Michael Livermore 0:10
Welcome to the free range podcast. I’m your host, Mike Livermore. This episode is sponsored by the Program on Law Communities and the Environment at the University of Virginia School of Law. With me today is Katherine Blunt, a journalist at the Wall Street Journal, and the author of the recently published “California Burning: The Fall of Pacific Gas and Electric and What It Means for America’s Power Grid”. Hi, Katherine. Thanks for joining us today.
Katherine Blunt 0:33
Thanks so much for having me.
Michael Livermore 0:35
So unfortunately, the subject of wildfires in California does not seem like it’s ever going to get stale, at least anytime soon. As we’re recording, I guess the mosquito fire is burning near communities in the Tahoe and Eldorado National Forest, the book California burning, it’s really a fascinating deep dive into the history of the utility PG and E and its problems. But before we kind of get into the story and the content of the book, I was just curious, as someone that’s, you know, been observing and thinking and writing about this for a while, whether you had any hope that kind of in our lifetimes, the wildfire risk in California will be well managed enough to that it kind of fades into the background, rather than being such an omni presence in people’s lives.
Katherine Blunt 1:23
You know, unfortunately, I think at this juncture, it’s really hard to say, you know, a big factor, one of many that I’m sure we’ll explore in this conversation is that a lot of this risk has been exacerbated by by climate change in the, you know, the various severe drought periods that we’ve seen, which just makes this all the more difficult to manage, and all the more difficult to predict. And so I think that there’s a lot of very smart minds working on this issue. But in at least in the foreseeable future, it’s hard to really anticipate that it will be minimized in a major way to the point where it actually fades into the background.
Michael Livermore 2:02
Well, that would that that tire prediction, maybe we could kind of talk about how we got to where we are today. So this the book is about a utility, which, you know, for the casual reader, right might not sound like an obvious topic for, you know, for a page turner, but really, you know, it’s corporations may not be people, but they’re full of people. Right. And you there’s just an absolutely huge, fascinating cast of characters. In the in the book, you know, there are CEOs, there are people’s whose homes and lives have been destroyed by fires, there’s, there’s cops, there’s prosecutors. And you know, one of the questions I was just curious about is, you know, you spent a lot of time with with, with these folks, and with a lot of documents and a lot of proceedings, again, reporting and doing research for this book over the past several years. Who did you end up kind of identifying with or finding some common perspective within the, over the course of meeting all these all these different folks?
Katherine Blunt 3:06
Yeah, you know, I really enjoyed everyone who I spoke to, for the book I enjoyed speaking to for different reasons, they all brought very different perspectives. One question, you know, you said in just a few minutes ago, you know, corporations aren’t people, but they’re full of people, which is true. And, of course, you know, in the eyes of the law, that they are people and can be prosecuted as such. And twice now this, this company has been convicted on criminal charges of neglecting the safety of infrastructure. And there were a few individuals in particular, the prosecutors who investigated the deadliest wildfire in California history, as well as a former San Bruno police officer who’s helped investigate a deadly pipeline explosion, talking to these people and getting a better understanding of the investigations that they conducted, really, I think helped me explore this idea of corporate liability and what it means to convict a company of these charges. You know, corporate liability, as you know, is not it’s not really an intuitive idea. A lot of people fail to understand how you can convict a corporation without pressing charges against any individuals. And I, I think it’s really important to understand that and I, I really enjoyed those conversations for that reason.
Michael Livermore 4:30
Yeah, it is a it’s a fascinating, it’s a fascinating topic, actually. And this is the, of course, a major part of the framing of the book is around these criminal investigations and these criminal charges, and maybe we could dive into that because I’m, I’m interested in this as well. And I’d be interested in your thoughts on maybe just as a bit of framing, you know, what are the core criminal charges that you end up following? At least you’re part of the book,
Katherine Blunt 4:54
Right, right. So the first major incident occurred in 2010 when A gas transmission pipeline exploded in San Bruno, which is a small community, you know, a few minutes south of San Francisco. The explosion destroyed a neighborhood, it killed eight people, a lot more people were injured. And it resulted in a very long and detailed federal investigation into this, how PG&E was managing its gas transmission system, and ultimately resulted in the company going to trial, over charges of violating the federal Pipeline Safety Act. And the company fought very hard, which is, of course, really uncommon, you rarely see these kinds of things go to trial. But ultimately, it was convicted on six counts, or six, six charges, five of which were violating the Pipeline Safety Act, and the other one was obstructing the National Transportation Safety board’s investigation of the explosion. Rule really, really fascinating trial, like a really great lens through which to understand this really weird idea of corporate liability and what that meant, in this case, the other charges were just I mean, frankly, it was an unprecedented situation in which, in 2018, a electric transmission line failed, ignited the most destructive and deadliest fire in California history in which 84 people died. The prosecutors in the county in which it occurred, did a really, you know, really amazing investigation into exactly what happened and ultimately indicted the company on or grand jury indicted the company on 84 counts of involuntary manslaughter. PGE has been one of the few corporations to face homicide charges. Historically, it’s and the company agreed to plead guilty. So that’s where that’s where we stand now.
Michael Livermore 6:55
Yeah, yeah. So these are the two I mean, they’re really, as you said, kind of unprecedented, fascinating cases. And the underlying offense or, you know, just incredibly tragic. One of the one of the senses that I think at least I felt at the end of it was, there’s some dissatisfaction like you, you have these prosecutions are actually ultimately successful. You have a guilty you have a trial in San Bruno case. You have a guilty plead in the wildfire case. And, you know, that’s that’s a successful resolution from the from the prosecutors perspective. But, you know, one goes to jail, right? It’s just something very different when a corporation is on the, on the other side of it. So, so I was just curious if that impression was was, you know, is accurate in the sense that folks felt a little, there’s something a little deflationary in the sense about kind of the ultimate wrap up even of a successful prosecution.
