On April 3, 2000 I appeared before the ad hoc subcommittee on taxi deregulation. At that time, I advised the committee that the current city ordinance regulating entry and competition in this business was unlawful under applicable state law. In my opinion, the City of Madison and the current taxi operators were at risk of being sued under state or federal antitrust law for conspiring to monopolize that business. I identified certain specific provisions in the current ordinance that raised particular concerns. In addition, I pointed out that the presence of representatives of the currently franchised taxi companies as voting members of the subcommittee greatly increased the risk of an adverse antitrust judgment. I attach a copy of the outline that I prepared for the subcommittee in connection with that testimony.
The taxi companies have remained voting members of the committee. On August 21, a majority of that subcommittee including the taxi companies' representatives recommended the elimination of only one of the three major barriers to entry into this business. The barriers that they propose to retain are the most likely to fence out new competition. These requirements, if adopted, are bad public policy. They also will expose the city to a substantial risk of liability. First, I will address the merits of the majority recommendations and then discuss the risk of liability that the city faces.
I. The proposed regulations impose monopoly prices and are not justified by any services provided to the community by taxi companies
The report necessarily but implicitly acknowledges that Madison residents are in fact overcharged for taxi services at least during the day. This admission takes the form of the claim that charges leveled on riders during the day pay for unprofitable late night services. If the existence of substantial overcharges is true and external evidence supports the view that Madison taxi services are more expensive than most other cities, then removing the restraints on new entry would be likely to attract additional competitors. Increased competition should in turn cause a reduction in the price of cab rides and improvements in the quality of the service.
On the other hand, the claim that the excessive day charges subsidize night service is very unlikely to be true. The report provides no economic or accounting evidence to support its claim. The substantial discretion of the existing companies as to the amount of service to provide at night and the lack of any city oversight of such efforts makes it extremely unlikely that these companies are in fact experiencing out of pocket losses from providing such services. Further the report does not measure the overcharge imposed on daytime riders nor does it provide an estimate of the financial need that it claims must be met to continue night services. Thus, the report fails to make the case that the taxi users are being overcharged only enough to cover the unmet costs of night service. In addition, the report offers no justification for charging daytime users of taxis for the costs of night service provided to other users. Finally, if it were true that night services provided by three companies are collectively unprofitable, then the scheme of subsidizing all three is an irrational waste of money.
Assuming that a subsidy is needed for late night service, an obvious and much more efficient solution is to impose a modest tax on cab riders during the day (if day users should pay this cost) and use that fund to pay one company (not three) to provide late night service. Companies could bid for the right to provide such service. This would provide a market measure of the subsidy required. There would then be no barriers to entry by new firms. In addition, assuming (contrary to the likely facts) that night service imposes great costs on existing companies, the lower operating costs for all existing and new companies would make possible lower, competitively set, day prices so that customers would probably pay less during the day even with the subsidy, have better service, and still retain night service.
Instead of addressing the special economic issues of nighttime service, the report recommends that the city retain its requirements for 24 hour a day, seven day a week service to the entire city. In combination, these requirements will make it impossible for single cab operators to enter the market. Even an entrant with two or three cabs would face very high entry barriers because of the need to obtain staff to provide 24/7, city wide service as a condition of entry. Thus, the report proposes that the city continue to favor the existing cab companies and make new entry next to impossible.
In addition to the 24 hour, 7 day a week service requirement, the report also recommends retaining the requirement that all taxi companies regardless of size must "serve" the entire city–meaning be willing to pick customers who call every where in the city. It bears emphasis that this issue is important only because of the historically limited character of Madison cab service (try to hail a cab as one would in any other city and the driver will wave back while continuing on his way). If actively enforced, this requirement would impose another major burden on one or two cab companies. The requirement applies only to situations in which someone calls for service (probably the primary basis for seeking service in Madison). The alternative is for the city to define two to four "zones" and require that each taxi company indicate which of these zones it will serve in responding to calls. Small firms would be likely to serve the areas near their base until they had expanded to the capacity to provide city-wide service. The only rational for a city-wide service requirement is to create another obstacle to entry by small firms into the business of providing cab service in Madison.
In sum, the current ordinance protects existing firms from competition and results in excessive prices to customers. It also makes new entry into this business very difficult. The proposed changes do not make a significant change in that situation. Entry will still be blocked unless the entrant is willing and able to provide city-wide, 24 hour, 7 day a week service–an extremely unlikely situation. Madison residents and visitors will continue to be overcharged for taxi services without an offsetting benefit.
II. Both the current ordinance and the proposed revisions create serious risk of liability for the city.
If the city agrees to these recommendations from a sub-committee on which all three of the existing taxi companies participated and voted for the retention of the anticompetitive regulations, it will have entered into an agreement with those companies to restrain trade. Court decisions involving cities in other states have immunized local governments for suppressing competition in the taxi business where that state's legislation expressly authorized such actions. Wisconsin law does not authorize Madison to eliminate competition unless it is essential to carry out a policy enacted by the legislature. Our state legislation on taxis, however, contains no general permission for local government to suppress competition in this business. In addition, Wisconsin law requires that any elimination of competition be no more intrusive that necessary to accomplish the legislative goals. Thus, even if unprofitable night service were deemed an essential element of the legislative mandate (a doubtful claim in itself) so that a subsidy is needed, the proposed ordinance is the most anticompetitive way to carry out such a goal. An approach that inflicts the maximum and not the minimum harm on both consumers and potential competitors is clearly contrary to state law and would mean that the ordinance is invalid.
