The Wall Street Journal has an excellent article today asking a question I have been asking for a long while now: PG&E caused over 400 fires in 2018. Where were the regulators? The answer, which has been obvious for some time, is that the California Public Utility Commission (CPUC) prioritized user rates and green projects over the safety of California residents and their property.
As I noted in an earlier blog post, the transmission line that caused the deadliest fire in California history last year was constructed in 1921 and had last been inspected in 2001. California is witnessing a systemic failure both of its grid and of its governance structure.
But the details of how this situation came to be are probably uglier than you’d think.
Utilities throughout the country have a social contract with the residents they serve collectively: The utility gets the pricing power and economic security of having a natural monopoly. Residents, via their government, get to subject the companies to higher levels of supervision, to ensure that prices remain relatively fair and the community is not faced with a long period without essential services. The CPUC has failed spectacularly on both counts to maintain a balance between corporate interests and the interests of the people.
Early on in the WSJ article, the reporters bring up the revolving door between California utility companies and the CPUC. The term “revolving door” refers to a situation where employees from a company take jobs at the government agency tasked with regulating that company and vice versa. Revolving door situations tend to destabilize an industry over time. Other examples of revolving doors would be folks from Wall Street going to work for financial regulators during the Bill Clinton and George W. Bush administrations, thus bringing about the financial crisis, or the hundreds of Google employees that found work within the Obama administration, which has given us a highly politicized tech industry where some people feel targeted online for their personal beliefs.
The revolving door between California utility companies and the CPUC is nothing new. This is from a 2012 column in the San Francisco Examiner, Revolving door between CPUC and PG&E must shut:
Several current and former CPUC officials have intimate connections with the energy utilities they are supposed to regulate. Commission President Michael Peevey is a former CEO of SoCal Edison. The agency’s top lawyer, Frank Lindh, worked at PG&E for 16 years. Delaney Hunter, a former CPUC government affairs chief, became an energy lobbyist in 2008. Former Executive Director Steve Larson left the CPUC in 2007 to work at a natural gas company. Ex-Commissioner Jessie J. Knight now leads San Diego Gas & Electric.
CPUC officials deny there is a conflict of interest, pointing out that the CPUC has imposed more than $500 million in fines on utilities in the past 10 years.
“We’re a long way from being a ‘cozy regulator,’” said CPUC Executive Director Paul Clanon.
This is hard to believe, particularly when a yearlong National Transportation Safety Board investigation of the San Bruno explosion concluded that lax oversight contributed to the disaster.
When CPUC staff discovered problems, as they did in an audit months before the San Bruno blast, they failed to bring the utility before the commission for months. And then the commission often did nothing.
NTSB Chairwoman Deborah Hersman said PG&E “exploited weaknesses in a lax system of oversight” and regulators placed “blind trust in an operator that doesn’t deserve that trust.”
How did such a grotesque revolving door come to be? Well, you can ask previous California governors, as they were the ones responsible for appointing and vetting these people according to law. Safety was less of a concern at the statehouse than finding people who would respond well to political mandates surrounding environmental populism.
A 2015 expose in The Mercury News (whose readership is situated within the path of many recent fires) listed specific cases where CPUC officials had intervened to benefit the companies they were supposed to be regulating:
Over the past 20 years, a number of high-ranking officials at the state Public Utilities Commission — including its top boss for 12 years, Michael Peevey — joined the agency after working for utilities that the PUC regulates, or landed jobs in the power industry after stints at the PUC. That includes at least two current staff members whose emails with utility executives were among tens of thousands that revealed the cozy relationship between the agency and utilities, including PG&E.
Reform proponents point to several examples to argue that stronger rules are needed to shut or at least slow down the door:In 2008, Peevey intervened in a rate case involving his former employer, Southern California Edison, and the utility ended up with hundreds of millions of dollars more from ratepayers.
In several instances, PG&E executives who came from the PUC worked closely with their former colleagues to shape policy and influence decisions to set the utility’s rates, and they often received advance notice of pending action by the PUC.
Current PUC staffer Marzia Zafar, a former executive at an energy company, bantered with utility officials about shutting off the microphone of a long-winded PUC commissioner, and joked about returning to her old job, a sign to critics of what they say is the too-close relationship between regulators and the regulated.
“Peevey created an atmosphere at the PUC where it was known that if you serviced the needs of the utility industry, you would be advantaged at the PUC or you’d get a job in the utility industry,” said former PUC Commission President Loretta Lynch. “The revolving door really perverts the purpose of the PUC. And the ones who inevitably lose in this are the ratepayers.”
Because the utility companies are renting the people at the top of the bureaucratic hierarchy at their regulator, they have control over the entire structure. These folks are not going to hire or continue to employ people who have a gotcha attitude toward the utilities. This is how you end up with a situation where a transmission line has not been inspected for nearly two decades.
