Legislature(1999 - 2000)
03/31/2000 03:24 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 386-BREWPUB LICENSES CHAIRMAN ROKEBERG announced the next order of business is HOUSE BILL NO. 386, "An Act relating to brewpub licenses." Chairman Rokeberg informed the committee that he intended to take all the testimony on HB 386 and depending upon the testimony, he doubted that the bill would move out of the committee. Number 1615 REPRESENTATIVE HALCRO, Alaska State Legislature, testified as the sponsor of HB 386. He explained that HB 386 was introduced after one of his constituents [brought this problem to his attention]. This constituent has one of the few brewpub licenses in the state and thus they own a brewery and a restaurant. The problem, the limit of 75,000 gallons of beer [manufactured] per year [under a brewpub license], surfaced when they attempted to open a second restaurant in Anchorage. With a second restaurant, they will reach the aforementioned limit in September or October and won't be able to sell their own beer in their own restaurant. Representative Halcro acknowledged the concerns from some of the small brewers and stated that he was open to ideas such as limiting [the manufacture of] anything over the 75,000 gallons per year to be strictly sold within the [restaurant]. He specified that it is not his intent to create a "super brewery" as some of his opponents have charged. The intent was simply to allow this company that was opening a second location the ability to sell its own beer in its own restaurant. Representative Halcro noted that there is a proposed committee substitute (CS), which merely tightens the language in the title. Number 1756 REPRESENTATIVE MURKOWSKI moved that the committee adopt the proposed CSHB 386, version LS1469\G, Ford, 3/31/00, as the working document. There being no objections, it was so ordered. CHRIS ANDERSON, Co-Owner, Glacier Brew House, testified via teleconference from Anchorage. He stated that he didn't have a problem with increasing [the amount of beer manufactured under the brewpub license] from 75,000 to 150,000 gallons. Although the Glacier Brew House will not be affected by this legislation in the short term, he anticipated being in the same situation as the Moose's Tooth by this time next year [because] the Glacier Brew House is in the process of opening its second restaurant in May. Mr. Anderson informed the committee that the local production is only about 7 percent of the total beer served in the state. Therefore, the target is not the local breweries. In fact, he expressed the need to expand beer production throughout the state through brewpubs or breweries. Personally, Mr. Anderson didn't see any reason to have a limit at all. However, if the [limit in the manufacture of beer under a brewpub license] is to be 150,000 this year, he fully supported that [amount]. Number 1897 DOUG GRIFFIN, Director, Alcoholic Beverage Control (ABC) Board, testified via teleconference from Anchorage. He informed the committee that he was present in order to answer questions and observe as the board does not have a formal position on this. However, the ABC Board has talked with many of those involved in this matter. He noted that the ABC Board also shares some of the concerns of Representative Halcro in regard to competition and what can been done to maintain the health of the industry as a whole. REPRESENTATIVE HALCRO pointed out that last year HB 69 made folks such as Mr. Anderson purchase a beverage dispensary license, which cost about $125,000 to $150,000, in order to be able to open another restaurant. He asked if Mr. Griffin saw the need for, what Representative Halcro considered, fairness. Two restaurants have had to [purchase a beverage dispensary license] simply because competitors have raised a fuss and now these [two restaurants] are in a spot with the opening of additional locations that only serve beer. He asked if the ABC Board has discussed that matter. MR. GRIFFIN answered that the board itself has not had discussions on that matter; however, he has had discussions with the Chairman of the ABC Board, Mr. Robert Klein, who is probably a good indicator of how the board would view this. Mr. Griffin related his belief that the ABC Board and Mr. Robert Klein would not have a problem raising the limit on the amount of beer manufactured for sale within [the brewpub's] own restaurant. He believes the big concern was in regard to competing with breweries in the marketplace as a whole and competing with other tap lines in other bars. Although [the brewpubs] did have to purchase a beverage dispensary license, these [brewpubs] have the benefit of the income generated by the operation of the restaurant and the bar to subsidize the marketing of their beer in competition with the