Ep. 1: Katherine Blunt discusses her book, California Burning: The Fall of Pacific Gas and Electric—and What It Means for America's Power Grid

SEASON 01, EPISODE 01

[INTRODUCTION]

[0:00:07] ANNOUNCER: This is Financial Climate. Can innovations in finance help the world decarbonize? How can trillions of dollars of assets be redirected to catalyze a net zero economy? We explore these questions through conversations with innovators, experts and investors from around the world. Here's your host, Alex Roth.

[OVERVIEW]

[0:00:34] AR: America's power grid is at a pivotal moment. In order to fight climate change, we have to electrify everything we can in a big hurry. Things like home heating, cooking and industrial processes. We're also switching from gas powered to electric vehicles. The result is that America's demand for electricity is expected to increase faster than it has in years.

Fortunately, power from wind and solar has recently become amazingly inexpensive, but it's produced intermittently when the wind blows or the sun shines and we have to integrate vast amounts of new generation onto the power grid very quickly. All this at a time when much of the grid is aging and it's harder than ever to cite needed infrastructure, like new transmission lines. If that weren't enough, climate change is intensifying forest fires, storms and temperature extremes, which can threaten reliability.

Rapid changes in technology may soon make some existing utility investments obsolete and may even disrupt the business model of traditional electricity providers. One region that has recently had to contend with these issues in extreme ways is Northern California, which is served by Pacific Gas and Electric. PG&E is one of the largest utilities in the country. It serves more than 5 million customers, including much of northern and central California. In 2019, after PG&E was deemed responsible for several devastating forest fires, the utility filed for bankruptcy for the second time in less than 20 years.

My guest, Katherine Blunt, writes for The Wall Street Journal, where she covered these events extensively as they happened. Now, she's written an insightful and captivating book. It's called California Burning: The Fall of Pacific Gas and Electric and What it Means for America's Power Grid. I sat down with her to learn more about the critical and compelling issues she's investigated in California and their broader implications. Here's that conversation.

[INTERVIEW]

[0:02:38] AR: Katherine Blunt. Welcome to Financial Climate.

[0:02:41] KB: Thanks so much for having me.

[0:02:44] AR: Your book is California Burning: The Fall of Pacific Gas and Electric and What it Means for America's Power Grid. Before we get too far into that, can you just tell us a bit about your background as a journalist and how you got interested in this subject in the first place, and how you came to write about it?

[0:03:01] KB: Sure. I started my career, actually, in San Antonio, I covered transportation. I moved to Houston and I worked for the Houston Chronicle for a few years, covering various things. Business, I did some energy. I did some work there actually, that caught the attention of the Wall Street Journal's energy editor at the time. The energy team is based in Houston. There was a position open to cover renewable energy and utilities. This was late 2018. I recognized that it would be a really awesome opportunity.

I mean, it was just exactly the right time to cover that beat, so to speak. Interestingly, three days after I joined the journal, the campfire ignited in Northern California as a result of the failure of one of PG&E’s transmission lines, killed 84 people. Within a few weeks, it became very clear that PG&E was going to be implicated in that. I worked with a couple of really talented colleagues who knew the utility space much better than me. We produced some work that I'm very proud of. Ultimately, it is the foundation for the book.

[0:04:07] AR: That's great. Yeah, you brought up the campfire, and that figures into the story that you write about in the book quite prominently. Maybe for people who are unfamiliar with it, you can just explain a bit about what the campfire was and what was the immediate cause of it.

[0:04:22] KB: Yeah, absolutely. It was the morning of November 8th, 2018. The winds were very, very strong in Northern California. This happens every autumn. They're called the Diablo winds. Yeah, so early that morning, the winds were strong enough that a very small hook, roughly the width of a fist broke in half in this. The hook supported a live wire that swung against the metal transmission tower. Sparks flew and settled on really dry brush beneath the tower and the fire spread extremely quickly. Within a matter of hours, several nearby towns had been totally destroyed, most prominently the Town of Paradise. 84 people died directly as a result of the fire. Another person died by suicide as the flames approached. It was just an absolutely horrifying situation.

The hook on the transmission line in question was original equipment from 1919. The transmission line and the hook itself was roughly about 100-years-old. It really underscored the risks that aging infrastructure can pose if it's not properly maintained.

[0:05:27] AR: It's really sobering what the stakes are. You also describe in some detail the early history of PG&E. In a lot of ways, that history, as you describe it, runs parallel to the history of electric power in America more broadly. Can you just give a brief overview of how PG&E developed in its early years and how it came into the modern era?