In addition to warning the subcommittee, I have undertaken to make both the city attorney's office and the mayor's office aware of the legal risks that the present taxi regulations present. I am deeply disappointed that the city attorney in the one discussion with the subcommittee that I witnessed provided them with no clear recommendations about the limits imposed on their discretion by state law. Unless the transit commission promptly acts to propose a real reform of our taxi ordinance so that it conforms to the limits of imposed by state law, the City of Madison risks being a defendant in an antitrust case which it is likely to loose.
This leads to the following conclusions:
Peter C. Carstensen
Professor of Law
University of Wisconsin Law School
I have previously presented a written analysis of the issues to this body (September 12) and have prepared a longer analysis (dated October 4) for the City Attorney, Mayor and others that I understand has been provided to you. On Thursday, October 5, the City Attorney issued a brief memorandum responding to my memorandum. Regrettably, based on her comments it appears that the City Attorney did not appreciate that my October 4 memorandum was in specific response to her request and that of others for an elaboration of my views. Since then I have referred the City Attorney to additional cases. Because the City Attorney addressed primarily the issue of the legal limits on city policy making, I comment on her memorandum in the second part of this statement.
Briefly, the primary issue is what is good public policy. Whether the city may legally adopt bad public policy is a secondary issue that will arise only if the city decides to retain bad public policy.
In so far as the ordinance addresses issue of driver qualifications, car safety, insurance, and proper display of consumer information there is no present contention that such requirements are either bad policy or legally at risk. The City Attorney’s memorandum confuses hours of service with health and safety regulation. The 24/7 requirement is only a time of service requirement and has nothing to do with safety or driver qualification. The 24/7 requirement for all taxi companies is similar to imposing a requirement that all restaurants should be open 24 hours a day, 7 days a week because the city concluded that it was in the public interest to have food available all day.
Policies that are unnecessary to achieve their primary, public interest object or that cause unnecessary but significant costs to the community are bad public policies. The current Madison taxi ordinance has two such bad policies in it. Those policies are (1) a requirement that new entry can occur only if the proposed entrant bears the burden of proof that such entry will serve the convenience and public necessity and (2) a requirement that every taxi operator must provide service 24 hours a day, 7 days a week–the 24/7 requirement.
There appears to be common ground that the “convenience and necessity” standard should be removed. It is anticompetitive and serves no useful public purpose. It must be removed immediately.
The 24/7 rule is one way to ensure that taxi service is available at all times to residents and visitors to Madison. I will assume that there is substantial public interest in having such a guarantee of service. Given that public interest, the question is whether any affirmative action by the city is necessary to obtain this desired service. Only if some action is necessary to obtain or to guarantee the maintenance of such service, is there a need for any policy. If such a need exists, the question is what policy will impose the lowest cost on the community in order to achieve the primary objective of ensuring over night service availability.
It is common ground among all participants in the discussion of the 24/7 rule with the exception of the city attorney that the rule has an adverse effect on entry into the market. I have elaborated on this issue in the October 4 statement and will not repeat myself here. The bottom line is that this rule is a barrier to entry and so a restraint on competition as that concept is understood in antitrust.
Based on an analysis of the data (my Oct. 4 memo), no requirement of service is necessary. The business records supplied by the incumbent taxi companies shows that it would be irrational for them to suspend service for two or so hours each night. They would loose more money than they would save by doing so. Moreover, providing 24 hour service is a way to differentiate such companies from single cab or small fleet operators who can not provide such service. My analysis is the only analysis of the central economic facts relevant to this issue.
If the analysis is wrong about the need for a guarantee of service (i.e., that there is real risk that all three companies would refuse to provide such service), then the city has a number of options that do not involve requiring all companies to undertake what the city must regard as an onerous and costly burden. Among the options are including a guarantee as an element of various contracts that the city current writes with cab companies or establishing a new guarantee policy, asking for bids and then allocating the cost of the guarantee to existing service providers based on the number of cab licenses that they have.
The key point is that there is absolutely no need to suppress competition in the overall taxi business in order to be assured to the guarantee of night service from at least one cab company. In fact, assuming that late night service is economically inefficient, requiring all companies to provide such service only magnifies the costs without adding to the positive benefits for the community.
The conclusion is that the current 24/7 requirement is unnecessary, unjustified and so should be eliminated. What takes it place requires a more focused and thoughtful review of the actual facts and a risk assessment based on those facts. There are many ways, as Mr. Frank Monfort has pointed out, to be assured of 24/7 service that do not require suppressing overall competition. Moreover, the city may need to consider whether there are additional, relevant criteria for getting and retaining a license to operate a cab.
What can happen if this advice is ignored? It could be costly to the city’s taxpayers and embarrassing to all city officials involved. Unnecessarily anticompetitive regulations are not lawful in Wisconsin. This point is one on which the City Attorney and I agree.
The City Attorney has opined that the current ordinance is lawful and by extension any changes would be lawful. In part, she based this conclusion on the claim that the regulation is not a restraint on competition. From an antitrust perspective such a claim is not correct. The regulation is necessarily and on its face a restraint on entry and so is a restraint on competition.
As a matter of law, the City Attorney relied heavily on Town of Hallie v. City of Chippewa Falls. That case upheld the refusal of Chippewa Falls to provide sewer service to the Town of Hallie unless the town was annexed to the city. In upholding this “tieing” conduct, the Wisconsin supreme court emphasized the specific provisions of state law that demonstrated that the legislature had concluded that sewer service could be conditioned on annexation in certain circumstances. The court also referred to the general home rule powers of a city to support its conclusion that the legislature had approved the kind of “tie-in” at issue even when it was not expressly authorized.
