 Energy 808, the cutting edge. Wow, do we have a show today? We have my co-host Eric Gleason joining me again and we have a stellar, stellar guest in the personage of Catherine Blunt from The Wall Street Journal. Thank you so very much Eric for joining me again and thank you especially Catherine for being available today to have, I'm sure it's going to be really juicy conversation amongst the three of us so Mahalo Nui to both of you. Happy to be here. So let's take the immediate dive. I always like to ask our guests kind of what brought them to where they are now and in your particular case what brought you down the path to become an Energy Bee Reporter at The Wall Street Journal? Well before joining The Wall Street Journal it was about five years ago. I worked for the Houston Chronicle. I did a little bit of energy coverage but really there was the opportunity to cover power and utilities at The Journal and I recognized that it was going to be an important space and only become more so just given the energy transition and things along those lines. I started in my role on November 5th, 2018 and three days later one of PG&E's power lines ignited the campfire in Northern California that destroyed the top of paradise and within a matter of weeks it became very clear that PG&E was going to be not only the biggest utility story in the nation but really one of the biggest stories of the entire year and I spent a great deal of time focused on that and it was really had to learn extremely quickly and it was quite a fascinating lens to us to learn about the utility space. I've been doing it ever since. And fascinating to the point where you wrote a whole book about it that came out last year that Eric and I have both read California Burning. So it's great that you were dedicated and interested enough obviously in the subject to actually do a whole book on it and boy anybody wants to know anything about PG&E. I mean you wrote the Bible really from beginning to the current day so kudos for your fantastic book on PG&E. So Eric let me turn it over to you. Yeah thank you Catherine for being here. You know you did you wrote the book on utility caused wildfires which was you know it's a terrific terrific terrific book I mean obviously a terrible tragedy. You live in California so it'd be really interesting to get your perspective on what's changed over the last five or years or so since since the PG&E caused fires. And as California figured out how to manage this risk. Sure so it's been quite an intense five years in which after the 2018 fire the camp fire combined with a series of fires there in 2017 PG&E estimated at $30 billion in liability costs. It's on bankruptcy protection from the second time this century and that had major consequences for wildfire victims the state of California itself. Really really challenging two years there and since the company has emerged it will say if there's anything positive to come out of that it's that the company has never been more aware of the risks that it faces and is under new leadership. That is very dedicated to trying to kind of turn the ship permanently with a you know a suite of risk production measures meant to put this company on a trajectory in which it won't have to seek bankruptcy protection again. That being said the challenge is really great there's millions of dead trees as a result of years of severe drought you know climate change threatens to make that worse with every passing year. There might be a bit of a reprieve this year just because the winter was so wet but we've seen in the past drought can sneak up and it can sneak up very quickly and so it's we're at a period in which the consequence of infrastructure failure has never been higher. It might have been 20 years ago that a power line could fail and start a fire that was relatively easily contained right now the conditions are such especially at a windy day that that fire has the potential to blaze out of control and so the question really becomes that I mean for a wildfire perspective how do you prevent power lines from sparking but I mean I guess from the state's perspective as well how do you address in some of the potential other causes as well I mean this is this is not just a utility issue though utility lines have been implicated in some of the worst fires we've seen up late. And then the largest fires I think some of the you know has that utility yes do you show it sounds like I mean that did not show me with great a great sense of comfort that the risk has been significantly reduced I mean do you think has has how much progress has really been made? Well to be fair I think that there has been quite a bit of progress earned by each of California's large utilities. The Southern California utilities have had a bit of a head start on fire mitigation the California Public Utilities Commission required these companies to do more to address fire risk earlier because it was understood that fire well it was thought that fire risk was greatest in Southern California because that's historically been true. It's really not true anymore the risk profile Northern California has changed very quickly again as a result of drought and tree mortality. PG&E has made quite a bit of progress in figuring out at least interim ways to reduce risk. There's of course the sort of the typical tools that a utility uses by you know trimming trees doing thorough inspections frequent inspections proper maintenance to make the likelihood of power line failure less. But to supplement that it's been doing two things it's tweaked the settings on a power line so that if you know a branch or an animal or any other object comes into contact with the line wire shuts off within a tenth of a second and then the other tool is that it's all the California utilities do this they practically shut off power to the parts of the system in risky conditions so that again there's the prospect of anything coming in contact with those wires the lines are de-energized and it significantly reduces fire risk in those particular areas. But again I mean that's a that these are both safety measures that come at the expense of reliability so the companies try to figure out how to better balance that going forward with more permanent risk reductions measures such as putting the wires underground. One of the things that really struck me is after PG&E declared bankruptcy for what the second time in 20-some odd years there were some very real credible voices and forces to break up the company from the mayor of the mayors of I believe with San Jose San Francisco and other entities that were really put a serious effort in trying to break the company up and understandably PG&E fought that and they effectively prevailed correct so I'm wondering