Update on Utah's Privatization Process
As we previously reported, Utah is considering privatizing at least some aspects of its liquor control. On Wednesday, August 25, John Freeman, the Deputy Director of Operations for The Utah Department of Alcoholic Beverage Control (“DABC”) appeared before the Privatization Board to answer questions.
Mr. Freeman presented four reasons to maintain the status quo. First, he contended that privatization would decrease the state’s net revenue from alcohol sales. As previously reported, Utah garnered $59 million in profit and $41 million in tax receipts from liquor sales in 2009. Mr. Freeman cited the findings of the Alcohol Research Group, a California-based division of the Public Health Institute, which indicate that control states like Utah generate three times the revenue of non-control states. Members of the Board appeared reluctant to accept these findings, focusing instead on the state’s hard costs to run the liquor stores. As the Salt Lake Tribune reported, Randy Simmons, the Board’s chair, indicated that the primary question for him was whether the money spent to run the liquor stores (estimated at $21 million) could be put to better use. The Board did not discuss how the state would compensate for the millions of dollars in lost revenue, which appear to be far greater than the estimated savings.
Second, Mr. Freeman contended that private retailers would not have the same buying power the state has, and therefore, could not offer the same selection of products. Mr. Freeman specifically cited the state’s ability to stock stores with niche wines, indicating that more than 4,000 wines were available in the state. The Board questioned, however, whether the state is responsive to customer preferences. While there was some confusion among Board members as to whether privatization for both wholesale and retail aspects of alcohol sales were options, it appears that only the retail side is currently under discussion. Thus, the question of choice in products is likely moot as the state would still control selection and would maintain its current buying power.
Third, Mr. Freeman argued that consumers would pay more under privatization. As it stands, Utah marks products up by a statutorily-mandated 86%. Private retailers would need to add sufficient amounts to the price to cover their costs and be profitable. The discussion indicated that wages are one area that would likely cost private retailers more. Currently, the state legislature sets wages for store employees, which average barely above minimum wage.
Finally, Mr. Freeman argued that DABC’s primary responsibility was to ensure public safety and that any form of privatization would create more alcohol-related problems in the state. The Alcohol Research Group study supported these claims, showing that consumption rates in non-control states are higher than in control states, due in part to more outlets and longer hours. The Board questioned the study’s findings regarding alcohol-related problems in Utah, with Randy Simmons stating that he had read conflicting studies. The Board did not address whether the state would continue to mandate the number of outlets and their hours under privatization.
Because of time constraints, the session abruptly ended with both sides promising to forward on their sources and to continue the conversation regarding privatization. We will keep you updated as these issues develop.
Possible Privatization of Utah Liquor Stores
The sixteen-member Utah Privatization Policy Board was created by the legislature to determine what services currently provided by the state can be privatized. State liquor stores are one of many state functions that the Board is examining.
Utah is one of 18 states, and two Maryland counties, that currently use a state run retail system, commonly called control states. The other 32 states issue licenses to private companies to sell liquor. Four control states (Washington, Virginia, North Carolina and Utah) are currently considering privatization. See Susan Johnson’s blog for a terrific discussion of the Washington initiative process. Utah also controls the wholesale market for liquor, which is not under discussion for privatization.
The debate thus far has centered on the economics of privatization and the level of state control exercised over liquor sales. There seems to be consensus that privatization will occur only if shown to be both profitable and to allow for sufficient state control.
From an economic perspective, state liquor stores are one of the few profitable government agencies in Utah. Estimates indicate that state liquor stores sold $269 million dollars worth of product in 2009, yielding $59 million in profit and $41 million in tax receipts, with $27 million going to the school lunch program. Information gathered by the Board so far indicates that privatization could result in $21 million dollars in annual savings from lowered payroll, operational and liability costs. The potential cost savings are more than offset by last year’s profit levels, however, which exceeded the potential annual savings by $38 million. It is not clear that tax receipts would remain consistent either. Both Montana and Maine, two states that recently privatized, have reported a drop in sales (and thus tax receipts) due to increased prices. It is not clear whether a privatization of Utah liquor stores would be likely to result in increased prices. Although privatization could lead to a decrease in revenues for the state from profits and tax receipts, privatization would bring in new streams of revenue, such as real estate taxes on liquor store properties, which are currently exempt. The state would also realize one-time gains from selling the current liquor store businesses and property. The Privatization Policy Board will need to consider whether these revenue streams would be sufficient to replace any lost revenues associated with lost profits and tax receipts.
