blank.gif (51 bytes) September/October 2000
Land of the Unfree

Nevada's hardly the land of
opportunity for limo entrepreneurs

by Clark Neily

ome 200 years ago Americans began pushing west in search of greater freedom and economic opportunity. They overcame long odds and great risks through an indomitable pioneer spirit. In modern times, the word "entrepreneur" describes a person who "organizes, operates, and assumes the risk for a business venture."

Nevada owes its existence to pioneer spirit and the vision of entrepreneurs. That's why the state's continuing assault on independent limousine operators (See "His Master's Voice," Nevada Journal, June 1999)—who personify the very pioneering, entrepreneurial spirit that makes Nevada such a great place to live—is both ironic and sad.  

Big Mutha', May I

Actually, it's an outrage. In America, entrepreneurs usually don't have to beg permission from the government to go into business. But limousine drivers in Nevada do. Here, anyone who operates a limousine "in passenger service" without first obtaining a "certificate of public convenience and necessity" (CPCN) may be imprisoned for up to one year and fined $22,000, for a single incident.

As the state agency charged with enforcing these draconian laws, the Transportation Services Authority (TSA) has its own special police force, which patrols the streets, pulling over limousines at whim, interrogating drivers (often right in front of horrified passengers) and then issuing citations to "uncertificated" drivers. The only way to challenge these citations is in a kangaroo court where the prosecutor, judge and jury are all representatives of the TSA. To top it off, any fines imposed by this "court" go right into the TSA's own private bank account. That's not American-style due process, comrades.

Why don't limousine drivers just "follow the law" and get a certificate before they go into business, as their critics patronizingly suggest? In short, because the "law" they're supposed to follow is a joke. In communist countries, such as Cuba, the government decides how many shoes, tractors and hamburgers the people need—not the market. So it is in Nevada with limousines. Instead of simply ensuring that applicants meet certain minimum qualifications—i.e., proof of insurance, current vehicle safety inspections, a good driving record—the TSA uses an array of subjective, ill-defined "standards" to arbitrarily withhold certificates from otherwise qualified limousine drivers.

Among other things, an applicant for a certificate to operate limousines must demonstrate to TSA czars that:

  • The proposed business will not have an "adverse and unreasonable effect" on existing limousine companies (in other words, the applicant will not compete successfully with any of the politically connected fat cats who have already been granted certificates and who would prefer not to see any new players in the market);

  • The applicant's service "is or will be required for public convenience and necessity" (whatever that means—no one at the TSA has been able to explain it);

  • The applicant is financially "fit" to run the business (now there's a decision that belongs in the hands of government bureaucrats); and

  • The applicant's proposed rates are "reasonable." (The TSA's definition of "reasonable" shows it's no fan of American-style free markets: "Certainly, reasonableness of transportation rates cannot be based on charging whatever the traffic will bear.")

Apart from how absurd they are, the thing to note about these "standards" is that each of them is totally subjective. This gives the TSA the ability to grant or withhold a CPCN for reasons that have nothing to do with the merits of a particular application. The result? A government-run protection racket for a handful of favored limousine companies.

Notoriously Underserved Vegas

For years, the Las Vegas limousine market was dominated by a few companies that worked hard—not to deliver superior customer service, but to make sure no additional competitors ever got a foothold in Sin City. And it was common knowledge in the industry that it was futile for newcomers to apply for a certificate to operate limousines. Indeed, the TSA representatives routinely (but unofficially) told potential applicants that they "shouldn't bother" applying for a certificate because it wouldn't be granted. Statistics bear this out: Between 1977 and 1997, the TSA (and its predecessor agency, the PSC) granted only three applications for new limousine service in the Las Vegas area, despite that fact that the city was the most notoriously underserved limousine market in the entire country.

It doesn't take a rocket scientist—or a conspiracy theorist—to understand what was going on. Simply put, for over 20 years the TSA/PSC ran interference for a select handful of limousine companies that had the political clout to get certificates for themselves—and then slam the door to any further competition.

The tendency of government agencies and the companies they're supposed to oversee to jump in bed together is well known—economists call it "regulatory capture." Of course, neither the TSA nor the monopolists it serves would ever admit that rank economic protectionism lies at the heart of their relationship. That would be impolitic. But actions speak louder than words.

The Right to Routinely Pummel

Under Nevada law, existing companies have the right to "intervene" in and oppose any newcomer's application to obtain a CPCN. They exercise that right zealously. Thus, whenever a new company applies for a certificate to operate limousines, the existing companies routinely send out their lawyers to try to derail the application.

This includes pummeling the applicant with repeated requests for documents and information, filing multiple written motions designed to delay and complicate the application process and cross-examining applicants about intimate—but irrelevant—details of their personal finances. Indeed, the viciousness with which existing companies gang up to destroy would-be competitors has prompted one observer to liken the process to "a Great White feeding frenzy."

The TSA says it would never withhold a certificate just because the new business might compete with existing companies. In fact, the law specifically forbids this. But again, the conduct of the intervening companies speaks far louder than the TSA's hollow disclaimers. Here are some typical statements made by interveners trying to convince the TSA to torpedo new applicants:

  • "Any time another limousine operator is introduced into the area, [Company A] experiences an immediate drop in revenue."

  • "Any significant diversion of [Company B's] charter business to a new competitor would put [Company B] back in a loss position."

  • "The Application does not propose to provide any services which are not already being adequately provided by existing carriers . . . . As a result, [Company C] believes that the Application . . . seeks to divert the same customers from which [Company C] derives much of its business."