Katherine Blunt 7:57
Yeah, absolutely. So on the one hand, you look at both of these investigations and the successful prosecution. It’s, it’s amazing in that it’s very difficult to convict a corporation. And, you know, of course, after these disasters, everyone asks, who’s at fault, you know, who’s who’s to blame for what happened. And when you consider an organization like a utility, now, with so many people making decisions, you know, very diffuse hierarchy and decision making processes. Legally speaking, it is really difficult to assign blame. And even outside, I mean, this legal context, it’s very difficult to assign blame, and you really see this. I mean, it’s what it is, is, I mean, PG&E is a story of systemic breakdown. Right? And so in that, with that in mind, it’s really amazing that these prosecutions were as successful as they were. But it’s it also speaks to the fact that, you know, it’s, it’s in the eyes of many, it’s just a really unsatisfying outcome to have charges pressed against the corporation itself. And because because it feels as though I think there’s just so many questions of accountability, you know, what’s the best way to hold a company and the people within it accountable? And also, you know, the, with the resolution of these cases, the, you know, the Penal Code is is written to penalize individual people, you know, it’s it really the ultimately the company ended up paying almost nothing relative to its overall size in in fines for these crimes. And in many people felt that that was really ineffectual almost in terms of punishment. In the case of San Bruno, actually, it was interesting, the company was placed on corporate corporate probationary period in which, like the, you know, the the chief requirement was was no more crimes which of course, they ultimately ended up being convicted, convicted on 84 kinds of involuntary manslaughter during this period. So that didn’t work out especially well. And I think the judge overseeing that case, really, was he felt, I think, at the end of the day really hamstrung in his ability to enforce compliance and to make that probationary period effective. So I think that you’re right, there’s a lot of frustration. And it’s such an interesting subject as to, and it raises great questions of accountability. And, you know, how you pursue resolution after these sites sorts of disasters?
Michael Livermore 10:32
Yeah, it really it really is, I mean, he just kind of thinking about so. So when I think of the criminal law, as opposed to other areas of, of regulatory law, or whatever. One of the big differences is that we use the criminal law as a way of condemning kind of morally condemning behavior that we reserve, or we often reserved the criminal law for types of behavior that we think, you know, it’s kind of fundamentally morally wrong, and we want to, and we want to kind of show society’s judgment about that. And, and we actually, you know, criminal law is integrated with lots of regulatory programs, like in the environmental context, if you say, falsified documents and submit it to the government, you know, you’ll you’re personally criminally liable for that kind of thing. But here, we’re not talking about that kind of that charge, right. It’s not that someone falsified a document or engaged in some particular criminal act that they’re held liable for? It’s the, as you said, there was a systemic breakdown. Or at least, let’s just say the system, that is the company, interacting with its environment produce this result, which is that, you know, 80 people died, or 84 people died. And, and it is tricky, because in a sense, I mean, again, as someone who’s kind of as familiar as anybody is with the details of the cases, what, what’s your sense of the kind of the moral culpability of the individual actors? And can we separate out us into something that’s distinctively a distinct moral culpability of the collection of kind of how they’re interacting with each other in a structure? That’s distinct from the moral culpability of the individuals involved?
Katherine Blunt 12:18
Yeah, I mean, that’s a that’s a really great question. One of the more difficult ideas for in reading, this, I felt was the sort of the collective nature of the of the charters that we’re talking about. So the the prosecution following the San Bruno explosion, these charges were predicated on this idea of, you know, collective knowledge and collective intent. And I’m sure many listeners know, I mean, that’s just a very complicated area of the law. And there’s because there’s no, there’s this idea that, you know, corporation acts through its employees, historically speaking, charges can be brought against the company, if one person is criminally liable for a certain set of set of actions. But it starts to get a lot more complicated when you have, you know, these these sort of very complicated corporate structures in which a lot of people are acting in a lot of different ways with a lot of different types of knowledge. And the best way I could kind of sum it up was, and you know, this is probably still, to some degree and precise because it is so complicated, but rather, you know, a lot of different individuals within the company knew that there were some things that were going wrong, that they weren’t doing exactly what they were supposed to do. And like kind of through their interactions with each other ultimately sort of ignored these risks and problems or made them worse. But nobody acted with such specific criminal intent that it was appropriate to bring the charges against that individual. And so you know, it in even just listening to the testimony of some of these engineers, during the San Bruno trial, I mean, it doesn’t appear as you’re talking through the complexity of the issues that they were, you know, acting with, with true immorality. To answer your question, you know, it seems as though, you know, they, they kind of knew that something was going wrong, but they didn’t realize the extent to the consequences of their decisions. And, you know, unfortunately, it was brought into incredibly sharp relief after the explosion. And, you know, it was interesting, too, and, you know, the defense in you know, the defense really argued for a very strict definition of of intent. You know, somebody had to have acted with an evil meaning mind with the with the knowledge that his or her conduct was unlawful. Ultimately, the judge in the case said no, like, in this case, intent is defined as willing just willful disregard for the regulations that were in place. And now that’s a much lower bar to clear from, you know, prosecutorial standpoint. So it’s a really good question. And it’s just, it’s just one that I just found it to be so interesting to kind of sit with and understand that when you have the indictment and ultimate conviction of a company like this, it’s not necessarily a very strong indictment of the individuals within the company, if that makes any sense.