The WSJ quotes a retired administrative law judge for the commission, who complained that there was no one internally at the CPUC who could figure out the weather events that posed the highest risk situations. That would involve a level of critical thinking that regulatory capture precludes.
Government consultants in the past had highlighted concerns about the state caring more about environmental populism than the safety and stability of the grid:
Utility commissioners, appointed by California’s governors, have focused much of the past two decades on implementing politicians’ increasingly ambitious goals to reduce the state’s carbon footprint by requiring utilities to buy more wind and solar power.
Those efforts were largely successful in pushing the utilities toward renewable power, turning California into a green-energy leader. But now, as state fire officials link outdated PG&E and Southern California Edison equipment to an increasing number of destructive fires, the CPUC faces criticism it should also have prepared the state for the rising wildfire threat.
In 2013, a consultant interviewed CPUC staff about the agency’s safety-enforcement efforts and issued a report concluding the safety division received less money and staffing than others focused on delivering green energy and setting rates.
The report stated: “There has been little attention and limited resources directed toward reliability, and even fewer toward safety, by the Legislature and the Commissioners.”
Several of its safety auditors and other staffers have moved into roles at PG&E and other utilities in recent years to oversee the functions they were once charged with regulating.
When Gavin Newsom became California’s governor, he moved a previous appointee of Jerry Brown’s, Marybel Batjer, to the utility regulator to supervise a restructuring. Before Ms. Batjer decided to work in government, she was an executive at Caesar’s Entertainment Corporation in Las Vegas. Because why hire, you know, an engineer or something, when you can have someone who used to run a casino? This is the kind of shit that happens when literally the only thing you care about is politics.
The WSJ provides a long history of the state’s love affair with green contractors to the peril of the safety and stability of its existing infrastructure:
The 1,200-employee CPUC, whose roots trace to 19th-century efforts to check railroad tycoons’ power, is the nation’s largest state-utility commission. The next largest, Virginia’s, has about 625 employees to regulate utilities and other industries, according to the National Association of Regulatory Utility Commissioners. California’s commission oversees a range of industries, including telecommunications and ride-sharing companies like Uber Technologies Inc.
From the early 2000s, the commission’s focus was on setting rates and implementing Sacramento’s renewable-energy goals. Starting in 2002, three consecutive governors, two Democrats and a Republican, signed bills ratcheting up the percentage of wind and solar power utilities had to buy.
These mandates required investor-owned utilities such as PG&E to change their mix of generation, effectively phasing out burning coal and lowering reliance on natural gas while signing contracts to buy electricity from new solar and wind farms. The CPUC oversaw these deals, as well as figuring out how to integrate thousands of new rooftop solar installations.
“Was there a considerable amount of resources placed on policy? Yeah, there was,” says Timothy Alan Simon, a commissioner between 2007 and 2012 and now a utilities consultant. “It’s a challenge to balance between the safety aspects and the need for policy deliberation.”
Michael Peevey, a former Southern California Edison president, and CPUC president between 2002 and 2014, was a vocal champion of renewable-energy policies. Now retired, he says the regulator was large enough to focus on safety and renewables simultaneously but that it was tough to get Sacramento lawmakers excited about funding safety.
When compared with eliminating coal and adding solar energy, he says, “Safety is not a glamorous thing.”
Got that? The California’s utility regulator was being run by a former utility executive who made a conscious decision to prioritize green projects over safety because politicians only care about bragging about green projects. They don’t care about essential government services. Dozens of people died over this. Many thousands of people have lost their homes and become uninsurable over this.
But it wasn’t just about green projects being sexy. It was also about money. California governors continued to appoint these people because they represented some of their largest donors:
PG&E was among nine corporations that made the maximum $58,400 contribution to Democratic Gov. Newsom’s 2018 campaign. It was a major contributor to the gubernatorial campaigns of Democrat Jerry Brown and Republican Arnold Schwarzenegger before him.
The company reported in a federal court filing earlier this year that it made $5.3 million in contributions to candidates, political parties and political-action committees in 2017 and 2018. The top recipients were the state’s Republican and Democratic parties, which each received more than $400,000, according to campaign-finance records …
Those political donations were rewarded with an ever larger sandbox to play in:
The commission’s budget for regulating utilities was roughly $200 million in the 2018-19 fiscal year, up from $98.5 million in the 2015-16 year, a budget that funds all activities related to the oversight of utility companies, including inspections, rate-setting, auditing, writing reports, doing investigations and other bureaucratic tasks—but that budget doesn’t fund its regulation of other industries. The CPUC has historically struggled to find sufficient resources to conduct safety inspections and investigations, despite a long string of California utility disasters that have suggested the need for closer oversight.
