EXPLANATORY STATEMENT

 

Select Legislative Instrument 2006 No. 304

 

 

Issued by the authority of the Minister for Industry, Tourism and Resources

on behalf of the Treasurer

 

 

Trade Practices Act 1974

 

Trade Practices (Industry Codes - Oilcode) Regulations 2006

 

Section 51AE of the Trade Practices Act 1974 (the Act) provides that the Governor‑General may make regulations prescribing a mandatory industry code for the purposes of the Act.

The Regulations prescribe a mandatory industry code for the retail petroleum industry.  The Regulations form part of the Government’s Downstream Petroleum Reform Package which also involved the passage of the Petroleum Retail Legislation Repeal Bill 2006 (the Bill).  The Bill repealed the Petroleum Retail Marketing Sites Act 1980 (the Sites Act) and the Petroleum Retail Marketing Franchise Act 1980 (the Franchise Act).

The Sites Act restricted, via set quotas, the number of retail sites that the prescribed oil companies: Australian Petroleum Pty Ltd; BP Australia Holdings Limited; Mobil Oil Australia Limited; and Shell Australia Limited (the oil majors), could own or lease and operate either directly or on a commission agency basis.  The Sites Act operated concurrently with the Franchise Act, which set out the minimum terms and conditions for oil company franchisees.

The Regulations commenced upon repeal of the Sites Act and the Franchise Act and apply to all retail petroleum industry participants.  The Regulations were designed to remove restrictions on competition, promote industry certainty about the future, promote cultural change and improve sustainability.  This has created a more effective regulatory regime, giving all industry players the freedom to respond to changing conditions in the retail petroleum market without reducing levels of competition.

The Regulations:

·               establish standard contractual terms and conditions for wholesale supplier-fuel retailer re-selling agreements for both franchise and commission agency arrangements.  These standards build upon, and strengthen, relevant provisions in both the Franchise Act and the more general Trade Practices (Industry Codes — Franchising) Regulations 1998.  The regulations provide that tenure of existing fuel re-selling agreements will be honoured but all other contractual conditions will be expected to comply with the minimum standards established under the Regulations;

·               introduce a nationally consistent approach to terminal gate pricing (TGP) arrangements to improve transparency in wholesale pricing and allow access for all customers, including small businesses, to petroleum products at TGP, whilst not negating the ability of entities to negotiate individual supply agreements nor preventing the offering of discounts; and

·               establish an independent, downstream petroleum dispute resolution scheme including the appointment of a Dispute Resolution Adviser to provide the industry with a cost‑effective alternative to taking action in the courts.

The Regulations were developed following extensive consultation with industry, industry associations, consumer groups, State and Territory agencies and relevant Australian Government agencies.  The impact of the Regulations is considered in the Regulation Impact Statement (RIS) at Attachment A. 

Details of the Regulations are set out in Attachment B.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commenced on the commencement of Schedule 1 to the Petroleum Retail Legislation Repeal Act 2006.

 

 

 

ATTACHMENT A

REGULATION IMPACT STATEMENT

PETROLEUM RETAIL LEGISLATION REPEAL BILL 2006

 

1.         Introduction

The retail petroleum industry underpins many facets of the Australian economy, making a direct contribution to the economic growth of fuel intensive industries such as agriculture, mining, construction and transport[1].  Petroleum products comprise 52 per cent of Australia’s total final energy consumption and liquid petroleum fuels provide in excess of 93 per cent of Australia’s transport needs[2].  The industry also indirectly contributes to the wellbeing of all Australians, with a considerable contribution to national revenue, via a range of state and federal taxes, levied on petroleum products.  In 2003-04 the retail petroleum industry was expected to contribute almost $13 billion or 7 per cent of total revenue to governments[3].

In 2003-04 the industry generated revenue of $19.3 billion, provided around 39,000 direct jobs and paid over $697 million in wages.  During this period, the retail petroleum industry experienced growth in turnover of 4 per cent.  However, over the same period, the number of retail establishments fell 3 per cent to around 6,500, the number of enterprises reduced by 1 per cent and employment dropped by 2.5 per cent[4].  Business structures utilised by the industry are described in Box 1 and Figure 1. 

The rationalisation experienced by the retail networks in 2003-04 is symptomatic of ongoing structural change in the industry over the past few decades.  In 1970 there were over 20,000 retail petroleum sites around Australia, however, following the oil shocks of the 1970s and 1980s this number reduced to approximately 12,500 sites and has continued to decline to the current level. 

Market rationalisation is being driven by a range of issues including:

·      reductions in retailer margins, which have been driven by intense competition and exacerbated by the market entry of businesses whose structures are not constrained by the current downstream petroleum legislation;

·      a lack of national consistency and transparency in the regulations governing the wholesale and retail sectors of the petroleum market.  For example the disparity between states in terms of the mechanism to determine, and requirement to display, a terminal gate price (TGP) [5] for the spot sale of petroleum products from a wholesale facility; and

·      declining sectoral profitability caused by constrained global supply capacity.  The adverse effect of capacity constraints has been particularly noticeable following the introduction of the Fuel Quality Standards Act 2000, which will bring Australian fuel standards in line with global environmental best practice for motor fuels[6].

1.1        Legislative Environment

The structure of the industry is regulated by two interrelated, industry specific Acts, which supplement the Trade Practices Act 1974 (TPA): the Petroleum Retail Marketing Sites Act 1980 (Sites Act) and the Petroleum Retail Marketing Franchise Act 1980 (Franchise Act).  Whilst the TPA regulates the general competitive conduct of the industry, the Sites Act and the Franchise Act were designed specifically to counteract the dominance of the petrol retail market by the refiner/marketers and to encourage small business entry into the industry under franchise arrangements[7]. 

 

They were introduced in 1980 by the Australian Government (‘the Government’) following a number of failed attempts to get the industry to voluntarily address concerns regarding alleged unfair price discrimination, vertical integration and unfair leasing arrangements between the refiner/marketers and their lessee dealers (i.e. commission agents)[8]. 

The Government consulted with the Trade Practices Commission during the development of the Acts and concluded that despite the TPA, the Acts were necessary to correct the aforementioned alleged marketing practices, maintain fair competition and maintain a vigorous and effective small business sector for the long term competitiveness of the industry[9].

1.1.1       Petroleum Retail Marketing Sites Act 1980

The Sites Act limits the number of retail sites that the refiner/marketers (currently BP, Caltex, Mobil and Shell, who are collectively known as the ‘oil majors’ or the ‘refiner/marketers’) may own or lease and operate either directly or on a commission agency basis.  It is not applicable to any other entity operating in the industry. 

Figure 1. The distribution of business structures utilised in the petroleum retail market (Source: DITR 2005; AIP 2004)

 

The key objective of the Act was to limit the price setting activities of the vertically integrated oil majors by compelling these entities to use franchise arrangements at the majority of company-owned retail sites.  This move was considered to have had a secondary benefit of encouraging the entry of small businesses into the sector, as franchise arrangements, developed in accordance with the Franchise Act, provided certainty of tenure and clarity of rights for small business participants, a right not enjoyed by those operating under commission agency agreements[10].

The Sites Act aims to achieve its objective by setting a site quota for each prescribed oil company, which is based on the volume of fuel each company has the capacity to produce at their domestic refineries[11].  The Sites Act quota encourages the use of franchise operations within the industry, as sites subject to a franchise agreement are not reportable under the quota as they are not directly operated by the prescribed companies. 

Companies are required to report to the Government each month on any changes to the number of sites they are running in accordance with the Sites Act.  The Department of Industry, Tourism and Resources (DITR) has responsibility for managing this reporting requirement and monitoring compliance[12].

1.1.2       Petroleum Retail Marketing Franchise Act 1980

The Franchise Act sets out minimum terms and conditions, including duration, renewals and associated disclosure requirements for franchise agreements in the retail petroleum industry.  The Act operates concurrently with the Trade Practices (Industry Codes — Franchising) Regulations 1998 (Franchising Code of Conduct), which regulates all other franchising activities in Australia. 

The aim of the Franchise Act was to provide franchisees in the motor fuels industry with a level of certainty during negotiations with refiner/marketers and thus encourage the entry of small businesses into the retail petroleum market.  The Act applies only to entities trading under a supplier’s brand with a contractual relationship for the sale of petrol, which legally allows those entities to determine their own prices.  To be covered by the Act these sites must have a minimum sales volume of 30,000 litres of petrol per month and must not be subject to the Sites Act quota.

1.1.3       Impact of the Sites Act and the Franchise Act

In 1980 the Government considered the Acts to be in the public interest as they compelled the refiner/marketers to either give up many of their established retail sites or convert them into franchise operations.  This move was aimed at minimising the control the refiner/marketers could exert over petrol prices in the market and increasing the diversity of the market’s structure through small businesses’ participation[13]. 

Although the Franchise Act does not prevent all forms of price discrimination it does prevent the franchisor from discriminating between its franchisees in terms of fuel supply and any associated discounts, allowances, rebates or credits.  Exempted circumstances include those where the lower price can be justified in terms of a cost saving or if competition forces in either the supply or retail market dictate that price discrimination is necessary to meet competition[14].  Also, by providing certainty of tenure (nine years) and setting out the minimum acceptable disclosure requirements, the franchise arrangements were considered to encourage greater investment by the franchisee in the site than had previously existed. 

1.1.4       Trade Practices Act 1974

Like all Australian industries, the petroleum retail industry is also regulated by the TPA.  The Australian Competition and Consumer Commission (ACCC)[15], is responsible for monitoring and enforcing compliance with the TPA.  The most common public concerns raised with the ACCC in relation to the retail petroleum industry relate to allegations of fuel price fixing and collusive behaviour, with nearly 1,200 inquiries and complaints received during 2003-04[16]. 

Whilst most concerns are addressed by enhancing public knowledge on pricing and behavioural issues, several cases relating to anti-competitive behaviour, primarily price fixing, were brought against fuel retailers during that period[17].  As such, it is Section 46 (misuse of market power) and section 155 (ACCC information gathering powers) of the TPA that are most commonly considered when looking at the behavior of the industry.

Section 46 (misuse of market power)

Section 46 prohibits the misuse of market power by prohibiting a business that has a substantial degree of power in a market from taking advantage of that power for the purpose of:

• eliminating or substantially damaging a competitor;
• preventing the entry of a person into a market; and
• deterring or preventing a person from engaging in competitive conduct in any market.

Therefore a breach of Section 46 occurs when three things are shown:

• the corporation in question has a substantial degree of power in a market;
• the corporation has taken advantage of that power; and
• the corporation did so for a prohibited purpose.

Concerns about the industry often centre on the alleged use of ‘predatory pricing’ or ‘below-cost selling’ to undermine competitors in the market place.  Predatory pricing occurs when a company sets an unrealistically low price for a product for the purpose of forcing a competitor to withdraw from the market.  Whilst price cutting or underselling competitors is not necessarily predatory pricing, use of such techniques with clearly mercenary objectives by a business with substantial market power is considered by some to be a misuse of that market power.  To date no cases of predatory pricing in the retail petroleum industry have been proven.

Section 46 has been examined in a number of Government reviews, most recently, The Review of the Competition Provisions of the Trade Practices Act 1974 (the Dawson Review) and the 2004 Senate Economics Reference Committee (SERC) inquiry, The Effectiveness of the Trade Practices Act in Protecting Small Business.

The Dawson Review, released in April 2003, concluded that there was no need to amend section 46, as it already prohibited misuse of market power.  The Government accepted this recommendation, however several important TPA cases were considered after the Dawson Review delivered its report[18].  These cases provided the backdrop for the SERC inquiry, for which the Government built on the position it established in response to the Dawson Review, including the view that “the competition provisions [of the TPA] should not be regarded as a means of implementing an industry policy or the preservation of particular corporations that are not able to withstand competitive forces”, and concluded that section 46 should be amended[19].  These amendments will allow the courts to consider below-cost pricing and recoupment for consideration of misuse of market power[20].  The Bill to implement the Government's response to the SERC report is expected to be introduced into Parliament in 2006.

