AGRICULTURE

Legal marijuana adjusts to life as a heavily regulated industry

First in a three-part series.

OLYMPIA, Wash. -- Randy Simmons never expected he would become Washington's cannabis czar. He didn't even want the job.

The day after Washington state voters approved Initiative 502, Simmons, whose official title is deputy director of the state Liquor Control Board, was called into a staff meeting and asked if he wanted to oversee implementation of the new law, which legalized possession of marijuana for adults over 21.

"I said no," Simmons recalled during a recent interview in his office here. "About a week later, my boss said, 'You don't get to have that choice anymore, so you're going to be the implementation manager.'"

Thus began one of the most interesting experiments taking place in any state capital in the country.

"I do think it's appropriate to think of this as a truly unusual thing in the world of regulation," said Philip Wallach, a Brookings Institution fellow who has studied Washington's system, "to have a commodity and a type of commercial product like these are that just have been totally legally marginalized and all of a sudden gets brought into the aboveboard regulated mainstream."

The results of the experiment underway here and in Colorado -- where voters also passed a legalization referendum in 2012 -- could provide a road map if legalization spreads to other states, and eventually the federal government, as advocates hope.

"There is a desire to be regulated because that's what it means to have a legal product," said Dominic Corva, who founded the Center for Cannabis and Social Policy, a Seattle-based think tank that helps industry stakeholders navigate the new legal environment.

Washington's experiment is being especially closely watched because Simmons and his colleagues started with a clean slate, as opposed to Colorado, which more or less opened the doors of its already well-regulated medical market to all comers.

While Washington's rollout has not gone as smoothly as many hoped -- with a slow rulemaking and licensing process leading to severe supply shortages when recreational pot stores opened their doors this summer -- its deliberateness could pay dividends in the long run by establishing a replicable model for legalization in other states, and for other types of policymaking, as well.

I-502 required strict regulation of the recreational market and set up a system through which an official think tank, the Washington State Institute for Public Policy, will analyze the costs and benefits of the program, paid for out of the excise taxes collected. That type of built-in evaluation captures some "low-hanging fruit" that is too often missed in all types of state-level policymaking, said Wallach, who authored a recent paper on Washington's rollout.

"Sometimes, when we think about federal politics and OMB and OIRA ... it's easy to imagine that every policy must be studied to death," Wallach said, referring to the work of the federal Office of Management and Budget and Office of Information and Regulatory Affairs. "But I think that's not at all the case out in the states."

Taming the Wild West

While it was just this year that any adult could walk into a store and buy a couple of grams of weed or a pre-rolled joint, marijuana has been prevalent in large cities like Seattle for years, thanks to Washington's having been one of the first states to allow medical marijuana back in 1998. Medical dispensaries thrive in big cities with accepting local leaders and law enforcement officials, but they are very loosely regulated.

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The state Legislature in 2011 passed a robust medical marijuana law, but it was gutted by an extensive line-item veto from then-Gov. Chris Gregoire (D), who feared making federal criminals of state regulators, "which obviously is not a concern at this point in time," Simmons deadpans.

Still, some medical growers and dispensary owners saw early on that the Wild West atmosphere could not last forever and made an effort to demonstrate they could play by the rules like any other legitimate business.

"We called out to the people in the industry who wanted to live under regulation," said John Davis, owner of the Northwest Patient Resource Center, a medical dispensary in Seattle, and founder of the Coalition for Cannabis Standards and Ethics.

While the governor eliminated most of the 2011 law, she left a section that has come to be known as the "five commandments," which allowed dispensaries and growers to organize themselves as "collective gardens" authorized to grow cannabis for qualified patients. Still, enough people decided to flout even those limited rules, leaving Simmons and other state officials unwilling to look to the medical market as a base upon which to build.

The result has frustrated entrepreneurs like Alex Cooley and Will Denman, whose firm, Solstice, grows medical cannabis from a warehouse in Seattle's industrial Sodo neighborhood. When they decided to open their 9,000-square foot facility, they "wanted to go through as if it was regulated," Cooley recalled in a recent interview there.

That meant approaching the city of Seattle and asking what they needed to do to become a fully permitted grow site. The process was an arduous one that involved identifying an obscure, theretofore-unused part of the city code regulating "vertical farming," upgrading the electrical infrastructure, and otherwise retrofitting their 1927 warehouse and submitting to round after round of inspection from a variety of agencies.

They finally received a certificate of occupancy and all their necessary permits, and have been supplying medical dispensaries in Washington for the last year and a half. But none of the product grown in the retrofitted warehouse will make its way to the newly legal pot shop a few blocks away -- where a line of customers stretched around the building on a recent afternoon waiting to purchase pre-rolled joints or small bags of marijuana.

While it is one of the leading players in Seattle's thriving medical marijuana scene, Solstice was not given any special treatment as Washington state regulators began designing a system to make cannabis available to any adult over 21.

Each state a 'unique snowflake'

Washington and Colorado were the first to legalize recreational marijuana, and measures are on the ballot this fall in Alaska, Oregon and the District of Columbia. Additionally, 23 states and D.C. allow the use of medical marijuana, with new programs being developed in states like Illinois and Nevada.