brewers, who only have one means of support [income]. The brewers only have the sale of their beer as a means of support. Therefore, Mr. Griffin didn't believe that the ABC Board would find it problematic to raise the limit of the manufacture of beer in order to have enough beer to sell in the restaurant. However, if the desire is to raise the limit [for these brewpubs] so they can market their beer in competition with other beers that are in the marketplace, then that creates the problem. Number 2163 REPRESENTATIVE HALCRO reminded everyone that last year part of the opposition from some of the brewpubs was directed at the $125,000 to $150,000 beverage dispensary license [that the brewpubs had to purchase in order to expand] even though they didn't want to serve hard liquor. Therefore, the notion that these brewpubs would make up that cost through bar sales is off-the-mark as the desire was to merely open a new location. Representative Halcro asked if Mr. Griffin felt that the ABC Board would be amenable to inserting language to the effect that any beer manufactured over 75,000 gallons would have to be sold in the [brewpub's] restaurant. MR. GRIFFIN indicated that the ABC Board would probably [be amenable] to [language] such as that. However, he didn't know how that would be regulated, specifically what gallons are sold at which establishment and thus there may be some technical aspects that require consideration. Mr. Griffin noted that he provided committee staff with a provision that was in the ABC Board's bill [SB 138] from the last legislature. The provision refers to a "soft cap," which means that if a brewpub believes that it will exceed the 75,000 limit in September or October, the brewpub [would need] to petition the board and request a waiver in order to produce more [beer]. At that time, the board could query the brewpub as to why they need to exceed the limit, where [the beer] would be sold and how many tap lines [that particular brewpub] has in other parts of the state. Based on the responses from the brewpub, the board could determine whether or not to grant the waiver. He also noted that regulations could provide a framework in regard to how [such a decision] would be applied. He viewed this as a way for the legislature to delegate this matter to the wisdom of the board that regulates the industry. CHAIRMAN ROKEBERG pointed out that the economic interest provision of the existing statute prohibits a brewery from owning a restaurant. He asked if that is the root cause of the problems and the legislation that occurred last year. MR. GRIFFIN agreed that [the economic interest provision] is part of the problem. TAPE 00-41, SIDE A Number 0018 MR. GRIFFIN reviewed the situation with the Glacier Brew House and the Moose's Tooth, their desire to expand, which resulted in last year's discussion and the conversion of these breweries to brewpubs. Due to the conversion from the brewery to the brewpub model, they were given additional flexibility - that brewpubs didn't have [before] - to be able to sell their product off-premise. He believes that is the point at which the breweries became concerned because the 75,000-gallon limit was a safeguard [in regard to the brewpub's ability to market their beer beyond their own restaurants]. He reiterated that this [problem] began with the original model which was "cut out from under them," which left them scrambling. He commented that he has sympathy for all parties involved in this matter. Therefore, he indicated the need to arrive at some balance for everyone, which may be placing this matter in the hands of the board in order to come to a resolution in an open meeting with all involved parties. CHAIRMAN ROKEBERG informed everyone of his position that if the Alaska State Senate would agree to the elimination of the economic [interest] provision, that would allow any brewery to own its own restaurant and vice versa. However, he believes that last year's legislation [illustrated] that the cap is present for a reason, [in order] to differentiate between the brewpubs and the breweries. Number 0251 LISA PELTOLA, Beer Sales and Office Manager, Midnight Sun Brewing Company, testified via teleconference from Anchorage. She informed the committee that she would read the letter in the committee packet from Mark Staples, President/Owner of Midnight Sun Brewing Company. She read the letter as follows: This letter is to voice my opposition to HB 386. HB 386 is designed to help two brewpubs, which currently hold "super licenses". The super license, passed under last year's HB 69, allows owners of dispensary licenses to sell up to 75,000 gallons of beer. The 75,000-gallon cap was designed to allow these license holders to produce as much beer as they need to satisfy the demands of their own bars. Both of