Australian Convenience Store News | Forecourt

eform of the industry came a step closer in November 2002 with the release of the Downstream Petroleum Industry Framework by the Federal Industry Minister.

As we flagged in the May 2002 issue of Australian Convenience Store News, reform of the industry was announced for 2003. Minister for Industry, Tourism and Resources, Ian Macfarlane, made this clear and unequivocal when he released the "Framework" last year.

The focus on refinery consolidation reflects the Government's commitment to retaining a refining industry that supplies the vast majority of the nation's petroleum needs. To do so, refiner margins need to increase through improved efficiencies, and in some instances, these efficiencies can only be realised through some form of rationalization. This does not necessarily mean closure.

"The worst case would be closure of refineries one by one with none of the efficiencies being available to the remaining refineries," says Bruce Harrison, Deputy Executive Director, AIP. Restructuring is more likely to take the form of merged operations. The government recognises the efficiency gains that are available from greater coordination.

"For example, linking the two Brisbane refineries with Lytton maximising petrol production, and Bulwer Island maximising diesel production may be more efficient," says Ian Macfarlane. "And these gains would generate a public benefit without a significant detriment to competition." Mergers would still need Australian Competition and Consumer Commission (ACCC) approval. This is now more likely to be forthcoming, with the Government supporting applications in the future.

Representing the Independents
The priority given to the refining industry and the likely introduction of an Oil Code covering all industry players (see later) has brought a new group to the negotiating table. The Independent Petroleum Group (IPG) represents the interests of the larger independent wholesale and retail suppliers - 7 Eleven, Gull Petroleum, Liberty Oil, Matilda Fuels, Neumann Petroleum, Trafigura Fuels, and Woolworths. Although significant industry participants - accounting for 25% of Australian petrol sales - they have remained outside the regulatory framework.

"It is not just the new Framework that has brought us together," says Neil Rae, Chairman, IPG. "It is also the recent structural change within the industry and government policy. With the major oil companies shifting from refinery exchange to buy/sell arrangements and the introduction of new fuel standards, competition has been reduced at the wholesale level. We are concerned that any margin improvements due to assistance to refiners could be used to target independent importers. Further, refinery consolidation will potentially reduce competition, particularly in States that do not have independent import facilities."

As discussed in the September 2002 issue of Australian Convenience Store News, the Federal Government is phasing in new fuel standards, including restrictions on the MTBE content of petrol from 2004. According to the IPG, more stringent fuel specifications have reduced imports in Western Australia. The Government is concerned with suggestions that the new fuel standards may limit competitive supply between 2004 and 2006.

"We don't want importers removed from the market for two years due to fuel standards," says the Minister. "But these concerns must be balanced with the environmental benefits of cleaner fuels." The effect of fuel standards is being examined in an APEC review of fuel supply security, and it is not clear at this stage of the process how this issue will be addressed in the final reform package.

A national terminal gate price system
The Minister stated early in 2002 that there will be a national terminal gate price (TGP) system, and that if it were not introduced voluntarily, it would be mandated as part of the reform process. Since then, three major oil companies and the importers have introduced new TGP models.

According to the Motor Trades Association of Australia (MTAA), fair, transparent pricing is the key to reform, and such a system would not allow for rebates and discounts. However, it is widely acknowledge that even if a restriction on wholesale price discounts and rebates is desirable, it would be very difficult to implement. "I don't know how we can stop discounting and not be accused of collusion," says Bruce Harrison. "There needs to be some consideration for volume," adds Garth Symington, General Manager, APADA. "If only there were some way to quarantine the volume consideration out of the price."

"The issue of discounting and rebates is still to be resolved, mainly due to the difficulty in finding a workable model," says the Minister. "We contemplated banning price support while allowing volume discounts to be negotiated in advance of transactions, but this creates problems for franchisees."

"Even if we can't prevent discounting by oil companies," says Jim Lamb, President, PMAA, "there needs to be some response when discounting undermines independents. If wholesalers want to compete on price, all buyers should get a lower TGP instead of franchisees getting price support and independents buying at a price above the retail market. There would be more competition at the retail level and the lowest cost operator would be able to sell at the lowest price."

"It is a problem when the wholesale price is above retail," says Minister Macfarlane. "An outright ban on retail sales below TGP would not work as it stops oil companies matching the price of larger independents." A set of principles covering the definition of a terminal gate price, the issue of discounting and rebates, and access provisions will form part of the Oil Code.

