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So&Ion. M__ 0t222-1073

(611) MS-7240

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UNITED STATEb Of AMERICA

FEDERAL TRADE COMMISSION

BOSTON REGIONAL OFFICE

COMMISSION AUTHORIZED

V880034

July 15, 1988

Mr. Alfred Testa, Jr. EsquireLegal counselDepartment of TransportationDivision of AirportsTheodore Francis Green state Airportwarwick, Rhode Island 02886

Dear Mr. Testa:

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The staff of the Federal Trade Commission is pl~ased torespond to your invitation for comments concerning theadvisability of authorizing additional taxicab service atTheodore Francis Green state Airport. l We understand that thetotal number of airline passengers at Green Airport has increaseddramatically, from 737,000 in 19B2 to more than 2 millionpassengers in 19B7. To accommodate this increase in passengers,the Rhode Island Department of Transportation ("RlDOT") iscurrently formulating plans for significantly expanding airportfacilities. concurrent ~ith this expansion, RIDOT propose8 toincrease the level of taxicab service at the airport, which ispresently serviced by a single taxicab company pursuant to aconcession agreement.

Permitting open entry into the airport market and allowingfares to fluctuate under a reasonable ceiling would likelybenefit Rhode Island residents and visitors in two ways. First,limited derequlation of fares and open entry would introduceoompetition and likely lead to lower fares. We believe that eventhis limited fare competition may save consumers of airporttaxicab services about $200,000 annually. Second, increasing thenrt~ber of taxicabs servicing the airport should reduce the timethat consumers wait for taxicabs.

1 These comments are the views of the staff of the BostonRegional Office and of the Bureaus of Competition, ConsumerProtection, and Economics of the Federal Trade commission. Theyare not necessarily the views of the Commission or anyindividual Commissioner.

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An analysis of the effects of deregulation of taxicabs atairports is included in the 1984 FTC staff economists' report.Prior to that report, in 1977, the FTC sponsored a detailed studyby Professor Arthur De Vany of regulations governing taxicabservice at the Dallas/Fort Worth Regional Airport. 5 Each ofthese reports recognizes that distinctions must be drawn betweenmetropolitan and airport taxicab markets and that totaldaregulation at airports may not always be feasible. Each reportconcludes, however, that partial deregulation of taxicabs atairports can provide the same beneficial effects that flow fromthe deregulation of taxicabs in other areas.

Airports in Seattle and San Diego encountered difficultiesthat can accompany total deregulation of taxicabs at airpdtts. 6For example, the airport in Seattle experienced a lengthening ofcab lines, significant fare variance, disputes among taxicabdrivers, and refusals by drivers to provide short-haul servicefor customers. Professor Richard O. Zerbe suggests that theseproblems stem from one fundamental cause--taxis are able tocharge high fares because customers are not able to shopefficiently for the lowest fare.? Consequently, cab queueslengthen as drivers attempt to reap fare premiums. S These

5 A. De Vany, Alternative Ground Transportation Systemsfor Dallas/Fort Worth Regional Airport (1977).

6 Airport taxicabs typically form a single queue, makingit difficult for consumers to consider several taxicabs beforeselecting the one they prefer. In contrast, taxicab users inmost cities can easily sample a number of taxicabs by calling thedispatch services of various companies until they ultimatelyselect a taxicab company for use on a regular basis. In such aradio-dispatch market, taxicab companies can develop reputationsfor price and service, allowing competition to work to thebenefit of consumers.

7 R. Zerbe, Seattle Taxis; Deregulation Hits a Pothole,Regulation, Nov.-Dec. 1983, at 48.

• 8 These problems appear to have been exacerbated bySaattle's retention of the dispatching system it had prior toderegUlation, when fares were uniform. Taxicabs were called intothe loading area according to their place in line. If thetaxicab was refused by a customer, the taxicab did not go to theend of the line, but went to a holding area and soon returned tothe head of the line.

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problems spawned a rash of consumer complaints. Seattleauthorities responded by putting a ce~ling on the fares thatcould be charged by airport taxicabs, by providing for rate-posting, and by creating a separate queue for short-haul trips.IOThese measures resulted in an increase of taxicab competition andfewer consumer complaints.

