August 8, 2019
The Philadelphia Inquirer
Eight groups representing wine and spirits producers from Canada, Europe, and New Zealand said the Pennsylvania Liquor Control Board’s ability to negotiate lower prices from suppliers and then decide on its own whether to pass any savings on to consumers violates international trade law.
As a “state-trading enterprise,” the PLCB must maintain “certain requisite levels of transparency” because markups by such enterprises are “no different than other government taxes or charges,” according to an Aug. 5 letter to Gov. Tom Wolf and other state officials, including the chairman of the state monopoly and its executive director.
“We understand the PLCB may believe it is easier to raise additional revenues for the citizens of Pennsylvania in secret, behind closed doors, but we believe such an approach is inconsistent with the operation of an open and fair market,” the letter said.
The PLCB uses its new “flexible-pricing” power, granted by a 2016 law, to negotiate privately with individual wine and spirits companies. Under the old system, the PLCB tacked a 30 percent markup onto whatever price the supplier agreed to. That mean suppliers and consumers — if they really cared — could know that the state agency was not picking winners and losers.
“We will review the letter,” said Wolf’s spokesperson, J.J. Abbott. “Gov. Wolf supports PLCB using its authority to get the best prices for Pennsylvania consumers.”
At a joint hearing in June on the pricing regimen before the House Liquor Control and the Senate Law and Justice Committees, PLCB Chairman Tim Holden touted the financial benefit of flexible pricing to the state’s coffers.
“You can see it in our revenue transfer. We were transferring anywhere between $80 and $100 million, and now we’re transferring $185 million,” he said, referring to the state-owned board’s annual contribution to Pennsylvania’s general fund. Officials said they expect higher profits to continue as long as they keep flexible pricing.
What’s not clear is how much of that extra money is coming out of the pockets of wine and spirits companies and how much from consumers, most of whom are also taxpayers.
In a statement Wednesday, the PLCB said: “Over the last three years since the PLCB was granted flexible pricing authority by Act 39 of 2016, we have been able to both maintain fair and competitive prices for consumers on a wide selection of products that deliver value, variety and quality, while growing profit and revenue to meet increased funding requests of the PLCB since Act 39 to balance the state budget. Our transparency and openness regarding our approach to flexible pricing is demonstrated by the annual reports and public testimony we’ve offered on the matter over the last three years, and we remain committed to productive and collaborative negotiations with suppliers regarding product cost and retail pricing.”
The group provided some examples of how the PLCB’s pricing practice violates trade law.
For example, “all imported spirits must be subject to the lowest PLCB markup applied on any U.S.-sourced spirit,” the letter said. Members of the World Trade Organization must “treat ‘like’ (e.g. spirit) imported products equally without regard to their origin," it said.
CJ Hélie, an executive vice president at Spirits Canada, one of the trade groups, said in an email that it was impossible to provide specific examples because “there is no transparency or visibility on the actual charges being applied.”
Asked whether the letter could be a prelude to legal action, Hélie said: "Our expectation is that now that Pennsylvania officials have been made aware that the PLCB’s “flexible pricing” model is inconsistent with international trade rules under the WTO agreements that corrective action will be taken.”
Hélie said the Liquor Control Board of Ontario backed off a similar policy in 2016, “when they realized it would run afoul of Canada’s (and Ontario’s) international trade obligations.”