operators. However, the taxi industry requires the flexibility to respond to these pressures. If the industry is provided the opportunity to adjust its operations, entry by TNCs is likely to provide considerable benefits to consumers, including on dimensions of competition such as:

Traditional taxi companies have responded to these innovative offerings by introducing their own software applications that include many of the functions offered by TNCs. For example, Toronto taxi companies such as City Taxi and Beck Taxi have been developing new apps to compete with Uber.Footnote 26 Similar efforts have been undertaken by other taxi companies in Canada and abroad.Footnote 27 Even the threat of possible future entry by TNCs may provide taxi service providers with an incentive to develop more innovative product offerings. Although regulations in Vancouver prevent the operation of TNCs, four taxi companies have nevertheless jointly launched a software application that allows passengers to request and track taxis, pay with their credit card and rate their driver.Footnote 28

Taxi companies and drivers have also worked to improve the quality of their offerings, ensuring cleaner vehicles and more timely and courteous service. They are, however, limited in their ability to compete with TNCs on price, as they must charge prescribed rates set by regulation.

Increased competition from TNCs is also reflected in falling values for taxi plates in municipalities that have faced entry by these service providers. For example, taxi plate values have reportedly fallen in Toronto from a high of CDN$360,000 in 2012 to CDN$188,235 in 2014.Footnote 29  Similarly, the value of taxi medallions in New York City fell from a peak value of USD$1.05 million to sale prices of USD$800,000.Footnote 30 This represents a significant loss of value to taxi plate owners.

3. Regulatory responses to TNCs

Some jurisdictions, including several European countriesFootnote 31 and Canadian cities such as Vancouver,Footnote 32 have enacted regulations or taken legal action to explicitly prevent the operation of TNCs. Recognizing that TNCs operate outside of existing regulations, others have treated TNCs as unlicensed “bandit” taxis, and have taken law enforcement action against them. As examples, the City of Montreal has reportedly seized almost 200 private vehicles since the beginning of 2015 for allegedly engaging in illegal ride‑sharing,Footnote 33 the City of Ottawa has laid 142 charges against unlicensed drivers believed to be working for Uber,Footnote 34 and the City of Toronto has laid 208 charges against 104 UberX drivers between 2012 and 2015.Footnote 35 Until regulations are reformed, many TNCs will continue to operate in ways that may fall outside local bylaws.

Other Canadian municipalities have announced that they are considering enacting or revising bylaws to allow the licensing and operation of TNC drivers within their borders.Footnote 36 Regulatory frameworks for TNCs have been adopted by a number of U.S. regulators,Footnote 37 but are still in their relative infancy. These regulatory frameworks generally treat TNCs as a separate class of service provider in vehicle‑for‑hire legislation. They appear to be intended to ensure that TNCs and their drivers are subject to safety and consumer protection rules similar to those that apply to taxis, particularly with respect to minimum insurance requirements, criminal and driving background checks on drivers, and vehicle inspections.Footnote 38 Most of these proposed regulatory frameworks propose fewer regulatory restrictions on TNCs  compared to traditional taxis, including those dealing with vehicle size and age restrictions, accessibility requirements, and a lack of limits on the number of vehicles that are allowed to operate within a city. However, TNCs also enjoy fewer privileges, as they are not allowed to accept street hails or use taxi stands located on streets.Footnote 39

4. Principles for regulating transportation services

While TNCs provide a number of competitive benefits to consumers, they also raise legitimate regulatory issues. Taxi regulations play an important role in addressing market failuresFootnote 40 and ensuring the safe, orderly operation of ground transportation services and keeping drivers, passengers and the general public safe. As TNCs operate outside of traditional regulatory frameworks, they raise a number of issues relating to ensuring public safety, consumer protection, and other public interests.

Many regulators have expressed concern that TNC drivers do not undergo sufficiently robust criminal background checks and/or that they do not carry adequate insurance coverage.Footnote 41 Traditional taxi companies and drivers argue that not only does this create safety and liability concerns, the unlevel playing field may jeopardize investments made by companies and drivers to establish themselves in the taxi business. As discussed above, competition from TNCs may also cause a significant decrease in the value of taxi plates, which may represent significant investment losses to these stakeholders. These concerns have led many regulators to restrict or discourage the entry of TNCs into local areas.