The airport in San Diego experienced similar problems aftertotal deregulation. Consumers complained about high fares andfare variance. There were long queues, short-haul refusals, anddisputes among cab drivers about their places in line. San Diegosubstantially relieved these problems by imposing fare ceilings,raising the permit fee, and hiring additional starters. ll

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The Current System at Green State Airport

Green State Airport is presently serviced by a sole taxicabcompany pursuant to a concession agreement. The concessionaire'staxicabs, like all taxicabs in the State of Rhode Island, areregulated by the Rhode Island Public Utilities Commission(RIPUC).12 Under existing regulations, a taxicab may solicitfares only in the areas for which it holds operating authority.

9 Lengthy cab queues may be shortened by reducing fareceilings, thereby making it less lucrative for taxicab drivers towait long periods of time for a passenger. The ceiling imposedby Rhode Island's current method of rate regulation (the zone ofreasonableness discussed in the next section of the text) may below enough to constrain undue lengthening of taxicab queues atGreen State Airport. If not, RIDOT may wish to consider whetherit should petition RIPUC to establish a separate fare ceiling forairport service.

10 The New Orleans airport also has separate taxicabqueues for long and short trips.

11 Taxicab Regulation, supra note 3, at 135-36. In viewof the planned expansion at Green State Airport, RIDOT may wishto address such problems by providing consumers with theopportunity to shop around by establishing a taxi dispatch systemth.t allows cabs to compete and consumers to choose amongdifferent levels of taxicab fares and service.

12 RIPUC and RIDOT are separate, unrelatedadministrative agencies. RIDOT has no direct authority toregulate taxicabs. It can do so only collaterally, as part ofits authority to manage the airport, which is private property.

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Typically, that authority is confined to the city or town inwhich the taxicab is based. The requlations also provide that atrip may not originate outside of a taxicab's base city unlessthe trip is pre-arranged at the request of the passenger, ~,the passenger calls the taxicab company. Thus, while a taxicabmay transport a passenger from its base city to any point in thestate, including the Green state Airport, it must return empty,or Itdeadhead," to its base city if it is not authorized tosolicit passengers at the airport. Similarly, an airport taxicabtaking a customer to a location other than the city of warwick,where the airport is located, must deadhead back to the airport.This deadheading back to the base city is inefficient and leadsto higher costs for taxicab service. IJ

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All Rhode Island taxicab companies must disclose their ratestructure on tariffs that are filed with RlPUC. These rates mustbe approved by RlPUC as just and reasonable. RIPUC hasestablished a zone of reasonableness within which fares will bepresumed just and reasonable. Taxicabs filing rates within thiszone need not explicitly justify their rates and no publichearing on the validity of the rates is necessary. Presently,the zone of reasonableness ranges from a minimum of $4.80 to amaximum of $9.00 for a five-mile trip. The taxi concessionaireat the airport charges $8.05 for a five-mile trip. While thiszone of reasonableness may provide the flexibility for some pricecompeti~ion among taxicabs transporting passengers to theairpor~, it obviously has no such beneficial effect on trips thatoriginate at the airport, where there is a single concessionaireproviding taxicab service.

From conversations with officials of RIDOT and RlPUC, weunderstand that both agencies have received consumer complaintsabout long waiting times during peak periods for taxicab serviceat the airport. RIDOT also believes there is a perception amongairport patrons that taxicab service at the airport is notadequate and that this causes many people to make prearrangementsfor pick-up by private automobiles. RlDOT believes thatimprovements in the taxicab system at the airport may result inincreased usage of taxicabs by consumers and reduced automobilecongestion.

13 In his stUdy of the Dallas/Fort Worth Airport, DeVany observed that the extra costs of deadheadin~ are usuallypassed on to customers in the form of higher fares, surcharges,longer waiting times and refusal of service.De Vany, supra note 6, at 31-32.