With regard to control, the primary question is how to balance free-market principles with moral regulations. Many supporters of privatization equate state-run liquor stores to socialism. Opponents question whether a loosening of state control would result in increases in impaired driving and alcohol consumption, particularly by minors. One Board member, Senator Howard Stephenson, Republican from Draper, has indicated that liquor stores lend themselves to privatization, but that all of the current controls should remain in place. It is unclear whether business would be able to operate profitably if the state maintains current restrictions on advertising, locations, hours and days of operation. Further, as long as the state keeps its monopoly on wholesale liquor distribution, the state would maintain control over the brands offered and any volume discounts negotiated, which could limit the ability of retailers to compete based on selection and price. It is unclear what effect, if any, consumers would experience other than new names on the liquor stores.
Stoel Rives will be monitoring the privatization debate in Utah. We will post an update after the next Board meeting, expected to be held in late September.
Variations of Organic Labeling
Figuring out what information must be on your wine label can be tedious. Adding terms like "organic" or "sustainably-grown" can be even more challenging. Extra steps are required for adding organic certifications or claims to a wine label, although the regulation of such claims under the TTB COLA process has been made more clear with the Memorandum of Understanding between the TTB and the USDA concerning organic labeling and adverting. The MOU clarifies and delineates the enforcement responsibilities of each agency with respect to labeling and advertising of alcohol beverages produced under the Organic Foods Production Act of 1990 (OFPA).
The USDA has authority over domestic and imported agricultural products to be sold, labeled, or represented, as organically produced. Under OFPA, the USDA has established the National Organic Program (NOP). Agricultural products that are sold or labeled as organically produced must be produced and handled in accordance with NOP. Any use of the term "organic" on a wine label or in adverting of wine must comply with the USDA's NOP regulations. Now, with the adoption of the MOU, it is clear that TTB has the regulatory authority to determine whether proposed labels are consistent with NOP.
The Advertising Labeling and Formulation Division (ALFD) of the TTB has guidance for organic labeling applicants. The guidelines provide a step-by-step process of what is required to obtain label approval, including the need for proof of USDA-accredited certifying agent (ACA) preview, a certification statement, a sulfite statement, an ingredient statement, the USDA seal, and so on. The guidelines also contain an organic label quick reference sheet that explains the requirements for the various organic claims, like "100 percent organic," "organic," or "made with organic (specify ingredient)." Additional TTB guidelines on variations of "organic" labeling are available at www.ttb.gov/pdf/wine.pdf.
For fun, I looked at four different bottles of wine that made some claims for "green production." The first was a NSA Organic, USDA certified wine from the Columbia Valley. The bottle was blazed with the "organic" nature of the wine, from the foil marked with "NSA Organic" to the "certified organic vineyard" on the "back" label. The USDA Organic stamp was also featured. Comparatively, an Oregon pinot from Eola-Amity Hills was simply marked with a small "made with organic grapes" statement and certified organic by Oregon Tilth. Then there was another wine from Columbia Valley that, while not having any "organic" claim, was described as a "wine of sustainable and environmentally friendly farming." Finally, the fourth was an Austrian wine certified "Demeter," a biodynamics certification. However, notably many wines that are known to value biodynamic or sustainable farming practices do not make such claims on their labels. Recognizably, this allows for more flexibility and avoids the extra steps of having to prove organic label claims.
