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2004-2005-2006
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
PETROLEUM RETAIL LEGISLATION REPEAL BILL 2006
EXPLANATORY MEMORANDUM
Circulated by authority of the Hon Ian Macfarlane, MP,
Minister for Industry, Tourism and Resources
CONTENTS
GENERAL OUTLINE ...................................................................................................................3
FINANCIAL IMPACT STATEMENT..........................................................................................3
REGULATION IMPACT STATEMENT......................................................................................4
1. Introduction..............................................................................................................................4
1.1 Legislative Environment ........................................................................................................... 5
1.1.1 Petroleum Retail Marketing Sites Act 1980........................................................................................... 6
1.1.2 Petroleum Retail Marketing Franchise Act 1980................................................................................... 7
1.1.3 Impact of the Sites Act and the Franchise Act ....................................................................................... 7
1.1.4 Trade Practices Act 1974 ....................................................................................................................... 8
1.2 Industry Structure ..................................................................................................................... 9
2. The Problem ...........................................................................................................................11
2.1 Commission Agents ................................................................................................................. 12
2.2 Price Support ........................................................................................................................... 12
2.3 Multi-Site Franchising ............................................................................................................ 13
2.4 Terminal Gate Prices............................................................................................................... 14
2.5 Dispute Resolution ................................................................................................................... 14
2.6 Summary Tables ...................................................................................................................... 15
3. Objective ................................................................................................................................15
3.1 Related Government Policies.................................................................................................. 16
4. Options...................................................................................................................................17
4.1 Option A - no change to the current legislative environment ............................................. 18
4.2 Option B - repeal the Sites Act and the Franchise Act ........................................................ 18
4.3 Option C - repeal the Sites Act and the Franchise Act and introduce an industry code
mandated under the Trade Practices Act 1974..................................................................... 18
5. Impact Analysis ..........................................................................................................................19
5.1 Option A - No change to the current legislative environment ............................................ 19
5.1.1 Refiner/Marketers................................................................................................................................. 19
5.1.2 Importer/Marketers and Supermarkets................................................................................................. 19
5.1.3 Franchisees ........................................................................................................................................... 19
5.1.4 Commission Agents ............................................................................................................................. 20
5.1.5 Small Independents .............................................................................................................................. 20
5.1.6 Government .......................................................................................................................................... 20
5.1.7 Consumers ............................................................................................................................................ 20
5.1.8 Summary.............................................................................................................................................. 21
5.2 Option B - Repeal of the Sites Act and the Franchise Act .................................................. 23
5.2.1 Refiner/Marketers................................................................................................................................. 23
5.2.2 Importer/Marketers and Supermarkets................................................................................................. 23
5.2.3 Franchisees ........................................................................................................................................... 23
5.2.4 Commission Agents ............................................................................................................................. 23
5.2.5 Small Independents .............................................................................................................................. 24
5.2.6 Government .......................................................................................................................................... 24
5.2.7 Consumers ............................................................................................................................................ 24
5.2.8 Summary............................................................................................................................................... 24
1
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 ......................................................................................................................... 26
5.3.1 Refiner/Marketers................................................................................................................................. 26
5.3.2 Importer/Marketers and Supermarkets................................................................................................. 26
5.3.3 Franchisees ........................................................................................................................................... 27
5.3.4 Commission Agents ............................................................................................................................. 27
5.3.5 Small Independents .............................................................................................................................. 27
5.3.6 Government .......................................................................................................................................... 28
5.3.7 Consumers ............................................................................................................................................ 28
5.3.8 Summary.............................................................................................................................................. 28
6. Consultation...........................................................................................................................30
7. Conclusions and Recommended Option.................................................................................32
8. Implementation and Review....................................................................................................33
APPENDIX A ...............................................................................................................................36
History of Downstream Petroleum Reform Policy ...........................................................................36
NOTES ON CLAUSES ................................................................................................................39
Clause 1 - Short title ............................................................................................................................. 39
Clause 2 - Commencement .................................................................................................................. 39
Clause 3 - Schedules.............................................................................................................................. 39
Schedule 1 - Repeal of Acts ................................................................................................................. 39
Schedule 2 - Consequential amendment ............................................................................................ 39
2
PETROLEUM RETAIL LEGISLATION REPEAL BILL 2006
GENERAL OUTLINE
The Bill forms part of the Government's Downstream Petroleum Reform Package (`the Reform
Package'), which will address the regulatory failure that has resulted from the inequitable
application of, and inefficiencies created by, the current retail petroleum legislation.
