The San Bruno Explosion Was an Early Example of That

In this episode, Wall Street Journal reporter Katherine Blunt discusses her new book, California Burning: The Fall of Pacific Gas & Electric — and What It Means for America's Power Grid, in which she details PG&E’s decades of setbacks and missteps.

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David Roberts

Reporter Katherine Blunt was still new to The Wall Street Journal when 2018’s devastating Camp Fire broke out in California and she was swept into the biggest story of her career. Alongside colleagues Russell Gold and Rebecca Smith, she wrote a series of pieces on the ongoing travails of Pacific Gas & Electric, or PG&E, the utility whose power lines had started at the Camp Fire.

The Journal's coverage was a finalist for the 2020 Pulitzer Prize, and Blunt has now expanded it into a new book: California Burning: The Fall of Pacific Gas & Electric — and What It Means for America's Power Grid. It is a rollicking tour through PG&E’s decades-long series of disasters and their roots in the early 20th century.

I am a longtime critic of utilities, but even I was stunned to see all of PG&E’s incompetence and malfeasance gathered together in one place, alongside its well-meaning but serially failed attempts to put things right. It’s a story of failure and redemption, except the redemption keeps being interrupted by more failure.

I couldn't put the book down, so I am eager to talk to Blunt about how the utility’s travails began, why is has struggled so mightily to take control of its fate, and what might come next for the electricity sector’s favorite punching bag.

So, without further ado, Katherine Blunt. Welcome to Volts. Thanks so much for coming.

Katherine Blunt

Thank you so much for having me.

David Roberts

This book, Katherine, is a bit of a mindblower. I mean, I probably, because of my job, followed this stuff as it was happening, closer than the average Joe or Jane, but it is still stunning to see it all put in one place. As far as I can tell, for the entirety of the 21st century, PG&E has been in one of three states: either a) causing some disaster that kills a bunch of people, b) dealing with the blowback and lawsuits that come as a result of the disaster that killed a bunch of people, or c) implementing an ultimately failed and useless attempt to mitigate the disasters that killed a bunch of people and prevent future disasters.

There has not been a period of just normal operation of PG&E for decades now. It's all its perpetual crisis. How how much of that did you appreciate going into this story? How much of that? I mean, it's just such a dumpster fire. I can't believe I wasn't more aware of it. And I can't believe, like, the public's not more aware of it. How aware were you going in?

Katherine Blunt

Yeah, it's totally true. These last 20 years have been just exceptionally bad for the company. I had some idea of this going into it because of my coverage at the "Journal" that, as you say, I had collaborated on with two close colleagues. And one of the final stories that we did together was a really big picture narrative that tried to take readers through the last 20 years and what that's meant for PG&E. But as I got more into the details, I, too, was really surprised at some things and how bad it was.

David Roberts

Well, let's go back into the recesses of history. One of the most sort of telling tales from the beginning is that the original merger of PG&E with Great Western, another utility. This is the merger that ended up sort of saddling PG&E with all these power lines, that it never really understood. And that, to me, is kind of like the original sin, like the seed of everything that came after us. To tell us a little bit about the story of those two utilities and how they ended up as one.

Katherine Blunt

There's a couple of ways to think about this. It is a really fascinating part of PG&E's history. So, as I'm sure at least some listeners know, PG&E is a very old company, more than 100 years old at this point. It's got roots dating back to the Gold Rush. It only ever had, in the early days, one real competitor, and that was Great Western Power. Both PG&E and Great Western were competing to build systems to serve San Francisco to support the population growth there. And around this time, you're beginning to see the solidification of the conventional wisdom that utilities should be these monopoly companies. Because, of course, this industry is very capital intensive. And the idea was you shouldn't have a bunch of companies building duplicative infrastructure. And you're beginning to see the regulator emerge to oversee all of this.

David Roberts

There's some wild quotes from that period where people are like, "nothing scares customers more than an outbreak of competition among you." It's just such a weird perspective based on our current way we talk about markets.

Katherine Blunt

Yeah, absolutely. There was a lot of kind of colorful stuff that I managed to dig up, like a lawyer for PG&E and a lawyer for Great Western, like, almost got into a fistfight at what was known as the Railroad Commission, which is now the California Public Utilities Commission. Pretty funny. So they competed for a while, and then they ultimately merged and it formed the big Northern California monopoly that we know today. And so there's a few consequences of this. So it really did give this company a lot of economic might, this merger, and it allowed it to exist as a pretty good company for most of the 20th century. It did a lot to invest in its system. It helped electrify different parts of the state. It supported economic growth. It was largely run by engineers.

And as we will discuss in depth, this really begins to fall apart in the 21st century. And quite literally, in that, one of Great Western's power lines, one of the earliest transmission lines that this company built, that PG&E ultimately inherited, failed and started the Camp Fire. The component of the line that broke was literally 100 years old. It was installed somewhere around 1920, and it hung there ever since.

