In 1626, Native Americans sold Manhattan Island to the Dutch for $24 worth of beads. Today, Manhattan’s assets number in the billions if not trillions of dollars. What if Native Americans were to come back, having seen the value of Manhattan today, and demanded “just” compensation?
It seems to me that the Enumclaw City Council is trying to do the same to the city of Buckley in regard to Buckley’s gas works that Buckley is selling to Puget Sound Energy.
Here’s some background. A gas pipeline was first constructed from Auburn to Enumclaw and Buckley in 1957. In 1995, the “wheeling” charge was increased to a higher rate for Buckley from Enumclaw. As a result the city of Enumclaw collected more money from Buckley. Today the city of Buckley can no longer afford to maintain its own gas utility and voters overwhelmingly approved the sale to PSE. But in order to complete the deal PSE had to agree to pay Enumclaw for the use of its pipeline to Buckley.
That’s where the rub comes in. Enumclaw Councilman Darrel Dickson, with the help of his father-in-law, Hugh Hales, a retired BYU chemistry professor who worked for oil companies, did some research and concluded that the city of Enumclaw had been receiving too little compensation from Buckley since at least 1995 and probably as far back as 1957.
Although PSE is offering $80,000 a year instead of the previous $40,000 that Buckley paid to Enumclaw, it was not deemed sufficient to make up for the losses Enumclaw suffered in previous years. Dickson and others on the council are leveraging to alter the PSE-Buckley utility sale to extract more money to compensate for these losses.
There could be consequences to pushing PSE. As Enumclaw City Attorney Mike Reynolds noted in a recent council meeting, PSE could extend a pipeline from Bonney Lake instead, leaving Enumclaw with all the costs of fixing the original pipeline built in 1957 but without financial support from PSE.
Bill Donahue, PSE administrator, noted in a question-and-answer session before the Enumclaw council that Enumclaw probably got more than just compensation from 1957-95 for letting Buckley use its gas pipeline.
If delays continue, relationships with Buckley will certainly deteriorate. More than a month has passed since the Enumclaw City Council voted to study the issue. At the March 24 meeting the council decided to hold a workshop on April 2, further delaying its approval for the Buckley sale of its utility to PSE.
It is my view that the Enumclaw council runs the danger of making major errors based upon a skewed understanding of economics.
Potential error 1: The council believes the city of Enumclaw has been taken advantage of by Buckley over the pipeline. Previous councils approved the contracts both in 1957 and 1995 and questioning these contracts today is a fruitless endeavor.
Two principles of capitalism are at work here: that all trade is voluntary and that trade increases wealth. Enumclaw voluntarily agreed to contract with Buckley, and both towns have benefited from the arrangement.
Several on the council seem to think it is their right and due to extract more money to make up for lost revenue. This leads me to their second error in thinking.
Potential error 2: The council is unaware of the principle of “sunk costs.” The definition of sunk costs is that all costs of a project can be recouped, even if no longer feasible. The money spent is long gone and cannot be regained. Trying to regain the income only continues the error. It’s like holding stocks that have decreased in value hoping the price will rise. If the council continues in that error, they are not facing the reality of the financial loss and then moving on.
Potential error 3: Some on the council may be focusing on the supposed losses since 1995 and forgetting the likely gains from 1957 to 1995.
The Enumclaw City Council is in danger of making one or more of these three potential errors. Continued delay will hurt relations with both the city of Buckley and PSE. Lost revenue is gone, and if the city made money on the contract from 1957 to 1995, perhaps it is time to accept the sunk costs from the 1995 contract and move on. Previous councils and administrations made decisions based upon what they understood at the time. Second guessing them is a waste of time.
I hope the Enumclaw City Council will realize the potential errors it may be making. Council members should listen to the recommendations of the administration and stop trying to reap benefits that can’t be realized. A further journey down this path is as unrealistic as Native Americans today demanding just compensation for their sale of Manhattan in 1626.