[0:05:47] KB: Yeah, absolutely. I mean, we're talking about this 100-year-old transmission line. The line itself is a really interesting window into that history. PG&E grew in the late 1800s, early 1900s, at a time when electricity was experimental. Long-distance transmission certainly was. You had a number of different pioneers across the country who were trying to figure out how to make this work, how to build systems to transport power generated in remote areas and bring it into fast-growing population centers.

In California, that really resulted in a focus on hydropower in the Sierra. PG&E formed initially as the result of the two men in particular who were smart in acquiring some of these tiny power companies that were cropping up to serve different parts of Northern California. PG&E solidified as a company around 1905. It had many different sorts of generation assets, but it was skewed pretty heavily toward hydro to serve San Francisco. The company really has only ever had one real competitor. That was a company called Great Western Power.

Similarly, Great Western was very focused on the vast river systems in the Sierra and building a really extensive hydro network, anchored by a reservoir that's now known as Lake Almanor. The two companies competed really fiercely, until they merged in ultimately in 1930, creating the big Northern California monopoly that PG&E is today. That merger gave PG&E enormous economic might. It was able to build out the system, not just electric, but gas as well, supporting economic development all throughout the region. A very storied history. A lot of positive stuff there.

But it also inherited that hydro system that Great Western had built. PG&E didn't have any role in building it. It really didn't understand those assets as well as it probably should have. That certainly became true later on as the years went by, and as the decades went by really. The transmission line that fell and ignited the campfire was original Great Western infrastructure, built in a very, very remote part of the state, lining the Feather River Canyon, so access has historically been really limited.

[0:07:57] AR: You also write, getting into a little bit of the later history of PG&E, about the deregulation of the California utilities in the 1990s and then early 2000s, and what led to that whole botched deregulation and the power crisis of that time. Can you talk a little bit about what that meant for PG&E and how it played out in the larger state of California?

[0:08:20] KB: Yeah, yeah. All I can say is, I'm glad I wasn't covering it at the time. It was so incredibly complicated. Really what happened was, of course, utilities across the country did so much to build critical infrastructure, especially after World War II, to serve the massive population growth. There were a number of what I guess could be seen as missteps, especially in building nuclear plants, major cost overruns. In the 70s, you have the implementation of PURPA. The utilities are required to contract for pricier forms of generation. I'll just leave it at that.

Power was getting expensive and there was discussion all throughout the country about whether opening power generation, specifically the power generation function open to competition would result in lower electricity prices. California was one of the first states to really try to experiment with this in earnest. The utilities went along with it, but the deal was, they wanted to still be able to recoup the cost of those nuclear plant overruns and the pricey contracts that they'd signed by law.

The California market was constructed in a way that retail prices were set at a certain rate, so to speak. The idea was that the new competitive wholesale market was going to keep wholesale prices really low, and the utilities would buy that cheap wholesale power. They would charge the pricier retail rate, pocket the difference until they were made whole on those what were known as stranded costs.

It worked well for a few months. Then power supplies got really scarce for a number of reasons. I think natural gas prices were going up. There might have been some issues with hydro. There hadn't been a whole lot of new generation built. Supplies are tight. Prices are going up. Then on top of that, some very notorious traders, Enron and others figured out ways to manipulate the market to capitalize on that scarcity and further drive prices up. Wholesale prices ended up exceeding the rate at which utilities could charge customers, so they were racking up a lot of debt.

PG&E ultimately, of all of California's utilities, was the only one to seek bankruptcy as a result of this. I think the lasting implication was that the company really felt a need to re-establish itself on Wall Street to regain the trust and the affection of its shareholders. There began a real push to grow earnings. At the time, the leadership was pushing on this in a way that it ultimately came at the expense of certain safety spending. That came to light very clearly in 2010, when a natural gas pipeline exploded just south of San Francisco and San Bruno, destroying part of a neighborhood and killing eight people. It was the first big disaster that the company had to contend with.

[0:11:00] AR: It sounds like it was mostly that botched deregulation and the resulting energy crisis that led to the 2001 bankruptcy of PG&E. Then is it right to say that the resulting shift in management priorities following that is what helped lay the groundwork for the more recent crisis in the 2019 bankruptcy?