David Roberts

Yeah, it's wild. Great Western built these lines, and then PG&E sort of inherited them in the merger and never really had good documentation of them, or, like, never really did particularly good monitoring of them. It's kind of a gimme for a utility to do well in the 20th century, since mostly what they were asked to do, during the 20th century, is build stuff. And they love building stuff, and that's how they make money. And now we reach the age of maintenance and everything falls apart.

So before we actually get into the specifics, I wanted to, this is a bit of an axe I have to grind, so I have to emphasize it up front, but I thought your book was just this exquisite extended illustration of a point about utilities that I've been hammering for over a decade now — which is that investor-owned utilities make money by building new stuff. They get a rate of return on investments in new stuff. They do not get a rate of return on maintenance, on spending money, on monitoring and maintaining existing infrastructure. And that's just, that force, you see that at work throughout your entire book. Like, tell us, you know, that the one sort of engineer mentions, in the electricity department mentions, like, "if I spend $100 on a new line, we get 120 back. If I spend 100 on maintenance, that's it." So just, like, spell that out a little bit, that sort of disparity that sort of works its way into PG&E's operations throughout this whole century.

Katherine Blunt

Yeah, absolutely. So, of course, as I'm sure many listeners know, the argument for the investor owned utility model is that having this profit motive allows for greater access to capital. It's a capital intensive business. Okay? And I guess if we're talking about the balance between capital spending and maintenance spending, and the fact that strong financial performers are good at minimizing expenses to free up money to invest in capital, I guess, theoretically this is possible without compromising safety. But PG&E did not do this well. It didn't do this well at all.

And a really big issue happened in 2010 in which a natural gas transmission pipeline exploded in San Bruno, which is south of San Francisco, and that results in this big federal investigation of PG&E gas transmission operations. The company, I think, provided the prosecutors something like 10 million pages of documents or something like that. And in those documents was evidence that the company had been under great pressure, in kind of the early 2000s to around the 2010 time frame, to reduce expenses. There were a number of reasons for this, but it found that, in particular, gas transmission faced major expense pressures, at the time that the company was still able to maximize its authorized rate of return. As a matter of fact, it exceeded is what some auditors had found. So it had been investing a lot of capital, making pretty substantial returns, and also underspending on operations and maintenance and gas transmission, far less than the company told regulators it had planned to spend.

You can't draw a straight line between that finding and the fact that the pipeline blew up. But I mean, it's all part and parcel of the conclusion that it had basically broken federal law in the way that it was running its gas operations. And so what was striking to me, in kind of really delving into the underlying issues with the Camp Fire, as we discussed earlier in the program, is that there were a lot of parallels here. The Electric Transmission Division also faced a lot of expense pressure for various reasons. And the consequences of that were just devastating.

David Roberts

Like we were saying, it's kind of built in. Like, if you want to be a growing, you want to be on Wall Street, you want to be a traded company, you want to, you have to demonstrate growth and all that. And all spending on maintenance does nothing for that, does nothing to grow you, does nothing to make you any profits. Like, from the perspective of investors, every penny you spend on maintenance is basically just dead-weight loss.

With that structure in place, the Feds can come along and say, "that doesn't mean you can't spend on maintenance. You still have to spend on maintenance." But like, you can say that all day long, but the financial forces point the way they point. And as you say, the San Bruno explosion was an early example of that. And after the San Bruno explosion, in the court case and everything, one of the things PG&E was forced to do was sort of, and this becomes a familiar story as well, after the disaster, there's this scramble. Like, we've got to do a major assessment of our gas pipelines. Now that the explosion has already happened, we need to go down and see if it's going to happen again. So tell us about what they found when they went down and looked.

Katherine Blunt

So they did find a lot of problems. One of the issues leading up to San Bruno is that the company was supposed to do more to test the integrity of welded pipes, who seems to have the potential to have some sort of issue. The best means of doing that is draining the line of gas, and filling it with pressurized water, and monitoring the pressure of that water running through the pipeline. And if you can see if there's any sort of rupture, or at worst an explosion...obviously, that takes a lot of time, takes a lot of money, and it's inconvenient for customers, for the company. Not a preferred mode of doing things for a while, but then they had to go back and do it.

And there were several other pipelines that had issues with their scenes, and at least three, I think, exploded when they were hydro tested. It was also just like other stuff within the division that was antiquated, antiquated systems, antiquated trucks. And so they did a pretty big overhaul. But one thing that's frankly scary, and this is not just scary in PG&E's case, I think it's common for utilities across the country, it does take some sort of disaster to reveal the extent of the problems. And you made reference earlier to kind of someone talking about moving money around.

Yeah, the CPUC had a really interesting day-long affair in which they had a bunch of experts talk about safety culture within utilities. And there was one guy who was like, "if you invest a dollar in capital, you get 120 back. If you invest a dollar in maintenance, it's just a dollar out the door." So you have this kind of slow decision making over time. All of a sudden, it's a dollar ten in capital and $0.80 in maintenance. And so it goes. And the consequences of that, initially, are next to nothing. There's no immediate consequence.

David Roberts

Right.