The Town of Hallie case was decided in 1982. In 1990, the Wisconsin’s supreme court decided American Medical Transport v. Curtis Universal. The court applied the Town of Hallie standard to Milwaukee’s territorial allocation of ambulance services as well as its exclusion of several companies from the business in whole or part. Such market division is illegal under antitrust law. In this decision, the court looked to state law authorizing the city to provide ambulance service and found that there was no specific authorization for anticompetitive market allocation. It rejected reliance on the home rule concept as immunizing anticompetitive regulation of private business when there was no specific authorization for such actions. It also emphasized the importance of state competition law policy as set forth in 133.01 that requires regulators suppressing competition to do so in no more anticompetitive a way than is necessary to achieve the positive objectives of the legislature. The court found that the city and the ambulance companies who got the favored market position were engaged in an unlawful conspiracy under the antitrust law. The facts of the ambulance case involve the regulation of competition in the market for a service and so are much closer to the taxi situation than are the facts in Town of Hallie involving a service provided directly by the municipality that the court characterized as a public service and not a “proprietary” business.
In March of this year, federal judge Myron Gordon in Milwaukee held that Waukesha County’s regulation requiring all users of the county airport to buy gasoline from a single supplier was not protected from antitrust law because neither the state law authorizing the county to operate airports nor the more general legal right of county’s to have a form of “home rule” permitted such anticompetitive interference with the market. Judge Gordon observed that Wisconsin has opted for a legal system in which regulation “ ‘is to coexist happily with the full enforcement of federal antitrust principles.’” Cedarhurst Air Charter Corp, v. Waukesha County, 110 F. Supp. 2d. 891, 893 (E. D. Wis. 2000)(quoting Hardy v. City Optical Inc., 39 F.3d 765, 768 (7th Cir. 1994).
In light of this law, and the more general trend among federal courts to construe strictly the exemptions from the antitrust law, it is my opinion that the current taxi ordinance is illegal and that if the both 24/7 rule and the public convenience and necessity standard are not removed, it will remain illegal. If the ordinance is challenged in court, it is my expectation that the city will loose and have to pay the attorney’s fees of the successful challenger.
You have the choice. Do the right thing–eliminate the 24/7 regulation and replace it with some less anticompetitive approach that guarantees 24 hour service if you have a clear record that justifies concern about the guarantee of such service–and you have made good public policy while also avoiding antitrust liability and substantial expenses to the city. Do the wrong thing–give in to the lobbying efforts of the special interests–and you will both make bad policy and put the city in jeopardy of costly and embarrassing litigation. The choice is yours.
October 4, 2000
To: Mayor Bauman, City Attorney Gibson, Members of the Madison Parking and Transit Commission, Interested Alders, and Citizens
From: Peter Carstensen, Professor of Law, University of Wisconsin Law School
Introduction and Summary
This memorandum addresses the public policy questions concerning the merits of the proposed retention of the rule requiring all Madison taxi companies to provide service seven days a week, 24 hours a day (the 24/7 rule). It is bad public policy to impose unnecessary costs on a community in order to achieve any desirable public interest goal. The 24/7 rule is such a bad public policy. Moreover, Wisconsin's antitrust and commercial transportation law deny the city the right to retain such a rule given the explicit recognition of its anticompetitive impact. This in turn exposes the city to the risk of antitrust liability under both state and federal law. Nevertheless, on August 21, 2000, a majority of the subcommittee studying reform of the Madison taxi ordinance, including the taxi companies' representatives as voting members, recommended retention of the rule.
To its credit, the subcommittee did unanimously recommend the removal of the requirement that a new entrant must prove that its entry would satisfy the public necessity standard. I assume that the elimination of that highly anticompetitive and unnecessary requirement does not require further debate.
The 24/7 requirement makes it impossible for individuals to enter the taxi business and compete operating a single cab. The result, recognized by everyone who has examined this issue, is that this rule denies the opportunity to compete to individuals who would otherwise enter the taxi business as single cab operators. Moreover, there is substantial consensus that the rule has resulted in higher prices and less adequate service. As a result both taxi riders and those who would like to enter the business are harmed.
On the other hand, two justifications have been advanced for imposing these harms on the community. First, a majority of the subcommittee claimed that the rule was necessary to ensue 24 hour service. All three existing Madison cab companies supported this position. Second, the mayor, in defending the requirement, claimed it was necessary so that individuals seeking cab service at night would not have to make multiple phone calls to obtain service.
Although the subcommittee majority's report contended that the rule is necessary to ensure the provision of overnight service, it provided no empirical or logical support for that claim. The data before the committee in fact supports the view that large cab companies would be irrational not to provide service even during the lowest demand hours. Moreover, if there was any creditable possibility that all three companies would cease to provide service, there are a number of ways to ensure such service without imposing the unnecessary costs of both present and potential entrants of requiring all companies to provide such service.
Wisconsin's antitrust and commercial transportation law make it very clear that unnecessarily anticompetitive regulations are not authorized. Hence, the city of Madison is presently engaged in and will, if the present proposals are adopted, continue to engage in an unauthorized restraint on competition in the taxi business. This conduct exposes the city to liability under both state and federal antitrust laws. If the city does not remove the 24/7 requirement promptly, it runs the substantial risk of being the defendant in a law suit which will prove very costly to the city (under federal law the city will be responsible for the reasonable legal expenses of the plaintiff as well as its own legal fees) and which will result in a court rewriting the city's taxi ordinance.
This memorandum first examines the 24/7 rule to show that it is bad public policy. It should be rejected for that reason alone. Second, it discusses the potential legal liability of the city if it retains this anticompetitive regulation. This potential liability is an added reason for the prompt removal of this requirement.
I. The proposed retention of the 24/7 rule would continue to impose unjustified anticompetitive restrictions on the taxi market to the detriment of both users and potential entrants
Good public policy imposes no more costs or burdens on the community than are essential to achieve necessary public services at an acceptable level and quality. The 24/7 requirement is universally understood to create a barrier to entry into the taxi business. It would be impossible, consistent with the overall requirements of the ordinance for a single cab operator to enter the market. It is also recognized that absent the 24/7 rule there would be additional entrants into the business of providing cab service in Madison.