The Bill will repeal both the Petroleum Retail Marketing Sites Act 1980 (`the Sites Act'), which
restricts the number of retail sites that prescribed oil companies, that is BP, Caltex, Mobil and
Shell (`the oil majors') can directly own and operate in Australia, and the Petroleum Retail
Marketing Franchise Act 1980 (`the Franchise Act'), which sets out the minimum terms and
conditions for franchise agreements between the oil majors and their franchisees. Repeal of this
legislation is necessary as it has failed to keep pace with changes in market structure, for
example, the market entry of large independent retail chains and supermarket retailers. The
current legislation imposes additional costs on the oil majors and prevents them from achieving
increased efficiencies or responding effectively to changing market forces. It also provides
significant benefits to small businesses that are oil major franchisees but not to oil major or other
commission agents.
Under the Reform Package, repeal of the Sites Act and the Franchise Act will occur concurrently
with the introduction of an industry code, the Trade Practices (Industry Codes - Oilcode)
Regulations 2006 (`the Oilcode'), mandated under section 51AE of the Trade Practices Act 1974
(`the TPA'). The Oilcode will:
· 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
(Franchising Code of Conduct), to provide greater certainty and protection for all parties to
fuel re-selling agreements;
· 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 a independent, downstream petroleum dispute resolution scheme to provide the
industry with a cost-effective alternative to taking action in the courts.
The regulations will facilitate a more effective regulatory environment for the industry, while
recognising the power imbalance inherent in the substantial interdependency between some
small businesses operating under franchise and commission agency agreements and their
wholesale fuel suppliers, whether those suppliers are the oil majors or the independent retail
chains. In addition, it will improve the operating environment for all small business operators in
the industry by providing access to an alternative dispute resolution mechanism and increasing
the transparency in the wholesale market through a nationally consistent approach to TGP.
FINANCIAL IMPACT STATEMENT
The Repeal Bill does not contain appropriation provisions and will not have any financial impact
on Commonwealth revenue or expenditure.
However, the introduction of the Oilcode will require funding of $11.9 million over 4 years to
enable the Australian Competition and Consumer Commission (ACCC) and the Department of
Industry, Tourism and Resources (DITR) to undertake implementation, monitoring and
enforcement activities. A requirement of the costings agreed with the Department of Finance
and Administration is that any unused funding provided to the ACCC for litigation will be
returned to the Budget.
3
REGULATION IMPACT STATEMENT
PETROLEUM RETAIL LEGISLATION REPEAL BILL 2005
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 transport1. 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 needs2. 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 governments3.
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 cent4. 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 fuels6.
1
Australian Institute of Petroleum (AIP) 2003 and Commonwealth of Australia 2004c
2
Department of Industry, Tourism and Resources (DITR) 2005
3
Commonwealth of Australia 2004c
4
IBISWorld Pty Ltd 2005 & DITR 2005
5
TGP is the spot price at which any entity can purchase fuel (typically 35,000 litres) from a wholesale terminal. It
does not include delivery or any other changes the customer may request from the supplier.
6
Australian Competition and Consumer Commission (ACCC) 2004 Post-2006 fuel standards align Australia with
European standards (Euro 4 for petrol and Euro 5 for diesel).
4
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
arrangements7.
Box 1. Business Structures in the Retail Petroleum Industry
Nine different business models are utilised in the retail petroleum industry. They can loosely be divided into those associated
with the refiner/marketers and those associated with the importer/marketers.