Katherine Blunt

So that's scary, frankly.

David Roberts

It is scary. And this is another thing that comes up a lot in the book, in the court cases around this stuff, in the gas explosion and later the fires from the electricity transmission. There's this question of what exactly PG&E can be convicted for and whether it can be convicted of second degree manslaughter. Which first degree is, "I'm setting out willfully to kill you." Second degree is "I'm acting with willful disregard to your safety in such a way that I can reasonably predict the results." And so there's a lot of sort of discussion about, you talk about this long effect on decision making over time.

No single person, no single manager is thinking, "let's break the law, even though I know it's going to kill people to save a buck." It's just a little incremental decision here, a little incremental decision there, a little decision there, and these things sort of snowball on themselves. And you get the sort of aggregate effect of willful ignorance of maintenance without anyone in particular being responsible for it. It brings up all these weird questions about how to hold companies responsible.

Katherine Blunt

Yeah, absolutely. And honestly, this is one of the more interesting questions that I tried to explore in the book. The idea of corporate liability is not intuitive. And so after these disasters, everyone's asking, who is culpable? And the answer, almost inevitably, is like, nobody and everybody.

David Roberts

Right, we want a bad guy. But there's no bad guy here. There's never a bad guy in the whole book. There's not a single truly malign actor in the whole book.

Katherine Blunt

That's true, I think. So the trial that came after the San Bruno explosion was a really interesting exploration of this question. And so I kind of tried to go deep in sort of the legal theory that underpinned this whole thing. And I won't, obviously, get too much in the weeds on this, but it was just fascinating to — what the prosecutors did was they brought forward a lot of employees who had some knowledge that the company was not abiding by regulation. And they also knew that they weren't doing enough and spending enough as a result of expense pressure to do inspections that could ensure these pipelines were truly safe when they were running at higher pressures.

So, of course, you have to prove some level of intent to convict anybody, or a company, of a crime. And the idea of this intent was that, I think the exact definition was that they were, "acting with willful indifference to the regulations requirements," right? And so it gets kind of technical.

David Roberts

Well, it gets kind of philosophical too, right? Because by definition, a group of people doesn't have intent in the way we think about intent. Like intent is always sort of implicit, right?

Katherine Blunt

Yeah, it does get pretty philosophical. And, in the case of the Camp Fire, it was similar in that PG&E was ultimately convicted on 84 counts of involuntary manslaughter, as you were referring to earlier. And the idea was that the company, or a group of individuals within the company, knew that there was fire risk within the Feather River Canyon, and that specifically the transmission lines posed fire risk, and that they didn't do nearly enough to mitigate it. But in that, though, I think that what you have to understand is that the employees didn't understand the extent of the risk because they hadn't been doing enough to really understand that. So it is remarkable, and it's a lot to think about.

David Roberts

Yeah, it's one thing to convict a person, or a company, of something they did on purpose, but these are like counterfactuals, like something you should have known not to do or what you should have known in the counterfactual case. It gets super complicated. But as you say, they convicted them. They convicted PG&E in the San Bruno case, which sort of, I think, was a shock and a bit of a terror to probably not just PG&E, but probably to lots of other utilities too. So just a side question.

In the wake of the San Bruno explosion, as you say, this guy, I can't remember his name, was brought in to basically shape up the Gas Division because, in addition to the lack of inspections, there's just antiquated equipment, antiquated documentation, paper and boxes, information, and all these different offices not coordinating, et cetera. And he sort of tried to whip it into shape. And my impression from the book is that he more or less succeeded in that division. Now, which is the smaller part of PG&E, kind of got its act together. Is that true? Does it remain together?

Katherine Blunt

Yeah. So I think that it was widely acknowledged that — Nick is his name, Nick Stavropoulos — did a lot to help ride the ship, and the division operated much better as a result of the actions that he and his team took to modernize everything and to do proper inspections, proper testing. Of course, no one's perfect. Nothing's perfect. I'm sure that there are still some issues within the division. I'm sure some have even emerged since he left, but they haven't had any major issues since then. And so that's good. I mean, it certainly raises ... we're talking about sort of like underlying problems that affect all utilities. There's always questions to be raised, let me just put it that way. But they've not had any major issues since San Bruno.

David Roberts

Yeah, well, I mean, sort of one of the darkly comic chapters in the book is there's San Bruno explosion, horrible publicity. And so the company is like, we're going to devote all this money and time to shaping up the Gas Division and do so. But even as they are doing so, they are electing not to do so in the Electricity Division, and they are cutting back on inspections in the Electricity Division.

And this is like one of several parts of the book that reads a little bit like a horror story. Like the girls going up the stairs. You're like, "no, don't go up the stairs." And of course, immediately before the gas explosion bruhaha has even really fully wrapped up comes basically the equivalent on the electricity side of uninspected lines now starting fires, deaths, liability, the whole cycle starts all over again. So you have to sort of wonder, like, even if they got the clue on the gas side, they clearly didn't get the larger clue of a larger safety culture across the board, right?