This section presents the public policy analysis of this requirement. The initial step is to identify the justifications for imposing this rule. The next step is to establish that there are real costs to residents in the form of higher prices and poorer service from the restrictions on entry that result from it. The final step is to examine critically the relationship between the justifications for the requirement and the need for the specific rule.
The subcommittee report to the Parking and Transit Commission (PTC) recommends retaining the 24/7 rule. The report assumes that there is a public interest in providing such service 24 hours a day, but it does not contain an explanation for or data justifying this assertion. There are anecdotes to the effect that individuals late at night need to get to hospital emergency rooms and must use taxis (why EMS is not a better option is a mystery). More relevant is the need to get home from work or other late night activity after 11:00 p.m. when the buses cease to run. For individuals without cars or who should not be driving a car at that time there is a plausible need for some form of public transit. Thus, it would appear, and I am prepared to assume for purposes of this analysis, that the availability of 24 hour service is an important public need in a city the size of Madison. Such service serves a variety of needs for public transportation that exist at odd hours. Certainly the data on usage show that there is considerable demand even in lowest demand period - from approximately 3 a.m. to 5 a.m. - approximately one call every two minutes (see table 2).
Mayor Bauman has advanced a second justification for the requirement in a newspaper interview: Absent a 24 hour service rule, customers would not know which cab company to call and will make "a bunch of calls" (Wisconsin State Journal, Sept. 9, 2000). The article did not provide any information about the theoretical or empirical basis for the mayor's claim that serious consumer confusion would result. It is also not obvious that upon reflection the mayor, city council or PTC would in fact want to justify the 24/7 rule on this basis. Nevertheless because it is a different justification from the actual provision of service and the only other one that I have heard, it merits consideration as to its capacity to provide a rational for this rule.
Before it is plausible to challenge a rule as anticompetitive, it is important to establish that it has in fact or is likely to have such an effect. A rule might be silly or unnecessary without causing a significant negative impact on the market. Given the state of the data, it is not possible to quantify the burden to consumers from the 24/7 rule. However, there is broad consensus among both supporters and opponents of the rule that it has the effect and furthermore is intended to have the effect of foreclosing entry and protecting existing taxi companies from the competition of independent, owner-operated cabs. This is intended in the sense that the supporters of the rule recognize and understand that it has the effect of foreclosing entry. This adverse effect is then justified by reference to the other goalBnight serviceBwhich the restriction advances.
The minority report explicit adopts this position but without developing data to quantify the extend of the burdens.
The subcommittee majority report necessarily but implicitly also acknowledges that Madison residents are in fact overcharged for taxi services at least during the day. This admission takes the form of the claim that charges leveled on riders during the day pay for unprofitable late night services. The majority's logic is that by foreclosing competition during the day which would drive down daytime revenues, the existing companies receive a subsidy that they expend by providing nighttime service during hours when they loss money. The report calls the threat of such daytime competition "cherry picking" and also refers to the fact that the transit services for the disabled do not provide late night service. These two observations provide the logical nexus in the report between limiting competition during the day and the need for night service.
In addition, at the hearing on September 12 before the PTC, the representative of at least one cab company indicated that his company would consider withdrawing from 24 hour service if given the opportunity because of the expectation that night revenues would not justify operating at night. The implicit logic of this statement is that currently the daytime revenues are subsidizing night service. In a competitive market with lower daytime rates, the company would not provide night service. Similarly, several drivers of cabs defended the current rule because of its foreclosure effect on new competition. These statements from those most knowledgeable about the business are consistent with the position of the majority report that the current 24/7 rule protects existing firms from competition that would result in lower prices and better service during prime usage times. There is also a survey of taxi rates in other cities in the materials given to the subcommittee. That survey shows that Madison taxi services are more expensive than most other cities.
Finally, business logic and anecdotal information strongly support the conclusion that the present regulation imposes higher prices on those who use or would like to use taxis in Madison. It is undisputed that there are some individuals who would like to enter the taxi business as owner-operators but are barred from doing so by the current rule. Further, the focused opposition to such entry is consistent with the view that increased competition would threaten to reduce rates.
Of potentially even greater concern, but harder to quantify, is the problem of inferior service that is a predicted result of restricted competition. I have heard from both individuals and representatives of institutions that there are serious problems of obtaining taxi service on a reliable basis during daytime hours, especially at periods of peak demand. Finally the fact that individuals are interested in entering into the business of being owner operators strongly supports the claim that there are unmet needs for service in Madison.
In sum, cab riders in Madison are paying a higher price than would otherwise exist in this market and riders - actual as well as potential - are not receiving the quality and quantity of service that would exist if entry were not blocked.
Is there a need for a requirement that all cab companies provide 24 hour service, 7 days a a week? The existing cab companies have asked for this protection from competition. It is clearly in their economic interest to do so. But what are the costs and benefits to the community? The majority report is basically silent on these central questions. The majority does not quantify either the unmet costs (subsidy) required for night service nor does it define the amount of the daytime overcharge that Madison's taxi users pay. Hence, the majority report does not demonstrate that the costs to consumers of the present rule are reasonable in light of the subsidy paid to the cab companies to provide service to late night riders. In addition, the report does not offer a policy justification for imposing the costs of subsidizing late night service on daytime cab riders.
The report asserts the need for nighttime service and declares that this can only be accomplished by imposing the 24/7 rule on all taxi companies. One line of reasoning relies on the inference that service for disabled individuals is open and thus provides a picture of the likely behavior of firms in the general taxi market if the 24/7 rule were removed. None of the existing services provides service after 11:00 p.m.. Hence, the conclusion is drawn that taxi companies would also suspend night service. There is and was no data on demand for night service for disabled individuals. As a result, this argument by analogy is not convincing.