Refiner/Marketer Networks
Sites where the refiner/marketer have a direct impact on fuel pricing decisions (i.e. included in the Sites Act quota) are sites
owned or leased directly by a refiner/marketer and operated either by:
company staff - these are usually the high turnover sites such as those in the inner-metropolitan areas; or
commission agency - these sites are managed by an individual on behalf of the refiner/marketer and compensation is generally
in the form of a commission based on quantity of products sold.
Sites where the refiner/marketer does not have a direct impact on pricing decisions:
multi-site franchisees (e.g. Coles Myer) who rent a number of refiner/marketer owned sites and operate them under one or many
franchise agreements which legally allows them to determine their own prices;
single-site franchisees who rent a site owned by a refiner/marketer and operate it under a franchise agreement which legally
allows them to determine their own prices;
branded independent operators who use their own site and equipment but are in a branding agreement with a refiner/marketer
that generally also supplies fuel on contract to the operator. These independent operators often form a vital part of the
refiner/marketers' network. They allow the refiner/marketers to maintain a presence in rural and regional areas without
necessitating major infrastructure investment in areas that may otherwise by considered to be economically marginal; and
distributor-owned sites that are run by a local fuel distributor, some of which are owned or part owned by the refiner/marketers
and others which, like branded independent operators, use their own site and equipment and have a brand and supply
agreement with a refiner/marketer. In rural and regional areas these sites also play a critical role in the refiner/marketers'
network, allowing presence to be maintained within an economically viable framework.
Independent Networks
Independent networks range from single sites that are owned and operated by a family through to the large multi-site chains
owned and operated by importer/marketers.
independent chains (e.g. 7 Eleven, Liberty and Gull) that either import fuel or purchase fuel in bulk from local refiners to sell
through their company owned sites. Sites are generally operated on a commission agency basis;
supermarket chains (e.g. Woolworths) that either import fuel or purchase fuel in bulk from local refiners to sell through their
company owned sites. Sites are often operated on a commission agency basis; and
independent operators who use their own site, equipment and brand name and purchase fuel on an ad hoc or contractual basis
from local refiners or importers.
Source: DITR 2004
7
ACCC 2001
5
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 industry9.
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.
Australian Retail Petroleum Market
- distribution by business type
Refiner/Marketer
owner/operated and Comission
Small Independent Operators
Agents, 450
(non-branded), 700
Supermarket Chains
Multi-Site Franchise (Shell-
(Woolworths), 450
Coles ~ 600 sites), 1100
Independent Chains (eg 7-11,
Gull, Liberty, United), 400
Distributor Owned Sites (mainly Single Site Franchise, 200
branded), 200
Branded Independent
Operators, 3000
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
agreements10.
8
Commonwealth of Australia 1980a
9
ibid 1980a
10
Commonwealth of Australia 1980b
6
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 refineries11. 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 compliance12.
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' participation13.
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 competition14. 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.
11
Quotas are set under the Petroleum Retail Marketing Sites Regulations 1981 and were last revised in 1999.
12
To date only one significant breach of the Sites Act has been recorded by the Mobil Oil Company, who was found
guilty in 2004 and fined in accordance with the penalties specified under the Act.
13
Commonwealth of Australia 1980a; 1980b
14
Commonwealth of Australia 1980a
7
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 2003-0416.
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 period17. 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 report18. 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,
15
Previously know as the Trade Practices Commission
16
ACCC 2005
17
Several cases are ongoing. For details refer to the ACCC 2003-04 Annual Report.
18
High Court: Boral Besser Masonry Ltd v ACCC (2003) & Rural Press Ltd v ACCC (2003);
Federal Court: ACCC v Safeway Stores PL (2003) & Universal Music v ACCC (2003)
8
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 amended19.
These amendments will allow the courts to consider below-cost pricing and recoupment for
consideration of misuse of market power20. 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 TPA21.
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 sector22. 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 sector23.
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
future24.