So there you have it—visitors to Las Vegas are entitled to an "adequate" level of service, but not the kind of superior service that comes when companies actually have to compete for business. This leads to another fact that is common knowledge in the industry: Limousines operated "illegally" by uncertificated drivers tend to be newer, cleaner and more comfortable than the licensed companies' vehicles. Why? It's simple. Uncertificated drivers (who try to eke out an existence in the shadow of the law) must attract customers and earn repeat business by providing top-notch service, while licensed carriers have grown fat and complacent as a result of their government-enforced monopoly.

A Passive-Aggressive Agency

How else does the TSA stifle potential competition in order to protect existing limousine companies? By making sure the application process is so obnoxious and expensive that most people are discouraged even from applying in the first place. As would-be entrepreneurs like John West (whose application was recently denied by the TSA after two years of bureaucratic wrangling) know all too well, the "financial fitness" requirement provides an excellent vehicle for jacking up the cost and the aggravation of the application process. (Of course, the requirement is also irrelevant to any legitimate regulatory concern—in our free-market system, companies that are genuinely unfit simply go out of business.)

As Americans, readers may not be familiar with the idea of having to prove to the government that you are wealthy enough to start your own business. You might even find the concept offensive. In Nevada, however, anyone who wants to run a limousine business must first "satisfy the transportation services authority of [his or her] financial ability to perpetuate a continuous service, as applied for, consistent with the public interest." This means that would-be limousine operators must submit to a detailed investigation of their personal and financial history in order to "satisfy" the government of their ability to stay in business. In practice, this means handing over tax returns, bank records, paychecks, receipts—even telephone bills and credit card statements—to a bunch of strangers who will then question the applicant in minute detail about the accuracy and significance of particular figures, the wisdom of past decisions, the feasibility of future plans, etc.

All of this makes for a very expensive process. For one thing, most aspiring limousine drivers end up hiring both a lawyer and an accountant to help them through the minefield of regulations, filings, "data requests," hearings and countless other bureaucratic demands. Then there's the cost of putting together pro forma financials, assembling the reams and reams of "supporting" documents routinely demanded by the TSA's financial analysts, paying court reporters to transcribe multiple hearings—the list goes on. And of course, the intervening companies will be there every step of the way to ensure they miss no opportunity to make the process more costly and burdensome for the applicant.

A Scheme to Scare Off Mom and Pop

All told, the cost of applying for a CPCN can range anywhere from several thousand to tens of thousands of dollars—or more. In fact, a former TSA employee recently testified that he knows of a "household goods" moving company that spent $100,000 applying for its certificate. And remember—sinking all that money into the application process is no guarantee of success. Even when applicants dot every "i" and cross every "t," the TSA can (and does) deny them a certificate anyway. Sound like a good way to scare off mom-and-pop entrepreneurs who can't afford to gamble ten grand or more on a bureaucratic whim? You bet.

The TSA defends the "financial fitness" requirement on the grounds that undercapitalized limousine companies would "cut corners" by failing to keep up insurance premiums, neglecting basic vehicle maintenance and abandoning clients mid-trip to chase after higher fares. But even if these fears were justified (which they are not—the TSA has never offered anything but speculation and anecdote to support them), why single out limousine drivers? Does the prospect of any business in any industry cutting corners justify the prohibition of new entrants?

Hardly, as demonstrated every day by new restaurateurs, new doctors and even new lawyers—none of whom are forced to endure the ridiculous charade of establishing "financial fitness" before they can begin working in their chosen profession.

And the level of detail required by the TSA's financial analysts is mind-boggling: Besides tax returns, bank records and other personal financial data, applicants must provide a detailed list of anticipated start-up and operating expenses such as vehicle leases, maintenance plans, insurance and advertising costs, cellular phone charges—even the name of the gas station where they plan to buy fuel.

The TSA attempts to justify this fiscal Inquisition by arguing that it must have a complete understanding of each applicant's financial status in order to decide whether to issue a CPCN. But this explanation is a sham. If a "complete understanding" of an applicant's financial status is really necessary, then why does the TSA totally ignore one of the most significant start-up costs that many would-be limousine operators incur—namely, the expense of the application process itself?

The TSA thinks nothing of forcing applicants to spend untold time and money addressing such burning issues as how much they plan to spend on cellular phone service and oil changes, but when it comes to the cost imposed on applicants by the agency and its convoluted limousine-licensing scheme, well, somehow that's just irrelevant. This is like a doctor taking a patient's history for heart disease and not asking if the patient ever gets chest pains. So much for needing a "complete understanding" of an applicant's finances.

The TSA notes that it has been granting more certificates in the past couple of years. That's true. It's also true that the 20-year virtual moratorium on new certificates ended around the same time a group of independent would-be limousine operators sued the TSA for violating their constitutional right to earn a living. But maybe that's just a coincidence. Unfortunately for small entrepreneurs, many, if not most, of the new certificates have gone to local businesses that already had a foot in the transportation services market (existing taxi cab companies, for example) and other well-heeled players that could more readily afford the expensive gamble of the application process.

Arbitrary, Un-American Power

One thing that has not changed, however, is the TSA's ability to grant or withhold certificates at whim. The agency may have opened the faucet (albeit to a mere trickle) in recent years, but there is nothing to prevent it from turning the faucet back off whenever it chooses to do so. While there are still some places in the world where people have no choice but to accept this kind of bureaucratic despotism, America is not one of them. One way or another, the TSA must be stripped of its arbitrary power to stifle the kind of entrepreneurship that opened up the American West and helped make this the wealthiest and most productive country the world has ever seen.  NJ

Clark Neily is an attorney with the Institute for Justice, a public-interest law firm that represents several Southern Nevada entrepreneurs. They seek to open Nevada’s limousine market to competition.


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