Oil companies
fuel decline
of gas dealers

Dealers say rent is being raised
to unaffordable levels, despite a law
intended to help them

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By Tim Ruel
truel@starbulletin.com

Warren Higa is prepared to walk away from the Shell station he has run in Makiki for the past 22 years.

Shell is asking for a monthly lease that would reach $19,000 after two years, more than twice what Higa pays now. Shell is also asking that Higa sign a personal guarantee for the lease. If Higa were to walk away from the station before the three-year lease expires, Shell could go after his personal property, such as his home, to collect any amount owed on the lease.

"That's a real dealbreaker," Higa said. "It works totally in favor of the oil company and totally against the dealer."

A Shell Oil company spokes-man could not be reached for comment.

Despite the passage of a 1997 state law that was supposed to protect Hawaii's gasoline dealers from being replaced by stations run by oil companies, approximately 30 dealers have gone under since, according to the Hawaii Automotive Repair and Gasoline Dealers Association.

There are various reasons for the decline. For example, Shell scarcely used company-operated stations before a 1998 joint venture with Texaco.

But some local dealers blame loopholes in the state law, as well as a lawsuit over a portion of the law that restricts the amount the oil companies can charge to dealers for rent.

Under the law, Higa estimates his rent should be about $14,000. The Shell lease gives him a choice of paying the capped amount of rent. However, if the state loses the lawsuit over the rent cap, Higa would be liable for the difference.

The oil companies, which oppose the 1997 law, say dealers are going out of business because dealerships are a less efficient way of serving the marketplace.

"People don't choose where they buy their gas based upon saying this a dealer or company-operated station," said Albert Chee, spokesman for Chevron Corp. Consumers make their choices based on factors such as convenience, the type of services provided and price.

Plus, the recent arrival of massive gas stations run by retailers such as Costco Wholesale is providing heavy competition.

"We're dying," said Harvey Okamura, whose family has run the Aiea Shell dealership since 1969. His lease nearly doubled to $10,000 a month in 1998, though he plans to hang on. "I'm a diehard," Okamura said.

Consumers should be concerned about the situation, because the consequence of fewer dealers and more company-run stations will be higher gas prices, Higa said. Dealers are independent businesspeople, who can offer a variety of discounts and services to beat the dealer across the street, Higa said.

"If you take out all the dealers, [the oil companies] can price the way they want to price," Okamura said.

During recent arguments in the state's antitrust lawsuit against the major oil companies, attorneys for the oil firms repeatedly said Hawaii has high gas prices because just a few oil firms serve the local market. The companies are naturally discouraged from competing with each other, because they would collectively lose money.

"I can guarantee that [the price is] going to go up and up and up and the state's going to suffer," Higa said.

Chevron disputes that. There is no evidence of heavy price competition among the dealers to begin with, Chee said.

Company-operated gas stations are more economically efficient than dealer stations, because the oil companies have more control over operations, said Ken G. Smith, Chevron's marketing manager in Hawaii. Chevron benefits from the reduced costs and can pass savings on to customers, he said.

Chevron, one of two companies in the state that refine gas, has increased its number of company-run gas stations. Two years ago, five of Chevron's 48 stations on Oahu were run by the company, or about 10 percent, Chevron said at the time. Chevron now has nine company-run stations out of 38, or 24 percent.

Some dealers, even those who have already lost their stations, defend the oil companies. "I don't blame them," said Mike Hamada, who walked away from his Shell dealership on Vineyard Boulevard in November. "They're in business to make money."

The dealers are in business to make money too, but they're not making as much as they once did. Profit margins, which used to be more than 20 cents per gallon in the 1980s, are now closer to 3 cents per gallon, dealers said.

"When business was good, nobody was grumbling," Hamada said.

Another law

In response to concerns from some dealers, the state Legislature is again looking at ways to bolster the 1997 law. Similar efforts last year died early in the session.

Originally, the law provided that oil companies could replace a dealership with a company station, but only for three months, after which the company would have to find a dealer to run the station.

The law has since changed so that an oil company can replace a dealer with a company-run gas station for up to two years.

Because of the two-year time period, dealers have fewer stations in the islands to pick from, said Frank Young, a former dealer who agreed to vacate his Kakaako station in January after Chevron sued to evict him for violating his lease agreement.