these license holders have essentially reached or are close to reaching maximum beer sales based on square footage and seating capacity. At their maximum, the demand from their own bars is far under the 75,000-gallon cap. It is not feasible that demand from either of these bars will exceed 75,000 gallons. The true reason for HB 386 is that both of these brewpubs are selling significant amounts of beer to other bars and restaurants. The current super license puts breweries at an extremely competitive disadvantage as it allows these businesses to sell to other bars, restaurants and events at lower prices as a way to promote their own establishments. By undercutting the pricing of other Alaskan breweries and at times offering free beer, these super license holders are undermining the Alaska "free enterprise" beer market. By promoting their beers and pubs with near-cost beer prices to other bars and restaurants, they increasing [increased] their own brewpub business where highly profitable sales are made. A recent example is that Glacier Brew House gave free beer and bar service to the Anchorage Nordic Ski Association's annual ski train event. Midnight Sun has sold beer to this event in 1997, 98 and was scheduled to in 99 before it was canceled. While Midnight Sun certainly cannot afford to donate beer free to such events, ... these events still remain our bread and butter and Glacier Brew House merely uses it as a promotional vehicle to draw customers to its establishment. I'd like to have that every event, big or large, every draft account for Midnight Sun is our bread and butter; it's what keeps us alive. The spirit intended in last year's HB 69 was clearly designed to allow the brewpubs to make enough beer to satisfy the demands of their onsite customers. This new bill goes beyond these intentions, increasing the 75,000-gallon limit would create full production and distribution breweries fronting as brewpubs. Super license holders are selling or have sold beer to the following establishments: Humpy's, Harry's, Simon's and Seifert's, Snow City Cafe, Southside Bistro, Piper's at West Coast Int'l Inn, Outback, Cattle Company, Sitxmar, Chair 5, Upper One in the Anchorage airport and many others. By passing HB 386, you're sabotaging Alaska's brewing industry. Breweries work very hard to play by the rules and please don't let a couple of brewpubs destroy fair business in Alaska. If you look at the profits made by brewpubs versus breweries, its clear to see this bill could easily jeopardize some of the current breweries operating. It takes away our bread and butter. Thank you for taking time to understand Midnight Sun's position. Number 0510 LARRY HACKENMILLER, Club Manchu, testified via teleconference from Fairbanks. He noted that he agreed with the statements in regard to why HB 69 was passed last year and why the 75,000-gallon limit was established. Mr. Hackenmiller thanked Mr. Anderson for basically making his point; he reminded the committee of Mr. Anderson's testimony that indicated he didn't know why there is a limit, but if the limit is 150,000 gallons this year, then that is what he would "go for." Mr. Hackenmiller said, "The intent here is special interest, if you will, would be to just have whatever they want to have." He informed the committee that his point of view is not as a brewer, but [as a] full beverage license holder as he has a tavern. He further informed the committee that there are certain restrictions [with taverns]. For instance, if alcohol is sold by the drink, [the establishment] is not allowed to give away free alcohol. If a brewpub is allowed to [provide free alcohol] under the full beverage license, then the brewpub has an exception to the rule. He didn't view that as very competitive. Furthermore, if one has a package store license, consumption is not allowed on the premise while consumption can occur on the premise of a brewpub. MR. HACKENMILLER stated that one of the reasons an ABC Board exists with regulations as well as a distinction in licenses is in order to ensure that one doesn't cross the lines. For example, if one has a package store in the same building as a full beverage license, these have to have separate doors. These strict guidelines exist for a purpose, although those have been set aside for brewpubs. In essence, any restrictions imposed on a package store license or a full beverage license [don't apply] to a brewpub and now the desire is to increase the cap to 150,000 gallons. He remarked that [the brewpubs] will probably come back next year [to raise the cap]. He inquired as to the purpose behind this and refuted the notion that the purpose is for consumption on their own premises. Therefore, Mr. Hackenmiller emphasized his opposition to HB 386 and raising the cap to the 150,000-gallon