Last week I introduced you to the concept of the Certificate of Public Convenience and Necessity (CPCN), also known as the “competitor’s veto.” Today, I’d like to do a little deeper dive to give you an understanding as to why it is so egregious and anti-free market.
Reviewing applications for occupational licensing to assure individuals meet certain qualifications so that the public is protected from incompetent individuals is a straightforward process. Determining whether a business wanting to enter the market classifies “as being in the public interest and in accordance with public convenience and necessity” is not so straightforward. There is no universally recognized definition of what this means. Why? Because it is not known whether a business is needed unless it enters the market.
Obtaining a CPCN starts by submitting an application that includes personal demographics, the type of service to be provided, a list of equipment owned, the geographic area of intended operation and an application fee to a regulatory agency. Applicants must agree to obtain insurance and adhere to safety and inspection requirements.
Applicants must post notice of their application to existing certificate holders. Existing businesses may then protest the application. The process does not require that the protest cite concerns of fitness to operate or public safety. There is also no requirement that such objections be signed under penalty of perjury. The reason for protest can simply be that the existing certificate holder does not want competition.
Most applications are protested. When protested, a public hearing is held, and the applicant is required to demonstrate “public necessity” and that the market will support another business. In other words, applicants must demonstrate that their business will succeed in advance of opening. Although it would be beneficial in determining necessity, consumers are not required to attend hearings. Existing businesses typically testify stating they would be able to serve or would be willing to expand to meet public demand. The hearings are trial-like in nature, and after the hearing, the governing agency then decides whether to grant a certificate.
The CPCN process is not without economic consequences. It imposes barriers on those most in need of basic economic opportunity. In Nebraska, if you want to be a household goods (HHG) mover or provide passenger carrier services, you must obtain a CPCN. The HHG and passenger carrier industries typically attract those with limited access to capital and few skills. Protested applications are time-consuming, taking months, even years to complete.
Applicants need legal representation for the hearing process. A couple incurred $10,000 in legal fees during a year-long battle to expand their Virginia operation to West Virginia, only to be denied. This money could have been used for business investment.
Geographic mobility is limited. Like the Virginia example, it prevents business owners from expanding into neighboring states. It prevented a California businessman from expanding into Nevada. States like Nebraska that require CPCNs deter potential business. The process can also affect geographic mobility within states due to conditional provisions. It is not uncommon for a certificate to be granted limiting operations to rural areas or proposing alternate areas of operation.
A Nebraska entrepreneur who wanted to expand his home health care and hospice business to include transportation services for his clientele was denied a CPCN. He proposed his expanded business model because the passenger carrier services available were not meeting the needs of his clients. Several taxi companies protested his application.
Consumers are not immune to economic consequences. A Federal Trade Commission report noted that taxi regulation led to resource misallocation. The number of available taxis decreased while wait times and fares increased. Limiting the entry of new businesses can stifle innovation. Some cities and states initially banned ride-sharing services like Uber and Lyft. Nebraska battled this initially. These ride-sharing services introduced features not seen in the taxi industry like immediate hiring and paying drivers through cellular phones, and often at a lower price.
In general, society pays. When applications are denied, fewer entry level jobs are created for unskilled workers. There is reduced innovation in service delivery as seen in the Uber and Lyft example. Lastly, economic resources are diverted for rent seeking behaviors as existing industries lobby politicians to protect their turf.
The Platte Institute brought forward a bill during the 2019 session to repeal a CPCN requirement in our state, LB461. I still have more to say about this issue, so stay tuned. I’ll be blogging about the legislative landscape surrounding this issue soon!