Oregon Homebrewers Stymied by New Interpretation of Law
By Guest Blogger, Summer Associate
The Oregon Liquor Control Commission and the Oregon Department of Justice recently opined that, under a post-prohibition-era law, homebrewed beer and homemade wine must be consumed at home. This opinion, reportedly in response to a question regarding the permissibility of public competitions involving homebrewed beer, is in effect a reversal of the OLCC’s previous policy permitting public competitions and understandably has caused great concern within the Oregon home brewing community. One immediate effect has been the cancellation of the amateur beer and wine competitions at the Oregon State Fair after more than 20 years of such contests.
The law in question, ORS § 471.403(1), reads
No person shall brew, ferment, distill, blend or rectify any alcoholic liquor unless licensed so to do by the Oregon Liquor Control Commission. However, the Liquor Control Act does not apply to the making or keeping of naturally fermented wines and fruit juices or beer in the home, for home consumption and not for sale.
Apparently, the OLCC and DOJ determined that “for home consumption” does not include public tastings and competitions, and therefore any out-of-home consumption is subject to OLCC control.
However, a few questions remain. First, what will the Oregon courts say that the statute means? The OLCC and DOJ have changed their view of the law and may therefore choose to enforce its provisions more broadly, but in the absence of a new administrative rule codifying the revised interpretation, the courts may not come to the same conclusion as OLCC. Second, specifically which provision of the Act would a homebrewer violate by participating in a competition? Arguably, a homebrewer would violate ORS § 471.405(2), which reads
No person shall purchase, possess, transport or import, except for sacramental purposes, an alcoholic beverage unless it is procured from or through the Oregon Liquor Control Commission, except as provided otherwise in the Liquor Control Act.
That said, because ORS § 471.403(1) permits the “keeping” of homebrewed beer in connection with home consumption, it is not clear that participating in a public competition amounts to more than this.
In the meantime, some homebrewers have organized the Oregon Homebrewers Alliance to urge the Oregon Legislature to update the law during its next session in January 2011. Reportedly, Rep. Mike Schaufler, D-Happy Valley, and Sen. Floyd Prozanski, D-Eugene are working on a draft bill that would change the law to explicitly allow home brewers and winemakers to take their products outside their homes. Stay tuned.
States that Regulate . . . and Control
Taxes and One-Stop-Shopping
As we all know, Washington is not the only state that controls the sale and distribution of alcohol. Each of the 19 (1) “control states” have different practices that distinguish them. Here, and in future posts under “States that Regulate . . . and Control” we will provide bits of information on the control states and how they operate.
- IDAHO – What is distinguishing Idaho from other control states right now?
TAXES. There has reportedly been an influx of Washington customers who are traveling to Idaho to avoid paying the higher liquor taxes in Washington. This has long been a customary practice in the Northeast, where a shorter commute can make a trip across state lines worth the few dollars of savings. Here in Washington, however, only the eastern-most residents benefit. - PENNSYLVANIA – With the current drive to privatize in Washington, it is interesting to remember that the state could always impose more control: the Pennsylvania Liquor Control Board recently rolled out its new wine kiosks, where one must scan an ID, pose for the video camera, and take a breathalyzer before purchasing wine from an automated machine. In Pennsylvania, wine and liquor are sold from state stores, so this provides consumers the “opportunity” to buy wine in a grocery store – one stop shopping at its best?
(1) Alcohol is regulated at the county level in Maryland; Worcester and Montgomery counties both control alcohol sales.
Hong Kong Continues to Foster International Wine Industry
Hong Kong has been making a concerted effort to promote the wine industry within its borders. The Hong Kong Commerce and Economic Development Bureau (CEDB) began signing Memoranda of Understanding (MOUs) with wine producing regions in August of 2008 when it signed an MOU with France. This followed Hong Kong’s abolition of the wine tax, which opened up the market considerably to foreign producers. The MOUs piggy-backed on the 0% wine tax by addressing additional wine industry concerns, including fraud, storage and handling, education, promotion of wine tourism, and investment and cooperation in industry trade events. Since signing with France, the CEDB has signed similar MOUs with Bordeaux, Spain, Australia, Italy, Hungary and New Zealand, and has renewed its official support for its wine industry initiative.