Katherine Blunt

Yeah. And I think a notable detail in the book is that the Gas Division brought in Lloyd's Register, the British risk management firm. Anyway, so to basically assess where they were kind of immediately after the explosion and how far they'd come after they got everything into shape. And then I think Nick suggested to some colleagues on the electric, within the Electric Division, that they, "how about you have Lloyd's take a look at what you guys are doing?" And they said, "not necessary." That was the response, "not necessary."

David Roberts

Yeah. It's wild how many times, especially early in the book, they're like, "fires are for the hot, dry Southern California. We're up in Northern California. We don't really have to worry about that." Which just seems so darkly ironic in light of subsequent events for the Electricity Division, I want to go back a little bit to deregulation. This is a sort of legendary story in California lore already, sort of deregulation and then the subsequent energy crisis, and Enron and all the rest of it. And obviously I don't want you to tell that whole story again. There are plenty of books to be written about that, but sort of talk about how it affected PG&E specifically. Sort of like how PG&E emerged from that mess.

Katherine Blunt

Yeah. So I think in my view, there are two major consequences for PG&E. One is that it resulted in PG&E's first bankruptcy. So after the energy crisis, the company seeks bankruptcy protection. It emerges in 2004 time frame, and they then get a new CEO to kind of lead the company into this new chapter. And he is very, very intent on establishing the company as a strong financial performer, basically regaining goodwill on Wall Street, delivering to shareholders. We've already discussed how companies often deliver to shareholders. So there's a lot of expense pressure during this time. His tenure basically ends with San Bruno.

David Roberts

That's Darby, right?

Katherine Blunt

That's Peter Darby. Yeah. The other consequence is that as a result of deregulation, utilities in California no longer played the same role in building and operating power plants. They sold most of them during the deregulation push, with the exception of nuclear and hydro. And so that means that as California becomes really determined to bring a lot more wind and solar online, the utility companies are going out and contracting for this power. They're not building the wind and solar farms themselves. And as we know, wind and solar are some of the cheapest forms of generation today. They were not back when the utilities really began pushing on this, so they were signing a lot of really expensive contracts. Those costs were passed on to customers as expenses. This is not something on which the company earned a return. And I think that ironically, served to increase, added a further layer of pressure on the expense side.

David Roberts

Right. So you have sort of two forces working coming out of this post-deregulatory bankruptcy. One, the CPUC is forcing the company to contract for a bunch more quite expensive clean power. So rates are going up. So there's a lot of pressure on the utility to cut back. And then secondly, post-deregulation, this is a privately traded company on the market. And the way you make it healthy is draw new private investment. So the way to do that is to show returns, show quarterly, good quarterly performance. So that also is another huge pressure to cut expenses.

And all that pressure together, like as we were discussing what expenses get cut, it's the expenses that don't bring in any money. It's the expenses that don't bring in any return. And that's maintenance of this truly gigantic, sprawling infrastructure. So talk a little bit about, I found this really amusing, in a very early 2000s/2010s way, Darby's sort of idea of transformation. And he brought in Accenture. Tell us a little bit about the Accenture chapter, which I found you have to laugh.

Katherine Blunt

You really do. And also I'll just quickly shout out to my colleague, I guess former colleague. She just retired, Rebecca Smith, who she covered the company during this time, and she knew a little bit about the transformation, and so she did a lot of digging for us at the "Journal" and really kind of helped bring that to light. But then as I started getting even deeper into it, I mean, like, it was both terrifying and funny at the same time.

So the idea was to transfer on the business. I'm actually looking at a little, foam pyramid that has the goals on it right now. It's delighted customers, rewarded shareholders, and energized employees. Our vision, the leading utility in the United States. So at its core, the ultimate goal is 8% annual EPS growth. That was the goal. And the goal was to bring in Accenture to figure out ways basically to cut expenses. That was the idea. And Accenture, it was a bunch of them. I mean, they hired a lot of these consultants, and PG&E employees called them the greenbeans. And they come in, and they're looking through PG&E's records and data and stuff, and they're like, "hey guys, we're trying to do some benchmarking, and this is really hard because you don't have very good data."

David Roberts

I know.

Katherine Blunt

"Okay, well, proceeding on, we could cut expenses in all these areas because it's been outpacing inflation over a ten year period. So here's where you should be cutting costs." But the thing about, pretty much all of the initiatives that Accenture helped implement were just disasters for one reason or another. And payroll got bungled. Employees were mad. I think they were trying to use some new mapping tool that didn't work at all. So employees literally had to rely on Mapquest when they were trying to figure out where to go.

David Roberts

This is like every corporate transformation effort in a nutshell. It's like a parody of them. Like whizzbang new systems that nobody understands or likes, ignoring people, ignoring maintenance, producing these elaborate reports. Just, like, it's so early, it's so of that time.

Katherine Blunt

It was. It really was of that time. And ultimately, it was just a really expensive bust, is how you sum it up. And it was distracting. It made employees angry. And I think so. I've heard various estimates for how much it costs. Like, some people believe it cost a billion dollars. I've settled on the number $300 million, and PG&E ended up negotiating like some sort of discount because they were so mad.