[0:11:19] KB: Well, the company came out of bankruptcy – I mean, the balance sheet was relatively stable, but in the eyes of investors, it was still – There was reticence. I mean, the way I think about deregulation is deregulation in and of itself wasn't the problem necessarily. The crisis itself pushed PG&E into bankruptcy. That, of course, was a problem. I see two consequences of deregulation for PG&E. One, because of the bankruptcy, it became very intent on becoming a strong financial performer.

It is interesting, because as a result of deregulation, none of California's utilities would play the same role again, in building new generation facilities, new power plants. Instead, they'd be contracting for that power. Around the time that PG&E emerged from bankruptcy, you begin to see California set some very ambitious renewable energy targets. As we know, renewables are very cheap forms of generation today, in part because of California's early push on this. I mean, that's a big part of it.

Back in the day, when they were signing these initial wind and solar contracts, they were orders of magnitude more expensive than they would be today. Those contracts ultimately created cost pressures that manifested later on. Those are the two takeaways from dereg in my view. The energy crisis was complicated, at times entertaining, and ultimately, not great for PG&E in that it did create a little bit of a financial mess that it would have consequences later on.

[0:12:49] AR: I see. Yeah, that makes a lot of sense. Before we move on from the energy crisis, I'm trying to understand a little bit more, too, about how was it ultimately resolved? Because you could see that it created this terrible crisis with Enron and the high prices and all the problems that occurred and the bankruptcy. But then they didn't roll it back to the status quo before deregulation. What did they do to prevent that from happening again, or from continuing?

[0:13:15] KB: Yeah. I mean, the design of the market was really the problem. They tweaked it, so that – Or not even tweaked it, I mean, they really changed it, so that you wouldn't have some of the same issues, the retail price cap, or I guess, freeze. It's not really a cap. The retail price freeze, that changed. Part of the crisis involved an entity called The Power Exchange was tasked with overseeing all the trades and the scheduling. That function was ultimately given to the California ISO.

The way that, from a ratepayer standpoint, the state of California tried to manage these huge costs that were incurred as a result of the crisis. Gosh, I mean, it was the state agency that issued, the Water Agency issued bonds on behalf of the utilities and customers. I think, only just recently that weren't paying off those bonds resulting from the energy crisis anymore. That surcharge is being used for something else at this point.

I mean, it was just a really complicated exercise in trying to figure out how to securitize the cost overruns and try to redesign the market in a way that it wouldn't be so susceptible to manipulation. Obviously, California still has a competitive power market, but part of that involves the utilities contracting for long-term power supply, so you don't have the same necessarily day-to-day volatility that you did back then.

[0:14:30] AR: I see. They fixed a lot of the problems that made it susceptible to the abuses that Enron or others were participating in, but they kept the basic concept of deregulation.

[0:14:38] KB: That's right.

[0:14:40] AR: That makes sense. Yeah. I wanted to go back also to what you were saying before about the gas pipeline explosion in San Bruno. You talk quite a bit about that in a really interesting section of the book, and just was hoping you could explain a bit more about what were the broader implications of that.

[0:14:56] KB: Yeah. I mean, terrible event. It was September of 2010, when a seam on a big gas transmission pipeline ruptured, and the whole thing exploded. It took more than an hour for PG&E to shut off the gas. Meanwhile, it was burning the entire time. Eight people died. A lot more people were injured. I think 38 houses were destroyed. There was a number of things that came out of that, I think, most significantly, there was a very long running federal investigation into whether PG&E had been obeying federal pipeline safety laws.

Ultimately, the company was convicted on six charges of failing to do so, and placed on criminal probation, which is unusual. This actually resulted from a jury trial. So few companies go to trial over this stuff. It was like, it wasn't individual employees who were convicted, it was the company itself. It became a really interesting lens through which to try to understand this idea of corporate liability. All these engineers were called to testify about how they knew something was wrong, or they weren't doing quite what they were supposed to do, but nobody had the full scope of the information about just how risky things had become.

A big, big part of the problem was that the gas transmission division faced a lot of cost pressure. As a result, they were making decisions not to use the most thorough pipeline inspection methods, which happened to be the most expensive of the methods that they had to choose from. Instead, chose methods that were far less expensive. Frankly, as a result, I mean, much less thorough, right? I mean, not nearly as effective at assessing different types of risk. One thing that was notable, we were talking earlier about cost pressure, is the PUC actually audited PG&E’s spending between 1998, which is when the deregulation bill went into effect in 2010, when the explosion occurred.