limit. He further emphasized that he is tired of returning year after year to deal with brewpub rights, exceptions and grandfather rights. He indicated that brewpubs seem to be moving towards eliminating Title IV. In conclusion, Mr. Hackenmiller also suggested that HB 386 should be referred to the Judiciary Committee as there are unfair conflicts between what brewpubs are allowed versus full beverage licenses. CHAIRMAN ROKEBERG agreed with Mr. Hackenmiller; however, he wasn't sure HB 386 needs to have a referral to the Judiciary Committee. REPRESENTATIVE HALCRO asked if Mr. Hackenmiller brews his own beer. MR. HACKENMILLER replied no and specified that he is basically a tavern as he does not have a brewery or brewpub. REPRESENTATIVE HALCRO asked if Mr. Hackenmiller would support a provision specifying that any beer produced over the 75,000 gallons would have to be sold in that brewpub's own restaurant. He asked if Mr. Hackenmiller would support giving the ABC Board the ability to make special determinations when situations arise. MR. HACKENMILLER replied no because it would be too ambiguous. Furthermore, it would allow the ABC Board to make decisions based on political pressure. He felt that the ABC Board's job should be as easy as possible with clear [lines]. Number 0761 MATT JONES, Co-Owner, Moose's Tooth Pub & Pizzeria, testifying via teleconference from Anchorage, noted his support of HB 386. He informed the committee that the Moose's Tooth is about to open a second location and within a couple of months of operation, "we'll" be out of beer. Mr. Jones turned to the prior suggestion that any amount over the 75,000-gallon limit be sold only in [the brewpub's] own establishment. In regard to how that would be tracked, he said that it would be easy to track that as brewpubs already have to indicate, on a monthly basis, where their beer went on the Department of Revenue tax forms. He then turned to the suggestion of providing the ABC Board the ability to make special determinations when situations arise. He felt that a regulatory/discretionary process with the ABC Board would be an unknown result. For example, the ABC Board granted the brewpubs an exception to have live entertainment beyond 11:00 p.m. one night a month. After receiving complaint(s), that [exception] was decreased to nine times per year. MR. JONES turned to the charge that this would create a super brewery. He agreed that there hasn't been a level playing field between the breweries and the brewpubs. Perhaps, the only time it ever was a level playing field between those two, was prior to 1996 when one could open a restaurant and a brewery or have a brewpub. He said that he would like to have a level playing field, which he indicated would require parity between the instate breweries and brewpubs as well as parity between Alaska and the Lower 48. There are breweries in the Lower 48 that have their own pub and are allowed to brew as much beer as they can sell. Some of the large micro breweries in the Northwest distribute a good portion of their beer into Alaska and thus companies in Southcentral Alaska have to compete with companies [from the Lower 48] that run a brewpub and a production brewery. Therefore, Mr. Jones reiterated the need to review parity within the state as well as with the Lower 48. He remarked that the reason some [brewpubs] are successful is because "we" made a better product for cheaper not because someone had an advantage. In response to the charge that the [the brewpubs] sell a lot of beer off-premises, Mr. Jones informed the committee that last year [the Moose's Tooth produced] about 1,500 barrels of which about 200 went to taps, which amounts to about 13 percent. He expressed the desire for that number to grow; however, he didn't view the Moose's Tooth as a ruthless brewery [taking control] of tap handles left and right. CHAIRMAN ROKEBERG inquired as to Mr. Jones' current production level. MR. JONES answered that currently, [the Moose's Tooth] produces 1,500 barrels. He explained that the federal system is based on barrels while the state system is based on gallons. Therefore, 1,500 barrels amounts to approximately 49,600 gallons. In further response to Chairman Rokeberg, he said that his new establishment is not open yet. Number 1101 KAREN BERGER, Owner, Homer Brewing Company, testified via teleconference from Homer. Ms. Berger announced that she opposed HB 386. If the brewpubs intend to produce and serve their product in a licensed establishment for which they are covered, it appears that the 75,000-gallon limit per year would be sufficient. She informed the committee that 75,000 gallons [of beer] equates to 600,000 pints [of beer]; pints are a standard measure of beer. She further informed the committee that Mr. Anderson [as reported] by