The majority report and the testimony before the PTC claim that the excessive day charges subsidize night service. This is very unlikely to be true and neither the report nor the testimony provides the data essential to establishing this claim. The majority report provides no economic or accounting evidence to support its claim. This is surprising because the subcommittee has data on the demand for night service and could have obtained relevant cost estimates for the provision of that service.
The first and essential step in the logic of the cross-subsidy claim is to establish that night service does not cover its own costs. A key analytic point is that if that service would cover the out of pocket costs of the companies, then it is rational to provide that service because any revenue in excess of such expenses will reduce the other (fixed) costs of the business and so reduce the revenue required from daytime operations necessary to break even overall.
Because the present record does not identify the out of pocket costs of the individual companies nor does it provide a clear statement of the potential hours during which service must be subsidized, the majority report is inherently deficient in justifying its position.
There is data for late night calls in May 2000 that was provided to the subcommittee. There is no information to tell us whether or not May is a good representative month. Given that the University gets done in the middle of that month, it is possible that demand is less than in many other months. Nonetheless, the number of calls in that month does provide a starting point for analysis. Regrettably the data on revenue and expenses is not organized in a way that permits direct analysis of the out of pocket costs of operating late night service. I have done an analysis reported in Table 1 which is attached. That analysis uses the actual average numbers of calls by hour and two alternative revenue estimates based on the assumption that 50% of the fare goes to the driver and to the operating costs of the cab. The remainder goes to the taxi company. Table 1 uses two fares: $5 (the company gets $2.50) and $10 (the company gets $5). From its share of the revenue, the company must cover its direct operating expenses. Overnight staffing is the most substantial expense - estimates range from $12 to $16 per hour for a dispatcher. In addition, there might be some extra expenses for light and heat that could be avoided by shutting down. On this basis, the calculations in the table show that even at the lowest number of calls, the companies would be money ahead to continue to operate on a 24 hour basis. Other considerations reinforce this. There are costs associated with shutting down and reopening as well as the loss of customer loyalty if regular customers can not get service.
Table 1 also totals the daily revenue estimates for each meter company and provides an annualized estimate based on a 360 day year. The annual revenue from the five hour night service period for each company ranges from just less than $70,000 to as much as $185,000 depending on the revenue assumption and the number of calls received. Table 2 provides a further analysis that combines the calls for the two meter companies and shows that estimated hourly revenue, which makes it even more apparent that at least one of those companies will find it economically attractive to remain in the night business. Finally, I have added in my estimate of the number of calls received by the zone cab company and added them to the revenue estimate. This final figure is a very crude estimate of the potential revenue available on an hours, daily and annual basis for a firm that provided the only night service during those hours.
Within the limits of the data available, it is manifest that overnight service for the period from 2 a.m to 7 a.m more than covers the estimated cost of providing that service. Only if it were practical to isolate an hour, 3 a.m. to 4 a..m., or 4 a.m. to 5 a..m, would there seem to be any question of the adequacy of revenue for any one company. But to shut down for one or even two hours involves a significant closing and start up cost which would make such a withdrawal irrational.
A second implication for the table is that if one of the current providers withdraws from the market, the revenue available for the remaining firms would increase significantly.
The bottom line is that based on the analysis of the data available there is no reason to think that any existing cab company providing 24 hour service would withdraw from the business if the 24/7 rule were repealed. It is even less likely that all three companies would withdraw. Further, if there is new entry and any such entrant expands to the level of operating a modest fleet of cars, it is very likely that such a firm would find it rational to enter into 24 hour service even if it were not required to do so.
If contrary to the foregoing analysis, new evidence were to demonstrate that there was a substantial possibility that all existing companies would withdraw from night service, it would still be bad public policy to require all firms to provide such service. The necessary assumption is that late night demand is so low that it is unprofitable for even one company to provide such service. If that is the case, it is totally irrational to require all companies to do so. This means each company has higher costs and the unprofitable revenue is split among the companies. Obviously, if demand is very limited, it would be much more efficient to have one company handle the business. The current system, if it actually imposes losses, means that the subsidy required to ensure the provision of such service is three or more times greater than minimum required to have one cab company open at night. Thus, a 24/7 requirement for all companies is the least efficient, most costly response if there is in fact need for service during a time when it is unprofitable to provide such service.
Mr. Frank Monfort, a member of the subcommittee, has suggested a number of potential solutions to the problem of providing such service in a communication sent to the members of the PTC. One obvious and efficient solution is to impose a modest tax on cab riders during the day (if day users should pay this cost) and use that fund to pay one company (not three) to provide late night service. Companies could bid for the right to provide such service. This would provide a market measure of the subsidy required. There would then be no barriers to entry by new firms. In addition, assuming (contrary to the likely facts) that night service imposes costs on existing companies, this method would result in lower operating costs for all existing and new companies. This would make possible lower, competitively set, day prices so that customers would probably pay less during the day even with the subsidy, have better service, and the community would still retain night service.
Other alternatives exist to insure service at night. For example, companies operating more than 10 cabs could be required to provide 24 hour service. If the number of independent operators increases to a substantial number, they could be required to develop a night service system in which they share night obligations. It is in fact doubtful that the present cab companies would welcome such night time competition. Much more likely, faced with independent competitors they would prefer that they have no inducement to provide 24 hour service because that would reduce the differences in service characteristics among the competitors in the market.
