Health Committee on Sept. 12th, 2017

[Michael Hartman]

Yes.

Briefly, if I may say, before I turn it over to Washington, in 2014 we had a demand study that was issued and at the time it showed that 70% of the market demand in the State of Colorado was being supplied by the regulated marketplace. We are in the process of having that study updated. It should be issued here in the next few months. I anticipate that you will see a significant increase in what that percentage is. I don't have any data to support that; it's just a function of the anecdotal evidence I've seen in the marketplace.

[John Oliver, Liberal, Oakville, ON]

In Washington do you have any sense of the proportion of the black market that's been displaced?

[Rick Garza]

There are those who are reporting some of that information, but we have not looked at that.

We had assumed, after the first year, that we would be somewhere between 5% and 13% of the marketplace. Right now, at $1.3 billion in the third fiscal year, that's much larger than we anticipated. We'll be looking at that.

I would take a guess that we're maybe somewhere about 50% to 65% of the marketplace.

[John Oliver, Liberal, Oakville, ON]

Okay, thanks.

In terms of edibles, in the current drafting of the Canadian legislation these are not permitted as a legal substance. Part of the rationale for that was the lessons learned from Colorado, I think, that when you launched it there were problems with it. I think you referenced some of those and the lesson was to take it slowly and to deal with the truer products first before you get into the manufactured marijuana.

With the work you've done on this now, is there not a body of evidence or good public health information from your work in Colorado that Canada could borrow or lean on to properly license the use of edibles?

[Michael Hartman]

Yes, certainly I would say that we have a robust amount of data and learnings that we can and have shared with your regulatory infrastructure that's looking at rolling this out from the medical side to the recreational side. Anything that's available we'd be more than happy to collaborate with you on.

[Dr. Sam Kamin]

I think Colorado has definitely come up with some best practices, and Washington state as well. Resealable packaging, non-transparent packaging, with clear portion sizes and maximum THC per package markings on the individual pieces so they remain identifiable as marijuana even when they're outside of a package, all of those help mitigate the risks. It's for all of you to decide whether they mitigate them far enough that they ought to be permitted, but I think our experience and the American experience is certainly that we have learned how to mitigate those risks.

[Michael Hartman]

I think I'd add—

[John Oliver, Liberal, Oakville, ON]

Sorry, but I'm going to keep going along here, so thanks for that.

We heard this morning from our law enforcement that they don't feel they'll be ready to enforce the new laws as they come forward. It's more complex. There is federal and provincial...that are being brought to bear here.

In thinking back to your launch date, were there similar questions or issues with the law enforcement? Did they work their way through it, or did you have that all hand-in-glove before you launched?

[Michael Hartman]

My predecessors, Barb Brohl and Ron Kammerzell, who were very instrumental in the implementation of our architecture, used to refer to it as “we were flying the plane while we were building it”. That's unfortunate, but yes, it was done on a more accelerated timeline than we would have liked. It does present challenges, but you are able to work through them if you do it thoughtfully.

[John Oliver, Liberal, Oakville, ON]

Thanks.

Was it the same in Washington?

Do you remember, Mr. Garza?

[Rick Garza]

I think there was so much cynicism in our state with law enforcement because medical marijuana was unregulated that there were real concerns about whether this could be regulated and enforced. Again, I think the merging of medical and recreational that occurred last year has changed that dramatically, but we had two parallel marketplaces, one that was legal with a high rate of taxation and regulation, and one that was totally unregulated. We struggled with that for several years.

But to your point, I think law enforcement has struggled. I think one of the things we did, learning from Colorado, was to take our time. As everyone was screaming for us to issue licences, we took over a year to set our regulations in place.

It won't be just law enforcement, but all of the different government entities out there in the public who will—

[John Oliver, Liberal, Oakville, ON]

Thank you. I'm trying to sneak in one last question. I apologize for cutting you off here.