the Anchorage Press on September 30, 1999, stated that the Glacier Brew House had served roughly a total of 200,000 customers in their four years of business, which would amount to an average of 50,000 customers per year. Therefore, Ms. Berger felt that the current 600,000 pints per year limit would be plenty of product for a family restaurant that serves responsibly. However, last year's change allowed these brewpubs to sell [their beer] in the wholesale market as well. Breweries such as the Homer Brewing Company are allowed to exist in the wholesale market and thus the change has allowed brewpubs to unfairly compete with breweries in Alaska by offering incentives to other retail, eating, drinking establishments and package stores that cannot be afforded by those whose primary business is the wholesale market. She pointed out that the proposed increase to the brewing cap to 150,000 [gallons] is desired so that [the brewpubs] can serve this wholesale market. She further pointed out that this new limit would equate to 1,200,000 pints of beer or more than two pints per person per year for the population of the entire state. Therefore, Ms. Berger felt that this becomes an infringement on the three-tier system, which protects against the brewer controlling both the wholesale and retail markets. MS. BERGER said that Homer Brewing Company and the other breweries of the state have established their business based on the laws in place and not by overbuilding and hoping to change the laws in order to best suit their personal business plans. She pointed out, "The combination licenses that were granted in such a nebulous way in 1996, have been changed and provided for by last year's HB 69 and the current HB 386 to the detriment of those holding licenses that run their businesses with the intent of the laws as they are stated." She suggested that the change encompassed in HB 386 will curtail future small endeavors such as the Homer Brewing Company. Furthermore, [HB 386] will likely create a monopoly by the state's only regional brewery, which she believes "they" don't want to happen. Ms. Berger asked that the committee not pass HB 386 as currently written. Number 1307 MARCY LARSON, Alaskan Brewing Company, stated her opposition to HB 386. She informed the committee that [the Alaskan Brewing Company] has held a brewery license since 1986 and since that time there have been many changes in the laws. When the Alaskan Brewing Company began no brewpubs were allowed nor was home brewing and thus everything was fairly clear; she agreed with some of the brewers that that situation was not the best. She informed the committee that she enjoyed having a lot of brewers, but the problem becomes the balance. Currently, there is a brewpub license and a brewery license. She explained that the brewpub license is meant to rely upon the on-premise retail sales, while the brewery license is meant to rely on the wholesale sales to distributors and outside markets. She acknowledged that there have been bumps along the way with the simultaneous openings of restaurants and breweries. Furthermore, the balance includes the other liquor license holders as well. Although it seems simple to raise the limit, it is complicated. Ms. Larson informed the committee that 75,000 gallons of beer is approximately 5,000 kegs per year, which would amount to 100 kegs a week. Therefore, it would be a fairly large bar that puts through that quantity and thus she indicated concern in regard to doubling that amount. In regard to the idea of capping [the amount over 75,000 gallons] sold to wholesale venues, that business could sell the entire 75,000 to the outside markets. Perhaps, one suggestion would be to eliminate the wholesale aspect of the brewpubs and focus them on their establishments [where they could sell whatever amount they wanted]. Ms. Larson expressed frustration with this brewpub law that has had five amendments since its inception and every time the slope gets [more slippery]. Therefore, she expressed the need to develop something stable that everyone can agree upon. REPRESENTATIVE HALCRO asked if Ms. Larson would support eliminating all of the restrictions, which would allow a brewer to open a restaurant. MS. LARSON answered that there would be many things to take into consideration. She identified a problem in that [the brewer] can be a wholesaler, a retailer and a supplier; the brewing industry would be the only ones having that kind of total freedom. She didn't know if that would fly. CHAIRMAN ROKEBERG returned to his earlier comment that the economic interest clause has caused many of these problems. He mentioned that he would like to see that go away. If breweries were taken out of [the economic interest clause], then breweries could do what they wish with the proper