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Wednesday, 22 August 1984
Page: 98


Senator BUTTON (Minister for Industry and Commerce)(10.14) — I move:

That the Bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows-

This Bill, and its companion, the Petroleum Retail Marketing Sites Amendment Bill, which I will table shortly, propose changes to the petroleum retail marketing legislation package introduced in 1980. That legislation aims to provide lessee service station operators, called 'Franchisees' in the Bill, with certain basic protections, the Petroleum Retail Marketing Franchise Act, and to limit the number of oil company direct-operated retail sites, the Petroleum Retail Marketing Sites Act. A review of the legislation was announced on 18 May last year. This review was necessary because, since the introduction of the legislation, many problems have arisen in the operation of both Acts.

An important feature of the review conducted by the Department of Industry and Commerce has been the close consultation with all groups affected by the legislation-oil companies, dealer groups, consumer groups and State government departments. All parties displayed a very constructive attitude in addressing the many problems which have come to light during the operation of the legislation.

The amendments to the Franchise Act contained in the Bill now before the Parliament are quite extensive. Many of the amendments have arisen from the consultations and have the general agreement of the industry. However, I must emphasise that this Bill does not seek to alter the basic policy direction of the franchise Act, which is to confer basic rights on lessee service station dealers. Rather, it seeks to simplify the Act, and make it more effective and balanced between the parties.

The current legislation was introduced by the previous Government following sustained criticism of marketing practices and the highlighting of serious problems in the industry by the royal commission on petroleum in 1976. The commission drew attention to alleged unfair price discrimination, increasing vertical integration by the major oil companies and unfair leasing arrangements between the companies and their lessee dealers. The oil industry marketing consultative committee which was subsequently formed and the national oil industry conference failed to find agreed industry solutions to the serious problems in petroleum marketing.

It would be helpful at this stage if I were to outline briefly the main features of the current franchise Act.

The Act provides basic protection for certain dealers, both in the pre- franchise period, and during the currency of a franchise relationship.

An important condition for this protection, however, is that there is a franchise relationship in regard to the retail sale of motor fuel. Such a relationship demands three basic elements: the first involves the use by a franchise dealer of a Franchisor's Trademark in connection with the retail sale of motor fuel; the second relates to a right granted by that franchisor permitting the franchisee to possess, occupy or use premises for the retail sale of motor fuel; and the third entitles the franchisor to supply motor fuel for retail sale at those premises.

Where such a relationship is contemplated, the Act requires that information known to a potential franchisor, which is material and relevant to the operation and profitability of the relevant marketing premises, be made available to the potential franchisee. Once a franchise relationship is entered into, the Act protects a franchisee's tenure by guaranteeing a minimum term of three years and providing an entitlement in most circumstances to two three-year renewals. Termination of such a relationship by a franchisor is prohibited except on specific and limited grounds.

The Act generally prohibits a franchisor from discriminating between its franchisees in the price of motor fuel supplied to them, or in any discounts, allowances, rebates or credits given or allowed to them in respect of such fuel.

I should stress that the Act is not restricted to the franchise relationships of the major oil companies. It may also apply to the relationships involving any other companies engaged in petroleum retailing. The important condition for the Act's application is the existence of the three basic elements of a franchise relationship I mentioned earlier.

I now turn to the problems identified with the current legislation and the amendments contained in this Bill. A major problem that has arisen with the operation of the Franchise Act is that it has applied to a wider range of franchise relationships than was originally intended.

I understand that it was intended, and still is intended, that the Franchise Act would apply only to those relationships where a franchisee operates a typical ''retail service station business'', making retail sales of motor fuel on his own behalf, and not as an agent or employee of an oil company/franchisor.

Wholesale fuel establishments, referred to in the industry as depots, are the most obvious example of the Principal Act having a broader application than was intended. A significant number of lessee depot operators, in addition to their normal bulk and wholesaling functions, have historically engaged in some retailing, though usually as a minor part of their normal functions.

I also understand that it was intended that the Franchise Act would apply to franchise relationships in respect of depot or bulk sites if retail sales constituted a significant proportion of total sales. On the other hand, if retail sales were only a minor and incidental part of total sales, the Act was not intended to apply.

