States Increasing Production Caps for Microbreweries

Four Peaks Brewing Co. has grown over the last two decades from a historic red-brick microbrewery and restaurant into an Arizona staple that served nearly 1 million gallons of beer last year, including its popular Kilt Lifter ale.

The company has also become a mainstay in the corridors of the Arizona Legislature. Three times in the past 10 years, it has helped persuade lawmakers to change state law to increase a cap on beer production for microbreweries.

The increasing popularity of craft beer around the country has legislatures nationwide rewriting laws to accommodate microbreweries as they exceed production limits.

Arizona Republican Gov. Doug Ducey went to Four Peaks' original location in Tempe on Tuesday to sign a law that expands the caps, touting it as a business-friendly measure to assist the state's burgeoning craft beer industry.

"Arizona has a booming craft beer industry and it's growing every day. I want to ensure that it continues to thrive, unimpeded by overly burdensome regulations," Ducey said.

Americans' enthusiasm for microbrews reached new heights last year as craft brewers accounted for 11 percent of the U.S. beer market, according to the Brewers Association.

But the popularity has craft breweries bumping up against the country's longstanding three-tier system that governs the beer industry. It was designed to prevent mega breweries such as Anheuser-Busch from controlling beer production, distribution and retail sales at restaurants and stores. The three tiers consist of large breweries, distributors and microbreweries.

In many states, microbreweries can serve their beer at their locations and brewpubs, but lose that ability when they exceed production caps.

Several states including Arizona, North Dakota and Wyoming passed legislation allowing craft breweries to brew more beer, while Montana lawmakers defeated a similar measure. Other states have been revising laws to help the craft brewery business by removing restrictions on "growlers" - 72-ounce beer containers that people can refill and take home.

The laws are being rewritten because the craft brew business has grown so much that it is quickly exceeding the production caps.

The bill Ducey signed Tuesday strikes a compromise between producers and distributors: Microbreweries can keep up to seven retail locations and brew up to 6.2 million gallons of beer per year. After that, they'll have to give up their restaurants and apply for a producer license.

Distributors and producers agreed the compromise allows small breweries to flourish without taking power away from distributors.

"I think the state has been responsive to the growth of the micro-sector, whether it's beer, wine or distilleries and at the same time being careful to not eliminate the benefits of the three-tier system," said Don Isaacson, a lobbyist for wholesale wine and liquor distributors.

As craft breweries continue to grow around the country, Isaacson expects Arizona's new law will become model legislation for other states.

Rob Fullmer, executive director of the Arizona Craft Brewer's Guild, said the compromise will help bring more local and out-of-state breweries to the state.

"This was a win across the board not just for brewers but for Arizona. These are places where communities meet, these are jobs, these are bellwethers of how well the state and the neighborhoods are doing," Fullmer said.

Four Peaks is the only local brewery nearing the old limit of 1.2 million gallons.

"It basically raises the limit to an amount that we all agree on. We won't come back to the table and ask for more," said Jim Scussel, co-owner of Four Peaks.

Scussel said existing Arizona law prevented craft breweries such as Four Peaks from reaching their full potential. New breweries rely on restaurants to build their brand, gain exposure and sell beer at a rate that's profitable for the small amounts they're producing. If they go over the production cap, they can't keep their restaurants.

"At a restaurant you sell $4 or $5 pints. To make the numbers work, you need a restaurant," Scussel said. "That's why restaurants are vital to small breweries, just for that marketing and that revenue period."

Scussel said Four Peaks plans to use the new law to increase production and distribution within the state and then expand regionally.

"We want Arizona to be on the map for craft brewers," he said.