license. MS. LARSON interjected that the small breweries have entered thinking that all they can do is wholesale and thus such a shift would require utilizing retail as well in order to stay competitive. Therefore, there could be a down side to that. Number 1573 REPRESENTATIVE HALCRO pointed out that other states have fairly liberal laws that allow one to brew beer and open up restaurants. He expressed concern with the situation at hand in which a company wants to open a second location and employee an additional 100 people; however, they are being handicapped with HB 69. He feels that [HB 69] is unfair protectionism and he didn't feel that competition should be held back. However, he didn't want to create an unfair playing field and thus agreed that perhaps eliminating all the barriers would level the playing field. MS. LARSON informed the committee that in Oregon the McMenamins brewpub situation was tackled by allowing every brewery the ability to support two on-premise establishments. That situation seems to be working. She commented that there is a different situation in California and Gordan (ph) Beer Restaurants were brewpubs, but just had to sale all of their restaurants and go strictly into the brewery business due to a similar situation. Number 1720 ROD HANCOCK, Co-Owner, Moose's Tooth Pub & Pizzeria and Brewing Company, testified via teleconference from Anchorage. Mr. Hancock first commented on the need to maintain free competition and noted two failures in [this industry in the Anchorage] area: Bird Creek, a brewery; and Railway, [a brewpub]. He pointed out that the restaurant business is a difficult business, which has the highest rate of failure of any business type. Therefore, he didn't view [a restaurant] as an unfair advantage. MR. HANCOCK informed the committee that [the Moose's Tooth's] business plan is based on a Northwest model. In regard to McMenamins, that brewpub is allowed to self-distribute to two brewpubs and brew as much beer as desired to be [sold] to whomever, although they must use a distributor [for that beer]. He then turned to the Deschutes (ph) Brewing Company, which is not considered a micro brewery. Mr. Hancock explained that he came here with the [Northwest] model that was legal in 1996; the laws changed [after] we started and the [Moose's Tooth] could not use its brewery. Therefore, a compromise was struck with the creation of the beverage dispensary license that would allow them to supply multiple locations; however, now there isn't enough beer to do that as the brewery can't be used to its potential. Mr. Hancock reiterated that "we" are trying to fix our model that was legal to begin with. MR. HANCOCK acknowledged the probable frustration of the committee in regard to the divergent views of [the breweries and the brewpubs]. He noted his own frustration. However, he felt it natural that one would want to restrict one's competition if there isn't much consequence. Still, he indicated that everyone feels that it is about beer and brewing. In conclusion, Mr. Hancock explained that without raising the [75,000-gallon] cap, he will be forced to contract brew in the Lower 48 where the beer would be made and then returned to the state. Therefore, jobs would be created in the Lower 48 and they will keep the profits. Under that model, [brewpubs] still can't distribute their beer. Although [the brewpubs] can aggressively promote their beer, it would be from the Lower 48 not from the brewery that was built in Alaska. REPRESENTATIVE HALCRO requested that Mr. Hancock provide the committee with a brief outline in regard to competition and how [the Moose's Tooth] markets its beer to retail establishments. He informed Mr. Hancock that one of the opponents of HB 386, in a letter in the committee packet, lists the establishments in which [the Moose's Tooth] is selling beer. Representative Halcro imagined that [the Moose's Tooth], when going into any establishment, would have to compete for their sales just as anyone else would. MR. HANCOCK pointed out that he has to compete with the local breweries as well as those from the Lower 48. Mr. Hancock informed the committee, in regard to indications that [the Moose's Tooth] is undercutting the market, that he lost his tap handle at the Outback Steakhouse, where he sold a keg for $110. That is about [the standard keg price] on the market. However, Pete's Wicked Ale came in and sold a keg for $80. Number 2025 GLENN BRADY, President/Owner, Silver Gulch Brewing and Bottling Company, testified via teleconference from Fairbanks. He informed the committee that Silver Gulch Brewing is a micro brewery licensed by the state. He noted that the [committee packet] should include a copy of his letter [, and an amendment,] to the committee. Mr. Brady stated his opposition to