A national mandatory Oil Code, and no more Acts
It is fairly certain that the Government will repeal the Sites Act and the Franchise Act, and no-one is trying to keep them in place. The consensus is that they are useless. The discussion now is about the Oil Code that will replace them. "An Oil Code can help to secure the rights of franchisees and independent operators in dealing with suppliers," says the Minister. "As well as the terminal gate price system, the Code will cover the relationships between industry participants and incorporate the role of an independent arbiter. Although the arbiter will have no powers of enforcement, the Code will be placed under the TPA, and the arbiter can direct the ACCC to investigate."

The AIP has sought repeal of the Acts for many years, and now its concern is that the Oil Code does not replicate the Acts. The IPG is concerned that without the Acts, there will be no limit to the degree to which the major oil companies can control the retail market.

"Once the Code is in place, it is no longer an issue if oil companies own and operate their networks of sites," says Jim Lamb, "as long as they don't undercut the buy-price of other players. A major element of the Code will be dispute resolution. Most disputes could be fixed by a phone call. The arbiter (could be called the Fuel Industry Director) will have contact with senior management and will be independent of the courts and governments. With instant contact and a place to lodge any concerns about price, the Code will protect the TGP system."

"Currently, retailers feel that their only option is to request an ACCC investigation," says Minister Macfarlane. "With the new Code, the arbiter will undertake preliminary investigations - it may only require an explanation and could resolve many instances of concern. If a serious offence is suspected, the arbiter can direct the dispute to the ACCC for further investigation."

Whereas the Acts focused on the relationship between the major oil companies and retailers, the Oil Code will be broader, encompassing all industry participants. This reflects the changing structure of the industry, in particular the reduction in the numbers of single site franchisees, the increase in multi-site operators, and the growing numbers of commission agents in retailing for the larger independent networks.

"We expect the Oil Code to be a code of practice and ethics that spells out relationship principles for all players," says Garth Symington. "The Code needs to be mandatory to have any effect, and should be linked to the TPA provisions with respect to unconscionable conduct and misuse of market power. A key issue is that of tenure. Independent franchisees and commission agents need some tenure protection - probably less than nine years, but definitely greater than nine minutes."

In an unlikely alliance of views, the AIP and the IPG are reluctant subjects under the Code. IPG's members, currently outside the Acts, will now be drawn into the regulatory framework. "We don't need an Oil Code," says Neil Rae. "There is no reason to rope in the independents. The Code will be just another administrative burden and an attempt to tailor the way we do business. The consumer does not benefit from regulating companies such as ours."

On this point the AIP agrees. "We don't want regulation forcing the market towards a specific business model that is not necessarily the most efficient," says Bruce Harrison. "If specific retail models are regulated against this could affect competition and risk profile of the industry. In regulating a particular model, they could get it wrong."

However, the Government is hearing the concerns of retailers, and the MTAA is now supporting the repeal of the Sites Act and the Franchise Act subject to the introduction of an Oil Code that goes beyond the generic franchise code to the issues of tenure and pricing. "The industry is such that to repeal all regulation would create mayhem at refining and retail level," says Geoff Gardner, Deputy Executive Director, MTAA. The MTAA is also pressing the Government to tighten key provisions of the TPA that support the Oil Code.

Tightening the TPA
The MTAA in its own right, and as convenor of the Fair Trading Coalition that represents 300,000 businesses across all sectors, has made submissions to the Dawson review of the TPA for amendments to section 46 that covers misuse of market power. "We are also watching the Boral case currently in the High Court," says Geoff Gardner. "If the decision goes against the ACCC, then it is clear that Section 46 is not working and needs to be amended." The main changes sought are a replacement of the 'intent' test with an 'effects' test and the introduction of a 'cease and desist clause'. With these changes, a retailer would only need to show that their business had been affected by a supplier's behaviour (regardless of their intention) and could ask for the behaviour to stop while the case was being heard.

Sooner rather than later
The Minister could wait for the TPA to be amended (the review was due to report by end January), but by then the momentum would be lost. Even if the TPA changes are not made, there will be industry reform. By the time you read this, there should be a draft reform package under discussion. Once the final details of the Oil Code are negotiated, a final reform package will be with the Government for action in May this year.

"All players need to realise there will be a package of reform and they all need to get involved, contribute and possibly make concessions. If an independent arbiter is on the top of their wish-list, they must recognise that appointment only comes with the accompaniment of a national Oil Code and a national terminal gate price system. It's a trio of reforms: the three elements can't be separated and none will be sacrificed," says Ian Macfarlane.

Geoff Gardner sums it up for all when he says, "We remain very positive about the process. There is enough carrot and stick to get desirable change. If changes are implemented in 2003 this would be a wonderful result."

So, with all industry players agreeing that reform is needed and all participating in the process, will we all live happily ever after with the outcome?