They had over-earned their authorized rate of return. They did so by making large capital investments on which they would earn a return. It's an unusual way that utilities make money. They spent less on operations and maintenance than they told regulators that they would. Some of the deepest cuts came within the gas transmission division, specifically. It was discovered that a lot of safety projects were being deferred as a result of some of these cost pressures. The consequences of that were not immediate, but all these little decisions to cut corners ultimately accrued in enormous disaster in the form of the pipeline explosion.

[0:17:15] AR: That makes sense. Then it sounds like, the kinds of things that were occurring in the gas part of the business were also, kind of there were parallels in the electric side of the business. Is that right?

[0:17:25] KB: There were. In writing the book, even knowing about the disasters on the electric side, as well as the San Bruno explosion, I hadn't realized the extent of some of the parallels, but it’s true. Actually, the electric transmission division faced significant cost pressure as well. I think part of that was for the same reasons you saw on the run up to San Bruno, Because I think just to be very clear for listeners, utilities do make money in a weird way. They make an authorized rate of return on big capital investments that improve the overall value of the system. Operations and maintenance expenses, that includes inspections and stuff like that, is treated differently. It's just a dollar out the door. They can recoup it from customers, but they don't make a profit.

So, the best financial performers have a lot of money to invest as capital. Of course, as with any company, a utility has finite resources, right? The question becomes, how do you manage your capital budget with your expense budget? The best financial performers are able to invest a lot of capital and keep the ONM, so to speak, low, and Wall Street rewards them for it. You have to question, where are those cuts coming from? If it's just overall process efficiencies, fewer people in an office somewhere, that's one thing. But if it really means cutting back on the thoroughness of your inspections, the company is exposing itself to a lot of risk. That's ultimately what happened with PG&E, to put it simply.

Over time, the company did really scale back the frequency of its transmission inspections, and in many cases, the thoroughness as well. It became so that especially this remote infrastructure in the Sierra foothills, like we're talking about, it's hard to access anyway. They were dedicating fewer resources to trying to get at it and assess the risk, even though there was a lot of engineers who knew that there were risks that they weren't properly assessing.

When the transmission line failed, specifically, when the hook broke in half, no one within the company was aware of the extent to which that risk could emerge, because they hadn't gotten close enough to the lines to see it in a lot of years. I think some of those cost pressures, I mean, yes, I think that the push to please shareholders was part of it. I think another unfortunate irony, just to return to a point earlier, is that the company was spending a lot of money procuring wind and solar power at a time when those costs were much, much higher than they were today. Those are also treated as expenses.

It was creating an additional layer of pressure in keeping expenses low. Then of course, there's a really important element of this story, which is that, as PG&E is procuring all this wind and solar with an eye toward long-term climate change mitigation, as it's focusing on reorienting its gas division, the service territory that it has Northern California, it covers 70,000 square miles was changing really fast. The risk profile was changing really fast, in part because of climate change. There were some periods of really severe drought made worse by changing climate that just killed 10s of millions of trees. Forests weren't especially healthy to begin with, so that it made the consequences of infrastructure failure significantly higher than it had been historically.

A fire that maybe would have been easily contained 20 years ago, had the potential to explode into something that burned for days or weeks, in a way that they hadn't seen before. It is unfortunately ironic in a lot of ways.

[0:20:52] AR: Wow. What a, yeah, complicated set of problems.

[0:20:54] KB: Yeah. Absolutely.

[0:20:56] AR: Yeah. To that point about irony, I'm curious if you think that the large amount of money that California spent in those early days of renewable energy, when it was relatively expensive, do you think that contributed to the tremendous drop in cost that we've seen in recent years? Or was it really other factors outside of California?

[0:21:15] KB: I mean, I think it actually played a very significant role. I mean, I think that that early procurement, in and of itself, it's a good thing, right? I mean, procuring renewable energy, clean energy sources is critical in addressing climate change. California was clearly among the first states to take this seriously and to require it. I get some pushback from people sometimes on this. It’s like, it's not to say that it is not a good thing, because it really did help create the economies of scale that we have today. It made for much cheaper projects, and it's a huge reason why wind and solar are very competitive today. I mean, it's just a fact that they weren't back in the day.

Companies do have finite resources. I mean, these are multibillion dollar contracts collectively, and they're spending billions of dollars a year. It's interesting to think like, well, what would have happened if the company had been able to build the wind and solar facilities and earned a return on it, would that have changed anything, if they weren't procuring all the wind and solar? I mean, it's interesting to think about, but I think just for our understanding, it's just like, yeah, they were expensive. It was just another thing that added to cost pressures over time, even though, of course, today, the landscape is totally different in procuring all of that.