Mayor Bauman's rational for requiring all companies to provide 24 hour service assumes that potential riders are unable to determine which firms provide such service. The current yellow page advertisements for all three companies clearly state their hours of service. Anyone looking for late night service should be able to determine whether the particular company provides such service. If the mayor's concern has any basis in fact, it would be plausible to require that all taxi companies provide notice of their hours of service in all advertising and promotional materials. If that were not sufficient, there are ways to reroute calls from one phone to another which could be used to transfer requests to those firms that do provide night service. In short, given any harm to competition resulting from the 24/7 rule, the mayor's stated rational does not provide a plausible basis to impose costs on the entire community when far less intrusive options exist that would fully and completely resolve any actual problem.
The mayor's concern does raise one additional regulatory concern. It would seem desirable to require firms to make advance announcements of their hours of service and adhere to those hours until new notice and waiting periods have elapsed. Adhering to posted hours and charges are basic consumer protection ideas. While changes in fares should be facilitated promptly, changes in hours of service need to be related with the means of disclosing that information to the public (e.g., yellow page deadlines). Moreover, if there is a real risk of all companies dropping 24/7 service, then sufficient advance notice is required so that the city can implement an alternative plan to ensure the continuation of such service.
In sum, the current ordinance protects existing firms from competition and results in excessive prices and insufficient service to customers during the day and early evening hours at least. It also makes new entry into this business very difficult. The subcommittee majority's proposed changes do not make a significant change in that situation. Entry will still be blocked unless the entrant is willing and able to provide city-wide, 24 hour, 7 day a week service - an extremely unlikely situation. Madison residents and visitors will continue to be overcharged for taxi services. The claimed public benefit from this restraint on open competition is either provision of nighttime service that would not occur otherwise or the provision of improved information to consumers. The data currently on the record does not support the central claim that all existing taxi companies would withdraw from 24 hour service or that existing or new companies would have any incentive to confuse or mislead customers as to their hours of service. Hence, on this basis any rule is unnecessary.
Even if new data justified some concern for service at night or for customer information, many alternatives exist that would ensure such service or information without foreclosing new entrant and enhanced competition. Therefore, sound public policy requires that the 24/7 rule be eliminated immediately.
II. Both the current ordinance and the proposed revisions create serious risk of liability for the city.
The law does not always require that those adopting public policy select the best public policy. In some contexts those making regulatory decisions are given a great deal of discretion including the option of imposing unnecessarily anticompetitive regulations. Under such a legal system, a bad decision can not be challenged. Such is not the case with respect to anticompetitive regulations in Wisconsin.
The current and proposed Madison taxi ordinances are exactly the kind of unjustified, anticompetitive regulation that Wisconsin law forbids. The law of Wisconsin both in general and in particular with respect to public transportation services is clear in its requirement that competition is a fundamental goal along with a limited set of concerns for safety, reliability, and protection of victims in the event of accidental harm. Furthermore, the actions of the city in protecting and advancing the market dominance of the existing taxi companies in light of the limits on its legal authority constitutes a violation of both state and federal antitrust law. Further, if the city is sued under federal law and losses, as seems very likely, it will be required to pay the legal expenses of the other side in addition to absorbing its own legal expenses.
My analysis starts with the law of Wisconsin that limits the authority of the city to regulate the taxi business. In light of that analysis, I will explain how state and federal antitrust law will treat the city's unauthorized effort to suppress competition in this business. In this presentation I will focus on the legal liability of the city and not the three cab companies. Those companies have their own legal counsel who can provide them with an analysis of their potential liability which includes substantial greater economic risks (treble damages) than the city faces.
State law requires that regulatory agencies promote competition both in general and specifically in the transportation industries. Wisconsin's antitrust law, section 133.01 states: "It is the intent of the legislature to make competition the fundamental economic policy of this state and, to that end, state regulatory agencies shall regard the public interest as requiring the preservation and promotion of the maximum level of competition in any regulated industry consistent with the other public interest goals established by the legislature." (Emphasis added.) Wisconsin's motor vehicle transportation law is to the same effect; section 194.02 states: "The legislature intends to let the market promote competitive and efficient transportation services, while maintaining the safety regulations necessary to protect the welfare of the traveling and shipping public. It is the intent of the legislature that this chapter be interpreted in a manner which gives the most liberal construction to achieve the aim of a safe, competitive transportation industry." (Emphasis added.) Although 194.01 (1) exempts taxicab service from the definition of "common motor carrier" which means that most state regulation does not apply, taxicabs are not excluded from the broad policy governing "motor carrier operations" expressed in 194.02 (quoted above), and are subject to some specific state imposed requirements; for example, 194.41(6)(b)(2) sets minimum insurance requirements.
The City of Madison's authority to regulation the taxi business is conferred and defined in section 349.24 of the Wisconsin statutes: "The council of any city . . . may: (a) Regulate and license . . .operators of taxicabs used for hire; (b) Regulate and license the taxicab business by licensing each taxicab used for hire; . . . (d) Revoke any license mentioned in this section when in its judgment the public safety so requires." In addition, each taxicab must be insured at level set by local ordinance provided that the level equals or exceeds the minimum required by state law: 194.41(6)(b)(2) and 344.15(1). Thus, Madison's regulatory authority depends on an explicit grant of legal power from the legislature. Therefore, the city acts as a delegated sate regulatory authority and is subject to the commands of 133.01 and 194.02.
In drafting and enforcing its taxi ordinance, Madison can only implement legislatively defined goals and must seek the most pro-competitive means of accomplishing those goals. The statutory language governing the city's authority over taxi services explicitly identifies only two legislative goals beyond the potential to collect license fees:
In my view, the city can make a creditable argument that the grant of authority reasonably includes an implied right to define essential aspects of the taxi business:
Analytically, the first point is that the city lacks any overt legislative authorization to do anything about the hours of service. Only by arguing that some concern for hours is implicit in the delegation of authority can the city claim any power to impose any requirement concerning hours. Disclosure of hours that the operator is willing to provide service does not impose a serious burden and so can be defended. In my view, the city lacks authority to compel licensees to operate at hours that they do not choose to provide service. The city would need to have express legislative authority to impose such onerous requirements.
