HD49 - Divorcement and Representative Offering for Inclusion in the Virginia Petroleum Products Franchise Act

  • Published: 1991
  • Author: Joint Subcommittee
  • Enabling Authority: House Joint Resolution 120 (Regular Session, 1990)

Executive Summary:
Although the General Assembly chose to enact Senate Bill 235 (Chapter 907 of the 1990 Acts of Assembly), it also passed HJR 120 to examine the allegations made by dealers that refiners were trying to force dealers out of business by imposing rigid operating standards and employing unfair marketing practices in the sale of motor fuel. Refiners refuted these allegations and pointed to changing business and economic conditions as the reason behind dealer troubles. The controversy begun with Senate Bill 235 continued during the course of this study.

The main focus of HJR 120 was divorcement and representative offering which are defined as follows:

Divorcement -- the prohibition of a refiner from operating any major brand, secondary brand, or unbranded retail outlet in the Commonwealth of Virginia with company personnel.

Representative Offering (wholesale competition option, or limited open supply) -- the ability of a dealer to sell one grade of motor fuel, which was purchased from sources other than the refiner with whom the dealer has entered into a franchise agreement, through leased underground storage and dispensing equipment, so long as the dealer fully observes all trademark identification requirements established by such refiner and fully complies with all federal and state laws and regulations pertaining to motor fuel quality specifications, handling practices, and labeling requirements.

Partial retail divorcement has been the law in the Commonwealth since 1979 and limits the operation of refiner-operated retail outlets to 1.5 miles from any franchised dealer outlet. Proponents of divorcement argued that total retail divorcement is necessary to ensure the economic viability of dealer operated outlets. Likewise, proponents of representative offering argued that open supply is necessary to ensure the economic survival of dealers. Proponents also claim that open supply will enhance their ability to compete as small businessmen, resulting in lower cost to consumers.

The subcommittee met four times during 1990 to consider its charge under House Joint Resolution 120. In addition to its initial organizational meeting at which testimony was heard, the subcommittee conducted two public hearings. The work of the subcommittee culminated in a final work session at which recommendations for legislation were formulated and put to a vote.

Several issues were resolved by this study. During the 1990 Session, language was added establishing a standard for refiners in charging dealers for the use of refiner credit cards. The standard limited the fee charged by refiners to the customary fee charged by credit card services to retailers who authorize use of credit card purchases. The testimony presented to the subcommittee indicated that the "customary fee" standard was, at best, a nebulous one and one which required disclosure of confidential bank records and other matters of contract between private parties. As a result, the subcommittee voted overwhelmingly to remove this standard from the provisions of the Virginia Petroleum Products Franchise Act.

On the issue of divorcement, the subcommittee rejected by a 2 to 1 margin any move toward implementation of full and total retail divorcement in Virginia. The vote of the subcommittee reflected the concern that total retail divorcement would reduce competition in the marketplace and therefore limit consumers' freedom of choice in the products they buy. By a majority, the subcommittee also rejected an attempt to relax the application of the 1.5 mile rule to allow refiners to operate company-operated retail outlets so long as such outlets were no closer than 1.5 miles from outlets operated by the refiner's franchised dealers.

On the issue of open supply, the subcommittee, by majority, voted against the implementation of limited open supply in the Commonwealth. The subcommittee pointed to testimony which indicated that open supply provisions are already part of a number of franchise agreements and are not utilized by dealers. Further, the subcommittee questioned the wisdom of legislating the terms of private contractual matters.