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
19
Commonwealth of Australia 2004 a & b
20
Commonwealth of Australia 2004 a & b
21
The application of section 155 is considered in the ACCC document Section 155 of the Trade Practices Act 1974.
22
ACCC 2001; DITR 2002
23
ACCC 2004
24
ibid 2004
9
with a franchise arrangement with a refiner/marketer controls the operations of several sites25.
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 sales27. 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 states28. 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.
Box 2. Supermarket Entry to the Australian Retail Petroleum Market
Woolworths, one of Australia's major supermarket chains, entered the retail petroleum market in 1996, establishing nearly 300
independent sites and sourcing fuel from Australia's largest independent petroleum importer, Trafigura. Customer loyalty was
developed though the institution of discount shopper dockets linked to the purchase of groceries in a Woolworths' supermarket.
In 2003, the other major Australian grocery retailer, Coles Myer Ltd, established an alliance with oil major, Shell, based on a
similar fuel discount arrangement. This alliance consisted of Coles assuming responsibility for operating Shell's core retail
property network of around 580 service stations in Australia's largest multi-site franchise arrangement.
Woolworths and Caltex subsequently finalised an alliance, which added 120 of Caltex's retail sites to Woolworths existing retail
sites. Under this arrangement Caltex supplies fuel to all Woolworths retail sites, with fuel and grocery prices set by Woolworths
subsidiary, Woolworths Plus Petrol.
Sources: Australian Competition and Consumer Commission 2001, 2004;
Australian Institute of Petroleum 2003;
Dept Industry, Tourism and Resources 2004
25
The number of sites in a multi-site franchise arrangement may vary from two to many hundreds, with greater
economies of scale realised with a greater number of retail sites.
26
ACCC 2004
27
DITR 2004
28
ibid 2004
10
Box 3. Shopper Dockets
Claims that the use of `shopper dockets' are undermining the ability of independent chains and smaller operators to maintain
market share have also been considered by the ACCC. However, the 2004 report, Assessing shopper docket petrol discounts
and acquisitions in the petrol and grocery sectors, concluded that there were significant benefits to consumers from shopper
docket discount offers, including lower petrol prices for consumers and increased non-price competition which outweighed any
detriment the initiative may cause to individual entities. As a result, the ACCC reports that there are now over 100 shopper
docket schemes operating throughout Australia, many of which are run by small independent retailers in collaboration with local
grocery outlets.
Sources: ACCC 2004
Box 4. Australia's Refinery Capacity
Australia has eight major oil refineries, one of which has been mothballed due to poor refining margins and regional over-
capacity. The refineries, mainly constructed in the 1950s and 1960s, have undergone significant upgrading since the mid 1990s.
With the ongoing tightening of fuel operability standards in recent years, this upgrading is expected to continue to 2010 with the
overall investment expected to be in the vicinity of $2 billion.
International prices for diesel and petrol, as with other commodities traded freely on the world market, are set by supply and
demand factors, rather than production costs. Australian producers export crude oil, LPG and petroleum products into
international markets and the domestic wholesale prices for refined petroleum products in Australia are based on prices ex-
refinery in Singapore, which is the regional refining centre and an exchange point for refined products.
Sources: Australian Institute of Petroleum 2003;
Dept Industry, Tourism and Resources 2004
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.
11
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 arrangements29. As a result, the independent chains tend to have a significant
influence on localised price cycles, particularly in major cities30. 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 operator31 to effectively negotiate an equitable retail site occupancy
agreement with a much larger independent chain32.
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
competition33.
29
ACCC 2001
30
ACCC 2001
31
Anecdotal evidence suggests that most commission agents are 1-2 person operations. They are often run by
migrants for whom English is the second language and many operators fail to seek independent business or legal
advice before entering into a retail contract.
32
Anecdotal evidence suggests in extreme cases commission agents have been evicted from their retail sites with
only 24 hours notice from the operator and with no right of recourse.
33
ACCC 2001
12
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 cycle34.
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
majors35 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 market36.
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 flexibility37.