The reason the Franchise Act has inadvertently applied to many depots is attributable to the current application test which is based on the percentage of retail sales to total sales made at a particular site. This test has been found to be inappropriate as it applies the Act to some marketing premises which have only minimal retail sales, and yet fails to apply it to others which have significant retail sales.

The Franchise Amendment Bill introduces a new application test-a 'volume threshold' test. This new test will apply the Act only to franchise relationships where retail sales of motor fuel at the marketing premises, effected by a franchisee on his own behalf, exceed 360,000 litres per annum.

The objective behind the new test remains the same-the amended Act is not intended to apply to franchised premises with quite minimal retail sales. While the volume threshold level of 360,000 litres per annum is acknowledged to be well below the minimum economic throughput of an average lessee service station, the level was chosen following consultations, to ensure that the maximum number of franchise relationships will continue to have the protection of the Act. The government proposes to review the level of the volume threshold test periodically.

Because of this important change in the application of the Act, some transitional arrangements are required to cater for premises whose status under the current legislation may change when the amended Act comes into effect on 1 January 1985. These arrangements are contained in clause 25 of the Bill and concern essentially two major categories of marketing premises.

The first relates to existing franchise relationships pertaining to retail service station type premises. These will continue to have the protection of the amended Act from the date of its commencement, 1 January 1985, irrespective of whether or not retail motor fuel sales at those premises during 1984 met the new volume threshold. All such relationships will be accorded full protection of the Act for at least the year 1985.

In effect, a one year transitional period is to be allowed, during which time a franchisee will have the opportunity to meet the new test. For most true retail service station-type businesses, the threshold should present no problem, for as I have already mentioned, the threshold level has been set below what is regarded in the industry as the minimum economic throughput of an average lessee service station.

For those franchised premises, however, which do not meet the volume test in the year 1985, there will be no obligation on the franchisor to renew the franchise relationship when that relationship is next due for renewal. Failure to satisfy the volume threshold in 1985, or any subsequent year for that matter, will become a possible ground for non-renewal under the amended Act but, as such , it will be subject to the express safeguards of the Act relating to renewal.

The second major category of marketing premises dealt with in the transitional provision, clause 25 of the Bill, relates to franchise relationships pertaining to predominantly wholesale fuel establishments or depots. The Bill clarifies the unintended application of the Act to such outlets by expressly removing them from the Act, in the following manner.

A definition of a 'bulk site agreement' is provided to describe establishments to which the amended Act will not apply. In essence, marketing premises will be regarded as bulk wholesale sites where not more than 25 per cent of the total petroleum products dealt with at the premises during 1984 consisted of retail sales of petrol. This definition has attempted to capture the totality of the operation of a bulk site by recognising that products, in addition to being sold from the site, may also be transferred through the site to other storage places or marketing premises.

The amended Act will not apply to such sites for the remainder of their fixed lease periods. This temporary exemption is necessary to permit oil companies the opportunity to renegotiate their agreements relating to their own bulk sites to ensure the Act does not apply, if they so wish. Otherwise, a relatively small amount of petrol retailing might bring a predominantly wholesale business under legislation designed to regulate franchise relationships involving the retail marketing of motor fuel.

To allow companies the opportunity to renegotiate their agreements relating to bulk sites, it has been necessary for the Bill to provide for an amendment to section 7 (1) of the Act to permit what in effect might be described as ' contracting out' of the Act. This amendment, set out in clause 5, is, however, confined to agreements in respect of marketing premises which meet the test of a bulk site. It cannot be used by franchisors to deny the application of the amended Act to retail service stations to which the Act would normally apply.

I will now outline the other important amendments in this Bill.

Clause 8 introduces a new section into the Act to provide that payments required to be made by a franchisee during the currency of the franchise relationship, other than payments for motor fuel or other stock in trade, must not be increased unreasonably by the franchisor. At present, this protection only applies at the renewal stage of a franchise relationship. The new section will extend to the consideration of any rebates, waivers, discounts, allowances or other like arrangements which affect the actual amounts required to be paid by a franchisee.

Clause 15 introduces several additional grounds for termination of a franchise relationship. These cater for situations which are beyond the control of either party to the relationship, notably where the marketing premises are to be compulsorily acquired by the Commonwealth, a State, Territory or local government, or where the sale of motor fuel at the marketing premises is no longer permissible due to a change in a law relating to the use of the land.