Of course, the missing piece there is that CPUC officials stopped talking to lawmakers about funding for safety because safety is boring. You aren’t going to get an appropriation for something no one cares about. You can’t blame a lack of funding when you are the reason for the lack of funding. California has had massive budget surpluses in recent years. The money was there.
The CPUC safety culture (or lack thereof) became a major focus of scrutiny after the 2010 San Bruno explosion. San Bruno is a suburb of San Francisco. In September of that year, a natural gas pipeline operated by – y0u guessed it, PG&E – ruptured, killing several people. The explosion was so significant that it registered on the Richter scale.
Back to the WSJ:
Lawyers for San Bruno, who were suing PG&E following the explosion, uncovered evidence commissioners had engaged in back-channel communications with PG&E executives, which was supposed to be banned under the commission’s rules. Thousands of emails were made public that raised questions about whether the CPUC was too cozy with PG&E.
After an investigation, the commission last year fined PG&E, which admitted wrongdoing, $97.5 million for improper communications with its own officials.
Among those involved was Mr. Peevey. Four months before San Bruno, the commission’s then-president had invited a PG&E executive to his house for dinner. “No matter the menu,” he wrote, “we have some great bottles of Pinot to drink.”
Mr. Peevey says he extended the invitation upon running into the executive at a grocery store near his home. They discussed the company’s politically unpopular effort to push a failed ballot initiative that would have made it harder for local governments to form electricity-buying authorities, he says, calling the meeting “pretty innocent.”
At the end of 2014, then Gov. Brown appointed Michael Picker to succeed Mr. Peevey as president. Shortly thereafter, the commission fined PG&E $1.6 billion for negligence in record-keeping and other problems that led to San Bruno, the largest penalty ever levied against a utility in the state.
Mr. Picker pressed the agency to consider going beyond imposing fines to hold utility executives accountable for operating safely. He opened the 2015 investigation into PG&E’s safety culture and pushed to strengthen the commission’s approach to safety regulation. He declined to comment.
Last month, Mr. Picker expressed frustration that the CPUC was tasked with enforcing safety in addition to overseeing rates, which he saw as the regulator’s main mandate. “Utility commissions across the country were designed for one purpose, but now are expected [to] tackle everything,” he wrote on Twitter.
If it weren’t for PG&E’s history of leaving death and destruction everywhere it goes, this would be an entertaining remark. The CPUC has over a thousand employees, and its former head thinks it is impossible for them to handle more than financial analysis that a junior high student could do on a basic calculator. It’s just unfathomable that they should be concerned with stupid things like safety too. The struggle is real, y’all.
It took the regulator with over a thousand employees 5 years to map statewide fire risk. It took them over a year to review a consultant report on their safety problems, and then they decided to do nothing about the report’s recommendations until several years had passed and they needed something to grab onto after PG&E caused the deadliest wildfire in California history under their supervision:
In 2012, the regulator had launched an effort to map high-threat fire areas throughout the state, but the maps weren’t completed until the end of 2017. By that time, a wave of wildfires in the state’s wine country had killed 44 people and burned more than 6,600 homes. State fire investigators later determined that 18 of the fires, responsible for half the deaths, were started by PG&E equipment; the company concurred.
As part of the 2015 probe into PG&E’s safety culture, a consultant produced a report in May 2017 that spelled out the utility’s failings and made recommendations that involved increasing field training and supervision, hiring leaders with stronger safety qualifications and improving risk analyses.
The commission spent more than a year evaluating the report, and it didn’t vote to adopt the recommendations until last November, after the Camp Fire killed 85 people and destroyed the town of Paradise in the Sierra Nevada foothills. State fire investigators later linked the fire to PG&E equipment, a conclusion with which PG&E concurred.
How much of a disparity was there between green projects and maintenance expenditures? According to Forbes, in 2017, the year before the Camp Fire, PG&E spent $44 billion on purchase agreements with renewable providers versus $1. 5 billion on maintenance for their entire grid. And policymakers cheered this decision-making. Jerry Brown signed into law Senate Bill 100, which would remove fossil fuels from California’s grid by 2045. PG&E was visionary in managing its budget!
It is not a mystery how California ended up in the crisis it is currently in. It’s also not a mystery that this is a systemic problem. California’s infrastructure can be divided into two categories: (1) infrastructure that has failed, and (2) infrastructure that is about to fail. And judging from my personal interactions in the past with water and sewer utilities in California and their political radicalization, the state has probably repeated this issue across the board.
One generation. That’s all it takes to fuck up a good place.
If the story of this regulator scares you, just imagine: the same electorate that put these people in power also want the government to control the entire health care industry. What could possibly go wrong?