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
retailing38.
34
A price cycles typically starts when one service station in an area decides to reduce its price, lowering per unit
profit in an effort to increase sales (not only for petrol but also for other, higher profit, retail goods). Service stations
closely monitor local prices and respond by following a competitor's price cuts to maintain market share. These
variations can be in the same direction as, or counter to, the changes linked to world oil prices.
35
Senate Economic References Committee (SERC) 1999
36
SERC 1999
37
SERC 1999
38
Service Station Association of Australian in SERC 1999
13
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 forces39.
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
OMA40. 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.
39
Caltex 2005
40
The OMA has handled about 12 service station related disputes in the last 6.5 years.
14
2.6 Summary Tables
Petroleum Retail Marketing Franchise Act 1980
Benefits Costs Neutral
Single-site franchisees & Refiner/Marketers Independent Chains (inc
Multi-site franchisees dictates minimum requirements for supermarkets)
-
sets out minimum requirements for agreements, which may adversely Small Independent Operators
-
franchise agreements impact on overheads Commission Agents
no impact as business structure and
-
provides certainty of tenure dictates tenure of franchise
- -
contractual contents are not
agreements, which limits ability of
restricted
ensures appropriate level of
-
site to respond in a timely manner to
disclosure occurs before agreement
changes in the market
is entered into
Table 1. Summary of impact of Franchise Act on market participants.
Petroleum Retail Marketing Sites Act 1980
Benefits Costs Neutral
Single-site franchisees & Refiner/Marketers Small Independent Operators
Multi-site franchisees Limits number of sites that can be business structure not restricted
- -
Encourages use of this type of directly owned and operated
-
business structure
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
Independent Chains (inc Commission Agents
supermarkets) Restricts refiner/marketer use of this
-
business structure not restricted like type of business structure
-
that of their major competitors
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.
15
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 code41.
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.
41
Liberal Party and National Party Coalition 2004
16
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 pricing42, in relation to the Sites
Act and the Franchise Act43. 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 support44. 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 successful45.
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 parties46.
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 period47. 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
42
Pricing issues were, and remain, the responsibility of the ACCC (previously the Trade Practices Commission).
43
House of Representatives Standing Committee on Industry, Science and Technology 1997
44
ibid 1997
45
ibid 1997
46
ibid 1997
47
SERC 1999
17
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.
18
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.
48
Commonwealth of Australia 2000
19
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
49
for information on TGP refer to footnote 5.
20
minimal effect on petrol prices at the pump50. 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
Development51. 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
sector52.
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.
50
United Kingdom Office of Fair Trading 1998
51
OECD 2005
52
United Kingdom Office of Fair Trading 1998
21
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 · Nil
response to changes in the market structure
Benefits to Franchisees Costs to Franchisees
· Petroleum Retail Marketing Franchise Act 1980 sets · Use of multi-site franchising has minimised the entry
out minimum requirements for franchise agreements; of small businesses into the industry through
provides surety of tenure and ensures appropriate franchise agreements
level of disclosure occurs before agreements are
entered into.
· Access to alternative dispute resolution service
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
22
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 Conduct53. 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.
53
Along with 9 year tenure on retail sites the Franchise Act also legislates a number of industry specific disclosure
requirements between franchisor and franchisee.
23
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 structure54.
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.
54
United Kingdom Office of Fair Trading 1998
24
Option B - repeal the Sites Act and the Franchise Act
Benefits to Refiner/Marketers Costs to Refiner/Marketers
· Nil
· 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
Benefits to Importer/Marketers & Supermarkets Costs to Importer/Marketers& Supermarkets
· Fully flexible operating structures allow immediate · Potential for greater competition from
response to changes in the market structure refiner/marketers
Benefits to Franchisees Costs to Franchisees
· Franchise arrangements would be subject to the · Use of multi-site franchising has minimised the entry
Franchising Code of Conduct, which sets out some of small businesses into the industry through
general requirements for franchise agreements franchise agreements
· Would retain access to a low cost alternative dispute
resolution service
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 · Possible short term increase in ACCC industry
monitoring compliance with the Sites Act monitoring costs
Benefits to Consumers Costs to Consumers
· Nil
· Increase flexibility in the structure of refiner/marketer
networks should decrease inefficiencies and
associated overheads that may have been passed
onto consumers
Table 4. Summary of the Costs and Benefits to Stakeholders under Option B
25
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.
