Bills Digest No. 45   Petroleum Retail Legislation Repeal Bill 1998

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

Date Introduced: 25 November 1998

House: House of Representatives

Portfolio: Industry, Science and Resources

Commencement: If the Act is not proclaimed within six months of receiving Royal Assent, the first day after the six month period has elapsed

Purpose

To repeal the Petroleum Retail Marketing Franchise Act 1980 and the Petroleum Retail Marketing Sites Act 1980.

Background

1. Introduction

On 20 July 1998, the government announced reform of the petroleum industry drawing on recommendations of a report by the Australian Competition and Consumer Commission (ACCC) prepared in 1996.(1)

The reforms are not a direct result of, but are broadly consistent with, the National Competition Policy. (Refer to section 5, Competition Policy, for an overview of the National Competition Policy.)(2)

1.1 ACCC Inquiry

In August 1996 the ACCC made the following recommendations:

• The declaration of the four major oil companies(3) in relation to the supply of petrol and automotive distillate under the Prices Surveillance Act 1983 should be revoked
• Motoring organisations be urged to develop monitoring programs focussing on increasing the transparency of competitive conditions in country areas where prices appear excessive
• The Petroleum Retail Marketing Sites Act 1980 be repealed
• The Petroleum Retail Marketing Franchise Act 1980 be repealed
• The issue of simplification of new franchise agreements with oil companies be addressed
• Site remediation costs be considered in the Oilcode process
• The Commonwealth government establish the process and timetable for the opening of coastal shipping to international vessels
• The State and Territory governments give consideration to uniform franchise fees to eliminate border distortions, and
• The State and Territory governments give consideration to the mandatory display of price boards at service station sites.

1.2 Government Petroleum Retail Sector Reform Package

On July 20 1998 the government released details of its policy concerning the reform of the petroleum retail industry.

The package is stated to contain three main elements, namely measures to encourage competition, to protect consumers and to protect small business.(4)

The new arrangements:

• Lift prices surveillance and provide independent monitoring of retail prices
• Implement an 'open access' regime to terminals, giving new competitors improved access to the existing major oil refineries and access to the system of 'product swapping' under which the owner of a refinery in one part of Australia swaps product with a refinery in another part of Australia
• Introduce new procedures for resolving disputes between firms involved in the distribution of petroleum products, including small independent service station operators and firms involved in petroleum production
• Strengthen the Oilcode, which will establish new standards of behaviour backed by legislation. The principles will form the basis for regulations inserted under Part IVB of the Trade Practices Act 1974, and
• Relax the controls on the retail activities of the petroleum refining companies.

1.3 Current Progress Regarding Implementation of the Reform Package

• The Oilcode, which provides for alternative dispute resolution and new standards of behaviour in the petroleum retail market, is currently being drafted and is scheduled for release in December 1998.
• The declaration of the four oil majors in relation to the supply of petrol and automotive distillate under the Prices Surveillance Act 1983 has been revoked with effect from 1 August 1998.(5)
• The open access regime is a voluntary agreement made by way of undertakings provided by the oil majors to the Treasurer. It is not a regulatory matter.

2. The Petroleum Retail Marketing Sites Act 1980

The Petroleum Retail Marketing Sites Act 1980 (the Sites Act) fixed the number of sites that could be owned and operated by oil majors (direct vertical integration(6)) at half the level operating in 1980.

After receiving submissions on the subject the ACCC concluded that it is doubtful whether the Sites Act constrains the oil majors' involvement in the retail sector because this can be achieved by other vertical arrangements. The oil majors have used commission agents, price support, oil company cards, franchising and 100 percent ties to achieve the control at the retail level which the Sites Act sought to prevent.

Essentially the Sites Act has been bypassed using vertical arrangements to gain control of downstream activity.

3. The Petroleum Retail Marketing Franchise Act 1980

The purpose of the Petroleum Retail Marketing Franchise Act 1980 (the Franchise Act) was to address the imbalance in bargaining power between franchisors and franchisees by setting minium terms and conditions for franchise agreements.

When the Franchise Act was introduced the oil majors were generally opposed to it, while franchisees generally supported it. Yet despite the conditions imposed, allegations of harsh conduct persist and when the terms and conditions of the Franchise Act are translated into a legal document there is apparent confusion pertaining to the rights and obligations of franchisees and the scope of the franchisor's authority and powers.

The ACCC concluded that the existence of the Franchise Act appears to have little effect in terms of practical application to alleviate the imbalance it was introduced to address.