Section 155 (information gathering power)

Section 155 allows the ACCC to obtain information, documents and evidence when that information may not be voluntarily provided (this may be due to commercial or legal constraints on the entity under investigation rather than a deliberate desire to hinder an ACCC investigation).  To issue a notice under section 155, the ACCC must have reason to believe that a person is capable of furnishing information, producing documents or giving evidence relating to a matter that constitutes, or may constitute, a contravention of the TPA[21].

1.2        Industry Structure

At the time the Sites Act and the Franchise Act were enacted they were considered to be an appropriate response to limit the market dominance of the vertically integrated refiner/marketers and promote a viable small business sector[22].  However, structural change in the industry since the 1980s has decreased the ability of the Acts to achieve their original objectives. 

The number of refiner/marketers in the industry since the Acts were introduced has decreased from nine to four due to industry rationalisation.  This trend is also reflected in the retail sector where there has been significant rationalisation of retail sites in both the oil major and independent retail networks.  The ACCC has noted that whilst structural change is impacting on all market participants, access to fuel that meets national standards is expected to have a greater impact on the independent operators (both chains and small businesses) in the sector[23]. 

Historically, the independents have increased their market share by sourcing fuel supplies through independent imports at competitive prices.  A number of independent fuel importer/marketers entered the Australian market in response to an over supply of fuel in the Asia-Pacific region during the late 1980s to mid 1990s.  The business structure of the independent importer/marketers is not constrained by the Sites Act and the Franchise Act and as such, these entities tend to use commission agency arrangements to operate their sites (Box 1 above refers).  However, it is expected that difficulties in sourcing fuel that meets the new national fuel standards together with the expected shortfall of petrol in the Asia-Pacific region by 2006, are likely to make imports by independents into Australia less viable in the immediate future[24].

As the market became more competitive, with the entry of importer/marketers, the refiner/marketers were forced to adopt innovative responses to the marketing inefficiencies that the Acts placed on their business structures.  A key response was the implementation of multi-site franchising (MSF) arrangements.  Under MSF arrangements a single operator or company with a franchise arrangement with a refiner/marketer controls the operations of several sites[25].  The most notable example of this in the Australian market was the 2003 divestment of the Shell Company’s core retail site network to a subsidiary of the Coles Myer retail corporation under a franchise arrangement. 

The other major business structure that has emerged over the past decade is the alliance between some fuel retailers and supermarkets (Box 2 below refers).  These alliances are generally based on the premise that the supermarket is responsible for all aspects of the retail site, including setting fuel prices, whilst the wholesale supplier maintains fuel supplies to the site.  Customer loyalty is created through the practice of linking the sale of supermarket groceries (usually of greater value than $30) to a discount on the total cost of fuel (usually by four cents per litre) upon presentation of a receipt or “shopper docket”[26] (Box 3 below refers).  In a similar manner to multi-site franchisees, these alliances have the ability to operate with diminished margins, potentially absorbing short term losses through other facets of the alliance structure, such as grocery stores. 

As a result of these marketing strategies, around three-quarters of all retail sites in Australia are owned by or affiliated with the four refiner/marketers currently in the Australian market.  Their share of retail fuel sales is believed to amount to over 85 per cent of total sales[27].  These companies also dominate the domestic petroleum refining industry (Box 4 below refers) and wholesale market, although independent importer/wholesalers and smaller rural distributors maintain market share in most states[28].  Most metropolitan sites are operated by franchisees (single and multi-site) or independents (major-branded, own brand and chain).  The majority of service stations in rural areas are independents (major-branded, own brand and chain) supplied through distributors.  

 

 

 

2.         The Problem

The downstream petroleum industry has changed significantly since the introduction of the Sites Act and the Franchise Act in 1980.  Multi-site franchising, price support, the entry of large independent chains and changing costs structures have meant that the legislation is now an inappropriate tool for meeting the regulatory objectives of counteracting the market dominance of the refiner/marketers and to encouraging small business entry into the industry under franchise arrangements. 

In addition to failing to provide the means to meet their regulatory objectives, the Sites Act and the Franchise Act limit the ability of the refiner/marketers to compete vigorously with newer market entrants, such as the supermarkets and independent chains who are not similarly constrained.  By restraining freedom of choice in the selection of appropriate business models, the Acts are a barrier to competition in the petrol retail market and impose additional costs on the refiner/marketers, which are ultimately passed on to consumers. 

For small business operators in the industry there is considerable inequity with small business franchisees enjoying significant benefits while commission agents have no specific protections outside those provided by general law.  Unlike the Franchising Code of Conduct, the Franchise Act does not have an alternative to litigation to resolve disputes.  Legal costs associated with resolving disputes are prohibitive for the majority of commission agents and franchisees, especially when faced with the financial strength of the refiner/marketers and the importer/marketers.

In summary, the problem facing the industry is that the existing downstream petroleum legislation has failed to keep pace with changes in market structure.  It imposes additional costs on the refiner/marketers and acts as a barrier to competition, provides significant benefits to franchisees but not commission agents, and is preventing the industry from achieving increased efficiencies and responding to changing market forces.

2.1        Commission Agents

Commission agency arrangements (where the agent receives a commission on the number of litres of fuel sold but does not own the fuel) generally require a smaller up-front investment than franchise arrangements and there are no minimum requirements (such as tenure or disclosure) associated with such agreements.  As such this type of business structure allows the owner a degree of control over fuel prices and flexibility to respond quickly to changes in the market, allowing overheads to be minimised. Although the Sites Act allows the refiner/marketers to use commission agency arrangements (provided they remain within their quota limit) the larger independent market participants, such as the chains and the supermarkets, face no such restrictions.

Given the flexibility inherent in these agreements they have the potential to be more efficient than franchise arrangements[29].  As a result, the independent chains tend to have a significant influence on localised price cycles, particularly in major cities[30].  Due also to the large volume of fuel purchased, these entities can often obtain discounts from suppliers and as such have the capacity to lead market prices down.  Indeed the ACCC found that in general, it is the independent chains rather than the oil majors or their franchisees that lead market prices down.  By contrast, small independent operators (not associated with an oil major) tend to have less impact on the price cycle as they operate on a smaller scale and generally do not buy sufficient volumes of fuel to access discounts or influence price cycles.

It must be noted however, that commission agency agreements may place small business operators at a disadvantage, as without considerable business acumen it is challenging for the average small business operator[31] to effectively negotiate an equitable retail site occupancy agreement with a much larger independent chain[32]. 

2.2        Price Support

The move to compel the refiner/marketers to operate many of their company-owned or leased retail sites under franchise arrangements was designed to minimise their control over fuel prices.  However, as noted above, the Franchise Act does allow selective price support to occur under certain circumstances.  The ACCC has noted that such support may be used by the oil majors as a long-term strategy to maximise profit by controlling the price of fuel at franchise sites.  The ACCC also notes that such actions may also be used as mechanism to remove or limit competition[33].  

The 2001 ACCC discussion paper, Reducing Fuel Price Variability, found that the oil majors use price support schemes as a way to enable their franchisees to be competitive and/or to increase their influence over the pricing behaviour of retailers.  In general, price support takes the form of the oil majors guaranteeing a certain margin to their franchisee upon purchase of fuel.

Price support is given to franchisees selectively and is not available in all localities.  As some franchisees operate in very competitive areas, ongoing price support may be provided for long periods of time as these operations may not be viable without this assistance, especially during periods at the bottom of the price cycle[34]. 

2.3        Multi-Site Franchising

The other key objective of the Acts was to encourage the participation of small businesses in the retail market.  This objective has been undermined by the increased use of MSF arrangements, which generally cover more than two retail sites with each franchise operation representing a significant business in its own right.

MSF arrangements are an effective mechanism for the oil majors to minimise overheads and allow retail sites to compete more efficiently with the independent chains.  A number of the oil majors[35] have noted that multi-site franchising is the only way they can remain competitive in the market, with BP noting that following a poor profit result in 1997 it has little choice but to seek efficiencies or leave the Australian market[36]. 

The Australian Institute of Petroleum has noted that the advantages of multi-site franchising include:

·       the ability to spread franchise skills and resources better over the franchise network;

·       cost-saving to the franchisor, through a decreased requirement for liaison activities, compared to working with a large number of individual franchisees;

·       the ability for the franchisee to staff up specialist skills to service the multi-site franchise, thus improving the quality and competitiveness of the sites;

·       the ability for the franchisee to fine tune a network.  Sites in the multi-site franchise can be spread to meet particular local requirements, so that customer demands can be better serviced; and

·       advantages for the franchisee in efficiency in administration costs, improved purchasing power and starting flexibility[37].

Although acknowledging the efficiencies inherent in MSF arrangements, representatives of the smaller operators in the sector have noted that most MSFs are now of a size never contemplated and have called for them to be limited in size in order for small operators of service stations, whether franchisees or independent of the major oil companies, to hold a competitive position in retailing[38].

2.4        Terminal Gate Prices

The TGP is the price at which wholesale suppliers are prepared to sell full tanker loads (usually a minimum of 35,000 litres) of fuel to wholesale customers at seaboard terminals or refineries on a spot basis. The TGP is quoted for fuel only and includes no added services such as business support, freight, branding or credit.  Other than Western Australia (WA) and Victoria where TGP arrangements are mandated by law to a set formula, non regulated TGP arrangements are currently available on the websites of most refiner/marketers and some importer/marketers.  Non regulated TGPs are usually based on Singapore product price benchmarks (the regional exchange point for petroleum products) and include allowances for quality to meet Australian standards, freight to Australia, insurance and loss, wharfage and port charges, terminalling costs and return on investment and a wholesaling margin related to costs incurred up to the terminal gate. This import parity price calculation is then adjusted by a competitive factor that takes account of any terminal gate prices posted by competitors. TGPs are reviewed regularly and may change according to competitive forces[39].

The lack of national consistency in TGP arrangements means that there is inequity between fuel retailers and other wholesale customers across Australia in relation to the availability of information. Customers outside of WA and Victoria are at a comparative disadvantage as they are unable to make direct comparisons between the various TGPs on offer.  Further complicating this issue is that current delivery or invoice documentation for fuel purchasers does not typically include the TGP and additional fees for services such as brand, delivery or credit which makes comparisons by retailers between the various offers by wholesale suppliers, difficult or impossible.  This lack of information often leads to confusion amongst petrol retailers on the actual cost of the fuel on a cents per litre basis and the resultant uncertainty may adversely affect their competitive behaviour.

2.5        Dispute Resolution

Unlike the Franchising Code of Conduct, which provides access to a low-cost dispute resolution scheme, for example, the Office of the Mediation Advisor (OMA), neither the Sites Act nor the Franchise Act provide a dispute resolution mechanism for petroleum retail industry participants.  Franchisees in the industry do, very occasionally, take advantage of the services provided by the OMA[40].  Access to this service places franchisees at an advantage over commission agents and independent operators who have litigation as the only viable option for addressing alleged abuses of market power by the larger market participants.  As the cost of litigation is often beyond the means of many small businesses disputes may remain unresolved.

 

2.6        Summary Tables

Petroleum Retail Marketing Franchise Act 1980
Benefits	Costs	Neutral
Single-site franchisees & Multi-site franchisees -        sets out minimum requirements for franchise agreements -        provides certainty of tenure -        ensures appropriate level of disclosure occurs before agreement is entered into	Refiner/Marketers -        dictates minimum requirements for agreements, which may adversely impact on overheads -        dictates tenure of franchise agreements, which limits ability of site to respond in a timely manner to changes in the market	Independent Chains (inc supermarkets) Small Independent Operators Commission Agents -        no impact as business structure and contractual contents are not restricted

Table 1. Summary of impact of Franchise Act on market participants.