Michael Livermore 15:22
Yeah, well, certainly there’s going to be a lot of people who are just just unrelated in some sense, right? To what went on. And, you know, there’s another, so it’s just occurred to me, it’s not clear why we draw the boundaries at the corporation. I mean, there’s legal reasons for that, but just from a moral perspective, and if we’re trying to middle we want the law to some sense match our goals with respect to, you know, kind of moral condemnation, because the company is a meshed in, in a structure that includes the regulators, and includes, you know, politicians, and includes investors, and includes customers who put pressure on the company in different ways. And so there is something in a sense peculiar about, you know, selecting this collection of people, which is the corporation in visa vie their relationship, really, to this entity. But even though really, you know, there’s something artificial about that boundary, there’s lots of people in the company who we would just say, are completely unrelated to the bad axe. And there’s lots of people outside the company who are integral to the outcomes that we’re seeing there. And so that’s another peculiarity and I don’t know if that was something that presumably the prosecutors didn’t contemplate going after the regulators as a responsible party.
Katherine Blunt 16:42
No, that’s a really great point. And I never quite thought about it that way. But I mean, in, you’re right, it is, in some ways, arbitrary when you’re considering a company like PG&E. And so you know, pursuing charges against the corporate entity? Yeah, I guess. I guess in some ways, it does make sense because you are examining, you know, the the decisions of the people who are most responsible for the conduct of the company, but it is true, that the company is subject to is supposed to be subject to strict regulatory oversight. And in the case of the San Bruno disaster, the National Transportation Safety Board was very hard on the California Public Utilities Commission in spelling out its many failures in effectively overseeing this company in the run up to the explosion. So there’s real culpability there. But it’s I never quite, you know, considered it in the criminal context, because that was outside of the scope of the investigation. But it’s a very good point that you raised.
Michael Livermore 17:45
Yeah. And there’s another kind of tricky part of this, that, especially towards the end of the book, and, you know, we’ll give away the details, but there are, you know, what, we just kind of explained, right, the the we have these guilty verdicts and these pleas and there’s the problem of punishment, especially in the case of PG and E, which actually don’t have my timeline exactly straight in my head, but there’s a bet there’s a simultaneous bankruptcy proceeding, basically. Right. So, you know, if you haven’t you’ve equity investors have already not maybe fully been wiped out, actually, they were quite well protected the bankruptcy proceeding or something else. That’s it very interesting element of the book. But ultimately, when you impose costs on, you know, an entity like PG&E, there’s only so many places that can flow to it can flow to, you know, equity holders, it can flow to creditors, in the case of, you know, if you’re going to write down some debt, and really a lot of it’s going to flow to, to customers in the long run, or maybe to taxpayers if there’s an taxpayer ballot. So there’s this other kind of issue, where not only is it hard to identify the responsibility, but whatever punishment you put on the on the company is going to kind of get passed along to lots of different diffuse actors. And I was really struck in particular there was from now I’m forgetting the term, but this idea that now the kind of the company might be on notice that its actions are potentially harmful in the future Conservancy, it’s like a murder charge. And what struck me then was like, who’s gonna want to work at a place where you could literally be put in jail for murder based on the actual based on your decisions, like you’re gonna have to pay people so much money to do that. And then that means that someone’s going to have to pay for that, like you probably customers. So So I was curious, your thoughts about that, too, just the the complexity and difficulty and dilemma of actually, you know, punishing the actors involved.
Katherine Blunt 19:45
Yeah, so there’s a couple of interesting points there to unpack. I mean, the bankruptcy so Pekinese bankruptcy protection in 2019, after a series of deadly and destructive wildfires that occurred in both 2017 and 2018. Face the estimated $30 billion in liability costs. And so it, you know, use the chapter 11 process to sort through all that. It was an enormously complex bankruptcy. I, you know, to your point, yes, the shareholders in an unusual set of circumstances were very well protected, interestingly, and they really fought for a plan that wouldn’t require raising huge amount of equity, therefore, you know, better protecting the value of their holdings there. And how that ultimately shook out for individual fire victims and businesses who, you know, loss, loss of property loved ones in these disasters is that the company funded a Settlement Trust for them that was supposed to be valued at $13.5 billion. But at this point, because of various settlements with other financial parties, it didn’t have enough cash to didn’t have $13.5 billion in cash. So it funded the trust with half cash and half shares in the company itself. So that’s significant in that the compensation for the individual victims is tied to the, you know, the future stock price of the company. And a lot of different types of penalties have the potential to weigh on the company’s share price. Right, right. So there’s that I mean, that introduces a whole unusual layer of complexity. That’s really, of course, at its core, very sad. There’s a lot of frustration within the fire victim community naturally, that this is how it shook out for them. Whereas other major parties, including hedge funds, and insurance companies that are in the, in the risk business, so to speak, were able to reach all cash settlements secured no risk. So there’s that. I mean, that’s, that’s interesting to consider. And to your point about the kind of the potential murder charges, I found this to be very interesting. So, you know, the company was was convicted on involuntary manslaughter charges, right? I mean, the it was that was predicated on the idea of reckless negligence, not specific intent to kill um the prosecutors
Michael Livermore 22:04
And kind of just to give an analogy for folks like, you know, in the law, we do this all the time, right? There’s murder, which is like you intend to kill someone, but you could be acting with, like, reckless disregard for him. And that goal isn’t to kill someone, you’re doing something else. But you’re just so unconcerned with the consequences for other people that we’re going to that we find that morally blameworthy, and we’ll you know, we penalize that under the Criminal Law
Katherine Blunt 22:27
Right, right. So then in California, and probably other places, but there’s a specific California precedent in which there was there was a man who was ultimately convicted on second degree murder charges for killing a couple of people while he was driving under the influence. And he had done this before he had been convicted on DUI charges previously. And so the Prosecutors argued that that amount is his the knowledge that his his behavior was so risky, and then he was putting other people in danger at the fact that he’d been convicted on these charges previously, was enough to have that sort of implied intent, right, that’s needed to convict someone on second degree murder charge, the idea that your behavior is so risky, and yet you’re still engaging in it. And so that was the idea that the prosecutors put forward after convicting the company on these involuntary manslaughter charges. They said, Well, this is the second time you’ve been convicted on charges of basically, you know, recklessly operating some area of your system with deadly consequences. That should be enough. You know, next time, it could be second degree murder. I mean, I’m sure that, you know, if you were to really delve into this, from a legal standpoint, it gets much more complicated than that, but it’s simple enough. And I thought it was, you know, really kind of representative of the consequences here, and what could come down the pike. And to your point, yeah, I mean, how do you recruit and retain talent, if this company is really unable to get a handle on these kinds of risks, or kind of slips back into the, you know, it’s, it’s a slow drift, but drifts back into this sort of, you know, reckless pattern of behavior that resulted in these past failures. It’s, it’s, it’s not a it’s the risk of that is not zero, unfortunately, as we’ve seen,
Michael Livermore 24:16
Right, and you know, CEOs are, can be hard to sympathize with, but you can imagine coming into a company, it’s huge. I mean, I don’t know how many employees PGn has, but it’s in the many 1000s and it’s unbelievably complex to systems, there’s no one who has the system in his or her brain, it’s just like impossible, your brain can’t store that much information. And you can pound your fist on the table as much as you want. And you can fire people can hire people, we only have so many levers though, at the, you know, ultimately. In a sense, this is the problem of diffuse responsibility is that something builds up and you can make any one person just as they you know, we might not find the answer In any one person, it’s the kind of the collective, it’s actually very hard for any one person or even a handful of people with very good intentions and even a lot of skill and talent to actually effectuate change in such a complex system.