HB 386 as currently written. In regard to Mr. Griffin's earlier testimony, Mr. Brady generally agreed with Mr. Griffin's ideas as well as those ideas from the breweries. However, Mr. Brady believes that removing the barriers to competition would open a can of worms with the holders of the dispensary licenses and the existing three-tier system. He indicated that the existing three-tier system is possibly too difficult to deal with legislatively [and thus] more clear boundaries would create a level playing field for everyone. Mr. Brady turned to his proposed amendment, which would say that it wouldn't matter how much [beer] was produced as long as it was sold on the premises. Therefore, it would relieve the competition that Alaskan breweries face in the open marketplace in that small breweries compete, as mentioned by Mr. Hancock, with breweries in the Lower 48 as well as with brewpubs that can subsidize the overhead of beer production with high margin restaurant retail sales. In regard to Mr. Hancock's comment that [brewpubs] could possibly face turning to breweries in the Lower 48 to produce their beer, Mr. Brady noted that [the brewpubs] could come to the [Alaskan breweries] and thus keep the dollars in the state. In conclusion, Mr. Brady reiterated his opposition to HB 386 as currently written; however, he favored his amendment as a compromise. REPRESENTATIVE HALCRO inquired as to how many brewpubs Mr. Brady competes against in the Fairbanks market. MR. BRADY answered that he currently competes against two brewpubs: the Moose's Tooth and Glacier Brew House. He specified that he is referring to tap handle draft placements in bars in Fairbanks. REPRESENTATIVE HALCRO clarified that he classifies a brewpub as an eating establishment that sells its own beer. MR. BRADY responded, then, that there are no brewpubs in Fairbanks. CHAIRMAN ROKEBERG interjected that the product from the brewpubs is being exported through a wholesaler to the Fairbanks' market. Number 2192 S.J. KLEIN, President and Head Brewer, The Borealis Brewery, testified via teleconference from Anchorage. He first noted his appreciation of the committee's full understanding of this [industry and this] issue. He then informed the committee that The Borealis Brewery is a production brewery under Alaska law. He identified the problem as the state's designation that there are two different types of operations that make beer in the state. The difference between the production brewery and the brewpub designation is that the brewpub has the ability to sell beer to itself, while the production brewery has the ability to sell beer to anyone else. The [75,000-gallon] cap was the mechanism by which the difference between the two was established. He explained that the idea behind [this differentiation was that] if someone builds a brewery [and then] wants to make it a brewpub, [the brewpub] can only sell an amount that makes sense for what a brewery can sell to itself. The cap was established in order that [brewpubs] could build to a certain capacity, but [brewpubs] were given the legal ability to sell excess capacity to a distributor to sell on the open market. As a brewer, Mr. Klein has the specific goal of seeing local beer produced and sold for local consumption. Ideally, he would like to see any brewery follow the example of the Alaskan Brewery. However, it is going to take more than raising the cap for a specific and special interest group. Barring returning to the level playing field, a framework exists. If the [law/framework] is going to be changed every time the brewpub expands or changes its business, the same problem will exist in that production breweries will [still] be prohibited from owning a bar or a restaurant while [brewpubs] can subsidize their breweries with the restaurant. Number 2355 MR. KLEIN turned to the question of where to go from here. He suggested that first, the committee should ask itself: "What are the goals of legislation governing the brewing industry?" He didn't foresee anyone arguing that a goal of brewery legislation should encourage the beer that is consumed in Alaska to be produced in Alaska. However, a system has been created such that it is an incredibly unfair playing field. Mr. Klein informed the committee that, in view of this cap, he is seriously considering purchasing a liquor license, although he is not [particularly interested] in selling liquor. Mr. Klein said that he doesn't really want to become a brewpub; however, he expressed the desire to have the ability to do so if he decided he wanted to have a tap room once he is selling beer nationwide. In conclusion, Mr. Klein reiterated that an unfair playing field exists and this exemption makes it more so. He said that Alaska has a good set of laws governing the on-premise sale of liquor