 

Petroleum Retail Marketing Sites Act 1980
Benefits	Costs	Neutral
Single-site franchisees & Multi-site franchisees -        Encourages use of this type of business structure	Refiner/Marketers -        Limits number of sites that can be directly owned and operated -        Forces use of franchising arrangements if refiner/marketers wish to extend retail network beyond Sites Act quota -        May cause inefficient business structures to be used, increasing overheads	Small Independent Operators -        business structure not restricted
Independent Chains (inc supermarkets) -        business structure not restricted like that of their major competitors	Commission Agents -        Restricts refiner/marketer use of this type of business structure

Table 2. Summary of impact of Sites Act on market participants.

3.         Objective

The Government’s objective is to address the regulatory failure that has resulted from the inequitable application of, and inefficiencies created by, the current legislation.  Specifically, the Government seeks to facilitate an equitable market environment for petroleum wholesale suppliers and retailers, whilst recognising the power imbalance inherent in the substantial interdependency between some small business operators and wholesale fuel suppliers, for example, entities operating under franchisees and commission agency agreements. 

In addition, the Government seeks to improve the operating environment for small business operators in the industry by providing access to an alternative dispute resolution mechanism and by increasing transparency in the wholesale market through a nationally consistent approach to TGP.

3.1        Related Government Policies

Reform of the legislative environment governing the downstream petroleum sector has been considered by the Government on a number of occasions since it was identified in the 1996 Coalition Party election commitments.  An overview of the development of the Government’s downstream retail petroleum reform policy is at Appendix A.

Most recently, in 2003 the Government considered the Downstream Petroleum Reform Package (‘the Reform Package’), which consisted of an industry code (the Oilcode) mandated under section 51AE of the TPA and repeal of the Sites Act and the Franchise Act.  This package focused on creating a uniform regulatory environment that offered:

·        no restrictions on the type of business structure used by the refiner/marketers or any other market participant;

·        minimum standards, including tenure and disclosure, for a wide range of contractual arrangements where a substantial degree of interdependency between a small business operator and wholesale fuel suppliers existed;

·        a national approach to declaring a TGP that will increase clarity for purchases of fuel at the terminal gate and supplement the state based regimes without creating an undue administrative burden for wholesale fuel suppliers; and

·        the establishment of a downstream petroleum dispute resolution scheme to allow market participants to address concerns in a low-cost environment. 

Although the Government decided against proceeding with the reform package in 2003, in April 2004 as part of its consideration of the Energy White Paper, Securing Australia’s Energy Future, the merit of reform in the retail petroleum industry was acknowledged and the Government noted that it would reconsider implementation of the Reform Package if and when industry consensus emerged. 

Subsequently, the Government’s 2004 election commitments included a commitment to continue to work with the downstream petroleum sector to achieve consensus on the introduction of an industry oil code[41].

Ongoing stakeholder consultation throughout 2005 has resulted in amendments to the Reform Package.  These amendments were designed to:

·        ensure that the tenure of pre-Oilcode franchise agreements would continue to apply until those agreements expired;

·        extend the tenure provisions for new franchise type agreements to nine years from the five years originally proposed (unless otherwise noted, commission agency arrangements would retain five years tenure under the Oilcode); and

·        ensure that the Dispute Resolution Advisor will liaise regularly with industry and relevant government authorities on issues relating to the retail petrol market.

These changes are consistent with the policy objectives of the Reform Package that was considered by the Government in 2004.  As such, the Reform Package has now been fully endorsed by the Government.

 

4.         Options

Since 1996 the Government has given consideration to a number of options to address inequities in the current retail petroleum legislative environment, including the introduction of a voluntary Oilcode, and both the progressive phasing out and strengthening of the existing legislation.

The replacement of existing legislation with a voluntary Oilcode was abandoned early in the Government’s deliberations on this issue as it had already been unsuccessfully trialled in the late 1980s.  Introduced in 1989, the voluntary Oilcode provided the industry with an alternative, low cost dispute resolution process for addressing issues, other than pricing[42], in relation to the Sites Act and the Franchise Act[43].  It did not replace the Acts but was considered to be an adjunct to them.

A 1997 review by the House of Representatives Standing Committee on Industry, Science and Technology concluded that most industry stakeholders believed that the voluntary Oilcode would need to be strengthened significantly before any consideration could be given to repealing the Sites Act and the Franchise Act.  However, moves to discuss amendments were stalled when the Motor Trades Association of Australia (MTAA), a key stakeholder representing many small business operators in the industry, withdrew its support[44].  The MTAA argued that without the legislative framework provided by the Franchise Act there could be no voluntary Oilcode, as self-regulation without some legislative backing would not be successful[45]. 

This conclusion was supported by the findings of the Standing Committee on Industry, Science and Resources investigation, Finding a balance: towards fair trading in Australia, which considered both the voluntary Oilcode and the Franchising Code of Practice (also a voluntary code) and concluded that self-regulation had not worked in the franchising industry because self-regulation did not provide a viable regulatory strategy when there was such a disparity in the powers of the parties[46]. 

Another proposal, put forward by the Senate Rural and Regional Affairs and Transport Legislation Committee, was that the Sites Act and the Franchise Act run in parallel with the introduction of a mandatory Oilcode for a two year phasing in period[47].  However, the Franchise Act cannot co-exist with the Oilcode as many of the provisions relating to the minimum standards for petrol re-selling agreements would be duplicated under such arrangements.  Contrary to the intent of the reform objectives, this would place an additional administrative burden on the refiner/marketers and would continue to constrain their ability to apply different business structures to individual operations at their discretion.

Consideration was also given to broadening the application of the Sites Act to include other operators, such as the importer/marketers and the supermarkets, under the quota system.  However, this would again be contrary to the intent of the reform objectives as it would increase the number of entities whose business operations were constrained by legislation. 

This statement considers three options to meet the Government’s objective for reform in the retail petroleum industry: a) maintaining the status quo; b) repealing the existing legislation and allowing the industry to function without industry specific regulations; and c) repealing the existing legislation and instituting an industry wide regulatory regime. 

4.1        Option A – no change to the current legislative environment

Maintenance of the current legislative environment will result in the refiner/marketers continuing to have their business structures restricted, whilst their competitors operate in a more flexible environment that allows them to immediately respond to changes in the structure of the market.

It would also see ongoing disparity in the conditions provided to franchisees and commission agents with the latter not being subject to any set minimum standards in relation to contract requirements and tenure.     

4.2        Option B – repeal the Sites Act and the Franchise Act

Repeal of the existing legislation would, for the first time in over 25 years, result in the business structure of all operators in the retail petroleum industry being regulated solely by general competition and corporations laws. 

Although the repeal of the Franchise Act would remove the industry specific minimum contractual requirements for this type of arrangement, these contracts would be regulated by the Trade Practices (Industry Codes — Franchising) Regulations 1998 (Franchising Code of Conduct), which is a mandated code under the TPA.  This legislation would not impact on any other sector of the industry.

4.3        Option C – repeal the Sites Act and the Franchise Act and introduce an industry code            mandated under the Trade Practices Act 1974

The Reform Package involves the introduction of a bill to repeal the Sites Act and the Franchise Act and the mandating of an industry code, the Trade Practices (Industry Codes - Oilcode) Regulations 2005 (the Oilcode), under section 51AE of the Trade Practices Act 1974. 

Development of the Reform Package option follows extensive consultation with industry, industry associations, consumer groups, state and territory agencies and relevant Australian Government portfolios. 

The final version of the Oilcode represents a compromise on behalf of industry stakeholders and will:

·      establish minimum standards for petrol re-selling agreements between retailers and their suppliers to provide a baseline for negotiations, including strengthening of provisions (similar to those in the Franchise Act and the Franchising Code of Conduct) dealing with pre-disclosure, variation, agreed early surrender and expiry procedures to provide greater certainty and protection for parties;

·      introduce a nationally consistent approach to terminal gate pricing (TGP) arrangements to improve transparency in wholesale pricing and allow access for all customers, including small businesses, to petroleum products at TGP, whilst not negating the ability of entities to negotiate individual supply agreements nor preventing the offering of discounts; and

·      establish an independent downstream petroleum dispute resolution scheme and appoint a Dispute Resolution Adviser, to provide the industry with an ongoing cost-effective dispute resolution mechanism.

5. Impact Analysis

Any change in the retail petroleum legislative regime has the potential to directly impact on the business operations of both large and small businesses in the industry.  It would also affect the responsibilities of Government agencies charged with administering legislation in relation to the industry, in particular the ACCC and the DITR.  Change that has the potential to impact on the structure of the retail petroleum industry may also indirectly impact on consumers, in particular, various road transport users and related industries. 

The following analysis considers the impact in terms of costs and benefits for the identified groups with respect to all options.  Quantitative data is not available for this analysis as no independent collection of this type of data occurs in Australia but a qualitative assessment has been conducted.

5.1        Option A – No change to the current legislative environment

5.1.1       Refiner/Marketers

Maintenance of the current regime would see the refiner/marketers continuing to have their business structures bound by legislated requirements, placing them at a disadvantage compared to other industry participants.  They would continue to be subject to ongoing reporting requirements under the Sites Act, which is monitored by the Australian Government.  A number of refiner/marketers have estimated that ongoing compliance costs associated with the Sites Act are approximately $200,000 per annum. 

In an effort to remain competitive with unconstrained retail participants, the refiner/marketers would undoubtedly continue to seek mechanisms to minimise the impact of the current legislation on their business structures with a view to maximising profit margins.  This may be achieved through the further utilisation of multi-site franchising arrangements or a continued emphasis on alliances with groups that are not constrained by the legislation, such as supermarket chains. 

Ultimately some oil majors may seek to remove themselves from the retail market altogether, maintaining their domestic refining capacity and exerting a retail presence through the establishment of high volume off-take agreements with networks that are owned and operated by entities not captured or constrained by the current legislation (similar to the current supermarket-oil major alliances)[48]. 

5.1.2       Importer/Marketers and Supermarkets

The business structures and activities of the importer/marketers and supermarkets would continue to be unrestrained by legislation.  As a result, these sections of the market would be able to respond in a much more efficient manner to changes in the market structure.

5.1.3       Franchisees

The present legislative arrangements offer minimum standards in relation to contract requirements and tenure for small businesses operating under franchise agreements, including nine years tenure for retail sites.  Franchisees would continue to enjoy these rights.

Franchisees may also access the services of the OMA that was established under the Franchising Code of Conduct, to formally address disputes with suppliers (both the oil majors and the independent wholesalers). 

5.1.4       Commission Agents 

Entities operating under commission agency arrangements have no set minimum standards in relation to contract requirements and tenure.  Under current arrangements these entities remain vulnerable to the commercial decisions of the retail site owners (generally the refiner/marketers, importer/marketers or the supermarkets) and their contractual arrangements may be terminated with minimal notice and little justification.

Unlike franchisees, who may access the services of the OMA, commission agents may only seek to formally address disputes with fuel suppliers through the legal system.  The high cost associated with this type of litigation usually prevents smaller market participants from challenging perceived injustices. 

5.1.5       Small Independents

Small independent retailers in the industry tend to be located in rural and regional areas.  As they generally source their fuel from local fuel suppliers, either refiner/marketer or importer/marketer, the key issue facing this sector of the industry under the current legislative arrangements is access to standardised information regarding the price at which each fuel supplier sells its petroleum based products (TGP)[49].  Under the current regime there is no consistent mechanism for determining the TGP or for posting that information for the market to assess.  The lack of clarity can mean smaller operators often do not have adequate information with which to determine the most economically viable price for spot purchases of fuel products, hindering their ability to make the most effective purchase decisions.

5.1.6       Government

The industry portfolio administers the Sites Act.  This involves monitoring the application and adherence to the Acts at a cost of approximately $100,000 per annum.  Maintaining the current legislative arrangements will impose no additional cost on Government.

5.1.7       Consumers

With no change to the legislative environment, industry consolidation and structural change to facilitate more economically viable profit margins is inevitable.  The impact this is likely to have on competition and in particular on petrol prices at the pump is the key issue for consumers.  