[0:22:30] AR: Yeah. You talked about that unusual business model of the utilities. That's very different from what a normal business would face. You talk about how that was developed back in the early days of the development of the US power grid. It seems like that utility financing business model was created at a time when the main challenges or goals of the electric power system were very different from what they are today. Do you think that that method is outmoded and we shouldn't have that system of utility finance anymore?

[0:23:01] KB: Well, I think that it's a really hard question to answer, but it's definitely true that things are very different than they were 100 years ago. I mean, the primary goal for every utility in the 20th century was to build up a valuable system to serve cities, which in many cases were experiencing really rapid population growth. There was a real need to invest all this capital simply to support industry as it was developing and other things.

Now we have a system in place. We need to add more to the system, especially as we do more to electrify, add more EVs to the grid, electrify homes and businesses. I mean, increase electricity demand for the first time in a long time. More growth needs to happen. We also really need to do a lot to maintain what is in place in a way that maybe you hadn't had to do 50 years ago, because it's simply getting older. On top of that, as the climate changes, new strain is emerging to test different parts of the grid.

I mean, the model still has value in that capital investments can do a lot to address some of this. But maintenance and inspections are also becoming more critical. They've always been critical, but the consequences of failing to do that properly are becoming higher. Obviously, this speaks to the need for perhaps, closer regulatory oversight, and perhaps some creative minds in thinking about different accounting treatments for different things within the utility sector. It's a tough problem to solve. I think it still has functionality for sure. It's just, we need to think a little bit differently about it. I’d be curious if you have any thoughts on it.

[0:24:37] AR: Yeah. Boy, I don't know. I agree with you. It's a terribly complicated and difficult question. I guess the other piece, too, is that the timescale in which we have to address climate change is so short, that if there are big institutional changes like that, that in themselves could take years to occur, then they become less practical in a way. I feel like that's a part of the problem, too.

[0:24:58] KB: Yeah, yeah. Awesome. A big part of the problem, especially in a place like California, electricity rates are really high in general. In part, not entirely, but in part because of some of the early renewable energy contracts. Also, with the huge investments in wildfire mitigation that each of the big utilities have been making in recent years. Then more needs to be done to strengthen the grid as California moves so aggressively to add EVs, phase out natural gas to do other things.

I mean, there's this real question of how much can the customer really be asked to bear? It remains a relevant question, even if you're going to talk philosophically about other ownership models, right? If the state were to take over PG&E, then it becomes a taxpayer question. It's tough. It's like, we're moving into a new, I think, really, really challenging phase for the utility industry.

[0:25:49] AR: Yeah. While we're talking about all these financial questions about financial responsibility and financial structure and incentives, another piece that you talk about in the book is this idea of inverse condemnation, which exists in California that holds California utilities responsible for damage caused by their system, even in situations where they haven't been negligent. Can you talk a bit about that? I think that's very counterintuitive for people. Also, if I understand right, is pretty unusual in terms of that it's not widespread outside of California?

[0:26:21] KB: Right. Yup. That's right. Inverse condemnation stemmed from a constitutional provision, I think in the late 1800s, or early 1900s. The idea is simple enough to understand, even though it sounds super wonky. If you think about eminent domain, a governmental agency has the right to condemn your property if it's trying to build something that serves the public good, so long as you're appropriately compensated. As long as the landowner has paid appropriately for the property that's being seized.

The flip side of that, I think it's why it's called inverse condemnation, is that if the thing that's built to serve the public good somehow damages your property, you also have a right to compensation. This applies to literally all governmental agencies. It isn't just utilities. If a water district has a flood issue, now this would apply. It also historically applied to publicly owned utilities, like Muni, or something like that.

Then in the early 90s, there was a court case that ultimately determined that privately owned utilities like PG&E are substantially similar, because they build things that serve the public good, and therefore, should be subject to inverse condemnation. That does mean that if their infrastructure fails and somehow damages someone's property, most commonly it fails and starts a fire, the utility is liable for all the damages, regardless of how it maintained that line. Regardless if it was negligent. I mean, the line could be pristine, and it failed for some freak accident, the company is still on the hook.

It is unusual. Historically, California has been one of the only places in which this is a very established precedent. Interestingly, there are prosecutors who are pushing inverse condemnation claims against Pacific, or in Oregon. There's been some discussion about this in Washington as well. Washington State with a vista.