One proposal, introduced by a group of House Democrats, would shorten the amount of time an oil company can run a former dealer station back to three months. State Rep. Hermina Morita said she will try to keep the proposal alive, at least until the bill moves from the House to the Senate, where its fate is less clear.

Oil companies oppose the measure. In general, having two years makes it easier to decide how to fix a station that has business problems, Chee said. If Chevron were only given three months, it would likely close more stations rather than invest in them.

If it weren't for the new law, Chevron would have invested in building two more stations each year in Hawaii, at a projected cost of $1 million to $2 million per station, Smith said. Since 1997, Chevron has only built two stations, both of which are run by the company.

But Chevron would prefer to eliminate the entire 1997 law, which is known as Act 257.

Under the law, oil companies cannot build a new company-operated station within one-eighth of a mile of any dealership on Oahu. On neighbor islands, the distance is one-quarter of a mile. The rule represents a milder form of "divorcement," a restriction that some states have imposed on company stations. Maryland has had an all-out ban on company-run stations since 1979 (the U.S. Supreme Court has upheld the law).

Chevron opposes divorcement as a restriction on the marketplace that leads to higher gas prices and poorer service, Chee said. It allows weaker, badly run dealerships to survive competition. To bolster his point, Chee gave the Star-Bulletin an 8.5-pound notebook full of expert studies and opinions that oppose divorcement.

About efficiency

"This may be hard to believe, but the oil companies are the most efficient player in the marketplace, and with those efficiencies, they are able to offer the best services and the best products at the best price," Chee said.

His point was supported by John Umbeck, a Purdue University professor who has studied the Maryland law. Umbeck also plans to testify as Chevron's expert at the rent-cap trial.

Divorcement leads to higher prices because it protects dealerships from competition by the leaner company-run stations, Umbeck said. "Typically the capitalist system allows you to come into the market with a better idea," he said.

But divorcement isn't only about gas prices; it's about protecting the other things that a dealer offers to a community, Frank Young said. A dealer conforms more to local customers than a company that has nationwide policies, he said. A dealer could open customized accounts for business customers or carry local foods. "There's a more intimate relationship," he said.

Day in court

The trial over the rent cap is scheduled to begin Tuesday before U.S. District Judge Susan Oki Mollway, who will decide the case without a jury.

The cap was meant to prevent the oil companies from forcing dealers from their stations by using economic eviction, dealers said. Chevron argues that the cap was unconstitutional.

Under the law, the maximum amount oil companies can charge for rent is 15 percent of a dealer's gross profit at the pump, minus the applicable taxes that are paid by the dealer, plus 15 percent of gross sales of items other than gas, such as food and mechanical service.

Chevron's leases on Oahu are cheaper than what the law calls for, said Chevron's Smith. However, Chevron wants to charge rents on the neighbor islands that would exceed the cap, he said.

In November 1998, U.S. District Judge Alan Kay ruled the case in favor of Chevron in summary judgment, saying the law failed to promote the state's interest of lower gas prices. Kay's ruling was overturned in 2000 by the 9th Circuit Court of Appeals, which said summary judgment was premature because there was still a factual dispute on whether the law would lead to lower gas prices in Hawaii. On March 16, 2001, the U.S. Supreme Court declined to review the case, letting the appeals court decision stand.

The trial is likely to be an economic debate over rent controls, with Chevron and the state backing their cases with experts.

Chevron argues that the law does not lead to lower gas prices because the company is forced to make up for decreases in rent by raising wholesale prices. What's more, Chevron says, existing dealers can cash in on the added value that the rent cap provides by selling their stations at an inflated price, leaving no benefit for consumers.

Other dealers are mired in separate legal battles. Tomorrow, Arco dealers face eviction proceedings in state court by their owner, Dallas-based U.S. Restaurant Properties Inc., which is attempting to sell the stations to Lex Brodie's Tire Co.

Meanwhile, Warren Higa has until the end of the month to sign his new Shell lease in Makiki. He has already made up his mind, however. He's not going to sign, which gives him until May to move out.

"All these years I was a good proud Shell man," Higa said. "They've been a good oil company and they've been good to me, but I think they're doing something wrong here."