David Roberts

Because they didn't get anything. What was the guy's quote? He's like, "it's not like you shopped for a Jaguar and got a Volkswagen. It's like you shop for a Jaguar and didn't get a car."

Katherine Blunt

Yeah, that's what he said.

David Roberts

And so all of that process, aside from the rest of the fiasco, is the expenses that were getting cut were predictably maintenance and monitoring of this vast system of transmission lines. And then the other thing that starts happening, the other thing that's very of our time, that starts happening in the early 2000s and 2010s, California starts getting drier and drier, goes into these mega droughts. The winds comes. Basically, fire danger starts steadily rising even as PG&E is sort of cutting expenses monitoring it. And the sort of predictable result is a bunch of fires start based on failures of their transmission system.

And so this brings us to an interesting law in California which holds utilities 100% responsible for fires. They start tell us a little bit about that law, like how did that law end up on the books? It turns out to be incredibly consequential law. Why does California have this quirk?

Katherine Blunt

Yeah, so what we're referring to is, the wonky, official name is "inverse condemnation", and it sounds really complicated, but it's not so complicated. So you think about eminent domain, right? If some sort of governmental agency wants to build something serving the public good, they have the right to take your private land if they compensate you properly, right? The flip of that, I think is why it's called "inverse condemnation", is that if that thing built to serve the public good results in some sort of property damage, you, the property owner, are entitled to compensation.

And initially this really applied only to publicly owned utility companies, right, governmental agencies. But in the early 90s, there was a case that went all the way to the Supreme Court of California, I think, involving a power ignited by one of Southern California Edison's power lines. And the court determined that the privately owned utilities are substantially similar to their publicly owned counterparts, and, therefore, are subject to inverse condemnation as well.

David Roberts

And this sort of sets off this cycle. So California gets drier and drier, and PG&E has all these old power lines crisscrossing the state. And a fire happens on their watch, and it's huge, and the damages are enormous, and suddenly they have to compensate these enormous ... because they're completely responsible for under this law. They have to come up with, there's all these lawsuits, people arguing, coming to a settlement, finally. And then as that's happening, another fire starts.

And it's almost comical, and tell me if you think I'm wrong about this, but we have this law holding them responsible for the fires, and PG&E sort of ongoing health, or even existence, depends on not starting any more of these fires. But it simply can't not start these fires. I mean there's no, nobody at any point in the book has a serious plan for how PG&E could eliminate that risk.

Because just like talk a little bit about the extent of what it would really require to genuinely send out people to go put eyeballs...I mean, this is saying, like you talk about it's pretty labor intensive to test these natural gas pipelines in a proper way. And it's similar with the transmission lines. It's a labor intensive thing to truly inspect them. You're supposed to go climb, literally, climb the tower and look at all the little hooks. Put your eyeballs on all the little hooks. The cheap way is just to drive a helicopter pass. But to really do it, it's quite labor intensive. So just give us a sense of like, what would it take? How many of these lines are out there? What kind of workforce and money would it take to genuinely do the kind of inspection that would reduce this risk, appreciably, close to zero?

Katherine Blunt

Yeah. So I think that at the end of the day, getting to zero is about as close to zero as it gets because in some ways the risk is inherent throughout the system. So there are two primary risk modes, right? There's the risk that a tree branch or a tree limb or something could touch the live wire and ignite a fire. And so the way that the company tries to get ahead of this is to make sure that it sends out vast numbers of contractors to trim or remove trees that have the potential to contact the wires. But as we know, in Northern California, seasonal winds occur, very strong winds in the fall, maybe it lifts a branch from 50 yards away, and that branch gets tangled in the power line. I don't know how you account for that.

David Roberts

Yeah, and trees are quite legendarily growing all the time.

Katherine Blunt

They are in, most of them, in a constant state of growth of some kind. Yeah. And so I liken this Sisyphus rolling the rock up the hill, right? I mean, that's what vegetation management is. You roll it up, and then it falls back down, and then you go do it again.

And so then of course, the other risk is that the transmission line itself could fail in some way because of an issue with the equipment, whether that be like a tiny piece of hardware like a hook, or an issue with the wire itself, or the structure. And so that requires inspections to make sure that there hasn't been substantial deterioration of some kind that puts that asset at risk of failure. And the good news is that, I think, historically speaking, climbing the tower or the pole has been the best way to get a look at all of this stuff. They are doing more with like drones, and lighter technology, and things that make it so that you don't maybe have to do that all the time. But just to contextualize all this, the company's service territory is 70,000 square miles.

David Roberts

Yeah. There's like hundreds of thousands of miles of lines we're talking about.

Katherine Blunt

Certainly hundreds of thousands of structures. I think probably tens of thousands of miles of lines, but it's still, it's enormous. Yeah.