[0:28:11] AR: Interesting.

[0:28:13] KB: I had thought that it was settled precedent in other places throughout the West, but it's actually not. It's interesting stuff. I mean, all this is to say that one of the reasons why we're talking about PG&E right now is because it is a California utility. The fires ignited by its equipment wasn't just the campfire in 2018. There was also a series of really destructive and deadly fires in 2017 that ignited when tree branches hit its power lines. Faced an estimated 30 billion dollars in liability costs and sought bankruptcy a second time. That was hugely consequential.

[0:28:46] AR: Yeah, really interesting. Do you have thoughts on whether that policy of inverse condemnation makes sense? Because it does add to another cost burden to the utilities, even as it provides compensation for people that might otherwise not be able to get it?

[0:28:59] KB: Right. I mean, so I think suffice it to say that utilities have been pushing for a long time to change this, or to instead of a strict liability standard, to have a different standard in which they're liable if they were negligent, that kind of stuff. It's really, really hard to change, though. I mean, there's not really going to be the political will to make any meaningful changes there. That being said, it has become in some ways a liability for the state as well, because the state on numerous occasions at this point has had to step in to help the utilities, particularly PG&E, manage these liability costs, because they've become such a burden that it threatens the health, the financial health of the utility, which is untenable.

I mean, they have to have appropriate access to capital to make the sorts of investments to make the system safer, and to just run, to just be able to do the basic function of providing electricity, which is a critical service. That happened notably in 2019 after PG&E sought bankruptcy protection the second time. The state moved to create a wildfire fund to help all the state’s utilities manage the potential for really big liability costs going forward. For PG&E, it could only access the fund if it got approval of its bankruptcy plan by June 30th of 2020, basically the start of the 2020 wildfire season. It was a really, really challenging deadline that had consequences for how the bankruptcy shook out.

[0:30:23] AR: You write about the extensive litigation that followed from the fires and the PG&E bankruptcy. How did that ultimately play out?

[0:30:32] KB: The way that it happened, the company had to reach settlements with three classes of claimants, primarily. The first class of claimants and the smallest class were governmental agencies and other public entities that had incurred costs related to the fires. It settled with them first for a billion dollars in cash.

The second group was distinctly more complex in that ostensibly, it was a group of insurance companies. Because of inverse condemnation, if an insurance company pays a claim to a homeowner, or whoever, a fire claim, that insurance company has the right to recoup that cost from the utility company who started the fire. That's particularly a thing under inverse. There were a number of insurance companies that didn't want to wait around for a settlement and instead, sold their claims on the secondary market to financiers, basically. I mean, some for pennies on the dollar. 

These hedge funds got a discount on these claims, and then brought them to the utility. They succeeded in negotiating a very large 11 billion dollar, all cash settlement. There's been criticism of that, and I think rightfully so, because when it came time for the company to settle with individual fire victims, those who'd actually lost property and loved ones and other things, didn't have enough cash to fully compensate the value of their claims collectively. It shook out that the company decided to compensate them using a trust that was funded half with cash, half with shares in the company itself. The value was supposed to be 13.5 billion dollars when you add all these assets together. Of course, the total value of the trust, it depends on the company share price, all kinds of things. The trust, when PG&E got out of bankruptcy, was held at 20% of the company. The trust cannot liquidate these shares overnight.

[0:32:22] AR: Probably for victims, that's really not serving their needs very well to have shares in a particular company subject to changes in market prices and all those other problems that come with that.

[0:32:31] KB: Yeah. It creates a huge set of challenges for the trust and also for the company. One of the things that it needs to take into consideration is if it wants to issue more equity, wants to do an equity raise that dilutes the value of the – dilutes value for all shareholders, but they had this special set of shareholders, the victims. Yeah. It's not entirely without precedent, but the circumstances here are weird enough that it is really remarkable. There's the practical matter of the fact that it is hard for the trust to manage this set of assets and figure out how to sell it, or how to sell them and at what intervals. I mean, just also, obviously, a lot of victims on principle don't want to indirectly hold shares in the company that ignited the fires that destroyed their property.

[0:33:19] AR: Yeah, that makes sense. Then in addition to the civil litigation, there was a lot of legal action related to criminal liability as well, right?