why why did they all fail I mean the kind of shows a little bit my hand as far as I'm more in favor of but decentralized power and having kind of more local control possible as opposed to a large IOU that has such a large service territory so why were all those efforts to try to break up the company in the bankruptcy process ultimately they've failed well I think that there's there's kind of two conversations to be had about ownership structure there's kind of a philosophical conversation about what could potentially be the best model and then there's a practical conversation about the fact that I think at this point changing a meaningful change to the ownership structure of an investor on utility is really difficult especially the one the size of PG&E I think that you know resting control from shareholders would be a really long expensive and litigious process and a lot of stakeholders ultimately wouldn't want to necessarily go through the options that were proposed as PG&E was going through second bankruptcy there was a couple of ideas kicking around you saw you know a city like San Francisco want to break off and form its own municipal utility which is an interesting idea but there's a couple of issues associated with that is the San Francisco is not a great risk of fire it's it's you know as a as a city itself it faces that that risk is very low it's really the surrounding areas that are most prone to wildfire risk and if you think about where utility excuse me PG&E has been investing the most money over the years it's been ensuring that San Francisco's power is quite reliable or the really the entire Bay Area because that's um that you know the the biggest of the population base that it serves so it would be more of a symbolic split if San Francisco were to hive off and PG&E opposed that because it would set a precedent in which other um you know cities and towns um could break off and then you begin to see the revenue base change right I mean the the option utilities kind of exist to serve cities or at least that's where they reap most of their their revenue and that allows their company to fund or at least theoretically you know fund investments in the rest of the system in rural areas it just it creates kind of a challenging business model if you see those population centers break off the second idea was to create a customer owned cooperatives in which PG&E would no longer be owned by shareholders it would be owned by its customers it would no longer have a profit motive um and that idea I think it was certainly interesting it would it would PG&E by far would be the largest cooperative in the entire country if that were to happen but you know it solves some problems such as again you know the um the challenge of balancing the interests of customers and shareholders that uh the need to strike that balance because eliminated in the co-op model but there's still some issues with you know who is responsible for fire damages if parlor and fires ignite which is almost inevitable um wasn't a perfect solution either and uh of course that would require getting the agreement of PG&E shareholders to sign off on that and that was uh really kind of a um a distant prospect at the time of the bankruptcy right Eric you know one of the one of the I'd like to come back to this this whole topic of the PG&E bankruptcy and one of the things that um you know I wasn't I wasn't totally clear on it as me as a reader right because your book was great but is did did they ask to file when they filed it it took the market by surprise I remember the stock price went down is that is that something they they needed to do were there reasons were there advantages in doing it what was your take on that yeah there was certainly a number of people especially within the investor community who believed that they didn't have to and they were solving debtor um they they thought that that that move was unnecessary I do think it allowed them to consolidate a lot of the lawsuits that were pending and deal with it in a way that would have been um switched during probably more beneficial to the company overall in the long run and so I mean I can understand why there were compelling reasons from the corporate standpoint as to why it would engage in that it was disappointing to so a number of people at it certainly had significant consequences some of which I think the company didn't foresee in terms of the the toll that it would take on its financial health given the involvement of some of the uh the financial interests that ultimately shaped the outcome of the case um so so let's let's explore that a little bit more because that was really another dimension that I found fascinating is you know uh my my my basic summary would be it sounded like it was a food fight I mean you had you had creditors you had different sorts of creditors you had shareholders you had you know um victims um how you had you had you had government agencies you know that were trying to get compensated for their costs is that is that a fair summary that it's kind of a food fight absolutely everybody's everybody's scrambling for their piece of the pie not only a food fight but a really nasty one yeah I mean there's a lot of a lot of competing interests here a lot of moneyed interests uh yeah yeah and then management puts put in the end put forward a plan that I think was approved by the bankruptcy court um you know I think maybe there were a couple of iterations of that but you know in that do you have and then I'm not uh there's obviously a different management team to know in any case but I'm curious if you have a view you know where where were the victims in all of this were you know how how much how how does management balance doing right by the victims versus doing right by their shareholders versus doing right by the creditors because they seem to have some discretion in this process it certainly has some discretion in the process but I mean the again some of the financial interests that had held a lot of sway in the way the agreements were ultimately reached um uh also I mean also had a again I mean there was there was a lot of influential voices at the table let me put it that way and so how it happened was between a series of fires in 2017 and the 2018 campfire the company estimates it was 30 billion seeks bankruptcy protection has to reach settlements with three major classes of playwinds three main classes um the first was simple it was governmental agencies that had incurred fire suppression costs and other things um that that group was the first to reach a settlement for a billion dollars in cash the second class gets a little bit more complicated um where I it should be said just so the listeners understand in California if um if a