Katherine Blunt 25:13
That’s definitely true. It’s, yeah, absolutely. And I think that’s certainly a frustration that many people at different levels of the company have had for a long time. So I mean, historically speaking, of course, the company has employed very smart people with good intentions. And I think you see even more of that now with people who are attracted to try and solve this problem in a meaningful way. But they’re the I mean, the diffusion of responsibility is a huge issue. I mean, the sheer size of the company is a big challenge that it does employ 1000s of people, the service territory covers 70,000 square miles, you’ve got inherent risk, you’ve got old power lines running through parched forests filled with millions of dead trees. And the consequence of a single spark is considerably higher than it was even 10 years ago. And another key element of this story that I think is really crucial to understand is, you know, P Genie is a weird company, and that it is a publicly traded corporation that’s beholden to shareholders. It’s also a regulated monopoly subjected to stringent oversight of its spending, and of the safety of its system. In an ideal world. You know, there’s and so the, the way this company makes money is to make large capital investments in the system, you know, the types of investments that boost the overall value, it earns a authorized rate of return on those investments, you know, building new power lines, substantially, overhauling substations, things like that doesn’t make money on day to day operations and maintenance expenses, which means it doesn’t make money on doing inspections, it doesn’t make money on doing little tiny replacements of, you know, power line hardware that has the potential to fail. And this is the case for every so called investor owned utility, you know, theoretically, companies can strike this balance. But there was a great session held with the, you know, the California Public Utilities Commission, at some point after some of these disasters in which, you know, kind of an organizational behavior expert came in and just offered a really simple example for the regulators as to how the slowly starts to break down over time, you’ve got a manager who’s in charge of the capital spending budget, and the expense budget, if you spend $1, on capital, he gets 120. Back, if he spends $1, on maintenance, it’s just $1 out the door, nothing happens, you know, there’s no reward. And so if they spent $80, excuse me, 80 cents, on expenses, all of a sudden, there’s $1.20, to invest in capital with the prospect of a larger return. And the immediate consequence of cutting that, you know, that dime out of the expense budget, there’s no immediate consequence, nothing happens. And so this, this drift just happened slowly over time. And then all of a sudden, as you know, as these tiny decisions accrue, and the risks associated with them accrue all of a sudden, there’s a disaster. And that’s what it takes to sort of, you know, wake people up internally to the consequences of those actions, but only then. And that’s, that’s a really scary thing. And it’s and so the, the prospect of the drift is real, and I think it’s very hard to catch as it’s occurring. So it’s, it’s one of those things in which is a very sobering thing to think about, you know, it’s so mundane until it’s not.
Michael Livermore 28:50
Yeah, let’s, let’s get into the weeds of this, because this if there’s a kind of a policy recommendation that one could kind of read off, you know, maybe we could think about addressing that. But let me make sure that I’m getting this clear, because it is it is utility attitude. Well, no. Regulation is like an unbelievably complicated thing, but just in broad outlines, right. So we’ve got as you said, we have an investor owned utility, we have a regulator that approves prices and investments and other things right and just with respect to this capital versus lnM, operations and maintenance, so on the capital side utilities go to the regulator and they say look, we want to make this capital investment of X number of billions of dollars in order to you know, depending on you know, what stage of the deregulatory principle is just say to upgrade our lines, capital investment, upgraded lines, build a new power plant, whatever, right? And then the regulator says, Okay, do we need that? Do we not need that? If you if we think you do need that then fine, you can go ahead and you can you know, what, you will approve that spending and you can make that money back with a rate of return on that investment. Okay. And that’s kind of the capital side, and the O and M side. sure that I’m clear about this. These guys have Oh, nm budgets that are essentially approved by the regulators. Right? And then the costs are of ons are ultimately recouped from, from, from customers in terms of prices. Otherwise, someone’s got to pay for that one. And it’s coming from somewhere. And presumably, that that somewhere is, is customers.
Katherine Blunt 30:25
Oh, that’s exactly right. So actually, I mean, all of this is recoup their customers, ultimately, the both the capital as well as the as the expenses. And specifically, on the capital side, they, they collect even more in the form of the the rate of return that’s approved by the regulator.