[0:33:29] KB: That's right. In parallel, as the bankruptcy was playing out, local prosecutors in Bute County, where the campfire ignited, pursued a criminal investigation as to whether the extent to which the company knew about the risks. To be clear, PG&E didn't know about this very specific risk. It didn't know that the hook that broke was on the verge of failure. That's because it wasn't doing the sorts of inspections needed to evaluate that hardware. That was an issue in and of itself. But in probing all of this, the prosecutors learned by virtue of emails and correspondence and other things, that there were a lot of engineers and employees within the company who are aware of fire risk within the Feather River Canyon, which is where the fire ignited. They were aware of infrastructure risk. They knew that the lines were really old and needed more maintenance than they were getting.

They also knew that they were making decisions in response to cost pressure. They were making decisions not to do types of work that would have ultimately helped address a number of different risks to the infrastructure and could have resulted in fire. The prosecutors remarkably successfully convicted the company on 84 counts of involuntary manslaughter, deadliest corporate crime in all of American history for each of the deaths resulting from the campfire, the standard there is reckless negligence. They found that the company was operating the infrastructure in that region with reckless negligence.

[0:35:00] AR: That's amazing. Also, really tremendously unusual, isn't it, for corporations to be held accountable in these kinds of white-collar crimes in that way?

[0:35:07] KB: It is. It is highly unusual. Similar to San Bruno, prosecutors there were not able to bring charges against any individual. It was the same case with the campfire. The reason for that is it's not satisfying to a lot of people. They're like, “Who's to blame?” The answer and truth is no one and everyone all at the same time. A lot of different people within the company had some level of knowledge about risk and wrongdoing, but nobody knew enough, no one person knew enough about the extent of the risk and what could happen to actually bring charges against an individual. It's a collective liability theory that is not intuitive.

It is really important to understand in terms of really understanding what it means to convict a company, in and of itself. It is also critical to understanding the root of this problem, which is systemic breakdown. Little decision by little decision, no one doing so with any real ill intent. Ultimately, decisions to cut corners accrue to a point in which the risk is truly untenable, and no one fully recognizes it. That's what happened in both cases.

It is interesting. In the closing remarks that the prosecutors gave, after convicting the company on these charges, they were thinking about this case in which there was a man in California who had been convicted several times on DUI charges, and then he drove drunk again and killed two people. After that, he was successfully convicted of second-degree murder. The idea being that he knew about the risks of his behavior, because of his past convictions. Because he chose to do it again, he had acted with intent.

They invoked this idea in their closing remarks. This company now has been twice convicted on charges of failing to safely maintain the infrastructure. If you are convicted again, it's not involuntary manslaughter. It could be second degree murder. From a legal standpoint, I don't know how that would ultimately shake out if there was a third major disaster like this, but I think it's interesting to think about, in terms of knowledge and intent and what that all means. I found the whole thing to be totally fascinating, really.

[0:37:24] AR: Yeah. Well, and at the same time, on the one hand, is in some ways, a huge victory, because it's so rare to convict a corporation for something criminal and the state makes such a clear statement. Then at the same time, if I understand, right, the consequences are pretty limited, right? Because no individual can be incarcerated or anything like that. The company has to continue to exist.

[0:37:44] KB: That's another really important point as well. It's totally true. The penal code is written to penalize individuals. The financial penalties associated with these crimes are totally paltry if you're bringing them against a multibillion-dollar corporation. I think in both cases, both San Bruno and the campfire, the company paid in rough terms, roughly, gosh, 3 million, maybe. Three and a half million, which is nothing. It's nothing relative to PG&E’s overall balance sheet.

After San Bruno, the company was placed on criminal probation, which is highly unusual as well. Given, there was a new judge who inherited the case who ultimately oversaw the whole probationary period, which lasted for five years. He was such an interesting character. I mean, he was so intent on trying to hold PG&E accountable and make sure that it was – the first rule of probation is don't commit any more crimes. Ultimately, during this probationary period, the company committed 84 counts of involuntary manslaughter. He was just racking his brain, trying to figure out how to push PG&E into compliance. He just asked for reams and reams and reams and reams of information from this company.

Ultimately, it was disheartening, because when the probation period ended, he issued this very plaintive statement in which he said – he was just like, “I feel like I've failed here. I tried, but the risk remains.” I think his exact words were, “PG&E remains a menace to the state of California.”  Which was really reflective of who he was and how he spoke and communicated, but it just raised a lot of questions about, okay, even with a probationary period and a monitor and a federal judge, and all these people tasked with oversight, like how effective can it really be? How effective can third parties be at affecting change within a company like this? It's just been the question that's haunted everybody. The judge, the monitor, the state regulators, federal regulators. It's a super tough question.