David Roberts

Once again paralleling that the gas episode. Like they have this fire. They're found liable. There's all this backlash, and then there's this scramble to like, "we're going to fix this. Let's send people out inspecting and tree cutting." And they go out and find, just as they went out and found with the gas network, like, it's a disaster. There are decaying lines all over the place ,and trees all over the place. They just go out and discover, yet again, what a daunting and enormous task it is in front of them.

And they're sort of, like, frantically doing this. And as they're doing it, there's another fire, and there's another whole round of this. So let's talk about the final settlement with fire victims, because you spend some time on this, and it's really wild. If PG&E were literally on the hook to pay all the victims of all the fires that started, the full value of what they lost, PG&E simply does not have that much money.

Katherine Blunt

Right.

David Roberts

There's no way for it to settle that. So talk about what they end up giving of victims in this final settlement.

Katherine Blunt

Yeah.

David Roberts

Seems like a twisted irony to me there.

Katherine Blunt

Oh, it's completely. This is one of the saddest parts of the book. So I should say, at the outset, after a spate of 2017 fires that that resulted from trees touching PG&E's power lines, and then, of course, the enormous 2018 fire that resulted from the failed transmission line, PG&E estimates it faces about $30 billion in liability costs.

David Roberts

Wild.

Katherine Blunt

30 billion. Yeah. So there's three classes of claimants. The first is, like, governmental agencies, other public entities that incurred some costs as a result of the fire. The company reaches a settlement with them first. It's $1 billion in cash.

Now, predictably, during this bankruptcy, which was enormously complex, you've got all these savvy financial players, the really kind of savvy, distressed investor types, descend upon this whole disaster. And I say that because the second class of claimants is insurance companies that are eligible to seek compensation from PG&E because they paid claims to homeowners that the fire is actually PG&E's fault. So this is a result, again, of "inverse condemnation". So that said, a lot of these companies, these insurance companies, didn't want to wait around for a settlement, so they sold these claims on the secondary market to, basically, the hedge funds. There was one in particular that bought a lot of them at a very steep discount and stood to make a lot of money here. And PG&E reached the second settlement with this group, and this was $11 billion. And the group demanded that it be in all cash.

And so now the company is out $12 billion in cash. It doesn't have enough cash left to reach, what would be the largest settlement, which is with individual fire victims and business owners that actually lost property.

David Roberts

Yes, we paid off the hedge funds, and now we're a little short.

Katherine Blunt

Yeah. And so it also gets more complicated because there was competition between the company shareholders that didn't want a restructuring plan that would result in a huge equity raise that would dilute the value of their holdings. And the bondholders who were fine with doing that. They could issue equity all day long. And they had a plan that would have basically issued enough equity to compensate fire victims. But ultimately, the company, the shareholders, won. I'm just going to leave it at that. The shareholders won this battle.

And so what happened was the company settled with the last class of claimants, the individuals, for 13.5 billion in the form of a trust that was funded with half cash and half with shares in the company. So at the time the trust was funded, it was given enough shares that it held, like, a 21% stake in the company. So the irony is that they can't liquidate these shares quickly to compensate victims because doing so would sink the share price.

David Roberts

You're tying victims compensation to the ongoing health of the company. So now the risks PG&E faces are in part adopted by the victims of its previous risks.

Katherine Blunt

Exactly. Exactly. When the other two settlements had no risk. That's what happened. And of course, you know, it's after, you know, a year plus after emerging from bankruptcy, PG&E's share price hadn't really rebounded at the time the trust was funded. It it wasn't actually enough to be valued at that full 13.5 billion. It was actually less. It was something like 10 billion.

David Roberts

Right, it was premised on an increase in the share price.

Katherine Blunt

It was. That did happen.

David Roberts

Yeah. It's so twisted that these victims now have to be cheering for PG&E to do well to get their money back. It's wild. And also, it just seems to me, the risk, I even feel like calling it risk almost, is a misnomer. It is...given the volume of power lines out there, and the lack of inspections historically, and the sort of backlog they face on inspections, and monitoring, and tree trimming, and all that stuff...it is, to a first approximation, a certainty that they're going to start more fires, right? I mean, it's just with the drought going on and climate getting worse and worse, it's not even risk. It's just we know this is — we know it's going to happen again. There's no reason to think anything would be different this time, right? Like, there's no more prepared, there's no better system in place. It's just going to keep happening over and over again.

Katherine Blunt

Yeah. A couple of things there. I think that it's also worth noting that we often talk about these huge catastrophic fires that are ignited by PG&E's power lines, because they're very consequential, obviously. But these are not the only fires.

David Roberts

Right, of course.

Katherine Blunt

Their lines ignite hundreds of fires every year, and it just becomes a question of, "is it going to spread into a catastrophic wildfire?" Sometimes they're very small and easily contained. Other times, as we've seen, they are definitely not. The question only gets more consequential as the climate changes, as the drought gets worse, as the consequence of a single spark becomes much higher, or potentially higher, I should say. If there's any good to take away from this story, at least PG&E is now more aware of the risk than it ever has been, and it has probably never worked harder in its long history to address it.

