The long, sordid (ongoing) tale of California's biggest utility

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.


(PDF
transcript)


(Active
transcript)


Text transcript:


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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