Michael Livermore 30:39
Right. So then, I guess the question that immediately comes to mind is, why don’t they just ask for if the problem is, if they’re not spending enough? On O&M budget , they could ask for more, I think they asked the regular regulator to approve a greater own budget. So in a sense, again, this is an impression. So you’ll tell me if I’m wrong about this, but it seems that what is really happening here at some way, is that you have a fixed amount of political capital before the regulator, but you’re gonna go to the regulator, and you’re going to ask for them to approve different things. And when you when you, when they approve your own end budget, that’s nothing to you, that’s money in money out, you don’t does this basically have no value to you as a company, other than, you know, your system doesn’t burn down, you’re not going to be liable for things. But you know, putting that aside, you don’t make money on that. On the other hand, when the regulator approves the capital expense, you do make your rate of return on that. And so if you have a fixed amount of political capital, before the regulator, there’s going to be this tendency to say, okay, yeah, we’ll reduce on O&M. You know, we’re not going to put really big O and M budgets before the regulator that, you know, the customers have to pay for instead, let’s go for these, you know, big capital projects. And, you know, that’s, that’s a place where we can make some money.
Katherine Blunt 31:49
Yeah, I think in terms of the regulatory process, that sounds right, that’s, that’s that pretty well captured the dynamic, but I think that what happens then is okay, so the, the capital budget is approved by the regulator, the, the O&M, you know, the expense budget is approved by the regulator, but then you have the actual task of, you know, the the manager who’s overseeing the budget, and how this money ultimately gets spent. I think the point that this expert was trying to make was that, you know, so Okay, so you have these, these two budgets that were, I had received regulatory approval, that’s ultimately up to the company to determine how it spends that money. You know, and so then if you’ve got, if you just take a little bit out of that expense budget a little bit less than you said, Do you told the regulator that you were going to spend instead ship that over into some capital investment, you there’s, there’s there, the motive there is that you have that immediate return that immediate reward for doing that no immediate consequence. And it’s impossible for the regulator to very closely oversee exactly how the companies are spending the money that they’ve been approved to recoup through customers. And there was a really interesting example, that came out during the San Bruno trial that there was an auditor who came in after the explosion to look at how the company had been spending money over the course of about a decade. And they found that the company had consistently underspend spent less than it told regulators it would spend on lnM, specifically on gas transmission, that there was very significant expense pressure during certain years, and that the company had actually over earned its rate of return by shifting some of that money into the capital budget. So it just goes to show that this can sort of slowly break down over time, in part because of these, this really sort of challenging set of incentives that people are dealing with, or and sort of the lack of disincentive, right to shift money out of the expense budget, because once again, the consequences are not immediate. And so it’s the skip the scary part of it is the consequences are not immediate, until the consequences are catastrophic. Right?
Michael Livermore 34:00
Right. And it’s tricky, because on the other hand, you wouldn’t want the company to make like a rate of return on its, I would assume we wouldn’t want the company make the rate of return on its own and budget, because then it would just start spending money like crazy, thinks that they would want to spend, spend, spend, spend spend. And so, you know, there’s this back and forth. And, and maybe this this kind of allows us to expand out a little bit to probably talk about the the relationship between capital and operations budget forever. But this is kind of part of a broader point, I think even which is, you know, an impression that I got towards the end of the book is, you know, it’s kind of a question asking myself whether PG&Ekind of going forward putting aside kind of how I got here, just faces, is it an actually impossible task that we’ve charged this company with? Doing of delivering safe, reliable, affordable and clean energy kind of as we define those terms, that something’s got to give somewhere and I’d know that that was that was just a kind of a sense that I had that there was literally, you know that it was kind of just impossible to actually deliver on the on, you know, kind of what the charge of the company is at this at this time?
Katherine Blunt 35:15
I mean, it’s, it’s the key question in the book. And I know it’s, it kind of leaves people with this sense of despair that there’s no great solution. And I mean, there are many things, I think that can improve the circumstances. But, you know, something that’s sort of unfortunate and really difficult to sit with is at the end of the day, it’s next to impossible for this company to bring the risk to zero, given what it’s dealing with. And there’s all kinds of conversations that this sparks a lot of people ask what a different ownership structure be better if the profit motive was eliminated. And there’s a whole long conversation to be had about the, you know, the benefits of some sort of, you know, whether state ownership or some other sort of public ownership or customer ownership in the form of a cooperative. But, I mean, that still doesn’t change the fact that you have these power lines running through these forests, you have, you know, the inherent risk of failure of some kind, whether that be mechanical failure, or you know, a tree branch getting lifted in periods of high wind and getting tangled in a live wire. It doesn’t change the fact that the company under any ownership model would be liable for these damages resulting from these fires, which are becoming more destructive for a number of reasons. And so there’s been a few solutions that the company has been trying to implement lately, one, and something that’s, I think, going to be happening on a fairly regular basis, for the next number of years, at least, is that it preemptively turned off power during periods of high risk. So if the winds pick up and it makes it, you know, the likelihood of failure of some kind more likely, they will turn off the power to any number of customers in the risky areas, the idea being okay, if the if the line isn’t energized, it can ignite a fire. I mean, so the delivery system then becomes safe, but not reliable, right? Like, historically, we’ve counted on these companies to deliver safe and reliable power ups had been the expectation that’s started to break down for this company, you know, it can’t do that all the time. And I think that this sort of pre-emptive shut off situation, it certainly lowers the risk of ignitions. But it doesn’t, to me seem to be sustainable from a customer standpoint, in our collective expectations for PG&E, and other utilities. Now, the new CEO has proposed burying 10,000 miles of power lines in risky areas, because if they are underground, they cannot start a fire. And it’s interesting, because, you know, lately, I’ve gotten a few questions being like, well, that’s hugely expensive, which it is that they’re estimating $20 billion. And that might be a conservative estimate. Someone says, you know, why don’t they just insulate all these wires? Why don’t they just put, you know, what’s called tree wire so that if we know, if a branch hits that it won’t ignite a fire? And I would imagine, probably, that the installation work would be treated as an expense, less so a capital investment? And, you know, their argument is this is, I mean, the undergrounding plan is a big capital investment on which they will earn a return and do they really need to spend that much money and do do it that way. You know, maybe it’s the thing that sort of thread the needle on this, right? I mean, like they can, you can make some money for shareholders, while also making the system substantially safer. I don’t know, it’s like an interesting question for the regulator. But, you know, at the end of the day, even after all this, there is some inherent risk. And I think that some of the, I mean, all these ideas will help. But it’s, it’s definitely a tough, the company is definitely in a tough position for like, a lot of different reasons.
