In a December 19 post, I discussed the importance of the consumer in the free-market system. When we allow entrepreneurs to test their ideas, be it a product or service, with limited government interference, the result is innovation and lower prices. Consumers vote for these products and services with their pocketbooks.
Market economies are known for encouraging entrepreneurial activity through competition. While the goal for a market economy is economic growth, sometimes the government passes laws and creates regulations that are not always market-friendly.
One such example is known as a certificate of need (CON). CON laws do not require individuals to prove their competence or qualifications. CON laws allow existing businesses to protest the entrepreneur’s attempt to enter the market, which is why you may hear them referred to as the “competitor’s veto.”
CON laws are typically affiliated with health care and public service industries. Public service companies are those that supply a service or commodity to the public. They are privately financed, privately managed and engage in commercial activity; but the commercial activity is subject to public constraints that are administered by a government agency. Constraints include prices to be charged, the company’s financial practices and geographic boundaries of operation. A certificate of public convenience and necessity (CPCN) is a type of CON that is specific to public service companies.
Where did the CPCN originate? The history is lengthy, but I’ll highlight a few key pieces. It started with the railroads in Massachusetts. In 1882, the Massachusetts Board of Railroad Commissioners expressed concerns over the acquisition of property for railroad construction, the expense of the construction, and “that needless and useless roads have been constructed from spite, from a desire to control or annoy other railroad companies.” Nearly half of the state’s railroads were insolvent. The legislature amended the state’s 1872 general railroad law to require that the Board of Railroad Commissioners certify that “public convenience and necessity” required railroad construction. Railroads were required to propose routes, demonstrate feasibility of routes and detail the cost and plans of construction. Other states adopted similar laws.
A few years later, another industry entered the ring. Due to consumer demand for price controls and demands by the gas industry for protection against new gas suppliers utilizing different technology, Massachusetts enacted legislation creating the Board of Gas Commissioners in 1885. Eventually, a CPCN law evolved in this new arena and other states followed suit.
Fast forward a few more years. With the invention of the automobile, New York enacted a 1913 law requiring state certification of public convenience and necessity of motor carrier operators for stage routes and bus lines. In 1915, it was amended to include motor vehicle lines or routes and to add the language, “in competition with another common carrier” because their competition posed a threat to local street railroads and electric interurban lines. By 1920, fifteen other states passed similar legislation.
Supporters in both the late 1800’s and today have similar arguments for requiring entrepreneurs to obtain CPCNs:
- Wasteful duplication should be prevented. Because of economies of scale, existing businesses can plan for increased service demand.
- Preventing destructive, or ruinous, competition is necessary. Competition leads to such low rates being charged that operation costs are not covered, and businesses become insolvent. Competitors could cut corners to get ahead and jeopardize the safety of consumers.
- “Cream skimming” will occur. New market entrants will only serve the most profitable consumers, forcing less profitable consumers to be served by existing businesses.
- CPCNs assure that the investment climate is protected. In setting rates, regulatory agencies assure operation costs are covered. Certified operations signal more secure investments.
- Consumers may not have adequate information to make sound decisions and need to be protected from exploitation by bad actors. Existing businesses can police against bad actors because they know people in the industry and therefore know who would be qualified to operate.
So, why am I talking about the “competitor’s” veto? The Platte Institute brought forward a bill during the 2019 session to repeal a CPCN requirement in our state, LB461. There is a lot to say about this issue. For now, I will say that the fact that this law is on the books is egregious and prevents would-be entrepreneurs from starting a business. Stay tuned, I’m not done blogging about this issue quite yet!