In the short term, ongoing intense retail competition, aided by the oil majors’ practice of selective price support schemes, which allows price flexibility for franchisees, will maintain competitive petrol prices.  However, the ongoing use of inefficient business models by some in the industry may be to the detriment of consumers to whom the higher overhead costs are passed on through the price of petrol. 

Also, for many retailers, extended periods at the bottom of the price cycle are not sustainable and may lead to a decline in the number of retailers in the market.  However, rationalisation has been occurring in the Australian market since the 1980s and there has been little evidence that this has adversely impacted on price competition.  International evidence also suggests that over the long term the combination of rationalisation and the entry of supermarkets to the market have only a minimal effect on petrol prices at the pump[50].  Indeed, following the entry of supermarket retailers and significant market restructuring over the past decade, the United Kingdom (UK) still has the third lowest pre-tax petrol prices in the Organisation of Economic Cooperation and Development[51].  In addition, owner-retailers and small independents still operate a large proportion of UK retail sites albeit at lower levels than before the supermarkets entered the sector[52]. 

5.1.8 Summary

The current legislative environment does not constrain the business structures of the importer/markers and supermarkets.  This provides them with a competitive advantage over their main competitors, the refiner/marketers.  The disparity in operating regimes forces the refiner/marketers to seek alternative mechanisms to remain competitive, such as the use of multi-site franchising and implementation of price support schemes.  The current regime also facilitates inequities between small businesses that operate retail sites on behalf of the fuel suppliers (refiner/marketers and importer/markers) as franchisees and commission agents.  The inequities created by the current regime increase costs for those sections of the market that are constrained and increased overheads are passed onto the consumer in the form of higher prices.  Overall, Option A, maintenance of the current legislative regime, is considered to apply a net cost to the community.

Option A – no change to the current legislative environment
Benefits to Refiner/Marketers	Costs to Refiner/Marketers
·       Nil	·       Lack of flexibility in operating structure of retail sites which has potential to hinder efficiencies and restrict response to changes in the market structure ·       Ongoing compliance reporting requirements at a cost of approximately $200,000 per annum
Benefits to Importer/Marketers & Supermarkets	Costs to Importer/Marketers& Supermarkets
·       Fully flexible operating structures allow immediate response to changes in the market structure	·       Nil
Benefits to Franchisees	Costs to Franchisees
·       Petroleum Retail Marketing Franchise Act 1980 sets out minimum requirements for franchise agreements; provides surety of tenure and ensures appropriate level of disclosure occurs before agreements are entered into. ·       Access to alternative dispute resolution service	·       Use of multi-site franchising has minimised the entry of small businesses into the industry through franchise agreements
Benefits to Commission Agents	Costs to Commission Agents
·       Nil	·       No guaranteed certainty of tenure or set minimum standards in relation to contracts requirements
Benefits to Small Independent Operators	Costs to Small Independent Operators
·       Nil	·       No transparency in TGP can hinder ability to determine most cost effective fuel purchase
Benefits to Government	Costs to Government
·       Nil	·       Ongoing compliance monitoring costs associated with the Petroleum Retail Marketing Sites Act 1980 at a cost of approximately $100,000 per annum
Benefits to Consumers	Costs to Consumers
·       Nil	·       Costs associated with structural inefficiencies in the refiner/marketer networks are passed onto consumers ·       Potential reduction in competition if a refiner/marketer chooses to exit the market

 Table 3. Summary of the Costs and Benefits to Stakeholders under Option A

5.2        Option B – Repeal of the Sites Act and the Franchise Act

5.2.1       Refiner/Marketers

Repeal of the Sites Act and the Franchise Act would remove a market distortion that places restrictions on the business structures utilised by the refiner/marketers and adversely impacts on their ability to operate efficiently in the market.  As current franchise agreements expire, refiner/marketers would have greater flexibility to select the most appropriate business model to allow them to maximise efficiencies at individual retail sites.  The degree to which the refiner/marketers may choose to take advantage of this flexibility has not been measured as this would be a commercial decision for individual companies based on market realities.

Repeal of the Sites Act would also remove the cost of compliance reporting to Government that is incurred by the refiner/marketers.  This is estimated to cost each company approximately $200,000 per annum. 

5.2.2       Importer/Marketers and Supermarkets

Repeal of these Acts would have no direct impact on the importer/marketers or the supermarkets, as these entities are not captured by the Sites Act and the Franchise Act and their structure is already regulated by general competition and corporations laws, such as the TPA.  However, indirectly the repeal of the Acts may result in these entities facing greater competition in localised markets as their key competitors, the refiner/marketers, would have more flexibility with which to respond to market changes.

5.2.3       Franchisees

As noted above, upon repeal of the current regime the refiner/marketers may re-assess the use of franchise arrangements at some or all of their retail sites.  As a result of these reviews, some franchise arrangements may be converted to alternative business structures, such as commission agency arrangements, at the conclusion of their existing tenure arrangements.  The rights of those franchisees remaining in the industry would be limited to those specified under the Franchising Code of Conduct[53].  Franchisees would still have access to the dispute resolution services of the OMA.  

5.2.4       Commission Agents 

Repeal of these Acts would have no impact on existing commission agents, as they are not affected by the Sites Act and the Franchise Act.  As these agreements are less prescriptive than franchise arrangements, and contain no specified tenure requirements, there is a high probability that some franchise arrangements would, at the conclusion of existing arrangements, be converted to commission agency arrangements. 

As noted in Section 5.1.4, commission agents do not have access to any dedicated alternative dispute resolution scheme.  Anecdotal evidence suggests that resolution of issues through the legal system is costly and as such, concerns of many commission agents regarding these contracts often remain unresolved.

5.2.5       Small Independents

Like commission agents, the repeal of these Acts would have no structural impact on small independent operators in the industry.  However, as noted in Section 5.1.5, the ongoing lack of transparency in relation to fuel suppliers determining and posting a TGP would continue to adversely impact on the ability of small business operators to determine the most economically viable price for spot purchases of fuel products. 

5.2.6       Government

Repeal of the Acts would remove compliance monitoring responsibility from the industry portfolio.  This is estimated to cost $100,000 per annum. 

The ACCC has responsibility for general compliance with the TPA, and would continue to monitor competitive behaviour in the industry.  The level of monitoring required is difficult to gauge at this time but would conceivably increase in the short-term as the industry adjusted to a more liberal legislative regime.

5.2.7       Consumers

The increased flexibility in the application of business models could result in improved operational efficiencies for the refiner/marketers, reducing overheads.  Such arrangements may lead to greater competition in the retail market as companies would have an increased capacity to respond quickly to changes in local competition.

However, as noted above, prolonged periods at the bottom of the price cycle are not sustainable for many operators and such activities could lead to a decline in the number of operators in the market.  Whilst the impact of such rationalisation on competition is difficult to predict, international evidence suggests that petrol prices at the pump tend to remain competitive in the wake of rationalisation and changing market structure[54].  

5.2.8 Summary

By allowing the entire industry to operate under general competition and corporations law, this option would increase the flexibility in the structure of all retail networks and increase market equity.  It would allow the refiner/marketers to implement market structures that could respond efficiently to changes in local markets, potentially increasing competition.  Although the number of small businesses operating under franchise agreements may diminish, those that remained would continue to receive protection of their rights through the Franchising Code of Conduct.  By comparison, small businesses operating under commission agency agreements would continue to be at a comparative disadvantage to franchisees in their dealings with fuel suppliers.  In addition, unlike franchisees, commission agents and independent operators would have no avenue apart from the courts through which to address perceived inadequacies in their dealings with fuel suppliers. 

Option B delivers some net economic benefits to the community by creating an equitable environment for fuel suppliers to operate within.  However, noting the market imbalance between fuel suppliers and small business retailers in the industry, the inability of this regime to provide standards for the interaction between small business operators and fuel suppliers could cause inefficiencies for small business operators resulting in increased overheads, the cost of which may be passed onto consumers.

 

Option B – repeal the Sites Act and the Franchise Act
Benefits to Refiner/Marketers	Costs to Refiner/Marketers
·       Fully flexible operating structures allow immediate response to changes in the market structure ·       Save approximately $200,000 per annum that was associated with compliance reporting under Sites Act	·       Nil
Benefits to Importer/Marketers & Supermarkets	Costs to Importer/Marketers& Supermarkets
·       Fully flexible operating structures allow immediate response to changes in the market structure	·       Potential for greater competition from refiner/marketers
Benefits to Franchisees	Costs to Franchisees
·       Franchise arrangements would be subject to the Franchising Code of Conduct, which sets out some general requirements for franchise agreements ·       Would retain access to a low cost alternative dispute resolution service	·       Use of multi-site franchising has minimised the entry of small businesses into the industry through franchise agreements
Benefits to Commission Agents	Costs to Commission Agents
·       Nil	·       No guaranteed certainty of tenure or set minimum standards in relation to contracts requirements
Benefits to Small Independent Operators	Costs to Small Independent Operators
·       Nil	·       No transparency in TGP can hinder ability to receive best price of fuel purchases
Benefits to Government	Costs to Government
·       Save approximately $100,000 per annum in monitoring compliance with the Sites Act	·       Possible short term increase in ACCC industry monitoring costs
Benefits to Consumers	Costs to Consumers
·       Increase flexibility in the structure of refiner/marketer networks should decrease inefficiencies and associated overheads that may have been passed onto consumers	·       Nil

Table 4. Summary of the Costs and Benefits to Stakeholders under Option B

 

5.3        Option C – Repeal the Sites Act and the Franchise Act and regulate industry conduct
            through the introduction of an industry code mandated under Section 51AE of the
            Trade Practices Act 1974 

As the impact of repealing the Sites Act and the Franchise Act is considered in Option B, this section will focus primarily on the impact of replacing the Acts with a mandatory industry code, the Trade Practices (Industry Codes - Oilcode) Regulations 2005, under section 51AE of the TPA.  The Oilcode will:

·      establish minimum standards for petrol re-selling agreements between retailers and their suppliers to provide a baseline for negotiations, including strengthening of provisions (similar to those in the Franchise Act and the Franchising Code of Conduct) dealing with pre-disclosure, variation, agreed early surrender and expiry procedures to provide greater certainty and protection for parties;

·      introduce a nationally consistent approach to TGP arrangements to improve transparency in wholesale pricing and allow access for all customers, including small businesses, to petroleum products at TGP, whilst not negating the ability of entities to negotiate individual supply agreements nor preventing the offering of discounts; and

·      establish an independent downstream petroleum dispute resolution scheme and appoint a Dispute Resolution Adviser, to provide the industry with an ongoing cost-effective dispute resolution mechanism.

5.3.1       Refiner/Marketers

As outlined previously, by removing the constraints on the refiner/marketers’ ability to apply the most appropriate business model to individual retail sites, the repeal of the Sites Act and the Franchise Act will increase the flexibility and response time of these entities to changes in the market.  This flexibility will not be adversely impacted by the introduction of the Oilcode, which will apply minimum standards, including tenure for all fuel re-selling agreements where there is a substantial interdependency between the retailer and fuel supplier, for example, most franchise and commission agency agreements. 

There may be an initial increase in the administrative burden on refiner/marketers in relation to establishing new agreements under an Oilcode regime (tenure of on-foot contracts is honoured under Oilcode).  However, once systems are in place to comply with the regulations, this cost is not expected to be any different from the existing administrative burden associated with administering existing fuel supply contracts.  Noting the establishment of tenure for commission agents under Oilcode, the administrative burden on refiner/marketers may actually decrease as this type of contract would potentially be subject to fewer reviews and renewals than at present.   

Refiner/marketers would also be required to comply with the TGP arrangements prescribed in the Oilcode.  Once this system is established it is not expected to create an additional burden as the majority of refiner/marketers already maintain and publicly post a TGP for use by wholesale fuel buyers.