Michael Livermore 39:03
Right, and then, you know, the other piece of that is safe, reliable, and affordable, and no matter, kind of, certainly the, you know, the bearing lines, but also, you know, almost whatever you do, and including, you know, cutting down billions of trees, or, you know, redoing the wires, whatever it is, is going to cost you no money. And so there’s this trade off, and that money is going to be recouped, ultimately, either by either by consumers or potentially by taxpayers, if there’s some kind of bailout. I mean, even if you wipe out the share price, which as you noted earlier, is a chunk of which is, you know, held by victims of earlier, you know, earlier disasters. And so, you know, so that’s the other piece of it is that you want to do this in some kind of relatively cost effective manner because, you know, it’s being borne by someone somewhere. You know, these costs are being borne by someone somewhere Yeah, exactly.
Katherine Blunt 40:00
I mean, that’s a great point safe, reliable and affordable. And I mean, one huge practical challenge of burying all these power lines is that, you know, it is. It’s expensive. And I mean, already rates in California are very high. And of course, we’re in an environment currently in which it’s costing more to produce electricity, because natural gas prices are higher and likely will remain higher. For some time now, you just general inflationary environment. So managing those costs, and, you know, determining how much customers can and should be expected to pay is going to be a really tough question. I think that, you know, to some degree, this is reflective of a reality in which it is expensive to safely delay is becoming more expensive to safely deliver electricity in California, but that becomes a harder pill to swallow when you’re talking about PG&EBecause some of this is a result of its past mistakes, you know, and that’s tough. And so there’s, you know, there’s some mechanisms that can be used to sort of, you know, lessen the burden over time, I’m curious if there could be some mode of like, securitization, or something like that as it relates to these costs, but it remains to be seen.
Michael Livermore 41:21
Yeah. Look, we could just shift gears just a little bit to talk about renewable energy, which, which plays a role in the book as well. So, you know, because that’s part of the that’s part of the mix these days. It’s not just safe, reliable, and affordable. But ideally, it would be clean and wouldn’t be contributing to environmental risks, including local environmental risk. But obviously, these days, we worry a lot about climate change. So So what’s the what role does does renewable energy play play in this story that you’re telling us about PG&E’s? You know, kind of development over the last couple of decades?
Katherine Blunt 41:57
Yeah, absolutely. So around the time the company emerged from so the company sought has not bankruptcy twice in the last 20 years, the first time was after the California energy crisis of 2001. And around the time that it emerged, there’s a big shift underway in California in that the state legislature is beginning to set very ambitious targets for carbon reduction. And part of that require the utilities to go out and contract for a lot of new wind and solar capacity. And wind and solar are some of the cheapest forms of power generation now. But back when these goals got underway, they were not. And it was, it’s so happened that, you know, over the course of 510 years, the companies made, you know, they contracted for a lot of wind and solar power at prices well above what we see today. So these contracts, ultimately, were expensive, these long term contracts. And those are treated as expenses pass through to customers. So it created both rate pressure, as well as expense pressure, which of course those things are related. But it’s, you know, sort of Ironically, one of those things that added to the expense pressure within the company to minimize, you know, to minimize certain costs, some of that involves inspection and maintenance costs. So, you know, sort of the early investment in climate change mitigation, you know, made it so that it was harder for the company to ultimately manage its infrastructure, as climate change, seriously changed the risk profile of its service territory. So there’s some there’s some irony there. Right. And, you know, California is early investments in these forms of generation when wind and solar, I mean, it really helps drive down the costs. It helped create the economies of scale that we that we see today, that is, you know, made it so that these, you know, these, these forms of energy are quite affordable, relatively speaking. But, you know, the companies are paying huge, you know, billions and billions of dollars for this power, and it created unforeseen challenges.
Michael Livermore 44:11
Yeah, you know, I mean, this is a, it’s just it really is a great example, a sad example of the mitigation adaptation, problem and substance dilemma, because when you when you undertake efforts, as you know, to reduce greenhouse gas emissions, the benefits of that are very, very diffuse, they’re diffuse over time, you know, many decades, hundreds of years sometimes, and they’re diffuse over the whole planet, right when California reduces its greenhouse gas emissions, that benefits people in Pakistan and China and Europe just as much as it does people in California. And as you noted, California kind of created this positive externality broadly understood a kind of a technology externality where it created a market for tech technologies that we really need, the rest of the world really needs and, and other states and other countries have been able to take advantage of the lower costs of these technologies just the same way the US subsidizes drug development for the rest of the world, right? Because we pay kind of very high prices for prescription drugs, that then is what makes it possible to develop those drugs. And then you can make generics that everyone else uses, or just lower prices that get negotiated. So. So what do you how do you end up kind of feeling about that as as someone that’s in California is is it should California feel good, in some sense that it created these benefits are it was being a responsible actor at a time when lots of others weren’t being responsible actors about clean energy. But now, it’s kind of footing, in some sense, footing the bill in a very real way, both in terms of rates and in terms of trade offs that are being made between, you know, risks, that could be reduced, but they’d be very expensive, and electricity rates are already very expensive. And so yeah, how should people in California kind of feel about how this has all played out over the last couple of decades?