While regulators in current and potentially future legal marijuana states keep in frequent contact, each jurisdiction is pursuing its own approach. Medical markets also are subject to varying degrees of regulation -- from the relatively hands-off approach of California to tight controls in New Jersey.

The patchwork of state rules, combined with continued federal classification of marijuana as a schedule one drug, has made it difficult for marijuana growers, processers and sellers to establish consistent best practices or expand their businesses across state lines.

"To this point, there is no state like another," said Cooley. "Each is their own unique snowflake."

Now full legalization is introducing some of the most robust regulatory requirements anyone in the industry has ever faced. And that is expected to tilt the legal playing field even further in the direction of established businesses able to afford the lobbyists and lawyers they'll need to help shape and interpret the new rules of the game.

"There's really only now that there's a class interest developing, or redeveloping, essentially," Corva said. "It's not the same as the black market, but you've got a lot of people who were thinking about going in by themselves, you know, just making it happen.

"But industries don't really develop like that; they develop by organizing," he adds. "The people that organize are the ones that control the industry, and they also get to shape policy."

The maturing regulatory state growing up around the industry will help determine who wins and who loses if legalization spreads as advocates hope.

On the black market, success in the marijuana business requires a combination of the botanical talent to produce high-quality plants and the cunning required to evade law enforcement and thieves. As medical marijuana spread, establishing something of a "gray market" in the process, the industry started to attract entrepreneurs with more traditional business backgrounds who began to reach out to state and local politicians and regulators in a bid for additional respect and relevance.

Storefront dispensaries or delivery services for medical marijuana patients -- many offering wide varieties of strains and edibles -- are available in eight states, according to weedmaps.com, an online directory. They are Arizona, California, Colorado, Michigan, Nevada, New Mexico, Oregon and Washington.

To be sure, there could be growing pains ahead for this young industry, but it remains to be seen whether they will be felt more acutely by its pioneers or the flood of newcomers hoping to strike it rich in what has been dubbed the "green rush."

"You have these different groups and a different philosophy of what it is they're trying to capture," Simmons said.

"For one group, this is a way of life, and it's been a way of life for a long time. The other group is, 'How much money can I make?'" he adds. "So at some point in time, those two ideologies will probably clash. They haven't yet because right now everyone is just trying to get functional."

At the same time, productive partnerships could emerge as each side realizes it has something the other needs, Simmons notes. The new investors can't match the old growers' knowledge of how to produce a great crop, but the old growers may not know how to manage a payroll or file quarterly tax payments.

In some states, strict requirements on how much money a prospective grower or retailer has in the bank could foster these types of partnerships. Medical marijuana regulations being drafted in Illinois, for example, require applicants who want to open grow facilities to pay a $25,000 fee and sign a $1.5 million bond.

"So you only have people in line who have big pockets -- these people who have excellent business prowess but don't know a lick about cannabis," said Denman, Solstice's president. "They want to connect with people who know cannabis."

Having the 2011 medical law in place would have made it much easier for Washington to allow existing medical growers and dispensaries to transition to the recreational market, as has happened in Colorado. Without it, existing growers are struggling with the transition when they already are making millions of dollars selling their product to medical dispensaries.

"They put some really difficult regulatory roadblocks for that transition from medical to 502, so we're actually right now lobbying with them to change the rules," said Boris Gorodnitsky, owner of New Leaf Enterprises. "It's going to cost us like [$1.5 million] to $2 million to transition because of the way things stand. If they change the rules a little bit, we can just switch over, just flip the switch."

Gorodnitsky says the state Liquor Control Board would require him to empty the New Leaf warehouse of its existing plants, and a new recreational facility would not be able to open only with plants that were already flowering and ready to harvest. That would effectively cost two to three months of production, leading to up to $2 million in lost revenue, he said. The company is leasing a third warehouse that is sitting empty, intended to be the site of New Leaf's recreational operation, but the timing of those plans depend at least in part on how successful the company's lobbying effort is.

"I told them this is why people hate the government, because it makes you do stupid things like move all your plants, then move them all back in the next day," Gorodnitsky said in an interview at the company's warehouse. "Can you give me one good reason why that's a good idea?"

Still, Gorodnitsky says he understands the difficulty the board had in having to start a market from scratch and believes its intentions are good, at least.

The Liquor Control Board was just one step in the process. Growers, processors and retailers also have varying levels of additional rules and regulations to grapple with from Washington's 39 counties and nearly 300 municipalities as well as other independent or quasi-regulatory agencies.

"A lot of these guys thought the hardest part was passing the first step of getting through the Liquor Control Board, but that was just the first step," said Joanne Todd, a spokeswoman for the Puget Sound Clean Air Agency, a regional regulatory body for a four-county area around Seattle.

For example, growers hoping to set up in a warehouse have to get an air permit to ensure their smell is controlled, Todd said, "just like anyone who has a business that could either pollute the air or have an odor nuisance."

Tomorrow: Recreational market drawing entrepreneurs.

Twitter: @nickjuliano | Email: njuliano@eenews.net

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