Thus, only if a court were to stretch the implicit legislative regulatory authorization to include a right to consider the need of residents for late night service, would there be any basis for any action by the city in relation to this issue. Moreover, it is clear from the analysis set forth in Part I, that the present record does not demonstrate in fact a need to do anything to ensure late night service because it appears that such service will exist regardless of the regulation. Moreover, even if a need for city involvement in the provision of such service did exist, the present system is the most anticompetitive approach to resolving the problem. Further, a number of obvious and less anticompetitive options exist that have not even been evaluated.
In sum, the current and proposed requirement that all taxi operators must provide service 24 hours a day, 7 days a week is not authorized by state law and even if some concern for provision of service at night were lawful, the city has chosen an impermissibly anticompetitive way to achieve that goal.
The antitrust laws of Wisconsin and the United States outlaw anticompetitive exclusionary conduct. If this exclusion was done pursuant to agreement with the existing companies (something which is strongly implied, inter alia, by conferring on them a voting right with respect to the subcommittee recommendations), then the 24/7 rules is the product of an unlawful conspiracy. On the other hand, if this was the unilateral act of the city which is the operator of competing forms of public transit and holds a monopoly on access to the taxi business within the city, then it would constitute an unlawful attempt at monopolization. Moreover, the city has acted with express knowledge and intent to impose an anticompetitive condition on the taxi industry which demonstrates its market power in this context.
In short, absent some immunity from the ordinary operations of the antitrust law, the city=s action would be obviously illegal. With respect to the substance of antitrust law, the city can argue that it has the protection of the "state action" doctrine with respect to federal antitrust law and an implied exemption from state antitrust law. These are related issues because only if the city has an implied exemption from state antitrust law will it qualify for the state action defense in a federal law case.
The Wisconsin Supreme Court has made it clear that implied exemptions from the state's antitrust law for anticompetitive local regulations require clear legislative authorization. American Medical Transport v. Curtis-Universal, 154 W2d 135, 452 NW2d 575 (1990). Absent such authorization, the Court has held that local governments are "persons" (133.02(3)) to whom state antitrust law applies and that anticompetitive regulations constitute a violation of state antitrust law. Thus, on the merits, the Madison ordinance, being unauthorized and anticompetitive, is an unambiguous violation of the state's policy of promoting competition and competitive markets as well as of the antitrust law of the state. Further the fact that a number of substantially less anticompetitive options exist that the city has ignored despite their being both obvious and expressly brought to its attention means that even if a more creditable argument for subsidizing night service existed, the city could still not justify the 24/7 rule which is the most anticompetitive option open to it.
The federal state action exemption immunizes those anticompetitive regulations adopted by local government only if the state legislature has expressly authorized such conduct. Town of Hallie v. Eau Claire, 471 US 34 (1985). The policy of Wisconsin's law in general and in particular for the public transportation businesses makes it extremely unlikely that the city has any authorization to impose anticompetitive restraints on the taxi industry outside of the specific areas of express authorization, but in any event, the state law makes it clear that unreasonably anticompetitive regulation is not authorized. Moreover, given that under state law this regulation would be unlawful means that it lacks the necessary state authorization to protect it from federal law. Thus, the city 24/7 rules fails the key test for state action immunity - the legislature has not clearly authorized the city to suppress competition to achieve this goal nor has it authorized the use of such an anticompetitive means to achieve the goal of night service given the alternatives that the city had available to it.
The City Attorney's staff has called to my attention two decisions by Federal Circuit Courts of Appeal that have upheld anticompetitive taxi regulations adopted by cities in other states. Campbell v. City of Chicago, 823 F2d 1182 (7th Cir. 1987); Independent Taxicab Drivers' Employees v. Greater Houston Trans., 760 F2d 607 (5th Cir. 1985). The staff has suggested that these decisions somehow imply that the Madison ordinance would not violate federal law even though the staff review concluded, as I have, that the ordinance does violate Wisconsin's own antitrust law. Neither decision supports the view of the staff. In both cases, the decision points to explicit state statutory language that expressly authorized the anticompetitive conduct at issue. Moreover, neither state (Illinois and Texas) had or has a provision comparable to 133.01 that might have limited the choice of anticompetitive method of implementing the state policy. Thus, rather than supporting the legality of Madison's ordinance these two decisions show that the legality of such an ordinance under federal law requires express state statutory authorization. Such authorization is totally and completely absent from Madison's situation.
Under both state and federal law, the city is exempted from any liability for the damages that it has inflicted on consumers and potential entrants. Damage liability is exclusively a concern of any private parties that have colluded with the city.
In addition, antitrust law generally shifts the cost of legal expenses (reasonable attorneys fees) to the defendant if the defendant losses in either a damage action or an action seeking an injunction. Such fees can be and often are substantial. It is arguable that Wisconsin law denies to a successful plaintiff in a law suit against a local government the right to collect reasonable attorney fees despite prevailing on the merits. See 133.18(1)(b); but see 133.16. However, it is clear that under federal law that if a similar plaintiff prevails on the merits and gets an injunction against the local unit of government, that plaintiff is entitled to a reasonable attorneys fee.
First and foremost, the 24/7 rule is bad public policy. It imposes a costly and unnecessary requirement on the competitive market in order to achieve an end which the market is substantially certain to provide even without regulation. If in the future it appears likely that no cab company will provide 24/7 service, then the city has a number of options which are substantially less anticompetitive to achieve its public policy goals including ensuring that potential users are aware of the hours of service of particular companies.