Katherine Blunt 46:07
Yeah. I mean, I think that Well, I mean, California is contribution to exactly how you spelled it out. And it’s sort of a contribution to developing the economies of scale contribution to the idea of reducing carbon emissions. I mean, it it’s a, I mean, to some extent, it is a point of pride, and rightfully so. But I think that it’s been interesting to consider what this has meant. So not only were these con early contracts expensive, and not only did that create rate and expense pressures within PG&E, but in terms of the the role that the regulator played, you know, it was the California Public Utilities Commission that was tasked with overseeing the procurement of these contracts. And that really became the regulators focus at a very critical time. Like if you worked in the regulator, you wanted to be within that policy division. That was the that was the place that had the most cachet. It was it was, frankly, it was just the sexier place to be relative to the safety division, which we have certainly prior to the deadly fires of 17. And 18 was understaffed and underfunded. It just it couldn’t really compete with the other division for those resources. And as a result, these regulators had a great deal of challenge, having good oversight into what was happening within PG&E. And on top of that, there was also on in on both sides. Within PG&E as well as within the regulator, I mean, a real underestimation of the risk fire risk in Northern California, even as early signs are emerging that things were getting a lot drier and a lot more flammable. Both PG&E and the regulators sort of mutually agreed that PG&E shouldn’t have to do as much to address fire risk as its counterparts in the South because wildfires have historically been more of a problem until then California. Now we’re beginning to see the relationship between you know, what’s happened in the past, and what’s going to happen in the future breakdown, as climate change creates different sorts of patterns, you know, and I think that it certainly speaks to the fact that this was difficult to foresee. Even as signs were emerging, I don’t think it would necessarily have been easy to understand this, when we we have the benefit of hindsight now. But, you know, it’s, it’s, I think, it just speaks to the fact that there needs to be, you know, for PG&E, and for all utilities, and those tasked with overseeing them a different mode of risk assessment, you know, less of a reliance on what’s happened in the past as a, as a, you know, a lot of utilities and regulators sort of use backward looking models to try to anticipate what’s going to happen in the future. And that’s, it’s, it’s no longer as appropriate as it once was. And I don’t that doesn’t directly answer your question as to how should Californians feel about all of this, but I think that for a long time now, California has been a place in which you really do acutely see the consequences of climate change, and you’re beginning to see it elsewhere in the country as well. I think there’s there’s just sort of like a broader lesson to be learned here. It’s hard to answer how we should feel about it. But there’s like, there’s some good here, but there’s also, you know, a real cautionary tale.
Michael Livermore 49:24
Yeah, there’s a real cost I’m going to California is incurred to be a leader on this stuff. So speaking of the, you know, the elsewhere in the country, you know, obviously the book is very centered on California. Occasionally, we go to Michigan to pick up a CEO, but for the most part, we’re talking about California. But but there are going to be lessons here right lessons, you know, so I guess the question is, how much of this is is a California story or an arid West story? Or is this a national story or global story? What are the, you know, blowing kind of, you know, zooming out from California. What do you see? You know, folks elsewhere as as learning from from from this history, right, right. So
Katherine Blunt 50:05
I mean, it is very clearly, of course, a California story and an arid West story. I mean, that makes a lot of sense. But I think it’s important to just sort of think about the sorts of more severe weather patterns in weather events we’ve seen over the last couple of years. Not in every case, but in many cases, scientists say that the severity of the event had a climate signature, right. I mean, it would have happened regardless, but was made more severe by our changing and warming climate. And I think, you know, that really speaks to the fact that utilities everywhere are going to have to confront new risks as a result of this. And I think PGD story demonstrates that if any company has a history of mismanaging spending, or mismanaging risk, it is going to be much more challenging to get ahead of things. As you know, these risks begin to emerge and potentially in quite unpredictable ways, or difficult to predict ways I should say. And the consequences of the failure of the electric system are becoming greater. I mean, certainly whether it’s in a very acute sense if it’s in the West, and where we see greater risk of fire. But even on the East Coast, if you have a very severe storm that knocks out power for multiple days, as we’ve seen, of course, also, with PG&E story, when the power is out for a number of days, it’s, you know, has huge economic consequences, it has health consequences, you know, we are becoming increasingly reliant on electricity. I mean, we already are very reliant on and of course, but we’re also you know, trying to add a lot of electric vehicles to the system, we’re trying to do more to phase out natural gas. And to be without power for any stretch of time, is, it’s, you know, it’s on tenable for a number of reasons. And so if and then on top of all this, it’s important, remember to the grid everywhere is very old is becoming more prone to failure. So when you layer on this additional risk, it’s a lot to manage. And I think that there’s lessons for every region of the country.
Michael Livermore 52:12
Yeah, so actually want to go in two directions. One is a little micro was a little bigger picture. So let me let me ask my zoomed in question. First. It’s just that your response there, kind of that legacy mismanagement or legacy bad risk management practices are going to start to really, you know, show, I guess my my question there is, because the book is very much about PG&E. And there are other utilities there. As you mentioned, you know, there’s there’s wildfire risk in Southern California, that there are other utilities discussing the book to a certain extent, how bad and this is difficult, because you’ve been focused on PG&E, but you know, you have some familiarity with the industry more generally, how bad was PG and E’s risk management practices, and the way that they’ve maintained their system, compared to let’s just stick with in California, the other utilities in California? Is this just something where PG&E was, was mismanaged? And it’s really internal to the corporate culture? Or the individuals involved? Or, you know, or is it something that’s really more widespread throughout the industry?