5.3.2       Importer/Marketers and Supermarkets

With the introduction of the Oilcode the importer/marketers and supermarkets will be subject to retail petroleum industry specific regulation for the first time.  The burden of this regulation will be light, requiring the importer/marketers to adopt a minimum set of conditions and requirements into any fuel re-selling agreements they enter into.

Importer/marketers would also be required to provide greater transparency in relation to their TGP arrangements, which may result in an initial compliance cost.  Once established these systems would be expected to have only minimal ongoing costs associated with them.    

5.3.3       Franchisees

The Oilcode extends the minimum contractual requirements set by the Franchise Act and Franchising Code of Conduct and maintains nine year tenure arrangements for franchise-type arrangements.  It also establishes a dedicated industry dispute resolution service.  These initiatives will provide franchisees with more effective and transparent contractual arrangements and low cost mechanisms through which to resolve disputes.

5.3.4       Commission Agents 

The Oilcode is particularly beneficial for businesses operating under commission agency-type arrangements, where there is a substantial up-front investment by the retailer in the site.  These entities were not previously entitled to any certainty of tenure nor were their fuel suppliers required to uphold any minimum set of contractual requirements. 

Whilst there are not expected to be significant transitional or ongoing costs for small businesses operating under commission agency arrangements, there is an optional requirement to seek legal and financial assistance during fuel reselling agreement negotiations.

The establishment of the dispute resolution service, which seeks to encourage market participants to resolve disputes through mediation without resorting to legal action, will provide all market participants with a low-cost alternative to taking action in the courts.  It will provide small businesses with an economically viable avenue to address concerns with fuel-reselling agreements and other issues in relation to the Oilcode.  In the event that mediation is unsuccessful, commission agents, like all industry participants, will still be able to pursue standard means of dispute resolution, such as litigation.

5.3.5       Small Independents

For business models that do not utilise fuel re-selling agreements (many small independent operators own their own site and operate under supply-only or supply plus brand agreements with refiner/marketers or importer/marketers), the greater transparency in TGP arrangements prescribed under Oilcode will provide increased certainty as to the spot sales price of declared petroleum products, whilst not restricting the rights of entities to negotiate other arrangements should they wish. 

The Oilcode TGP arrangements do not require all wholesale sales to be made at a TGP price.  If both parties to a sale wish to negotiate a price on another basis, they are free to do so.  The Oilcode only requires that all purchasers be given the option to purchase declared petroleum products at a TGP-based price provided this option does not disadvantage the wholesale supplier[55]. 

5.3.6       Government

As the Oilcode will be a mandatory code under the TPA, the ACCC would assume primary responsibility for enforcement of the Oilcode and in educating market participants about rights and responsibilities.  The dispute resolution scheme would be established and administered by DITR on an outsourced basis. 

The funding required to implement the Oilcode is $11.8 million over a four year period, with an ongoing funding requirement of $3 million a year thereafter.  This funding would be shared between the ACCC and DITR. 

5.3.7       Consumers

As noted under Option A and Option B, rationalisation in this industry will occur regardless of changes to the current legislative regime.  However, the introduction of the Oilcode, with its minimum contractual requirements and greater transparency in TGP, will ensure that small business operators retain a competitive role in the industry.   

Although the introduction of more prescriptive requirements for fuel re-selling agreements is expected to create a slight initial administrative burden for fuel suppliers, the long-term impact this may have on overheads is expected to be mitigated by an increase in competition (that will flow from the refiner/marketers being able to apply more flexible business structures to their networks).

The establishment of a national mechanism to determine TGP will also provide consumers with greater transparency regarding the cost at which fuel is purchased from wholesale fuel suppliers.  This will allow more effective identification of price anomalies at the petrol pump.     

5.3.8       Summary

The Reform Package will achieve the Government’s objectives as it would allow all retail petroleum suppliers and retailers to choose the most appropriate business structure for individual operations.  The introduction of a nationally consistent approach to TGP arrangements will provide small businesses with greater clarity in their dealings with fuel suppliers.  Similarly, the dispute resolution service will provide the industry with a low-cost alternative to taking action in the courts, an option which is often beyond the financial capacity of many small businesses in the industry.  The Dispute Resolution Adviser will also liaise regularly with industry and relevant government authorities on issues relating to the retail petrol market.

When considered in the context of the enhancement of the minimal contractual requirements for franchise agreements, combined with the broader application of these minimal requirements to both franchise agreements and commission agency agreements (where there is a substantial investment in the site by the retailer), these initiatives will increase competition in the market whilst ensuring that smaller operators retain protection from the market power of wholesale fuel suppliers.  On balance, Option C will deliver net economic benefits to the community and these benefits are considered to be greater than those available under Option B.

 

 

Option C – repeal the Sites Act and the Franchise Act and implement Oilcode
Benefits to Refiner/Marketers	Costs to Refiner/Marketers
·       Fully flexible operating structures allow immediate response to changes in the market structure ·       Save approximately $200,000 per annum that was associated with compliance reporting under Sites Act	·       Mechanisms in place to provide greater transparency in TGP ·       Commission agents are required to have 5 years tenure and set minimum contractual requirements
Benefits to Importer/Marketers & Supermarkets	Costs to Importer/Marketers & Supermarkets
·       Fully flexible operating structures allow immediate response to changes in the market structure	·       Requirement to comply with TGP arrangements for fuel wholesale suppliers ·       Requirement to apply set minimum standards to fuel re-selling agreements ·       Potential for greater competition from refiner/marketers
Benefits to Franchisees	Costs to Franchisees
·       Fuel re-selling arrangements extend the minimum contractual requirements set by the Franchise Act and Franchising Code of Conduct and maintain nine years tenure. ·       Would retain access to a low cost alternative dispute resolution service	·       Requirement to seek legal and financial advice prior to entering into a fuel re-selling agreement (may be waived) ·       Use of multi-site franchising has minimised the entry of small businesses into the industry through franchise agreements
Benefits to Commission Agents	Costs to Commission Agents
·       Fuel re-selling arrangements would apply to operations where there is an up-front investment greater than $20,000 by the agent. ·       Fuel re-selling arrangements would extend the minimum contractual requirements set by the Franchise Act and Franchising Code of Conduct and provide 5 year tenure. ·       Would receive access to a low cost alternative dispute resolution service	·       Requirement to seek legal and financial advice prior to entering into a fuel re-selling agreement (may be waived)
Benefits to Small Independent Operators	Costs to Small Independent Operators
·       Would receive access to a low cost alternative dispute resolution service ·       Would have certainty of TGP during fuel purchases increasing ability to receive best price	·       Nil
Benefits to Government	Costs to Government
·       Save approximately $100,000 per annum in monitoring compliance with the Sites Act	·       Establishment and ongoing administration of the Dispute Resolution Service (DITR) ·       Undertake education and awareness campaign in relation to Oilcode (DITR and ACCC) ·       Monitor and enforce compliance with the Oilcode (ACCC)
Benefits to Consumers	Costs to Consumers
·       Increased flexibility in the structure of refiner/marketer networks should decrease inefficiencies and associated overheads that may have been passed onto consumers	·       Ongoing rationalisation may reduce the number of retail sites

Table 5. Summary of the Costs and Benefits to Stakeholders under Option C

 

6. Consultation

Consultation with the industry on reform in the retail petroleum sector has been an iterative process over the past decade. 

Straight repeal of the Sites Act and the Franchise Act has been debated on many occasions.  However, it is not considered to be a tenable option to some industry stakeholders as it would leave small independent operators, especially franchisees, in a more vulnerable position than allowed for under the existing legislation.  As such, the Reform Package has been proposed as a compromise position.  The Petroleum Retail Legislation Repeal Bill is a key component of the Reform Package and is the result of an extended period of industry-government consultation and negotiation (refer Appendix A).  The development process for the 2005 iteration of the Reform Package commenced with the release of the Downstream Petroleum Industry Framework in 2002[56]. 

The Framework evolved from over 12 months of public consultation and government review, including a number of Petroleum Industry Forums.  These forums gave key industry associations an opportunity to articulate member priorities, clarify key issues and assist in developing informed policy for the downstream petroleum industry.

The resultant Framework proposed a range of options to address the impact of refinery over-capacity, the trend towards multi-site franchising, the entry of new market players and the inability of existing legislation to evolve with the changing market structure.  It provided the basis for subsequent negotiations to develop the draft Oilcode that was presented to industry in late 2003.

The 2003 draft of the Oilcode was considered by the Government in late 2003.  The Government decided against proceeding with the Reform Package at that time because it was unable to reach industry consensus due to the rapidly changing market structure.  However the merit of sectoral reform was acknowledged and the Government noted that it would reconsider implementation of the Reform Package along the lines of the 2003 Oilcode if and when industry consensus emerged.

Since late 2004, the Government has undertaken an extensive consultation process, working with a number of stakeholders to clarify the application of several provisions in the Oilcode.  This consultation has included bi-lateral meetings with all parties, along with an industry roundtable, which provided a forum to address many outstanding concerns expressed by industry.  The outcome of these meetings has been several amendments to the Oilcode to increase clarity.  Following extensive industry discussions, changes were also made to ensure the preservation of tenure of contracts on-foot at the time the Oilcode is introduced.  Tenure provisions for fuel re-selling agreements under the Oilcode regime were also amended to allow nine years tenure for “franchisee-type” arrangements, which is consistent with tenure granted to this type of arrangement under the current legislation.  Stakeholders agreed that ‘commission agent’ type agreements, which include a reasonable investment by the retailer and that have no explicit tenure rights under current legislation, would continue to receive five years tenure under the Oilcode regime. 

Despite these amendments the policy intent of the reform package has not changed from that considered by the Government in 2003 nor have the key principles underlying the Oilcode, as outlined in Section 3, altered. 

Despite several years of negotiation, and significant concessions by some industry participants, it has not proven possible to develop an Oilcode that both satisfies all industry stakeholder demands and is consistent with the Government’s competition policy principles.  A number of parties representing independent operators and small businesses in the industry remain concerned that the Oilcode does not prevent either below-cost selling or the provision of discounts to large volume customers in the wholesale market (refer Table 6).  However, amendments to accommodate such a position would be inconsistent with the Government’s competition policy objectives as outlined in its responses to the 2003 Review of the Competition Provisions of the Trade Practices Act 1974 (The Dawson Review) and the 2004 Senate Economics References Committee Inquiry on The Effectiveness of the Trade Practices Act in Protecting Small Business. 

 

Benefits	Costs
Motor Trades Association of Australia (MTAA) The national peak body for the whole of the retail, service and repair sectors of the Australian automotive industry.
·       Nationally consistent TGP arrangements for those purchasing from primary suppliers ·       Transparent supply documentation ·       Greater transparency and certainty in fuel re-selling agreements ·       Extended coverage of fuel re-seller agreements ·       Dispute resolution scheme	·       Loss of Sites Act, which requires refiner/marketers to use franchise arrangements ·       No industry specific restrictions on pricing behaviour
Australian Institute of Petroleum (AIP) The key representative body of Australia's petroleum refining industry.
·       Repeal of Sites Act ·       Disputes about fuel re-seller agreements may be easier to resolve under Oilcode than Franchise Act	·       Commission agency arrangements covered by Oilcode
Independent Petroleum Group (IPG) The representative body of the major independent importer/marketers.
·       Nationally consistent TGP arrangements for those purchasing from primary suppliers ·       Transparent supply documentation ·       Dispute resolution scheme	·       Commission agency arrangements covered by Oilcode ·       No industry specific restrictions on pricing behaviour
Petroleum Marketers Association of Australia (PMAA) Represents the interests of those small businesses that are not covered by the MTAA or the IPG.
·       Nationally consistent TGP arrangements for those purchasing from primary suppliers ·       Dispute resolution scheme	·       Commission agency arrangements covered by Oilcode ·       No industry specific restrictions on pricing behaviour
Australian Petroleum Agents and Distributors Association (APADA) A representative body of wholesale and retail distributors.
·       Nationally consistent TGP arrangements for those purchasing from primary suppliers ·       Dispute resolution scheme	·       Commission agency arrangements covered by Oilcode

Table 6. Summary of stakeholder views and issues

 

7.         Conclusions and Recommended Option

In addressing the inconsistencies and shortfalls in the current regulatory arrangements, industry policy responses should not target specific business structures within the sector which may lead to further distortions of business models.  In other words, the overly prescriptive approach reflected in the Sites Act and the Franchise Act should be avoided in favour of creating an environment that allows businesses to determine the most appropriate operational structure to meet individual needs and that balances the interests of all market participants.