Prohibition, however, is a blunt regulatory instrument. Governments should use a “lighter” regulatory approach where possible, putting in place only those restrictions needed to achieve legitimate policy goals, while otherwise allowing market forces and competition to determine outcomes and drive innovation. Competition is generally the best means of ensuring that consumers have access to the broadest range of products and services at the most competitive prices. Where market forces alone are insufficient to achieve certain policy objectives, a regulatory framework may be appropriate to oversee the practices of transportation service providers.Footnote 42 However, such regulations should not restrict competition any more than is reasonably necessary to achieve legitimate policy goals, because doing so limits the benefits of these innovations to consumers. Regulations for TNCs which are designed to achieve policy objectives, such as consumer protection and vehicle safety, are a less intrusive form of oversight than blanket prohibitions.

The same “light” approach to regulation should also be applied to existing industry participants, including traditional taxi companies. Regulations should not be designed or implemented in a manner that favours or protects certain industry participants over others in the absence of legitimate policy goals. Just as regulators should ensure that the regulatory burdens placed on TNCs are not excessively onerous and are strictly tied to achieving policy objectives, they should also consider whether regulatory frameworks governing traditional service providers are unduly burdensome or restrictive. When regulators contemplate how to resolve differences in the regulatory regimes that apply to different business models, they should first look at how the existing regulation can be overhauled, rather than solely imposing restrictions on new entrants.

Regulations should be made and tested using empirical evidence wherever possible. Industry participants have an incentive to convince regulators to impose rules that favour and protect their own interests, rather than the public interest. To keep this process honest, regulators should demand and rely on empirical evidence to test the efficacy of any new regulation wherever possible. This evidence‑based approach to regulation provides a more objective basis on which regulations should be imposed. Regulators should be able to demonstrate that a rule will have an intended result prior to implementation, and progress should be measured on an ongoing basis to assess whether the rule is having its intended consequence.

Particularly when considering industries that are subject to disruptive innovations and rapid change, regulators should continually question the effectiveness of current restrictions. Existing regulations may no longer be serving their intended purpose and may even stand in the way of desired changes, or may be overly burdensome compared to less intrusive alternatives. Using sunset clausesFootnote 43 may help ensure that regulations are revisited once sufficient time has passed and data have been gathered to evaluate outcomes. At the same time, regulators should ensure that they allow appropriate time to pass between reviews.

5. Avoiding overregulation of TNCs and taxis

The Bureau urges regulators to take a less intrusive and more balanced approach when designing and implementing regulations for transportation services, including regulations pertaining to the following issues:

Regulators may find that designing minimally‑intrusive regulations results in similar outcomes for both traditional taxis and TNCs. In such cases, regulators may consider designating both under a single classification, such as vehicles‑for‑hire, and subject them to the same oversight. If regulators determine instead that there are significant differences between TNCs and taxis, such that different rules are needed to achieve desired policy outcomes, they should design these rules to be no broader than necessary so that passengers will still enjoy the benefits of competition between TNCs and taxis.

6. Conclusion

Competition should be an essential guiding principle in the design and implementation of regulations. Greater competition benefits consumers in terms of lower prices, higher quality of service, increased consumer convenience, and higher levels of innovation.

Competition is an effective means to ensure that consumers have access to the broadest range of products and services at the most competitive prices. Regulatory limits on competition should be based on the best available data, be designed to address legitimate policy concerns, and be no broader than what is reasonably necessary to mitigate those concerns. Regulations should also be subject to regular review to ensure that they are still responsive to market conditions and are still achieving policy outcomes.

Some regulators have begun to re‑imagine regulation in the Canadian taxi industry.Footnote 61  In doing so, allowing sufficient scope for the forces of competition to operate to the largest extent possible should be a primary focus. Traditional taxis, TNCs, and other new business models that may emerge should be subject to a level playing field, so that all participants in the industry have the opportunity to compete vigorously. Consumers can expect to enjoy the benefits of this increased competition, including lower prices, greater convenience and availability, and better quality of service through improved technology. With the right balance of competition and regulation, passengers can expect that the industry will ensure safe, competitive, and innovative transportation options in the future.

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