Katherine Blunt 53:13
Yeah, I think that there’s that’s a it’s a tough question to answer. So I think that Well, for one, I think, maybe just to start to set the stage, I mean, that we were talking earlier about the sort of the inherent tension within the industrial utility model between private interests in the form of satisfying shareholders and the public good in terms of, you know, safety, operations and maintenance expenses, and making sure that it’s done properly. That tension is inherent within every utility company. And I think that PG&E is hardly the only utility that has sort of mismanaged that for various reasons. Over the years, it just so happened that the consequences of PG&E’s mismanagement, were so incredibly great and greater than what we’ve seen elsewhere in many respects. And I think you’re also beginning to see that change, of course, as the consequences of failure become higher, but But to answer your question about like, you know, comparison to the utilities in Southern California, you know, there was a major fire in 2007 ignited by San Diego gas and electric power line. And it sort of was a wake up call for that company in the same way that the 2017 and 2018 fires was a wake up for PG&E, but it was also sort of a wake up for the regulator. And the regulator ultimately required those utilities to do more to address fire risk, didn’t ultimately end up requiring the same of PG&E. So it’s, but I think, you know, all of this sort of speaks to the fact that I should add that also in as a result of an investigation. It turns out that San Diego Gas and Electric had been to some extent mismanaging the risk prior to 2007. I haven’t delved super deeply into what exactly that looked like, but It sort of speaks to the fact that it kind of takes these disasters to sort of reveal some some sort of mismanagement or some other sort of systemic problem like poor records or something like that. And I think I mean, such shows tries to simply answer the question, it appears to me, that pee genies mismanagement has been more acute than what you might see in other utilities historically. And certainly, the consequences of it have been greater. But I think to some extent, this does occur within every company. And it’s not for necessarily nefarious reasons. It could be frankly, for sort of what might be considered, I don’t know if benign is the right word, but there might not be any ill intent, but that the break this is there is some level of systemic breakdown within different divisions within these companies. I’m sure of it. And so this is a challenge for every company.
Michael Livermore 55:55
So maybe my last question for for you will be, again, more of a kind of a big picture question is, you know, is this model just kind of broken at this point, like, especially as we face these increasing risks and changes from climate change, you know, there’s a kind of a almost like an ossification that that is part of the story here, where you have these incumbent actors, they’ve been along around a long time they’ve accrued these cultures and are incredibly difficult to change, they’ve incurred just liabilities. You know, in terms of these old infrastructure, these old power lines, these old gas lines, and, and maybe we should really just be thinking very differently about distributed energy storage, kind of an unwinding the relationship between electricity generation production and storage to assert to the stuff that we have any with these big legacy actors. And we should be thinking in a decentralized way. Now, that’s very different from an alternative vision that is more about building more, you know, high voltage, more centralized stuff to pipe, renewable power out of areas where it’s prevalent, and get it to places where it’s needed. Yeah. So so these are these kind of these two tensions as we move forward? Should we be thinking more decentralized and more centralized? And how do you think about that balance?
Katherine Blunt 57:19
Yeah, I think that I think that the answer there is somewhere in the middle, I think that, you know, distributed technology is going to play a role in, you know, how we generate and consume power, and it will change, it has the potential to reduce the amount of large centralized infrastructure that we may need going forward. But based on these sorts of technologies, and what we’ve got, at least today, it’s kind of hard for me to foresee a future in which, you know, it really substantially eliminates the need for, you know, centralized generation and large transmission to carry it over large, long distances, just given the amount that we need. But so I think that these companies for that reason, will continue to have a role to play there, and a very important one, not only maintaining what we have, but also adding to the system to support greater electrification in the end carbon reduction. And so, you know, the question, is the model broken? The I mean, the model has a lot of challenges that I believe are becoming more acute. The The challenge, though, is that there’s no, there’s no great solution to you know, kind of a, a substantially substantially different model, whether that be in terms of ownership, whether that be in terms of, you know, the financial relationship between capital and expenses. And so, I think I mean, there’s, so that really, the only solution is to try to, you know, work working within the parameters of what we have, how do we make it better? And like, did you know, distributed energy has a role to play there? There? Certainly, I mean, the kind of the, the regulators always had a very important role to play and has an increasingly important role to play. Customers have a role to play in being educated as to what’s going on and being able to, you know, actually maybe have a meaningful voice in some of this, because I think historically, this is really, a lot of these decisions have been made so far to the public eyes simply because the public wasn’t thinking about it. It’s been it’s been we’ve taken for granted the lights going on and off when we want for a long time. And without, you know, any major safety consequences. And you know, it’s and then there’s also just, I mean, there’s there’s a lot of practical challenges, too, with a major overhaul of the system as we know it. So it’s, I think that our collective challenges is improving what we’ve got, even as the challenges become greater
Michael Livermore 59:55
so it’s some says we have no choice but to muddle through, but we can still muddle through as as well as possible rather than, you know, kind of blindly going forward.
Katherine Blunt 1:00:03
I hope so. I hope so. I mean, it’s it’s, I think that the experience in California but also elsewhere, I think about the Texas freeze, right, in which two people died lights were out for several days. Other major disasters that we have, I think that it really underscores that the provision of art of electricity is a critical service. We need it. It’s we can’t take it for granted as we might once might have. And, you know, it’s, we have to muddle through for that reason, and hopefully with clear eyes.
Michael Livermore 1:00:40
Great. Well, katherine, thanks so much for joining me today. This is a really interesting conversation. Thanks for the wonderful book and all the extraordinary work and research that that went into it’s it’s a great addition to the literature on this stuff and and yeah, it’s a really fun conversation.
Katherine Blunt 1:00:56
Yeah, super interesting. Thanks for Thanks for having me. Really smart questions.
Free Range Podcast 