26
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
supplier55.
55
It would not be practical or competitive to fix national TGP as this could lead to collusion in the wholesale
market. Similarly, any move to restrict below-cost selling by suppliers through negotiated contracts would have the
potential to reduce competition in the retail petrol market and could lead to higher petrol prices for consumers. This
would also be contrary to the recommendations of the 2003 Review of the Competition Provisions of the Trade
Practices Act (Dawson Report), which concluded that competition policy is to preserve a competitive environment,
not individual competitors.
27
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.
28
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 · Mechanisms in place to provide greater transparency in
response to changes in the market structure TGP
· Save approximately $200,000 per annum that was · Commission agents are required to have 5 years tenure
associated with compliance reporting under Sites Act and set minimum contractual requirements
Benefits to Importer/Marketers & Supermarkets Costs to Importer/Marketers & Supermarkets
· Fully flexible operating structures allow immediate · Requirement to comply with TGP arrangements for fuel
response to changes in the market structure 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 · Requirement to seek legal and financial advice prior to
contractual requirements set by the Franchise Act and entering into a fuel re-selling agreement (may be waived)
Franchising Code of Conduct and maintain nine years · Use of multi-site franchising has minimised the entry of
tenure. small businesses into the industry through franchise
· Would retain access to a low cost alternative dispute agreements
resolution service
Benefits to Commission Agents Costs to Commission Agents
· Fuel re-selling arrangements would apply to operations · Requirement to seek legal and financial advice prior to
where there is an up-front investment greater than $20,000 entering into a fuel re-selling agreement (may be waived)
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
Benefits to Small Independent Operators Costs to Small Independent Operators
· Would receive access to a low cost alternative dispute · Nil
resolution service
· Would have certainty of TGP during fuel purchases
increasing ability to receive best price
Benefits to Government Costs to Government
· Save approximately $100,000 per annum in monitoring · Establishment and ongoing administration of the Dispute
compliance with the Sites Act Resolution Service (DITR)
· Undertake education and awareness campaign in relation
to Oilcode (DITR and ACCC)
· Monitor and enforce compliance with the Oilcode (ACCC)
29
Option C - repeal the Sites Act and the Franchise Act and implement Oilcode
Benefits to Consumers Costs to Consumers
· Increased flexibility in the structure of refiner/marketer · Ongoing rationalisation may reduce the number of retail
networks should decrease inefficiencies and associated sites
overheads that may have been passed onto consumers
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
200256.
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.
56
DITR 2002
30
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.
31
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 - Loss of Sites Act, which requires refiner/marketers to
-
purchasing from primary suppliers use franchise arrangements
Transparent supply documentation No industry specific restrictions on pricing behaviour
- -
Greater transparency and certainty in fuel re-selling
-
agreements
Extended coverage of fuel re-seller agreements
-
Dispute resolution scheme
-
Australian Institute of Petroleum (AIP)
The key representative body of Australia's petroleum refining industry.
Repeal of Sites Act - Commission agency arrangements covered by
-
Oilcode
- Disputes about fuel re-seller agreements may be
easier to resolve under Oilcode than Franchise Act
Independent Petroleum Group (IPG)
The representative body of the major independent importer/marketers.
Nationally consistent TGP arrangements for those - Commission agency arrangements covered by
-
purchasing from primary suppliers Oilcode
- Transparent supply documentation - No industry specific restrictions on pricing behaviour
- Dispute resolution scheme
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 - Commission agency arrangements covered by
-
purchasing from primary suppliers Oilcode
- Dispute resolution scheme - 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 - Commission agency arrangements covered by
-
purchasing from primary suppliers Oilcode
- Dispute resolution scheme
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.
