Pay at the Pump

Former Arco dealer rep Ron Raville testified in a 1996 deposition that while the company couldn't force dealers to cooperate on prices, it could make their lives miserable by withholding gas and not returning phone calls. And a former Shell rep says that during his tenure, dealers were allowed to make 8 cents a gallon, and no more. If a dealer tried to do better, "They'd raise his price."

Of all the squeeze tactics most galling to the dealers, however, one stands out as universal: zone pricing, the practice of breaking up metro areas into zones and charging different wholesale prices depending on the zone. The idea behind zone pricing, at least according to the companies that employ it, is to help dealers in highly competitive sectors without having to drop prices in an entire region. Since discrimination on wholesale prices is illegal, zone pricing gives companies the flexibility to support individual dealers depending on market conditions. "At Chevron, we price our wholesale gasoline to our dealers at prices that will allow them to be competitive," wrote a company spokesman in a 1999 letter to Arizona state Representative Barbara Neff.

That's the theory, anyway. In practice, dealers say, zone pricing is used to charge whatever customers are willing to pay in a given location as well as to keep uncooperative dealers in line. "The price is based on demographics," says Dennis DeCota, executive director of a California dealer trade organization. "The companies charge what the market will bear."

Proving DeCota's theory is an impossible task, especially because the companies collectively say the zone maps are proprietary. Where zones were once broadly defined using natural boundaries, such as rivers or interstate highways, now they can change block to block. But the huge spreads in relatively close areas seem difficult to justify. In August, for example, Mobil dealers in Scottsdale, a Phoenix suburb, were paying 14 cents per gallon more for regular gas than Mobil dealers in nearby Mesa. An Arco marketing manager told the (Arizona) Tribune in April that its maximum zone spread was 2 cents, but dealer invoices from the same day showed a 9-cent difference.

As for the theory that the lower prices exist to help dealers, Phoenix Texaco dealer Dave Saifi is among many who would disagree. When an Arco company-op opened less than a mile from Saifi three years ago and sold 3 cents below his cost, his Texaco rep told him that Arco wasn't considered the competition. When the price at the Union 76 across the street from him took a dip, he says, he got no assistance despite repeated requests. But when the 76 price went up, his cost went up with it. "According to them, nobody's any competition," Saifi says.

One former Shell marketing manager, who asked to remain anonymous, says the zone prices in his area were set by computer. Select stations in each zone would be surveyed daily, fed into the computer and an average price calculated. The zone price would then be 6 to 8 cents below the average in order to control the dealer's profit margin.

Of course, exceptions could be made. "If the district manager didn't like the guy or he wasn't pricing the way we wanted," he says, "up went the price."

With the specifics of zone pricing so nebulous, companies can pretty much charge whatever they want, wherever they want, as long as consumers are willing to pay. The potential for abuse -- and mounting evidence contradicting the industry rationale -- has spurred a number of legislative looks at the practice. And while zone pricing has been upheld as legitimate in the courts, elected officials such as Connecticut Attorney General Richard Blumenthal would like to change that. "Zone pricing is invisible and insidious," Blumenthal testified before the U.S. House Judiciary Committee in April. "It benefits only the oil companies, to the detriment of consumers."

Bill Schutzenhofer had a vision for Shell. The former head of Shell's marketing operations who retired in 1996, Schutzenhofer believed that the company's interests were best served by a professional network of dealers who could build brand loyalty by providing community-based service the way only a small-business owner can. Though gasoline retailing changed radically during his 14 years in charge, he says, the essentials -- good service, image, and price -- have been the same for half a century. "For us to succeed," Schutzenhofer says, "we had to have futuristic thinking without ignoring tradition."

For him, the future meant a transition from the old-style service station to the modern convenience store model; from stations that pumped 30,000 gallons a month to stations that averaged at least five or six times that figure. And though the one-station dealer with a mechanical bent might not have a place, tradition still meant the dealer, albeit a savvier breed that could operate several locations. "I can assure you that the dealers who ran multiple leased service stations for Shell had a passion to succeed," Schutzenhofer says. "And they would do anything Shell wanted them to do."