Continuation of the current legislative regime is not proposed.  This is because it restricts the business options of the prescribed oil companies (causing inefficient business structures to be utilised) and provides minimum standards for the fuel re-selling agreements of some industry participants but not others.  Its discriminatory nature may inhibit the long-term competitiveness within the industry as higher overhead costs associated with inefficient business structures are passed along the value chain.

Repeal of the existing legislation will allow the industry to be regulated solely by general competition and corporations laws.  This will provide a more efficient regulatory environment that will allow all industry participants the flexibility to choose the most appropriate business structure for individual retail sites in their networks.  However, given the imbalance between the market share held by the wholesale fuel suppliers and that held by many retailers in the industry, if there are no minimum standards for the wide range of contractual arrangements, small businesses operating under franchise-type and commission agency-type arrangements will be vulnerable to the market power of fuel suppliers during negotiations, particularly in relation to tenure.

In light of the above, and the extensive stakeholder consultation undertaken since 2002, Option C (i.e. replacing the existing legislation with a mandatory industry code of conduct under the TPA), is proposed.  This option will provide a more efficient regulatory environment for all industry participants.  It will allow all businesses greater flexibility when selecting the business structure for individual petroleum retail sites.  It will provide a minimum standard for agreements for businesses operating under fuel re-selling agreements, including certainty of tenure for agreements where there is a substantial degree of interdependency between the retailer and the wholesale fuel supplier.  For those not utilising such agreements, it will provide greater transparency in the cost of sales of declared petroleum products at the terminal gate.  It will also provide access to a low-cost alternative to resolving disputes in the legal system, which will provide many smaller businesses in the sector with an economically viable mechanism through which they can address compliance issues.

8. Implementation and Review

It is proposed that, concurrent with the repeal of existing retail petroleum legislation, the Oilcode will be mandated under the TPA.  The Oilcode will be administered by the ACCC, with DITR assuming responsibility for establishing the dispute resolution scheme.

The ACCC will have ongoing responsibility for monitoring the effectiveness of the Oilcode and, with DITR, will conduct a review of the Oilcode 12 months after it commences operation.  As the Oilcode consists of regulations under the TPA, any required amendments identified in such a review could be efficiently implemented through the standard regulation making processes.  This will allow the Oilcode to respond to future changes in market conditions or regulatory needs in a much more timely fashion than the current legislative framework. 

 

Reference List

Australian Competition and Consumer Commission 2005. Annual Report 2003-04, Canberra, Australia, [Online], Available: http://www.accc.gov.au [10 September 2005]

Australian Competition and Consumer Commission 2004. Assessing shopper docket petrol discounts and acquisitions in the petrol and grocery sectors, Canberra, Australia, [Online], Available: http://www.accc.gov.au [20 August 2005]

Australian Competition and Consumer Commission 2001. Reducing Fuel Price Variability - Discussion Paper, Canberra, Australia, [Online], Available: http://www.accc.gov.au [20 August 2005]

Australian Institute of Petroleum 2003. Downstream Petroleum 2003, Canberra, Australia [Online], Available: http://www.aip.com.au/ [20 July 2005]

Caltex 2005 source http://www.caltex.com.au/pricing_ter_qa.asp

Commonwealth of Australia 2004a. Government Response to the Review of the Competition Provisions of the Trade Practices Act 1974, Canberra, Australia [Online], Available: http://tpareview.treasury.gov.au/content/home.asp [20 August 2005]

Commonwealth of Australia 2004b. Government Response to the Senate Inquiry into the effectiveness of the Trade Practices Act 1974 in protecting small business, Canberra, Australia [Online], Available: http://www.aph.gov.au/Senate/ [20 August 2005]

Commonwealth of Australia 2004c. Energy White Paper: Securing Australia’s Energy Future, Canberra, Australia [Online], Available: http://www.pmc.gov.au/Senate/ [20 August 2005]

Commonwealth of Australia 2003. Review of the Competition Provisions of the Trade Practices Act 1974, Canberra, Australia [Online], Available: http://tpareview.treasury.gov.au/content/home.asp [20 August 2005]

Commonwealth of Australia 2000. Representation by Mr A. Brugger to the Senate Economics Committee, Tuesday 5 September 2000, E266, Canberra, Australia [Online], Available: http://www.aph.gov.au/senate/committee/  [20 August 2005]

Commonwealth of Australia 1980a. Second Reading Speech by the Hon. R.V. Garland, M.P., Minister for Business and Consumer Affairs on Petroleum Retail Marketing Franchise Bill 1980, Canberra, Australia

Commonwealth of Australia 1980b. Second Reading Speech by the Hon. R.V. Garland, M.P., Minister for Business and Consumer Affairs on Petroleum Retail Marketing Sites Bill 1980, Canberra, Australia

Department of Industry, Tourism and Resources 2005. Downstream Petroleum Industry Web Page, Canberra, Australia, [Online], Available: http://www.industry.gov.au [20 August 2005]

Department of Industry, Tourism and Resources 2004. Handbook to Australia’s Resources Industries, Canberra, Australia

Department of Industry, Tourism and Resources 2002. Downstream Petroleum Industry Framework 2002, Canberra, Australia, [Online], Available: http://www.industry.gov.au [20 August 2005]

House of Representatives Standing Committee on Industry, Science and Technology 1997. Finding a Balance: Towards Fair Trading in Australia, Canberra, Australia, [Online], Available: http://www.aph.gov.au/house/committee/isr/ppgrep.htm [20 August 2005]

IBISWorld Pty Ltd 2005. IBIS World Industry Report: Automotive Fuel Retailing in Australia, 20 January 2005, Australia

Liberal Party and National Party Coalition 2004. The Howard Government 2004 Election Policy Statement: Meeting Australia’s Energy Challenge: The Coalition’s Plan for Australia’s Reources and Energy Sector,  Australia, [Online], Available: http://www.liberal.org.au/2004_policy/Meeting_Australias_Energy_Challenge_merged.pdf [20 August 2005]

OECD 2005.  September 2004 Quarter OECD Prices and Taxes Tables, Paris, France

Senate Economics References Committee 2004. Inquiry into the effectiveness of the Trade Practices Act 1974 in protecting small business, Canberra, Australia [Online], Available: http://www.aph.gov.au/Senate/ [20 August 2005]

Senate Economics References Committee 1999. Inquiry into the provisions of the Fair Prices and Better Access for All (Petroleum) Bill 1999 and the practice of multi-site franchising by oil companies, Canberra, Australia, [Online], Available: http://www.aph.gov.au/senate/committee/  [20 August 2005]

Senate Rural and Regional Affairs and Transport Legislation Committee 1999. Report on the Provision of the Petroleum Retail Legislation Repeal Bill 1998 Canberra, Australia, [Online], Available: http://www.aph.gov.au/senate/committee/  [20 August 2005]

United Kingdom Office of Fair Trading 1998. Competition in the supply of petrol in the UK, London, United Kingdom [Online], Available: http://www.oft.gov.uk [20 July 2005]

 

APPENDIX A

History of Downstream Petroleum Reform Policy

Date	Item	Key Issues	Outcome
1996	Coalition election policy	Deregulatory policy for petroleum retailing: -        Principal aim of the policy was to enhance transparency, accountability and lower country petrol prices. Also proposed repeal of existing petroleum industry regulation, Petroleum Retail Marketing Sites Act 1980 (Sites Act) and Petroleum Retail Marketing Franchise Act 1980 (Franchise Act) following an independent review.  This position had strong support from consumer motoring organisations.	Issue were included in an ACCC review of the petroleum products declaration directed by Assistant Treasurer, Hon George Gear MP.
	ACCC Petroleum Products Declaration	Review of petroleum industry declarations under Prices Surveillance Act 1983.  The scope of the review was broadened by Treasurer Costello to include the Coalition policy on terminal gate pricing and country petrol pricing. Findings included: -  government regulations, especially price surveillance had been ineffective in achieving stated objectives and possibly contributed to industry inefficiencies; -  recommended repeal of Sites and Franchise Acts; and -  recommended continued development of industry code of conduct (Oilcode). The MTAA, in response to recommendations regarding repeal of legislation, formally withdrew from voluntary Oilcode and submit 10 demands for continued involvement in negotiations for any future Oilcode.	ACCC reported findings to the Government on 15 August 1996.  The Government responded in December 1996, with conditional support for repeal of legislation in exchange for implementation of pro-competitive measures, including: -  “access” to terminals regime; -  improved transparency; and -  restoration of the voluntary Oilcode.
1997               1997	Independent Review of Oilcode and Petroleum retailing	The Department of Industry, Science and Resources commissioned an independent review of the Oilcode.  The review, conducted by Mr Ray Braithwaite, considered the following: -  the effective operation of the Oilcode in the event of repeal of the legislation; -  possible measures to strengthen Oilcode; -  would a strengthened Oilcode provide protection for resellers under contract law; and -  options to facilitate repeal of the legislation.	Findings included: -  protections under the Sites and Franchise Acts were not covered by the Oilcode, other legislation or business agreements; -  there was a lack of incentives for participants to adhere to tenets of a voluntary Oilcode; -  the existing legislation provided limited protection for resellers; and that repeal of the existing legislation should be conditional on the development of a strengthened Oilcode and finalisation of other legislative underpinnings.
	Fair Trading Statement	The Fair Trading Statement was announced by then Minister for Employment, Small Business and Workplace Relations, the Hon Peter Reith MP in response to the HoR Standing Committee on Industry, Science and Technology Report, Finding a balance: towards fair trading in Australia.	Statement included proposed amendments to the TPA which allowed for prescription of mandatory industry codes in regulation.  The Government announced that industry codes would be developed for franchising and petroleum retail sectors.
1998	Petroleum Marketing: The New Era (20 July)	Policy statement announced by the Treasurer, the Hon Peter Costello MP and the then Minister for Industry, Science and Tourism, the Hon John Moore MP. The statement followed an extensive review of the petroleum retail market by the ACCC.	The first downstream industry reform package was developed and included the following initiatives to improve competition in the retail market: -  removal of prices surveillance; -  an “open access” regime for terminals to improve transparency at the wholesale level of the market; and -  the repeal of the Sites and Franchise Acts and introduction of a mandatory Oilcode under the TPA, governing interaction between major oil companies and their fuel resellers. The package also provided for a continued monitoring of prices by the ACCC and independent price monitoring by the Australian Automobile Association and the major oil companies.
	Coalition election policy	Commitment to refer Petroleum Retail Legislation Repeal Bill 1998 to Senate Rural and Regional Affairs and Transport Legislation Committee.	Government decides that repeal of legislation would not occur until consensus by all parties reached on final arrangements for implementation of the Oilcode.
1999               1999	Senate Rural and Regional Affairs and Transport Legislation Committee	Consideration of the repeal bill (Petroleum Retail Legislation Repeal Bill 1998)	Committee recommended Sites Act not be repealed for 2 years pending review of effectiveness of the proposed Oilcode. MTAA support findings of committee, major oil companies did not.
	Withdrawal of reform package (23 September)	The Government announced it would not proceed with reform package unless agreement reached on repeal of the Sites Act.  Major Oil companies are against retention of Sites Act coupled with introduction of Oilcode, whilst the MTAA is in favour of introduction of Oilcode but not in favour of repealing legislation.	Australian Democrats Industry spokesman, Senator Aden Ridgeway motions for inquiry to examine issues in petroleum retailing.
	Senate Economics References Committee	Inquiry to examine provisions of the Fair Prices and Better Access for All (Petroleum) Bill 1999 and practice of multi-site franchising by oil companies. During public hearings Professor Alan Fels, ACCC, indicated support for the Government’s reform package including repeal of the legislation and introduction of a mandatory Oilcode.	Government decides not to continue with implementation of the reform package.
2002	Petroleum Industry Forum (April)	Chaired by the Minister for Industry, Tourism and Resources, the Hon Ian Macfarlane MP.  Industry represented by: -  Australian Institute of Petroleum (AIP) -  Motor Trades Association of Australia (MTAA) -  Australian Petroleum Agents and Distributors Association (APADA) -  Petroleum Marketers Association of Australia (PMAA) -  Independent Petroleum Group (IPG)	Issues raised at forum included terminal gate pricing, fuel standards, and the relevance of existing legislation.  Minister undertakes to further progress issues of concern through bilateral consultations.
	Petroleum Industry Forum (November)	The Minister for Industry, Tourism and Resources launches the Downstream Petroleum Industry Framework document and announces six priority issues for guiding future retail market reform: -  terminal gate pricing; -   APEC fuel study; -  Dawson review of the Trade Practices Act 1974; -   national fuel standards; -  possible repeal of the Sites and Franchise Acts; and -  the impact of refinery rationalisation.	Minister announces intention to introduce a mandatory Oilcode that includes terminal gate pricing arrangements and applies to all industry participants.  The Oilcode is to be developed through bilateral and multilateral discussions.
2003	Petroleum Industry Forum (March)	The Minister for Industry, Tourism and Resources releases draft Oilcode.	Industry feedback is received and a final Oilcode is developed based on industry consensus and compromise.
	Downstream Petroleum Reform Package (December)	Government consideration of the Downstream Petroleum Reform Package, which represents a compromise by all stakeholders, occurs.	The Government decides not to proceed with the reform package.
2004     2004	Energy White Paper: Securing Australia’s Energy Future (April)	The Government notes that it continues to see merit in reform of the downstream petroleum sector.	Government agrees that it would reconsider implementation of the Downstream Petroleum Reform Package, along the lines of Oilcode proposed in 2003, if and when industry consensus in support of the reforms emerges.
	Coalition Resources and Energy Statement (7 October)	Release of Coalition Resources and Energy Statement, Meeting Australia’s Energy Challenge: the Coalition’s Plan for Australia’s Resources and Energy Sector.	Statement includes the following election commitment: ‘Continue to work with the downstream petroleum sector to achieve consensus on the introduction of an industry oil code’.
	Ministerial media release (7 December)	The Minister for Industry, Tourism and Resources announces the Government’s intention to proceed with further industry consultation with a view to achieving consensus support for the introduction of the Reform Package.
2005	Industry Consultation	The Minister for Industry, Tourism and Resources undertakes bilateral and multilateral industry consultation on the Downstream Petroleum Reform Package.	Industry forum on Trade Practices Act 1974 held.