Clause 16 deals with renewal of franchise relationships, including the mechanical and administrative procedures relating to renewal and non-renewal. I do not propose to talk about these procedures here, except to say that the reordering and clarification of section 17 of the current Act should assist all parties in their future renewal dealings.

There are however, several important new grounds for non-renewal which are worth mentioning. The first concerns the requirement that a franchisee achieve the volume threshold level of 360,000 litres per annum in each year of the three -year agreement.

This amendment will ensure that the basis for entitlement to the protection of the act at the commencement of a franchise relationship is continued throughout the renewal stages of the relationship, guaranteeing a minimum volume throughout for a franchisor before requiring a renewal of the relationship.

A further important ground for non-renewal concerns redevelopment of a site. Under clause 16 a franchisor will be able to refuse renewal where it proposes, in good faith and in the normal course of business, to occupy and use the marketing premises wholly for purposes other than the retail sale of motor fuel, or where it proposes to redevelop the premises wholly or principally for purposes other than the retail sale of motor fuel. This amendment is intended to broaden a franchisor's ability to refuse franchise renewal in order to obtain vacant possession of premises, and should assist in orderly rationalisation of sites in the industry.

It is not the Government's intention to entrench uneconomic sites and this amendment should clarify our position in this regard.

Clause 18 introduces certain protections for a franchisee made necessary because of the new redevelopment ground for non-renewal, which I have just mentioned. Situations may arise where a franchisor has not renewed a franchise relationship due to the planned redevelopment of the premises, but the redeveloped premises are to be used, in some capacity, for the retail sale of motor fuel. The franchisor will be required in most cases to offer the former franchisee the opportunity to remain at the premises under a new agreement, on terms no less favourable than those offered to other persons. This amendment should ensure that the redevelopment ground for non-renewal is not used as a means of denying an existing franchisee's security of tenure.

Clause 20 makes an important clarification to the prohibition of certain price discrimination in section 20. The act is presently unclear as to whether the prohibition of price discrimination by a franchisor amongst its franchisees relates only to motor fuel supplied for retail sale or whether it also covers wholesaling. This prohibition is being clarified to confine it to motor fuel supplied for retail sale.

On a more general note, the Government has given careful consideration to submissions on alleged price discrimination in the industry and to suggestions that the scope of section 20 should be broadened to include other classes of resellers, for example, owner-dealers. The Government is of the view, however, that the original intention of the franchise act in only regulating the relationship between a franchisor and its franchisees should be preserved. The Government considers it would be inappropriate to extend the franchise act to prohibit a franchisor from supplying motor fuel to its franchisees at different prices from those offered to other classes of resellers.

Clause 21 amends section 21 to allow franchisors to seek court relief to enforce provisions of the act or restrain contraventions of it. Section 21 in the act is currently restricted to franchisees, and this change should give franchisors an equal opportunity to protect their position under the act. Similarly, the clause amends section 22 to allow franchisors to be compensated by franchisees where the franchisor suffers loss or damage by reason of the franchisee contravening a provision of the act.

Clause 22, relating to the jurisdiction of courts in matters arising under the act, clarifies the intent of the government not to restrict the exercise of federal jurisdiction by the inferior courts of each state and territory in respect of all matters arising under the act, where those lower courts possess the authority to deal with such matters. It is the Government's belief that this amendment will permit parties to pursue remedies under the act which involve more speedy and less costly litigation.

This Government will continue the previous policy of having the franchise act enforceable by private action only.

The government considers that the measures contained in this bill will clarify the intention and application of the act and redress a number of the imbalances which have become evident in its operation. The changes will remove a number of the present restrictions on oil companies in rationalising their retail networks , at a time when the desire of the industry is that such rationalisation should occur. In proposing the amendments, the Government has also been conscious of the need to preserve certain protections for, and rights of, franchisees.

It is the Government's belief that the franchise act has done much to improve many of the problems in petroleum marketing relationships. We feel there is a greater understanding and tolerance now by all parties as to each others' problems and perceptions. As a result we believe that fairness and good relations will continue to prevail in dealings amongst all parties in the industry. The act when amended should provide the basic ground rules for this to occur.

FINANCIAL IMPACT STATEMENT

The measures introduced by this Bill will require no additional financial outlay by the Government.

I commend the Bill to the Senate.

Debate (on motion by Senator Reid) adjourned.