David Roberts

Your book kind of ends in the middle of this saga, ongoing. Like, there's been the latest round of fire lawsuit compensation, but we're almost certainly cruising toward the next one. Do you have any reason to believe, a) that there's not just going to be another fire, another round of the same thing, or b) that PG&E has changed in any fundamental way?

Katherine Blunt

So I think that on the day-to-day, they're doing a lot more to try to manage the risk, and they're doing it in a few different ways. I mean, better inspections, more tree trimming, and they're also preemptively turning off the power.

David Roberts

Not popular.

Katherine Blunt

No, it's not popular, and it's not a long term solution. It's like, at this point in time, the company can't safely and reliably provide power at the same time all the time, especially during the fall when the winds pick up. And this is really frustrating to customers, obviously, because we are incredibly reliant on electricity and are only becoming more reliant on it for obvious reasons.

So here's something that I find to be very interesting, and it remains to be seen how the company deals with this, but they got a new CEO in January of 2021. Five-ish, six months later, in the middle of the summer in July last year, a tree fell on a distribution wire that was not far from Paradise, which was destroyed in the Camp Fire. It ignites to become the second largest wildfire in California history. It, like, rose all around some of Great Western's old infrastructure, ironically. And so the new CEO goes up to Butte County, where the fire was blazing, and says, "we've got a new strategy that I'm announcing today, and we're going to underground 10,000 miles of distribution wire."

David Roberts

Yeah, she kind of dropped that on everybody. On the shareholders, too.

Katherine Blunt

Yeah, yeah. She had just told the board the night before that she was going to go public with this, and it was risky because the company hadn't really fleshed out the plan. It really hadn't decided which circuits need to go underground, hadn't really talked with the CPUC about what this is going to entail. They had a rough estimate that this is going to cost $20 billion over the course of the next decade or so. This is really interesting to me because we're talking about how a tree is inevitably going to strike a line somewhere, and a tower or a pole is inevitably going to have a problem somewhere, right? You can never completely reduce that risk. Undergrounding is basically the only way to eliminate the chance of the line causing a fire. Like that's it.

David Roberts

Yeah, in theory, it's possible to reduce the risk to almost zero, it's just with what money.

Katherine Blunt

Right, and so this is an expensive plan, especially. She made this announcement in July of 2021. Since then, everything has only gotten more expensive, right? We're living in a very expensive period. Labor is going to be more difficult and more expensive to come by. So the real challenge here, aside from the engineering challenges, is the cost management. Rates are already really high in California. There's a bunch of proceedings on affordability at the CPUC. So how the company is able to pull this off from a money standpoint is going to be really critical to watch.

David Roberts

This is something that the company argues throughout the book, which is infuriating, but not total BS, which is that if you impose too many costs on it or impose too high compensation for victims, such that you basically impoverish the company, then it won't be able to remain financially robust, and it won't be able to attract private capital. And if your model is that private capital is supposed to do the work, then you do need a company that can attract private capital. So that it's like limits on how much you can really punish PG&E, right? Because it does, at least the way the current model works, it does need to stay at least relatively healthy just to keep doing basic day-to-day stuff.

Katherine Blunt

It does, it does. And for most of the show we've been talking about the trade off between capital investments and safety spending that now PG&E and other utilities struggle with. It's possible, I mean, theoretically, that undergrounding actually threads this needle, right? It's something on which the company can earn a return, and it does a lot to improve the safety of the system at the same time. Instead of building a bunch of stuff they don't need or goal plating, their substations are actually able to earn a return on a real safety investment. But still, I haven't heard of any sort of shareholder sharing mechanism associated with this plan, so it will be recouped through customers. And this is a really challenging time to be passing more costs through.

David Roberts

The final question I wanted to come to, and to me, the most important and interesting question that emerges out of all this. You have at the root of this the infrastructure in place. It is what it is. The costs for properly monitoring it and maintaining it are what they are. And those costs are incredibly high. And you see over and over again through the book how the need to produce returns for investors, siphons money away from that, siphons money away from maintenance and safety.

And so on one hand, you can sort of blame the for-profit model, right? You can sort of say, like, the investor owned utility model, this is intrinsic to it, this conflict, and you're always going to get shortcuts on safety and so on and so forth. But on the other hand, and you address this a little bit towards the end of the book, like if, for instance, California took the dramatic step of buying PG&E and making it a publicly owned company, all those maintenance and safety costs still exist, and they're still huge, and all that liability still exists, and it's still huge.

Katherine Blunt

Right.

David Roberts

So if California bought the company, and then it caused the fire, the company would still be liable for all the damages to the fire. And instead of private investors paying that out, it would be California taxpayers. So, in other words, if it became a public company, all these costs would fall very squarely on ratepayers and taxpayers, and they're huge. So, like, bills would go way up, and that would be politically disastrous. So I guess I'm asking you an unanswerable question, which is just it doesn't seem like private capital covering this massive backlog of costs that don't produce any returns is a good model, but it also doesn't seem like taxpayers or ratepayers understand it well enough to take it over and then take on much, much higher costs upfront.