4. Oilcode

Established in 1989, Oilcode is an agreement between segments of the petroleum industry represented by their respective associations.(7)

Oilcode currently uses the contractual conditions defined in the Franchise Act as its basis and aims to provide for fair and reasonable conduct between oil companies, distributors and retailers and for the conciliation of disputes between such persons.

Obviously, without replacing the Franchise Act with another regulatory framework the force of the contractual conditions in Oilcode would be diminished.

Following industry negotiations, chaired by the Hon Andrew Rogers QC, draft principles for the strengthened Oilcode have emerged and will form the basis for regulations made pursuant to Part IVB of the Trade Practices Act 1974 to provide for a legally enforceable code of conduct for the petroleum retail marketing sector.

The draft principles may be summarised according to chapter headings as follows:

• Coverage
• Pre-contractual disclosure
• Business Plans
• Disclosure on assignment
• Continuous disclosure and review of business plans
• Alternative dispute resolution
• Re-negotiation of contracts
• Unilateral variations and discretions
• Tenure and renewal
• Termination and market exit
• Assignment
• Contracting out of Oilcode provisions
• Review and monitoring
• Minimum pre-contractual disclosure requirements, and
• Requirements for expiry and voluntary surrender of petroleum resale agreements.

It is proposed to table the Oilcode as a regulation under the Trade Practices Act 1974. The Oilcode is scheduled for release in December 1998.(8)

5. Competition policy

In October 1992, the Independent Committee of Inquiry into National Competition Policy (the Hilmer Committee) was established and on 25 August 1993, the Hilmer Committee recommended a policy comprising six main elements:

• Universal application of a set of competitive conduct rules
• Principles and processes to ensure greater scrutiny of government regulations or ownership policies that restrict competition
• A new legal regime to provide third party-party access to certain facilities that are essential for effective competition and which cannot be duplicated economically
• A targeted system of price oversight where pro-competitive reforms are not practical or sufficient, and
• A framework of principles for achieving 'competitive neutrality' between government owned businesses and private firms when they compete in the one market.

The policy framework was to be supported by two key institutions, the National Competition Council (NCC) and the Australian Competition [and Consumer] Commission (ACCC).

On 29 March 1995, the legislative package to implement the national competition policy was introduced into Federal Parliament and was agreed to by the Commonwealth and all State and Territory governments on 11 April 1995.

The National Competition Policy, introduced by the Australian Labour Party and supported by the Coalition, has attracted much and varied comment in terms of actual and potential success in achieving its outcomes.

In practical terms it is still early days in the implementation process and quantitative evidence of the reform agenda effect is relatively limited. The NCC has recently released its 1998 Annual Report and this indicates that reforms are delivering benefits in the form of lower prices and greater choice.(9)

It has been recognised, however, that there is a requirement for governments, Commonwealth, State and Territory, to more adequately explain the competition policy reform process and to increase the awareness of the role that public interest considerations play in competition policy.(10)

There is also recognition that whilst the reforms are broad ranging they do not impact to the same degree throughout Australia. The Productivity Commission has received a reference from the Treasurer to report by September 1999 on the impact of competition policy reforms on rural and regional Australia.

Both Labour and Coalition political parties support the concept of a National Competition Policy acknowledging that Australia must continue to seek ways to improve the efficiency and competitiveness of the economy.(11) Changes resulting from implementation of the National Competition Policy are considered to be an inevitable consequence of participation in the global economy.(12) It is acknowledged, as with all reform, that short-term impacts are contiguously apparent while long-term outcomes are less obvious.

It should also be noted that competition policy encompasses a broad range of policy actions aimed at promoting competition in the economy and covers such things as business conduct, market structure and regulation. The National Competition Policy is, however, focused on those issues identified by the Hilmer Report.

6. Conclusion

Consideration of current vertical arrangements within the petroleum products industry raises questions about the effectiveness and perverse effects of legislative attempts to restrain vertical integration.(13)

Vertical integration and vertical arrangements possess the potential to have substantive effects in terms of reducing costs and increasing efficiency in the petroleum retail market.(14)

The ACCC considered that vertical integration was not of itself a concern, however, lack of competition between vertically integrated firms engaging in horizontal arrangements(15) may have potentially adverse anti-competitive effects.

Finally, the restrictions imposed on the oil majors by the Sites and Franchise Acts seemingly have done little to alleviate dissatisfaction in other sectors of the industry.

Main Provisions

1. Schedule 1

Item 1 repeals the whole of the Petroleum Retail Marketing Franchise Act 1980.

Item 2 repeals the whole of the Petroleum Retail Marketing Sites Act 1980.

2. Regulations making transitional or saving provisions

Clause 4 states that regulations making provisions of a transitional or saving nature in relation to the repeals may be made.