 

 

 

 

 

ATTACHMENT B

 

Details of the Trade Practices (Industry Codes - Oilcode) Regulations 2006

 

There are four parts to the mandatory code as follows:

Part 1 – Preliminary (Definitions and coverage of the Code)

Part 2 – Terminal gate price and related arrangements

Part 3 – Fuel re-selling agreements

Part 4 – Dispute resolution scheme

 

Part 1 – Preliminary (Definitions and coverage of the Code)

 

Regulation 1 – Name of Regulations

This regulation provides that the title of the Regulations is the Trade Practices (Industry Codes – Oilcode) Regulations 2006.

 

Regulation 2 – Commencement

This regulation provides for the Regulations to commence on the commencement of Schedule 1 to the Petroleum Retail Legislation Repeal Act 2006.

 

Regulation 3 – Code of Conduct

This regulation provides that for section 51AE of the Trade Practices Act 1974, the code set out in Schedule 1 is prescribed and is a mandatory code of conduct.

 

Schedule 1 – Oilcode

 

Name of code

Section 1 provides that the name of the code is the Oilcode.

 

Purpose of Oilcode

Section 2 provides that the purpose of the code is to regulate the conduct of suppliers, distributors and retailers in the petroleum marketing industry.

 

Monitoring and review

Section 3 provides for monitoring of the code by the Australian Competition and Consumer Commission and a review of the code 12 months after implementation by the Department of Industry, Tourism and Resources.

 

Definitions

Section 4 defines various terms used in the code.

 

Meaning of fuel re-selling agreement

Section 5 defines a 'fuel re-selling agreement' for the purposes of the code. A fuel re-selling agreement is a contractual arrangement that has the following characteristics:

1.      One party (the supplier) grants another party (the retailer) the right to conduct a business and is able to exert substantial control over the operation of that business;

2.      The business will be associated with a trademark or symbol owned, used or specified by the supplier or an associate; and

3.      The retailer is required to pay, or agree to pay, a fee before starting business.

 

The section excludes landlord/tenant relationships, employee/employer relationships, partnership relationships, cooperative agreements recognised under State and Territory law and fuel agreements related to a retail site that is not owned or leased by the supplier.  A note giving examples of types of agreements that are, or are not, fuel re-selling agreements is included.

 

Application of Oilcode

Section 6 provides for the coverage and the timing of the code's application.  The Oilcode applies to all wholesale suppliers as defined under the Oilcode and to all sales of declared petroleum products.  The Oilcode also applies to all fuel re-selling agreements, including existing agreements, where the amount of motor fuel supplied will be more than an average of 30,000 litres for each month of the term of the agreement.

 

Part 2 – Terminal gate price and related arrangements

 

Division 1 – Preliminary

 

Terminal gate price arrangements

Section 7 specifies that services additional to the supply of a declared petroleum product may not be included in a posted terminal gate price (TGP), but may be charged as an additional amount.  It also allows that the supplier may apply a discount to the posted terminal gate price.

For new and existing term contracts, a wholesale supplier must offer the customer the option of purchasing a declared petroleum product at the posted TGP or at a price derived from that price.

 

Division 2 – Terminal gate price for declared petroleum products

 

Setting terminal gate price

Section 8 specifies which wholesale suppliers involved in the selling of declared petroleum products by wholesale from a wholesale facility, must identify a TGP to be charged on a given day. 

 

A TGP is to be posted by all wholesale suppliers (refiners, importers and wholesalers) who sell declared petroleum products from a wholesale facility to a non-related party e.g. a sale by a refiner to an end user, retailer or a distributor. 

 

The only exception to this requirement is where more than one related body corporate is selling declared petroleum products by wholesale from a given wholesale facility.  Under these circumstances, only one of the related body corporate entities is required to post a TGP that may be utilised by the group of companies for the purpose of complying with the Oilcode.

 

Disclosing terminal gate price

Section 9 provides that a wholesale supplier must make its TGPs available to the public each day on an internet website or from a telephone or facsimile service operated by, or for, the supplier.

 

Selling declared petroleum products - documentation

Section 10 sets out the documentation required for sales of declared petroleum products where the price is based on the TGP.  The applicable TGP and temperature corrected value is required on delivery, unless all of the required information is available from a telephone or facsimile service or an internet website operated by, or for, the supplier.  Complete documentation is required within 30 days of delivery.

 

Division 3 – Supply of declared petroleum products

 

Supplying declared petroleum products

Section 11 specifies that a wholesale supplier must not unreasonably refuse to supply a declared petroleum product to a customer and sets out some conditions, such as insufficient supplies, under which the supplier is not required to supply a declared petroleum product.

A supplier may advertise a minimum amount of declared petroleum product that the supplier will accept as a spot sale and is not required to supply an amount less than that minimum.

 

Health and safety requirements

Section 12 sets out the health and safety requirements for sale and delivery of declared petroleum products.

 

Part 3 – Fuel re-selling business

 

Division 1 – Fuel re-selling agreements

 

Subdivision 1 – Disclosure document for fuel re-selling agreement

 

Creating disclosure document

Section 13 provides for the circumstances in which a disclosure document must be produced, specifically, for the purpose of entering into a fuel re-selling agreement; and not later than 3 months after the end of each financial year in which a fuel re-selling agreement is in force.

 

Purpose of disclosure document

Section 14 specifies that the disclosure document is to ensure adequate information is provided by the supplier to allow the retailer to make an informed decision on the proposed fuel re-selling agreement.

 

Content and layout of disclosure document

Section 15 specifies the content and layout of a disclosure document.  A more comprehensive level of disclosure is required for agreements with duration of 5 years or greater.

 

Giving disclosure document

Section 16 provides for the circumstances in which a supplier must give a disclosure document to a retailer or a person who intends to become a retailer.

 

Giving additional information

Section 17 sets out the circumstances in which a supplier may be required to provide additional information for agreements with less than 5 years duration.

 

Subdivision 2 – Disclosure before completing fuel re-selling agreement

 

Application of Subdivision 2

Section 18 defines the circumstances under which this Subdivision applies to a disclosure document, namely when a disclosure document is given by a supplier to a person who proposes to become a retailer or when a retailer proposes to renew or extend a fuel re-selling agreement.

 

Supplier’s obligations

Section 19 sets out a supplier’s obligations under this Subdivision.

The supplier must give a copy of the Oilcode and the relevant disclosure document to a retailer or a person proposing to become a retailer, at least 14 days before entering into, renewing or extending a fuel re-selling agreement or paying non-refundable money to a supplier in connection with a proposed agreement.

 

Requirements before entering into fuel re-selling agreement

Section 20 specifies the requirements on a supplier before entering into a fuel re-selling agreement.  A supplier must not enter into, renew or extend an agreement until the supplier has received a written statement from the other party stating that the party has read and understood the Oilcode and the disclosure document.   A supplier must not enter into an agreement before receiving a statement that the prospective retailer has obtained independent professional advice or has declined to seek such advice.

 

Division 2 – Transfer of fuel re-selling agreement

 

Creating disclosure document

Section 21 provides that a person who proposes to transfer a fuel re-selling agreement must create and maintain a disclosure document.

 

Content and layout of disclosure document

Section 22 specifies the content and layout of a disclosure document for the transfer of a fuel re-selling agreement.

 

Giving disclosure document

Section 23 provides for the circumstances in which a person proposing to transfer a fuel re-selling agreement must give a disclosure document to the transferee and specifies the additional information to be given to the supplier.  The information to be given by the supplier to the transferee is also specified in this Section.

 

Division 3 – Conditions of fuel re-selling agreement

 

Cooling-off period

Section 24 allows for a cooling-off period of seven days after entering into a fuel re-selling agreement or paying any money under the agreement.  It also requires the supplier to fully refund all money paid should termination of the agreement result except where the agreement allows for the suppliers reasonable expenses to be deducted.

 

Copy of lease

Section 25 specifies that, where the fuel re-selling agreement includes lease of a premises, the supplier must give the retailer a copy of the lease or the agreement to lease within one month after the document is signed by the parties.

 

Similarly, where a retailer occupies, without a lease, premises leased by the supplier (or an associate of the supplier), the supplier (or the associate of the supplier) is required to provide a copy of the supplier's (or associate's) lease or agreement to lease, or a copy of the documents giving the retailer rights to occupy the premises, or written details of the conditions of occupation, to the retailer within 1 month after occupation commences or after documents giving rights to occupy are signed.

 

Association of retailers

Section 26 prohibits a supplier from inducing a retailer not to form an association for a lawful purpose or inducing a retailer not to associate with other retailers for a lawful purpose.

Prohibition on general release from liability

Section 27 prohibits a fuel re-selling agreement entered into after commencement of the Oilcode from containing, or requiring a retailer to sign, a general release of the supplier from liability towards the retailer.  However, a retailer is able to settle a claim against the supplier after entering into a fuel re-selling agreement.

 

Marketing and other cooperative funds

Section 28 sets out the information to be provided to retailers who are required to make financial contributions into a general marketing or cooperative fund.

 

The provision requires an annual audited statement on marketing expenditure to be prepared within 3 months after the end of the last financial year and to be provided to the retailer, on request, within 30 days after the request. A vote by 75% of the supplier’s retailers in Australia in any year may waive the requirement for the audit.