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The Benefits of an Open Entry System at Green state Airport

The taxicab system at Green State Airport shares many commonfeatures with the Dallas/Fort Worth Airport system studied byDe Vany in 1977. These common characteristics inclUde theoperation of the taxicab system by a sole concessionaire, aprohibition against other taxicabs picking up passengers at theairport unless expressly requested to do so in advance by aparticular passenger, and a requirement that the concessionaireprovide a minimum number of taxicabs to service the airport. AsDe Vany found, a system that employs a sole concessionaire is notconducive to price competition or quality of service competition.Consumers may be forced to pay higher fees than they would/underan open entry system. When properly designed, an open entrysystem has the potential to lower fares and to ameliorate otherproblems, such as excessive waiting time. Open entry would alsoeliminate or minimize the inefficient deadheading that now occursWhen, for example, a taxicab transports a passenger fromProvidence to the airport and must then return empty to its basecity.14

RIDOT may wish to consider a system at Green state Airportthat would allow any taxicab licensed in Rhode Island to servicethe airport. In his study of the Dallas/Fort Worth Airport,De Vany found that an open system involved the elimination ofdeadheading by permitting all taxicabs to pick up passengers bothat the airport and in the community to which they took thepassengers. l5 Significantly, De Vany calculated that, as of1977, the elimination of just one-half of the deadheading thatoccurred at the Dallas/Fort Worth Airport would produce annualsavings in excess of $700,000. 16

The deregulation of taxicabs at Green state Airport canyield benefits that are real and immediate. In addition to theelimination of inefficient deadheading, deregulation would likelybenefit consumers by leading to lower fares and improved service.The fares charged by the current concessionaire are higher than

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15 Most airports that have open systems, such as New York,Chioago, Washington National, and Los Angeles allow all citylicensed cabs to serve the airport. De Vany, supra note 6, at 14.

16 zg. at 32.

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those of moat other Rhode Island taxicab companies. If openentry led to a fare reduction to approximately that of the medianfare for the Providence/Cranston/Johnston area, airport taxicabconsumers would save over $500 per day, or about $200,000 peryear in fares alone. 1? We cannot estimate the dollar value ofother likely benefits such as reduced waiting time and reducedtraffic congestion. However, such benefits are likely both to besignificant and to increase the demand for airport taxicabservice, thereby increasing consumer benefits still further.

other locales that have dereQulated taxicab service ha~eexperienced comparable benefits. For example, after Seattlederegulated taxicabs in 1979, more than 200 new jobs for taxicabdrivers were created between 1979 and 1983. 18 In addition,waiting times in Seattle decreased significantly, and nomunicipality that has dereyulated taxicab entry has reported anincrease in waiting times. 9 Similarly, in San Diego, theaverage waiting time in the radio-dispatched taxicab marketdeclined 20 percent after deregulation, and the average waitingtimes at major taxicab stands became negligible. 20

18 Zerbe, supra note 8, at 43-44. It is also estimatedthat price regUlation in Seattle had inflated taxicab fares byapproximately 11 percent. ~. at 45.

17 Based on fares listed in the report by ParatransitServices, Taxicab Tariffs and Regulation in Rhode Island (1984),the median Providence fare for a 10-mile trip (for 145 of thatcity's 157 authorized vehicles) was $10.85. The comparableairport fare at that time was $14.80. RIDOT has told us that theaverage length of taxicab trips originating from the airport is10 miles and that there are an average of 150 trips per day, andthat the taxi concessionaire must pay RlDOT $.30 for each tripthat originates at the airport. Thus, a "competitive" fare of$11.15 might result, if the $.30 charqe is added to the area-wide average. Subtracting this fare from the comparable airportfare yields an overoharge of $3.65 per 10-mile trip. This $3.65overcharge on 150 daily trips, 365 days per year, reSUlts in anestimated loss to consumers of $199,931.50 per year. Thiscalculation assumes that the typical airport-originated trip isno more costly to provide than the typical area-wide taxicabtrip •

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20 TAxicab Regulation, supra note 3, at 117.

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07/14/1988 09:57

Conclusion

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RIDOT may wish to petition RIPUC to sanction the adoption ofan open entry system at Green state Airport that would allow anytaxicab in the State of Rhode Island to service the airport.Properly instituted, such a system can both lower fares andincrease the availability of taxicabs at the airport byeliminating wasteful deadheading and by introducing otherefficiencies. Experience has shown that similar systems at otherairports have produced these benefits by increasing competitionin the taxicab market. Adoption of such a system is likely.toprovide tangible benefits to taxicab patrons at Green stateAirport and to the citizens of Rhode Island. I

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We hope these comments will assist you in your deliberationsand we appreciate the opportunity to present our views.

Sincerely,

~]) M"KPhoebe D. MorseRegional OirectorBoston Regional Office

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