The last question I have is on pardons in cases in which there have been recent criminal charges for things that are now legal. Did you have a pardon practice in Colorado or Washington? I heard that a point system was applied in Washington to assess the severity of some of those criminal charges, but did you go through a pardon process after you enacted the law?

[Michael Hartman]

In the five weeks that I have been on the job, I have not seen any come across my desk. I don't know about prior to that.

Mr. Kamin may.

[Dr. Sam Kamin]

We don't have a pardon process. There was a process by which people could have their previous convictions overturned by a court.

I know we're short on time, but briefly, there's a problem with that, because we rely so heavily on plea bargains. Often the prosecutor will come in and say, yes, we let this person plead possession of less than an ounce or possession of less than six ounces. We don't, however, know that this is what in fact happened. There might also have been cocaine; there might have been a larger amount and we let them plea to a smaller amount. There has been push-back from prosecutors about undoing and unravelling prior convictions.

[Rick Garza]

It's similar in Washington.

[The Chair, Liberal, Bill Casey]

Okay, that completes our seven-minute round. Now we'll go to a five-minute round, and we're going to start with Mr. Webber.

[Len Webber, Conservative, Calgary Confederation, AB]

Thank you, Mr. Chair, and thank you to the presenters.

My first question is for our friend in Washington state, Mr. Garza.

Thank you for your information here on the sales and tax activity. I find it very interesting, especially the future projections of the tax revenue you will generate from the sale of cannabis. At a 37% excise tax rate, how do you compete with the black market, with that being as high as it is? How does your pricing compare with that of the illicit trade or black market? I've asked this before, but not of an American who actually deals with the product down in the States.

How, then, does your product compare, in both Washington state and Colorado, with the black market?

[Rick Garza]

What's interesting is that the excise tax applies to both medical and recreational cannabis, so we don't have the issue in Colorado, where people are sticking with the medical program, where they can easily get an authorization to use medical cannabis. It's of real concern when they merge the two together—at least for medical patients. They were concerned that the excise tax should not apply.

Now, they can receive an exception from the retail sales tax; that can be 7% to 10%. It's amazing, though, that we're down to about $7.48 a gram. When legalization occurred in 2011 and 2012, we believe that the black market cost in Washington was somewhere between $9 and $11 a gram. As soon as those prices fell to about $10 a gram in Washington about a year and a half ago, then we saw the sales occurring. What basically we believe happened is that once it hit the same price as the black market price—and at that time grey market for medical marijuana—there was no reason not to go to a retail store to purchase: it was being tested, as I said earlier; it had packaging and labelling.

We learned from Colorado about some of the issues they had around medicals. I didn't talk about this specifically, but 10 milligrams per serving, 100 milligrams, or for example, it even went further after their.... It went from 5 milligrams and 50 milligrams for a product.

But to address your question, I think the size of the marketplace now, at about $4 million a day in sales, suggests that those prices are equal to, if not lower than, the black market prices.

[A voice]

I was going to say, that has been our experience as well.

[Michael Hartman]

Yes, and I think the answer is economies of scale. While I'm here, my students are touring a Colorado grow facility of several hundred thousand square feet. They can achieve economies of scale there such that the concern now is whether the price is going to drop too low. Do we need to set a price floor because marijuana will be so cheap that export out of state or resale to youth is going to become a problem? Notwithstanding taxes, the price is still falling significantly.

[Len Webber, Conservative, Calgary Confederation, AB]

With the high regulatory environment, I just don't understand how the licensed producers can keep the price that low. With the overhead costs, the security, etc., how do they do it? The black market doesn't have to adhere to any of that.

[Dr. Sam Kamin]

It's like that joke: they do it in volume.

[Len Webber, Conservative, Calgary Confederation, AB]

Yes. Okay.

[Michael Hartman]

That's right. I think the black market runs significant legal risk associated with their operations that, candidly, if it were included into their pricing structure, would make their margins substantially lower than they are.

[Len Webber, Conservative, Calgary Confederation, AB]

Right.

Yes, sir?