In February of 2010, the CEDB took another step forward when it signed a cooperation agreement with China regarding wine entering the mainland through Hong Kong. This agreement puts in place a voluntary registration system that seeks to streamline the process of importing wine from Hong Kong, and in the process sets Hong Kong up as a gateway for foreign wine entering China, which as we all know is an important and growing market.
The CEDB’s activity has finally reached the U.S. – in May of this year it signed an MOU with the U.S. and a joint MOU with Washington and Oregon. Not only does this continue efforts that regional organizations have been making to promote Northwest wine in Asia, but it is yet another acknowledgment of how important this region is becoming in the global wine economy.
FYI - Upcoming events in Hong Kong include the Wine and Dine Festival in October and the Hong Kong International Wine and Spirits Fair in November.
Dueling Liquor Privatization Initiatives in Washington State: What do the Initiatives Say and Who are the Players?
Word is out that enough signatures have likely been gathered to ensure that an initiative backed by Costco will make it on the on the ballot in Washington State in November. The Costco backed initiative would transition sales of spirits in Washington State from state operated liquor stores to private retail stores and allow manufacturer to retailer direct sales and volume discounts.
A second initiative backed by distributors would also move spirits sales from state operated stores to private retail stores, but would preserve the role of distributors in a traditional three tier system, has until July 2nd, to amass enough signatures to make it on the ballot.
A third group is raising money to oppose any attempts to change the current state administered system. Combined contributions of over $1,200,000 have been reported to the Washington State Public Disclosure Commission in support of and opposition to privatization.
We have assembled the following information so that you can read the actual initiatives, explore the proponents and opponents, and form your own opinion.
1. Initiative No. 1100 was filed by Modernize Washington, is financially backed by big box retailer Costco, and has statements of support from other groups that retail liquor such as the Northwest Grocery Association and the Washington Restaurant Association.
- Where to Follow updates: Modernize Washington on Facebook
- Reported Contributions: > $700,000
2. Initiative No. 1105 was filed by Washington Citizens for Liquor Reform and is financially backed by alcohol distributors Young’s Market Company and Odem Southern Holdings.
- Where to Follow updates: Yes on 1105 on Facebook
- Reported Contributions: $400,000
3. Keep our Kids Safe is leading efforts to preserve the existing state operated system. Washington Association for Prevention of Substance Abuse filed fund raising reports for Keep our Kids Safe with the Public Disclosure Commission. The reports identify the union that the state liquor store employees belong to, United Food and Commercial Workers as the source of the funds. UFCW 21, with the endorsement of other organizations, has issued a fact sheet outlining rationales for preserving the current system of state run liquor stores.
- Reported Contributions: $38,000
We will report back in a few weeks to let you know if one or both privatization initiatives make on to the ballot and the status of efforts to promote preservation of the existing state operated system.
Wineries Taking Greenhouse Gas Reduction Seriously
At least fourteen wineries Oregon have instituted improvements to reduce Greenhouse Gas (“GHG”) emissions, including the installation of solar panels, lighting retrofits, tank insulation and in some cases, have gone so far as to use goats, sheep, and raptors instead of lawn-mowers and pesticides. For instance a winery in Eugene, reportedly has trained owls and red-tailed hawks to protect the vineyards from the small birds that like to feed on their grapes.
In 2009 the fourteen wineries in Oregon banded together to create the first industry carbon-reduction program. The “Carbon Neutral Challenge,” a joint project of the Oregon Environmental Council and the Oregon Wine Board included twenty percent of Oregon’s wines annual production in 2009. In other words, one in five bottles of wine produced in 2009 was produced in a facility that completed the Carbon Neutral Challenge. Each contributing winery accounts for their greenhouse gas emissions and incorporates this information into a carbon inventory tool. The participants must also become part of the Climate Registry.
Over the last year these projects have repeatedly prevented 211 metric tons of methane from being released; the CO2 is equivalent of 9,370 barrels of oil consumed; the annual emissions of 770 cars or the electricity used by 489 homes in one year. For any emissions that remain after all their reduction efforts, the wineries have located verifiable offset projects in the agricultural sector including methane digesters in Oregon, Washington and Idaho through the Bonneville Environmental Foundation.