32
Repeal of the existing legislation will allow the industry to be regulated solely by general
competition and corporations laws. This will provide a more effective 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 effective 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.
33
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
34
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]
35
APPENDIX A
History of Downstream Petroleum Reform Policy
Date Item Key Issues Outcome
Coalition
1996 Deregulatory policy for petroleum retailing: Issue were included in an ACCC
election policy review of the petroleum products
Principal aim of the policy was to enhance
-
declaration directed by Assistant
transparency, accountability and lower country petrol
Treasurer, Hon George Gear MP.
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.
ACCC Review of petroleum industry declarations under Prices ACCC reported findings to the
Petroleum Surveillance Act 1983. The scope of the review was Government on 15 August 1996. The
Products broadened by Treasurer Costello to include the Coalition Government responded in December
Declaration policy on terminal gate pricing and country petrol pricing. 1996, with conditional support for
repeal of legislation in exchange for
Findings included:
implementation of pro-competitive
- government regulations, especially price surveillance measures, including:
had been ineffective in achieving stated objectives and
- "access" to terminals regime;
possibly contributed to industry inefficiencies;
- improved transparency; and
- recommended repeal of Sites and Franchise Acts; and
- restoration of the voluntary Oilcode.
- 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.
Independent
1997 The Department of Industry, Science and Resources Findings included:
Review of commissioned an independent review of the Oilcode. - protections under the Sites and
Oilcode and The review, conducted by Mr Ray Braithwaite, considered Franchise Acts were not covered by
Petroleum the following: the Oilcode, other legislation or
retailing - the effective operation of the Oilcode in the event of business agreements;
repeal of the legislation; - there was a lack of incentives for
- possible measures to strengthen Oilcode; participants to adhere to tenets of a
voluntary Oilcode;
- would a strengthened Oilcode provide protection for
resellers under contract law; and - the existing legislation provided
limited protection for resellers; and
- options to facilitate repeal of the legislation.
- that repeal of the existing legislation
should be conditional on the
development of a strengthened
Oilcode and finalisation of other
legislative underpinnings.
The Fair Trading Statement was announced by then Statement included proposed
Fair Trading Minister for Employment, Small Business and Workplace amendments to the TPA which
Statement Relations, the Hon Peter Reith MP in response to the allowed for prescription of mandatory
HoR Standing Committee on Industry, Science and industry codes in regulation.
Technology Report, Finding a balance: towards fair The Government announced that
trading in Australia. industry codes would be developed
for franchising and petroleum retail
sectors.
36
Date Item Key Issues Outcome
Petroleum
1998 Policy statement announced by the Treasurer, the The first downstream industry reform
Marketing: The Hon Peter Costello MP and the then Minister for Industry, package was developed and included
New Era Science and Tourism, the Hon John Moore MP. the following initiatives to improve
(20 July) competition in the retail market:
The statement followed an extensive review of the
petroleum retail market by the ACCC. - 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 Commitment to refer Petroleum Retail Legislation Repeal Government decides that repeal of
election policy Bill 1998 to Senate Rural and Regional Affairs and legislation would not occur until
Transport Legislation Committee. consensus by all parties reached on
final arrangements for implementation
of the Oilcode.
Senate Rural
1999 Consideration of the repeal bill (Petroleum Retail Committee recommended Sites Act
and Regional Legislation Repeal Bill 1998) not be repealed for 2 years pending
Affairs and review of effectiveness of the
Transport proposed Oilcode.
Legislation MTAA support findings of committee,
Committee major oil companies did not.
Withdrawal of The Government announced it would not proceed with Australian Democrats Industry
reform reform package unless agreement reached on repeal of spokesman, Senator Aden Ridgeway
package the Sites Act. Major Oil companies are against retention motions for inquiry to examine issues
(23 September) of Sites Act coupled with introduction of Oilcode, whilst in petroleum retailing.
the MTAA is in favour of introduction of Oilcode but not in
favour of repealing legislation.
