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Pennsylvania liquor privatization drive hits wholesale snag

June 10, 2013

What may end up derailing the Republicans’ drive to privatize Pennsylvania’s sale of wine and liquor is not who gets to sell it — but who gets to deliver it.

Both a four-month-old plan by Gov. Tom Corbett, a Republican, and a bill that passed the GOP-controlled House in March would dismantle the Pennsylvania Liquor Control Board’s less-seen but lucrative business of buying and delivering wine and liquor.

However, a state senator who will play a key role in drafting that chamber’s plan has sent strong signals that he does not think now is the right time to privatize the wholesale system, even as a top House Republican takes the hard position that no privatization bill could pass his chamber without it. That disagreement is emerging as a key sticking point as top Republican lawmakers try to reach a compromise in a quickly shrinking amount of time before the July 1 deadline that Corbett has pressed them to finalize a plan.

Complicating their efforts is opposition to privatization from Democratic lawmakers and the union that represents state wine and liquor store employees, who warn that it could simply empower a few big wholesalers that profit handsomely from their control of top-selling brands in Pennsylvania. In the meantime, distillers and wholesalers — the companies that ship and market wine and liquor — are vying for the upper hand in whatever regulatory structure fills the vacuum if the Liquor Control Board is banned from the wholesale business.

Sen. Charles McIlhinney, who heads the Senate committee that is handling the matter, said he is leaning toward writing legislation that would break state control of wine and liquor sales at the retail level, albeit under a different format than those envisioned by the governor’s plan or the House bill.

But McIlhinney, R-Bucks, also argued that selling the wholesale system right now would be unwise. Doing so would ignore the potential that it would be much more valuable once retail privatization legislation allows more stores to sell wine and liquor, McIlhinney said. And getting as much bang for the state’s privatization buck will be especially important since the state stands to lose a revenue stream of more than $100 million a year in profits from the state’s liquor business, McIlhinney said.

“It might be a better choice to find some sort of a lease program or some sort of an avenue where maybe we do keep the wholesale for the time being until we can guarantee some revenue without having the price go up,” McIlhinney told reporters after his third and final hearing on the subject Tuesday.

It is a valuable business: The architects of Corbett’s plan and the House bill each estimated the wholesale side would account for more than 50 percent of the overall value to the state if newly created licenses are sold to private companies that want to transport or sell alcoholic beverages.

And right now, it is what gives the Liquor Control Board substantial negotiating power. The agency’s status as a single large buyer allows it to cut out many middlemen brokers that exist in other states and negotiate favorable prices directly with distillers and vintners. That leverage helps produces profits for the state treasury, proponents say.

A substantial retail expansion could demand tens or hundreds of millions of dollars to build warehouses, hire workers and buy trucks and inventory systems, whether it is carried out by the Liquor Control Board or by private-sector wholesalers, said Dawson Hobbs of the Wine and Spirits Wholesalers of America, a Washington, D.C.-based trade association.

But privatizing the wholesale system could potentially create what some warn would be an oligarchy of a few private wholesalers to the detriment of consumers.

To that end, a trade association for liquor companies, the Washington, D.C.-based Distilled Spirits Council of the United States, asked the Senate to reject parts of the governor’s and House plans that would allow wholesalers to have “franchise protection” rights. Such legal protection, which exists in about a dozen other states, would give wholesalers exclusive control over the distribution and marketing of liquor brands with virtually no fear of losing the contract to a competitor, council official Mark Gorman said.

That, he suggested, could hurt consumers on the key elements that could otherwise benefit them: price, availability and selection.

House Majority Leader Mike Turzai, an ally of Corbett’s in the crusade to privatize the state’s wine and liquor business, said any Senate bill that does not immediately sell off the wholesale end of the business will not pass the House. It is, he said, “an essential component.”

Turzai, R-Allegheny, also played down the influence that McIlhinney will have over any bill that ultimately comes to the Senate floor.

“There will be a full body of the Senate that takes this up,” Turzai said. “It’s not going to be limited to a singular member.”

Source: The Examiner

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