So this is like the question I come to at the end of the book. It's just like, where does the money come from? The money you have to spend to make this system safe is what it is. Somebody's got to pay it. What is the right system for paying it? Nobody wants to pay it.

Katherine Blunt

Right. Yeah, exactly. The only argument for an ownership change is to remove the profit motive, right? But it really doesn't solve a number of other problems. It's either, basically, the taxpayer becomes responsible for upkeep of the system as well as the liabilities that result from inevitable system failure. Yeah, a lot of people focus on the ownership question. So there's certainly that sort of philosophical debate to be had about what is the right model.

But then there's also the practical reality of the fact that PG&E is not for sale, right? PG&E is not selling its assets. And it'd have to be a really contentious some, like forced takeover that would be really unpopular and definitely a protracted fight. So we're stuck with this. I don't mean that disparagingly, but this is the model. The cake is baked, so to speak, right? This is what we have.

And I think probably the better question becomes, like, okay, so then how do we make it workable? How do we make it so that there's better oversight of spending both within the company and within the regulator? How do you improve compliance? How do you drive down inspection costs? These kinds of things. And I think that everyone I will say that I think everyone who's kind of relevant in answering this question is trying to do so and is trying to do more. But as it's very clear in our discussion, there are problems and challenges of an enormous scale.

David Roberts

Yeah, and not particularly unique to California. And I just come back over and over again to the notion that as long as this basic, misaligned incentive exists in investor owned utilities, which is the only way to make money is to build new stuff and maintaining your current stuff is dead weight loss. You can push back against that incentive via really good regulators that are paying close attention, are new specific rules, but, ultimately, it just feels like you're kind of pushing against the tide there until that basic core incentive has changed somehow.

Katherine Blunt

Yeah, that's a very excellent point. This is not just a PG&E problem. I think a lot of utilities across the country have historically mismanaged spending or mismanaged risk in some way, and because of this tension between private interests and the public good that's inherent within the system, and maybe they did so with little to no consequence. But my view is that that's really starting to change. We're seeing more extreme weather events that's putting more stress on a system that's aging anyway.

David Roberts

Yeah, I mean the bill was going to come due at some point. You can't get away with it for a long time. From some perspective, it's friggin amazing that we built infrastructure in 1920 or whatever, 1915, that is still operating relatively reliably. I mean, all things considered it's crazy, but, like, of course that bill is going to come due.

And I don't even think it's just in utilities either. Like, you look at critics of suburban sprawl say basically the same thing. Like you build new suburban sprawl, you get a sort of immediate infusion of new money, immediate infusion of new investment, which allows you to go build the new thing. But sooner or later the bill comes due for maintaining all that stuff you build, and it's just not producing enough tax revenue to pay the maintenance costs. And who's going to pay the maintenance costs? All the shenanigans with corporate shuffling money about and shuffling liability about.

In the end you come to the question of like you just need a certain amount of money to maintain the stuff you built, and somebody's got to cough up that money. And it seems like America built a bunch of infrastructure and has been coasting on it. And now in all these different areas, the bill is coming due. And like, a) we've got corporations that are just not structured to pay it, and then b) we've got a public that has no idea that this dynamic is going on and would not react favorably if suddenly presented with the bill for all this maintenance. So we're just putting it off, in electricity and everywhere else.

Katherine Blunt

Yeah. And if there's one takeaway, I hope it's that PG&E is a good lens through which to view a lot of these challenges nationally. I think we're going to be talking a lot more about in the years to come.

David Roberts

The book stops more or less in the middle of these cycles: fire, lawsuit, verdict, scramble to improve things, another fire, more lawsuits. You more or less just stop in the middle of that cycle. a. do you have any predictions about how this will settle out, or even if it will settle at all? I don't know what even settling would look like. But b. are you going to write a sequel?

Katherine Blunt

I won't rule it out. But I'll say not immediately.

David Roberts

You need a little break from book writing.

Katherine Blunt

Maybe a little more content. We'll see what...we got to see what's next for the company.

David Roberts

Oh, you know, they'll comically screw up sooner or later. Start your watch.

Katherine Blunt

I'm sure that something really unfortunate will happen. But I will say this, I am cautiously optimistic that things will be somewhat better going forward. It remains to be seen how quickly that becomes the case and whether that is sustainable. So certainly keeping a close eye.

David Roberts

Right. The race between modest improvement and then things getting worse via climate change. Like, how do those two things balance out?

Katherine Blunt

Yeah. This book is a story of systemic failure and the convergence of kind of almost an unfathomable number of risks.

David Roberts

That's the story of our time. Well, thank you so much for coming on, and I really enjoyed the book. Even for someone who lived through all that stuff and wrote something about, it's a real page turner for me. There are tons of details I didn't know anything about that are quite fascinating.

Katherine Blunt

So glad to hear that. I really am. Thank you for having me. This was a really fun discussion.

David Roberts

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