 

Disclosure of materially relevant facts

Section 29 requires the supplier to disclose listed issues within 14 days of the supplier becoming aware of the fact(s). The facts to be disclosed are limited to the sale of an interest in a franchise, details of certain types of litigation, other legal proceedings and insolvency matters.

 

Making current disclosure document available

Section 30 requires suppliers to provide a retailer with a current disclosure document within 14 days after the retailer requests, in writing, a copy of the disclosure document. A retailer can request a disclosure document only once in any 12 month period.

 

Supplier’s proprietary fuel card

Section 31 sets out the time limits within which a supplier must reimburse a retailer if the retailer is required under their fuel re-selling agreement to accept the supplier’s proprietary fuel card for purchases by a customer.

 

Duration of agreement

Section 32 prescribes the duration for different types of existing and new agreements, and also prescribes arrangements for renewal of certain agreements with an aggregate duration greater than 5 years.

 

An existing fuel re-selling agreement must retain the duration specified in the agreement, including any arrangements for renewal of the agreement.  If the agreement was previously covered by the Petroleum Retail Marketing Franchise Act 1980, the duration and renewal arrangements must be those specified in that Act.  A new fuel re-selling agreement must have a duration of 5 years, except under the circumstances where:

1.      the fuel re-selling agreement is a ‘franchise-type’ agreement that requires the retailer to purchase fuel from the supplier or that gives the supplier an entitlement to sell fuel to the retailer, and that relates to a retail site owned or leased by the supplier.  Under these circumstances the duration of the agreement is to be 9 years total, comprising an initial 5 year period and a renewal or renewals of the agreement totalling 4 years; or

2.      the supplier and the prospective retailer agree that the site lease will expire within the 5 year timeframe or the site is expected to be leased, disposed of or otherwise used for a purpose other than the retail sale of motor fuel, or if the initial up front investment, as goodwill or ‘key money’ by the prospective retailer is less than $20 000.  Under these circumstances the fuel re-selling agreement does not have to specify a duration.

 

A supplier must not fail to honour a renewal in an existing agreement or facilitate a mandatory renewal as prescribed in 1 above, except under the circumstances where the supplier has decided that the retail site associated with the fuel re-selling agreement is to be leased, disposed of or otherwise used for a purpose other than the retail sale of motor fuel.

 

The procedures involved in a renewal of an agreement are outlined and include, disclosure requirements, the need for any changes to the agreement to be reasonable and in good faith, and arrangements for mediating disputes. 

 

If a retailer and a supplier enter into an agreement for a different duration for reasons that do not comply with 2 above, the agreement is taken to have the standard duration for that type of agreement (i.e. 5 or 9 years).

 

If the supplier and retailer agree to terminate a fuel re-selling agreement before it would otherwise expire, the supplier and another retailer may enter into a temporary agreement covering that site.  The duration of a temporary agreement may not exceed 6 months.

 

Renegotiation or variation of agreement

Section 33 sets out the conditions under which a party to a fuel re-selling agreement can require that the terms of the agreement be renegotiated, varied or exercise its discretion under the agreement. 

 

Renegotiation may occur where the operation of the agreement is substantially affected by a matter that is within the control of the other party that was not disclosed by the other party and was not reasonably foreseen by either party. 

 

Terms may only be unilaterally varied or a party may only exercise a discretion under the agreement if the terms in the original agreement specified that a given term could be actioned in such a manner.

 

Where the parties are unable to reach agreement the Dispute Resolution Advisor (DRA) may be of assistance.  If the parties are still unable to resolve the issue with assistance from the DRA, the retailer may request that the supplier terminate the agreement.

 

Transfer of the fuel re-selling agreement

Section 34 provides for the transfer of a fuel re-selling agreement to a third party and sets out the circumstances under which it would be reasonable for the supplier to refuse to consent to the proposed transfer.

 

Division 4 – Termination of fuel re-selling agreement

 

Termination by supplier – breach by retailer

Section 35 provides that a supplier must give the retailer reasonable notice that the supplier proposes to terminate the fuel re-selling agreement because of the breach and give the retailer reasonable time to remedy the breach.  If the breach is remedied within the prescribed timeframe then the supplier may not proceed to termination as a result of that breach.  Where the parties are unable to reach agreement the DRA may be of assistance.

 

Termination by supplier – special circumstances

Section 36 sets out the circumstances under which a supplier is not required to provide a right of remedy to a retailer prior to proceeding to terminate a fuel re-selling agreement.  Such circumstances include, bankruptcy, voluntarily abandonment of the fuel re-selling business or conviction of a serious offence.

 

In addition, a supplier may terminate a fuel re-selling agreement relating to particular retail premises if Commonwealth, a State or a Territory law relating to the compulsory acquisition of land is invoked or the sale of motor fuel at the premises is prohibited by, or under, a law relating to the use of land.

 

Termination by supplier of agreement mentioned in paragraph 32 (11) (c)

Section 37 applies to the termination of a fuel re-selling agreement which does not specify a minimum duration (as defined in paragraph 32(11)(c)).

 

A supplier intending to terminate such an agreement must give the retailer at least 30 days notice and offer to buy, or nominate a purchaser for, a reasonable quantity of saleable stocks of motor fuel, merchandise and equipment supplied under the supplier’s franchise or operational specifications.

 

Where the parties are unable to reach agreement on appropriate compensation in regard to termination under this section the DRA may be of assistance.

 

Agreed early termination

Section 38 applies if a retailer and supplier agree to terminate a fuel re-selling agreement before it expires.

 

The supplier must notify the retailer that the retailer has rights under the fuel re-selling agreement, seek to negotiate the reasonable termination of those rights, and advise the retailer that they should seek independent financial and legal advice about any offer made by the supplier.

 

The supplier must also offer to pay costs relating to the termination of the fuel re-selling agreement, which may include, subject to the terms of the agreement, a proportional refund of any investment by the retailer under the agreement.  The supplier must also offer to buy, or nominate a purchaser for, a reasonable quantity of saleable stocks of motor fuel, merchandise and equipment supplied under the supplier’s franchise or operational specifications.

 

Where the parties are unable to reach agreement on appropriate compensation in regard to termination under this section the DRA may be of assistance.

 

Expiry

Section 39, prescribes that the supplier and retailer must discuss the procedures that will apply to settle the commercial arrangements between the supplier and the retailer at least 60 days before the expiry of a fuel re-selling agreement.

 

On expiry of an agreement the supplier must offer to buy, or nominate a purchaser for, a reasonable quantity of saleable stocks of motor fuel, merchandise and equipment supplied under the supplier’s franchise or operational specifications.

 

Part 4 – Dispute resolution scheme

 

Application of Part 4

Section 40 prescribes that the dispute resolution scheme under the Oilcode applies to disputes arising when a wholesale supplier fails to supply a declared petroleum product to a customer and to any other dispute arising from Part 2 (terminal gate price) or Part 3 (Fuel re-selling business) of the Oilcode.  The dispute resolution scheme also applies to disputes between parties to a fuel re-selling agreement.

 

The DRA will be a non-binding decision maker for industry disputes relating to right of supply (where the DRA will get directly involved with a view to an immediate (24 hour) resolution) and for all other issues covered by the Oilcode, the DRA will appoint a mediator or other such facilitator to assist the parties to resolve the dispute in a confidential and efficient manner.

 

The DRA will establish and publish guidelines explaining how the dispute resolution scheme will function.  They will also liaise regularly with industry and relevant government authorities on issues relating to the retail petrol market.

 

The Scheme does not apply to disputes relating to pricing issues, such as predatory pricing activities and concerns about below cost selling of declared petroleum products.  However, the Government accepts that the DRA may become a focal point for the industry to express concerns in regards to these issues.  As a result the DRA guidelines will set out the protocols for dealing with the various complaints and issues that will be brought to its attention.

 

Dispute resolution adviser

Section 41 specifies that the Minister with responsibility for the Oilcode must appoint a person, the DRA, to advise the Minister in relation to dispute resolution that occurs in accordance with this Part.

 

Disputes about supply of a declared petroleum product — advice about supply

Section 42 applies if a wholesale supplier experiences a supply interruption or shortfall.  Under such circumstances the wholesale supplier may supply the DRA with details of the supply interruption or shortfall to assist the DRA in managing customer expectations.

 

Disputes about supply of a declared petroleum product

Section 43 sets out the procedure to be applied to disputes arising from a failure by a wholesale supplier to supply a declared petroleum product to a customer.  The customer may provide details and evidence of their complaint to the DRA and ask the DRA to attempt to resolve the dispute.

 

Under these circumstances, the DRA may seek details from the wholesale supplier on the situation or, if applicable, on issues relating to compliance with occupational health and safety requirements.  The wholesale supplier must comply with the DRA’s request.

 

After consideration of the issues the DRA may choose to make a non-binding determination about the dispute.

 

Dispute resolution procedure — disputes other than under section 43

Section 44 sets out the procedure to be applied to all other disputes arising under the Oilcode.  It prescribes that unless the DRA agrees that the dispute can not be resolved through negotiation the parties must try to reach resolution.

 

If the parties are unable to reach resolution on their own they may refer the matter to the DRA, who may appoint a person to mediate or provide other assistance to try to resolve the dispute. 

 

The parties must use best intentions to work with the appointed person to bring about a resolution of the dispute.

 

Either party to the dispute may involve a third party to assist or otherwise provide advice, but only the original parties to the dispute may enter into an agreement to resolve the dispute. However, should the person appointed by the DRA determine that the dispute revolves around a broader issue impacting on the industry, that person may ask the supplier to raise the matter with their dealer council or other fora as appropriate.

 

Provision of mediation and assistance

Section 45 notes that all mediation or other assistance offered in accordance with this Part of the Oilcode must be carried out in good faith.  The person appointed by the DRA must, within 28 days of being appointed, advise the DRA of arrangements they have put in place to assist the parties to seek resolution.

 

The person appointed by the DRA may need to consider a range of documents and seek the assistance of both parties in order to attempt to resolve the dispute.  If a resolution cannot be reached within 30 days of the start of arrangements to resolve the dispute, the parties may choose to cease utilising the services of the person appointed by the DRA.

 

The DRA may comment on any advice provided by the person they appointed to mediate or otherwise assist the parties to resolve to dispute.  The DRA may also choose to make a non-binding determination about the dispute.

 

Self-incrimination

Section 46 proscribes that any statement made as part of the procedures under this Part of the Oilcode is not admissible in a criminal proceeding or a proceeding for the imposition of a penalty. 

 

Conditions

Section 47 sets out the conditions of using the dispute resolution scheme under the Oilcode.

It notes that any action taken under Part 4 of the Oilcode does not affect the right of a party to a dispute to take legal proceedings under the Oilcode. 

 

It specifies that Part 4 cannot be used by a party to dispute the termination of a fuel re-selling agreement under circumstances where the retailer: no longer holds a licence that the retailer is required to hold to conduct a fuel re-selling business; becomes bankrupt, insolvent under administration or an externally-administered body corporate; voluntarily abandons the fuel re-selling business; is convicted of a serious offence; or agrees to the termination of the fuel re-selling agreement.

 

It specifies that, unless otherwise agreed, the parties are equally liable for any costs relating to resolution of the dispute and must pay for their own costs relating to any mediation to resolve the dispute.

 

 

Annexures

 

Annexure 1

Annexure 1 details the minimum information required to be contained in a disclosure document to be provided to a retailer or prospective retailer for a fuel re-selling agreement which specifies a minimum duration of at least 5 years.

 

 

 

Annexure 2

Annexure 2 details the minimum information required to be contained in a disclosure document to be provided to a retailer or prospective retailer for a fuel re-selling agreement which specifies a minimum duration of less than 5 years.

 

Annexure 3

Annexure 3 details the minimum information required to be contained in a disclosure document to be provided to a proposed transferee of a fuel re-selling agreement.