Concluding Comments

1. Interrelationship between the Oilcode and the repeal of the Petroleum Retail Marketing Franchise Act 1980 and the Petroleum Retail Marketing Sites Act 1980.

It is clear that to achieve efficient pricing outcomes there is a need for structural adjustment within the petroleum retail market and for the introduction of new approaches that continue to minimise costs.

It is equally obvious that the rapid pace of rationalisation within the sector places significant stresses on relationships within the industry and indeed raises concerns of downstream industry participants.

In an effort to assuage the concerns of non-oil major industry participants it may be prudent to establish a clear link between the repeal of the two Acts, the subject of this Bill, and the introduction of the Oilcode into the Trade Practices Act 1974.

It may not be adequate to merely state that the intention is for the Oilcode to take effect from the date of repeal of the Franchise and Sites Acts.

The Bill permits a 6 month delay in the commencement of the Act to repeal the Franchise and Sites Acts if it hasn't been enacted by proclamation beforehand. However, without the actual production of the Oilcode in final form it is likely that downstream participants may be concerned with the potential non-coordination of the repeal of the Franchise and Sites Acts and the insertion of the Oilcode into the regulatory framework.(16)

Endnotes

2. ACCC, Inquiry into the Petroleum Products Declaration, 1996

3. Questions on the Industry should be directed to Mr Mike Roarty in the Science, Technology, Environment and Resources Group of the Department of the Parliamentary Library who assisted in the preparation of this Digest.

4. Ampol Petroleum (Victoria) Pty Limited, Ampol Petroleum (Queensland) Pty Limited, Australian Petroleum Pty Ltd, BP Australia Limited, BP Oil Distribution Limited, Mobil Oil Australia Limited and The Shell Company of Australia Limited.

5. Office of the Minister for Industry, Science and Tourism, Petroleum Marketing - The New Era Overview, 20 July 1998

6. Commonwealth of Australia Gazette, No.S 379, Friday, 31 July 1998

7. Graham Bannock, RE Baxter & Ray Rees, The Penguin Dictionary of Economics, 2^nd Ed., 1978, Vertical Integration: The undertaking by a single firm of successive stages in the process of production of a particular good. The petroleum industry is a good example of a vertically integrated industry. The major firms undertake exploration, drilling and extraction, transport of crude oil to refineries, refining into petroleum, fuel oils, etc., transport to distribution outlets and ownership of those outlets.

8. The joint governing members are the Australian Institute of Petroleum, the Australian Petroleum Agents and Distributors Association and the Motor Trades Association of Australia.

9. Senator Nick Minchin, Government Introduces Petroleum Retail Legislation Repeal Bill 1998, Media Release, 25 November 1998

10. The National Competition Council 1998 Annual Report, documents, in certain geographical areas, of Australia such benefits as average reductions in electricity prices up to 30 percent, cuts in gas prices of up to 50 percent, rail freight rates 40 percent lower, streamlined business licensing requirements, cheaper prices for government services and environmental benefits.

11. House of Representatives Standing Committee on Financial Institutions and Public Administration, in its review of the National Competition Council 1996-97 Annual Report (June 1998).

12. ALP authorised by Gary Gray, A Better Plan For Treasury, 23 September 1998

13. Treasury, Socio-Economic Consequences of the National Competition Policy, 19 November 1998

14. ACCC, Inquiry into the Petroleum Products Declaration, 1996 at page 43

15. ACCC, Inquiry into the Petroleum Products Declaration, 1996 at page 32, 'Vertical integration may lower costs by reducing the time needed to negotiate conditions of supply, reducing the risks of quality and consistency of supply problems in the spot market, gaining economies of scale and of scope and sharing common costs, such as site design and product advertising.'
16. Refinery exchange agreements, borrow and loan arrangements and joint terminalling are horizontal arrangements in which oil majors are involved. The stated purpose of these various arrangements is to reduce cost and supply risk.

    Graham Bannock, RE Baxter & Ray Rees, The Penguin Dictionary of Economics, 2^nd Ed., 1978,Horizontal Integration see Merger: The fusion of two or more separate companies into one. Where two firms in the same business, ie., competitors, merge, this is known as horizontal or lateral integration.

17. An effort is apparently being made to ensure coordination of these events and therefore continuum of protection to small business. It is intended that the Bill will be enacted by proclamation and therefore permit presentation of the Oilcode regulatory framework at the same time.

Contact Officer and Copyright Details

Lesley Lang
1 December 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
© Commonwealth of Australia 1998

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Published by the Department of the Parliamentary Library, 1998.

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