Second, if the city agrees to the recommendations of the sub-committee majority for which the existing taxi companies voted and retains the anticompetitive 24/7 rule, it will have intentionally restrained trade. Wisconsin law does not authorize Madison to eliminate competition unless it is essential to carry out a policy enacted by the legislature. Our state legislation on taxis, however, contains no general permission for local government to suppress competition in this business. In addition, Wisconsin law requires that any elimination of competition be no more intrusive that necessary to accomplish the legislative goals. Thus, even if unprofitable night service were deemed an essential element of the legislative mandate (a doubtful claim in itself) and a subsidy was shown to be needed, the proposed ordinance is the most anticompetitive way to carry out such a goal. An invalid, anticompetitive ordinance is in turn a violation of both state and federal antitrust law. The city is subject to suit and if the suit employs federal law, the city will be subject to both an injunction and the obligation to pay a reasonable attorneys fee to the plaintiff that brings the action.
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TO: City of Madison, Wisconsin
FROM: The City Attorney
DATE: October 5, 2000
RE: Report of the Ad Hoc Committee on Taxi Deregulation
The decision as to whether or not to adopt the report with its recommendations is a policy decision for the Council to make. A number of comments have indicated that adoption of the Committee's recommendations, or leaving the present regulatory ordinance unchanged, would violate state or federal antitrust law. In my opinion, those comments are unsupported in the law.
Professor Peter Carstensen of the University of Wisconsin Law School has furnished a paper in which he gives his opinion that the City's present ordinance, Sec. 11.06, Madison General Ordinances, violates antitrust law. In February, 2000, I furnished him with research materials produced in my office. In September, 2000, I requested that, in return, he furnish me with research information, identifying by name and citation the cases to which he referred in general terms. He has not responded. Therefore, this report will comment only on the written materials he has furnished to the Ad Hoc Committee on Taxi Deregulation and to the Transportation and Parking Commission up to this date, including his memo dated October 4, 2000.
Most of the material provided by Professor Carstensen is of a policy, rather than a legal nature. Some of the factual assertions are incorrect. City Transportation staff can furnish information on those points. He suggests (October 4 report, page 2) that a person needing late-night transportation to a hospital ought to call an ambulance instead of calling a taxicab. The Council may conclude that that option would impose an unreasonable financial burden, both on the individual and on the City, and that the City ought not to encourage it.
This report will respond only to legal arguments. The Mayor and Council are best able to assess the facts and the various policies being proposed.
Professor Carstensen has suggested that the City's ordinance ought not to require a determination of "public convenience and necessity" for taxicab licenses. The Ad Hoc Subcommittee agreed and has recommended that that requirement be repealed.
Cities are permitted by Wisconsin Statutes to regulate taxicabs and taxicab operators in the interest of public safety. Sec. 349.24, Wis. Stats. In addition, the "home rule" statute, Sec. 62.11(5), Wis. Stats. grants city councils broad powers to "act for the government and good order of the city.” At the same time, such regulations are not exempt from the Wisconsin antitrust law, Sec. 133.01, et seq., Wis. Stats. However, "Only unreasonable restraints of trade are prohibited." Independent Milk Producers Coop v. Stoffel, 102 Wis. 2d 1, 298 N.W. 2d 102 (Ct. App. 1980). Only one case in Wisconsin has found a city's regulation to violate Wisconsin antitrust law, and that was a case where the City of Milwaukee had divided its area into four sectors and allocated only one sector to each of four ambulance companies. Three other companies were only allowed to furnish ambulance service on a "back-up" basis. American Medical Transport v Curtis-Universal, 154 Wis. 2d 135, 452 N.W.2d 575 (1990). In that case, it was undisputed that the Milwaukee regulation was anti-competitive. Milwaukee argued that the statutes permit an anti-competitive regulation. The Supreme Court said no.
Are Madison's current taxicab regulations anti-competitive? They do not regulate rates charged, except that they require rates to be filed with the City Clerk and they require notice and a waiting period before rate changes. They do not limit territories and they do not limit the number of companies or the number of vehicles. They do impose safety, insurance, and service requirements. I maintain that the Mayor and Council have the right to impose these regulations if they reasonably believe such regulations benefit the citizens of Madison.
Prof. Carstensen claims that the requirement that taxis serve every part of the city and provide 24-hour service limits entry into the taxi business, That alone does not constitute a prohibited restraint of trade. Entry into any business is limited by start-up costs and start-up costs may be imposed by legitimate regulations. For example, restaurants are not permitted to open if they do not have the equipment required to serve food safely. No one can claim that such safety requirements are anti-competitive, even though they do require an investment that many people would not be able to afford. Such regulations may limit entry, but they are not the kind of regulations which constitute an antitrust or antimonopoly violation.
On page 7 of the October 4 document, Prof. Carstensen proposes that the City impose a tax on daytime cab fares. The City has no authority to impose such a tax.
Finally, his analysis of applicable statutes (October 4 report, pages 9-11) omits any reference to the “home rule” statute, Sec. 62.11(5), Wis. Stats. The most important decision of the Wisconsin Supreme Court relating to compliance by municipalities with the antitrust laws, points out that the “home rule” statute must be considered. Town of Hallie v. City of Chippewa Falls, 105 Wis. 2d 533, 539, 314 N.W, 2d 321 (1982).
The City Attorney and staff have the greatest respect for Prof. Carstensen and the assistance he has offered on this issue. His comments on the policy issues will be of help to the Mayor and Council. I must respectfully disagree with his legal conclusion. We can never promise that litigation will not take place, and we can never promise with certainty what its outcome will be. In this case, however, the threat is not of the kind that should impose the demanded limit on the Council's decision-making. I recommend that the Mayor and Council decide this as they decide other policy issues, based on their considered judgment as to what is best for the citizens of Madison.
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