Pay at the Pump

Eventually his Hesperia account ran short and Shell put him on COD, which constricted his cash flow. Reed gave up the keys in August of last year, hoping to salvage his Victorville station. But Shell began withholding his credit card reimbursements, claiming he still owed the company money from the Hesperia location. The amount swelled to $50,000 before he threw in the towel. He still owes $100,000 on his SBA loan. "Right now, I'm very bitter," Reed says.

In court filings, Shell has denied that anyone ever told dealers that the Variable Rent Program would remain in place indefinitely. But financial statements prepared by prospective dealers with the company based estimated profits on a variable rent; in five cases, the statements each would have shown a net loss had the higher, contract rent figure been applied. One of those, submitted by dealer Martin Swofford for a station in San Ramon, California, and approved by the company, induced Swofford to buy the station. One month later the VRP was canceled. Dealer rep Ken Giffin stated in a related court filing that he and other employees were instructed to tell dealers the VRP was to continue indefinitely. "As a practical matter, dealers were dependent upon the VRP program economically, and the company knew that."

Though Shell is the most recent oil company to spike rents, it didn't invent the concept. In the 1980s Texaco figured out that raising rents to the breaking point was a good way to obtain locations the company wanted for itself. "The basic philosophy was, they just kept raising the rents 'til (the stations) wouldn't be profitable," says former Texaco employee John Gryder. A dealer rep until he retired in 1988, Gryder would make rent recommendations in pencil and forward them to his boss. When they came back, the figures had been inked -- at 20 percent higher than what Gryder thought fair. "They discriminated as a policy," he says.

Rents aren't the only expenses that have been thinning dealer bottom lines. In recent years, new contracts have forced lessee dealers to pay expenses once borne by the companies, including maintenance and property taxes. Withholding of credit card reimbursements, a major cash flow issue for many dealers, has become increasingly common -- San Francisco Bay Area Shell dealer Bob Oyster saw his withholding climb to more than $100,000 last year before the company finally settled his account.

The latest contracts -- offered on a take-it-or-leave-it basis -- include other provisions that profoundly affect a dealer's future prospects. Before 1990, dealers who had built a good business could count on the opportunity to sell their stations and reap the reward of their sweat equity. Shell, Texaco, and Chevron now require huge "transfer fees" -- up to 35 percent of the difference between what the dealer paid for the station and the sale price -- if a dealer sells his business to someone other than the company. The Shell and Texaco leases also state that prospective buyers who aren't already dealers for those companies are subject to a one-year "trial franchise" that doesn't have to be renewed by the companies.

Finding a buyer willing to lose an investment of $250,000 or more after a year is no mean feat. Even if dealers do, the companies won't always approve them, especially if they covet the location. A jury awarded Los Angeles-area dealer Carl Eastridge $5.1 million in 1983 because Shell rejected a dozen qualified buyers for his station. Houston Exxon dealer David Vawter, who settled a fraud case against the company for $250,000 in 1993, subsequently had 10 buyers rejected before Exxon informed him this year that his station was no longer in the master plan and would be "surplused." Eight other dealers told similar stories.

The new Shell and Texaco leases even ask the dealers to sign away any legal claims they may currently have or might have in the future, even though the right to seek relief in the courts is guaranteed them by the '78 Petroleum Marketing Practices Act.

The companies don't always ask dealers to abandon their rights first before shredding them. According to federal law, the dealers have the right to set whatever price at the pump they want without interference from the supplier. Companies do have the right to make recommendations, but that's it. As a Shell retail manager typically put it, such "price counseling" is merely "creating an awareness with some of our lessee dealers about the competition in the marketplace."

But dealers say the companies constantly pressure them to lower their price and reduce their margin, then punish them if they don't obey. Phoenix Mobil dealer Tom Van Boven says he regularly gets a "target price" from the company. "If I don't comply with their target price, the next day I get a 2-cent increase (in cost)," Van Boven says.