Senate Inquiry to examine provisions of the Fair Prices and Better Government decides not to continue
Economics Access for All (Petroleum) Bill 1999 and practice of multi- with implementation of the reform
References site franchising by oil companies. package.
Committee 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.
Petroleum
2002 Chaired by the Minister for Industry, Tourism and Issues raised at forum included
Industry Resources, the Hon Ian Macfarlane MP. Industry terminal gate pricing, fuel standards,
Forum represented by: and the relevance of existing
(April) legislation. Minister undertakes to
- Australian Institute of Petroleum (AIP)
further progress issues of concern
- Motor Trades Association of Australia (MTAA) through bilateral consultations.
- Australian Petroleum Agents and Distributors
Association (APADA)
- Petroleum Marketers Association of Australia (PMAA)
- Independent Petroleum Group (IPG)
37
Date Item Key Issues Outcome
Petroleum
2002 The Minister for Industry, Tourism and Resources Minister announces intention to
Industry launches the Downstream Petroleum Industry Framework introduce a mandatory Oilcode that
Forum document and announces six priority issues for guiding includes terminal gate pricing
(November) future retail market reform: arrangements and applies to all
industry participants. The Oilcode is
- terminal gate pricing;
to be developed through bilateral and
- APEC fuel study; multilateral discussions.
- 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.
Petroleum
2003 The Minister for Industry, Tourism and Resources Industry feedback is received and a
Industry releases draft Oilcode. final Oilcode is developed based on
Forum industry consensus and compromise.
(March)
Downstream Government consideration of the Downstream Petroleum The Government decides not to
Petroleum Reform Package, which represents a compromise by all proceed with the reform package.
Reform stakeholders, occurs.
Package
(December)
Energy White
2004 The Government notes that it continues to see merit in Government agrees that it would
Paper: reform of the downstream petroleum sector. reconsider implementation of the
Securing Downstream Petroleum Reform
Australia's Package, along the lines of Oilcode
Energy Future proposed in 2003, if and when
(April) industry consensus in support of the
reforms emerges.
Coalition Release of Coalition Resources and Energy Statement, Statement includes the following
Resources and Meeting Australia's Energy Challenge: the Coalition's election commitment: `Continue to
Energy Plan for Australia's Resources and Energy Sector. work with the downstream petroleum
Statement sector to achieve consensus on the
(7 October) introduction of an industry oil code'.
Ministerial The Minister for Industry, Tourism and Resources
media release announces the Government's intention to proceed with
(7 December) further industry consultation with a view to achieving
consensus support for the introduction of the Reform
Package.
Industry
2005 The Minister for Industry, Tourism and Resources Industry forum on Trade Practices Act
Consultation undertakes bilateral and multilateral industry consultation 1974 held.
on the Downstream Petroleum Reform Package.
38
PETROLEUM RETAIL LEGISLATION REPEAL BILL 2006
NOTES ON CLAUSES
Clause 1 - Short title
1. This clause is a standard provision setting out the title by which the proposed Act is to be
cited if it becomes law.
Clause 2 - Commencement
2. The Bill will commence on the day it receives Royal Assent. The Schedules will commence
by Proclamation and in any case within six months and one day of Royal Assent.
Clause 3 - Schedules
3. The schedules define the Acts that are to be repealed or amended on commencement of this
Bill.
Schedule 1 - Repeal of Acts
4. Upon commencement of this Schedule the Petroleum Retail Marketing Sites Act 1980 and the
Petroleum Retail Marketing Franchise Act 1980 will be repealed in full.
Schedule 2 - Consequential amendment
5. Upon commencement of this Schedule reference to the Petroleum Retail Marketing Franchise
Act 1980 will be deleted from the schedule to the Jurisdiction of Courts (Cross-vesting) Act
1987.
However, this deletion will not impact on any matters already before the court in relation to
the Petroleum Retail Marketing Franchise Act 1980.
39
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