10/09/2014 04:14 pm ET Updated Dec 09, 2014

How Regulators Are Clumsily Undermining Their Plan to Let Rideshare Companies Thrive

Just when I thought cooler heads had prevailed, all hell has broken loose in California's rideshare economy. Regulators gave the thumbs-up to companies like Uber, Lyft and Sidecar with one hand, and then used the other to layer on new rules.

As long as rideshare companies checked certain boxes, like background checks for drivers and increased liability insurance, the California Public Utilities Commission, under the leadership of president Michael Peevey, was happy to let this nascent industry bloom in the state. A year ago, it looked like California was showing other states the right way to regulate rideshare.

But now the same commission is putting the kibosh on a simple, great idea: carpooling. Each of the ridesharing companies has come up with its own version of carpooling where a driver can pick up two different people heading the same direction and charge them separate fares. The scheme is a win-win. Passengers get cheaper fares -- up to 50 percent off -- and the rest of us get fewer cars on the road and reduced carbon dioxide emissions. The commission should be cheering for this kind of innovation.

Instead, it sent letters to all three companies warning them that the carpooling option violates a 1960s-era regulation that says cars classified as "charter-party carriers" (think limos and party buses) can't charge individual riders separate fares.

The only problem with this -- well, one of the only problems -- is that companies like Uber, Lyft and Sidecar aren't charter-party carriers. They have a completely different business model. While limos and other charter-party carriers must only have one contracting party and charge by time and mileage, shared-ride services tell their customers to plan on sharing a car with another rider in exchange for a discounted fare, which is also based upon time and mileage. When the commission passed the first regulations regarding rideshare companies, there was no discussion about charter-party carriers.

But the commission didn't stop there. It also chided the rideshare companies for not coming to the commission first to get approval for the carpooling idea. From a commission letter to Sidecar:

"Sidecar has not yet approached the Commission regarding the Shared Rides service, nor submitted a request to modify its existing permit as a Transportation Network Company (TNC) to provide service under a different business model."

Of course the commission has a duty to keep a close eye on ridesharing companies as they grow. But the focus should be on safety and ensuring a competitive marketplace.

These knee-jerk actions by the commission, and the threatened regulatory roadblocks that come with them, go against the spirit of regulatory innovation that the commission showed when it passed its original rule last year. At the time I wrote:

"By realizing the value of technology and innovation for California's economy, and smartly supporting the trajectory of the digital revolution, the CPUC has shown regulations can indeed keep pace with the blazing speed of progress."

But the commission isn't the only culprit here. The San Francisco and Los Angeles district attorneys quickly joined the fray and issued threatening letters instructing the rideshare companies to remove the carpooling functions from their apps or endanger their "ability to continue operating." There are few things more chilling in business than receiving such a letter from powerful district attorneys. These actions show a widening gap between consumer protection and common sense.

So where do we go from here? Open communication is key. Regulators need to have face-to-face discussions with the rideshare companies to keep this process from sliding further into the political gutter.

One possible solution is working with the state legislature to move the ridesharing industry under its own chapter of the law, which would avoid regulating the business under antiquated rules. Lawmakers should reconsider their uneven approach to regulating this sector and instead walk a more productive path.