February 20, 2023
Utility Player: California’s Disastrous Electricity Policy
REVIEW ESSAY
California Burning: The Fall of Pacific Gas and Electric—and
What It Means for America’s Power Grid
by Katherine Blunt
Portfolio, 2022, 368 pages
Pacific Gas and Electric is by some measures the largest energy utility in the United States. It is also the culprit of “the deadliest corporate crime in American history”: the manslaughter of eighty-four people, who suffocated and were incinerated, or who otherwise perished, during the maelstrom of a 2018 fire caused by the company’s Caribou-Palermo electric transmission line. The energized wire that fell to the ground, creating the ignition, was loosed from its moorings when a dilapidated metal hook finally broke, nearly a century after PG&E’s predecessor, Great Western Power Company, bought it from the long-defunct Ohio Brass Company.
Katherine Blunt’s California Burning takes its readers through a history of PG&E, its financial motivations amid California’s manic political landscape, and its lack of focus in the face of many distractions on the maintenance of the critical infrastructure in question, all leading to this terrible denouement. Blunt has extensively covered these events in the Wall Street Journal, together with her colleagues Russell Gold and Rebecca Smith. The tragedy and horror of the story retold in whole, coming together in Blunt’s book-length treatment, is even more than the sum of the news stories she and her colleagues have written.
In this century, PG&E has been on two occasions convicted of felonies—once for the above crimes, and before that for violations of the Pipeline Safety Act and obstructing an official investigation in the aftermath of the explosion of its San Bruno gas pipeline. The utility also has twice gone bankrupt. Emerging from its latest bankruptcy, without adequate funds to pay the claims of fire victims, it instead converted them into equity shareholders. Any new fire for which PG&E is liable will come at the expense of a prior generation of fire victims.
Told throughout in an even-keel voice, the story does not need the assistance of tone to get its reader flummoxed and outraged. Through a series of mergers and acquisitions, restructurings, and a parade of CEOs, PG&E lacked an overarching vision about its mission. It deprioritized spending on maintenance, slashing a project on an electric transmission line that ultimately caused a fire, even though it had been reported to the Federal Energy Regulatory Commission as an important safety project. The utility relegated its rural transmission facilities, far from its San Francisco headquarters, to an “out of sight, out of mind” status. PG&E staff evidently reasoned that any outage on those facilities would not disrupt power to a large number of customers. It was a disaster waiting to happen—and it did.
The utility operated in a state of nearly postmodern unawareness, lacking even a complete set of records about what it owned. Indeed, after its gas pipeline explosion, it literally hauled in thousands upon thousands of boxes of property and inspection records from its regional offices to San Francisco’s Cow Palace to try to piece them together. The utility that serves America’s greatest tech hubs had not digitized its files.
That type of tragic irony abounds in Blunt’s book. The Caribou-Palermo line was, when it was constructed in the early 1900s, one of the first big transmission projects to connect clean energy to population centers. But the aged hydroelectric dams that the line facilitated are not the shiny objects of modern climate policy. As a consultant hired by the utility’s regulator, the California Public Utilities Commission, noted about the agency’s own operations: “Because safety is considered to be ‘off the radar screen’ of most Commissioners and legislators, it is considered to have little cachet for CPUC staff and managers.” Wherever safety ranked as a priority, it was not “safety first.” As Blunt tells it, “The CPUC’s intense focus on climate policy came at the expense of one of its core responsibilities: holding the utilities accountable on safety.”
It did not have to be this way. Policymakers in California two decades ago decided to demonopolize the generation and retailing of power, something that up to that point had been the more or less exclusive domain of PG&E in its service territory. That could have and should have paved the way for a PG&E that had one job: maintaining the poles, wires, and substations that together constitute the grid, which is the essential network for everything else that happens in the power sector. Rather than quarantining the residual monopoly to its proper role, however, politicians in California and other blue states could not help themselves from treating monopolies’ balance sheets as attractive playthings for public policy that was not directly related to the grid and its upkeep. Always thirsty for growth, and always accepting the bargain to go along to get along, PG&E went along with it all.
California Burning lucidly explains the financial motivations that caused this distraction on the part of the utility’s management. Specifically, its negligence with respect to its core business was the consequence of a perverse incentive that animates the business model of nearly every investor-owned energy monopoly in America today. For every dollar these utility-monopolies invest in capital expenditures (“cap‑ex”), they command a return on that capital set by the regulator. Meanwhile, for operational and maintenance expenditures (“op-ex”), like inspecting transmission lines and clearing underbrush from their rights-of-way, there is no return margin, only revenue from ratepayers designed to match the budgeted annual spending in these categories of op-ex. The only financial incentive that exists for op-ex is to try to reduce the spending after the dollars have been approved by a regulator in a rate case, because then the utility can pocket the savings. This topic is much written about by utility regulatory observers, but Blunt is one of the very few journalists to pay any attention at all to this set of incentives, even though it is sort of a skeleton key to understanding the electric-utility sector; literally, it explains almost everything, including PG&E’s safety performance. In California, the incentives coalesced with fatal simplicity. The utility was endlessly fascinated by cap-ex—that is, the shiny new things that policymakers most often wanted—while it neglected op-ex, the spending necessary to keep its grid running safely.
Yet one does not need to be interested specifically in utilities or the energy industry at large to appreciate this book-length reportage. Blunt has a number of warnings applicable beyond the sector: the rise of financiers at the expense of engineers, the risk of doing many things poorly rather than a couple of things well, the glamorous focus on the ever‑changing “current thing” at the expense of an enduring and important mission, and the regulatory capture that is a vicious cycle between big-dreaming policymakers and the energy monopolies on whose fortunes those policies often depend. If you were a business leader having to choose between the latest self-help pablum that populates much of the literature about how corporations work and California Burning, you certainly should choose the latter.
Blunt’s book does not deliver remedies, nor does it promise to. But its implications are clear enough. Energy utilities should focus on poles and wires: the distribution of energy. The generation and retailing of energy are complex distractions from that already-complex business. The possibility, too, of having a monopoly closely regulated by the state engaging in crossover activities that can and should be up for competition creates a corporate landscape where, inevitably, vying for new markets will attract the talent within the holding company—while the core business suffers. Regulators should work actively to ensure the monopolies they regulate have a mission and do not stray from that mission by attractive policy baubles. For California in particular, but everywhere generally, this should mean that different companies should handle the grid that delivers power, and the entities that generate and sell it. It should also be the case that these utilities are compensated adequately for executing that mission, which must mean orienting government-allowed profits to performance on missions like safety, and not only a return on whatever the utility happens to invest in private capital.
Finally, there is the important question of what government-regulated monopolies owe their customers, whose answer often is: much more than they are given. These monopolies too often treat governments as their customers—or “stakeholders,” if one must use the anodyne term—while their actual customers are mere ratepayers, transformed into captive and passive sources of revenue. There is very little chance of escape from this paradigm with government-regulated monopolies; again, a proof that their scope should be minimized, but also that competent and consumer-focused regulation is essential where monopolies are indispensable, as in the maintenance of the electricity grid.