[0:39:41] AR: Yeah. I wanted to also ask you about just looking forward into the future. I know you described, I think it was towards the end of the book, about PG&E’s plan to bury a lot of its transmission lines to avoid these problems in the future. Can you talk a little bit about that approach?

[0:39:57] KB: Yeah. I do think that this is not just a California story. I think that there's takeaways for people in every part of the country and utilities in every part of the country. I think that we've seen, especially over the last year or so, severe weather and storms and strange weather patterns becoming more severe and unpredictable, in part because of climate change. That puts new stress on the grid. That creates new risks for all utility companies to contend with. I think some of the smartest utilities companies right now are trying to figure out what climate change means for them, which is, I think, what every utility should be trying to do, and to figure out what sorts of system hardening needs to take place as some of these new risks emerge. Where are the risks? What are the consequences of the risk?

Powerline failure in North Carolina is highly – not likely to result in major wildfire. But if an especially strong hurricane came in and took out all the transmission lines and people were in the dark for three, four days, that's catastrophic, too, in its own way. We saw that with Hurricane Ida in New Orleans last year. I think, took out all the transmission serving – Or, excuse me, Louisiana, took out all the transmission serving New Orleans. There's been other sorts of weird incidents as I'm sure you experienced the heatwave in the Pacific Northwest. That put a lot of strain on systems that are just not accustomed to that heat. If that becomes more common, what does that mean?

Obviously, just to really make clear, of course, not every place is prone to catastrophic wildfire when a power line trips off or fails, but we are highly dependent on electricity already and we're becoming more so as we do more with it, charge cars and to cook and all that. I mean, even now, being without power for two or three days, people rely on electricity for medical reasons. It creates big risks for them. Obviously, big economic hit, whenever that happens in whatever region it may be. It's hard to overstate the importance of understanding there's several things going on at once. The grid’s getting older and becoming more vulnerable to failure for that reason. The climate is changing, new risks are emerging, and we're becoming more reliant on it. I think PG&E is not the only utility company that's had a history of mismanaging spending and mismanaging risk. I think that we're going to begin to see the consequences of that elsewhere in the country over the next 5, 10 years.

[0:42:25] AR: Yeah. Well, like you were saying, even up here in the Pacific Northwest, we've had some proactive cut off of power to certain areas, because of wildfire risk, even without the fires necessarily taking out lines. It seems like that's only going to become more common, especially in the western US. Yeah, more frequent. It makes me wonder. I mean, do you think that people of means are just going to respond to that by saying, “Well, now, some form of a home battery system is essential, because if power outages become that frequent, they just don't want to be without it,” or, like you say, have needs where they need to remain connected?

[0:43:02] KB: I mean, I think that's definitely part of the story. Any reliability challenge does generate interest in more distributed solutions, rooftop solar paired with batteries being a big one. Raises a lot of questions. I mean, on the one hand, it's like, having a large penetration of rooftop solar, specifically paired with batteries and other things, is probably a big part of the long-term solution for addressing fire risk and other things, because maybe it reduces the amount of big centralized infrastructure that you need running through the forest and stuff like that.

But it also creates another issue in which you've got people who are purchasing less electricity from the utility. You've got fewer nodes in the network, so to speak. Those who remain and don't have the means to do this might potentially be stuck with higher costs, as the utility to spend more to improve the overall safety of the system. These are not easy problems. I mean, it's really complex.

[0:43:59] AR: Yeah. Then it goes back to the questions we were talking about earlier around the future financing model, or financing structure of a utility, if it still is viable, and if there was some different way to do it, if it might take into account those considerations, too, right?

[0:44:13] KB: That's right. Yeah. I mean, certainly some of the smartest minds in the space are trying to figure this out. I mean, it is safe to say that things do need to change going forward. In the same way that the past isn't really the same predictor of the future that it was as the climate begins to change, the role and the importance and the function of the utilities also begin to change, so we're going to need to think about that differently in a lot of different levels.

[0:44:42] AR: Well, you've been very generous with your time. It's been terrific to hear about so many of these fascinating issues. I really appreciate your meticulous and insightful reporting. It’s a great contribution to the subject.

[0:44:57] KB: Thank you.

[0:44:58] AR: Katherine Blunt, thank you so much for talking with us.

[0:45:00] KB: I really enjoyed the conversation. Thanks for having me.

[END OF INTERVIEW]

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