in the state. With the exception of the four to six brewpubs, every bar, store and restaurant complies with those laws. Therefore, the other license holders are opposed to freeing the production of beer. He echoed earlier comments that the current brewpub legislation allows brewpubs to do everything. REPRESENTATIVE HALCRO asked if Mr. Klein sells kegs to retail outlets or restaurants. MR. KLEIN replied yes. He informed the committee that he has a total of 180 accounts from Talkeetna down to Homer. REPRESENTATIVE HALCRO inquired as to the average cost of a keg. TAPE 00-41, SIDE B [A portion of the exchange between Mr. Klein and Representative Halcro was not recorded as the tape reversed to Side B.] CHAIRMAN ROKEBERG interjected that Mr. Klein didn't have to answer [Representative Halcro's] question. MR. KLEIN answered that he is the most expensive beer, beer that is made in the Anchorage area, on the market. REPRESENTATIVE HALCRO referred to Mr. Hancock's testimony that he is competing for the same accounts that Mr. Klein is, but Mr. Hancock is sometimes having to walk away from accounts due to lower beer prices from the Lower 48. The example from Mr. Hancock's testimony was approximately $30 cheaper than what Mr. Hancock was willing to charge. Therefore, Mr. Hancock illustrates that he needs to make money on the beer sold to restaurants and they are not in a position "to take a hit." MR. KLEIN seemed to question the logic of [raising the cap] for this situation in which [these brewpubs claim they] are going to run out of beer in their own two establishments while selling beer to other establishments. To Representative Halcro's point, Mr. Klein agreed that it is a very competitive marketplace. He pointed out that part of the pricing is tied to the amount of beer that one makes. Although he agreed that Mr. Hancock may not have reduced his prices, Mr. Klein felt that the way the industry is set up, a brewpub has the ability to subsidize its beer sales through the profits of its restaurant. Mr. Klein offered to provide examples in which he has been bumped by other brewpubs giving away beer or selling it at half the cost of what they sell their beer in other markets. Mr. Klein remarked that Mr. Jones and Mr. Hancock are very responsible restauranteurs and do an admirable job of marketing their beer. However, the ways these laws are being manipulated doesn't correlate with the intent of the original law. Number 0128 REPRESENTATIVE HALCRO referred to another portion of Mr. Klein's letter, the portion referring to special legislation. He noted that he wasn't in the legislature in 1995 when the brewpub legislation was passed. However, Representative Halcro viewed it as a window of opportunity under which these folks built restaurants and breweries because they assumed that they would be able to grow their business under the terms of the brewpub law. CHAIRMAN ROKEBERG clarified that wasn't the brewpub law, it was the tavern law. The brewpubs were before that. REPRESENTATIVE HALCRO maintained his point that brewpubs were established as allowed by state law. MR. KLEIN interjected that his opposition to the current state of law began when that gap was closed; from that point forward, everything has been thrown into a conundrum and there became an unfair situation for businesses to compete. Therefore, he saw the solution as returning to the freedom to brew beer as it should be a goal of legislation to encourage local production of beer. Mr. Klein related his belief that the brewpub designation should be eliminated as well as the Tidehouse (ph) rule for local breweries. Therefore, if Ms. Larson wanted to start a restaurant, she would have to obtain a restaurant license and run that operation as a restaurant by the rules governing restaurants. He didn't believe too many people would argue against such a model and if they did, he believed it would be argued out of self-interest. Number 0252 MR. ANDERSON informed the committee that in 1999 450,000 barrels of beer or 900,000 kegs were sold in Alaska. He stated that the "super license" allowed him to sell 874 kegs of that 900,000. Therefore, less than three-tenths of one percent of total beer and keg sales was from the Glacier Brew House. He emphasized that this is such a minor issue. CHAIRMAN ROKEBERG noted that he has been independently involved in this issue for a number of years. He said that he agreed with everything everyone has said with the exception of dismantling the three-tier system. Chairman Rokeberg reiterated his belief that the solution to this is to eliminate the word "brewery" from the economic interest clause, which he announced would be one of his major goals. Chairman Rokeberg announced that HB 386 would held at this time.
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