power line ignites a wildfire the utility is responsible for the damages the result regardless of how the line is maintained to strict liability construct so uh there's no need for proof of negligence in order um for those whose properties were destroyed to be able to seek compensation because of that insurance companies had paid claims to homeowners had a right to seek reimbursement of those payments from PG&E so this the second class of claimants was ostensibly insurance companies that had again you know um paid claims but instead of waiting for a settlement a lot of these companies had sold their claims from the secondary market to hedge funds um some for as little as 50 cents on the dollar and those hedge funds one in particular a bow post group had a great deal of influence in the way that settlement was negotiated that settlement um came in at 11 billion dollars all cash so by the time the company uh was negotiating its settlement with individual fire victims the company was out 11 billion dollars in cash and didn't have enough left to fully compensate the value of their claims so how it shook out was this third settlement was um valued at 13.5 billion the company agreed to pay it half with cash half with shares in the company that would be administered through a trust so the fire victims would hold these shares indirectly through this trust that would slowly liquidate them um in order to compensate them for their losses and you know um it was very controversial obviously you know principle a lot of victims don't want to hold shares in PG&E indirectly it meant that the overall value of their compensation depended on the company's stock performance post bankruptcy and you know there was uh a lot of criticism as well that I mean the hedge funds and the insurance companies are in the business of being able to capitalize on risk and yet they negotiated settlements that were completely uh devoid of it instead like leaving that risk for the fire victims to shoulder and so did management have a role in this of course but I mean so did the other um I mean the financial interests that were able to really turn the screws and and get what they wanted out of the bankruptcy process a lot of them are quite shared in this way and sophisticated at navigating some of these you know complex financial settlements and negotiations it's I guess it's fair to say that the victims in general are not at the front of the line in a bankruptcy process right there there am I right that there any judgments or what have you or unsecured creditors yeah I mean um I mean this is kind of an odd case since I mean we're talking about civil litigation in this not civil litigation but civil claims right I guess it is litigation but uh it's all of these negotiations were kind of taking place simultaneously uh there was even within the groups representing the victims there was disagreement as to how to best move forward and some of the disagreements that were happening as part of these conversations to some extent allowed for the other groups to reach their resolutions more quickly um there was a lot of there was a lot of things happening all at once and I don't think this is should all be painted as you know any like nefarious or behavior by any one party or anything like that it's just it ended up getting pretty complicated a quick follow-up on that Catherine then let's move across the Pacific to Hawaii so the day before PG&E filed for bankruptcy protection do you happen to know where their credit reading was amongst the big three were they any of the big three did they put them in the C category which is kind of the the dark deep dark zone I don't remember when they were first downgraded um I would imagine they probably were after the 2017 fires but I I would have to double check that um it would be likely uh at that point because there was like a lot of indications that there was a credit risk at that point well moving across the ocean to Maui and Hawaiian Electric and the tragedy uh April 8th uh I've been reading your reporting as many others have over the past weeks and I wanted to ask you kind of you of course have all this background from fires in California and you wrote on what happened and what is happening in Hawaii Maui in particular what what kind of stands out in particular to you as far as your reporting with your background of big fires on the mainland and what happened and what's continuing to happen with uh Maui and Hawaiian Electric yeah so there's a lot of things that stand out in my mind and I'll say off the top of course we don't know officially what caused the fire um that's uh you know ATF is investigating we will wait to see what goes on there um the Hawaiian Electric has publicly denied that it um it doesn't believe that its power lines ignited the fire that ultimately destroyed Lahida and so well so I'll say that off the top that being said what we do know is that uh at least uh I um with some colleagues took a deep dive into some of the company's regulatory filings to try to figure out how it's been thinking about wildfire risk and what it's been spending money on over the last few years what we were able to determine is that in 2019 the company announced that it had been observing the situation in California with PG&E and believed it needed to do more to address wildfire risk and other climate driven risk as well but um you know in particular it highlighted a number of steps that it wanted to take to reduce the risk of its lines igniting wildfires um it didn't submit an official filing to the public utilities commission seeking permission to recoup that spending through customers until 2022 now the the company says well it hired a consultant and the consultant took a long time to make recommendations and then they took the recommendations and took a long time to make a plan it's all pretty typical in the world of utilities but it appears based on what we know that you know the risk on the islands it was changing very quickly um as it is throughout the rest of the west we're seeing fire risk increase precipitously as a result of drought dry vegetation high winds um also just more people living in close proximity to areas at risk of burning making the consequence of infrastructure failure higher and so um in 2022 it submits a large filing seeking to spend you know millions of dollars addressing wildfire risk other risks driven by climate change and that proceeding is still pending before the commission again I mean none of this is uncommon on typical utility timelines but it appears that um the risks Hawaii electric and other companies are facing might be changing more quickly than they're able to move I we certainly saw that with with PG&E and there's always criticism in hindsight that you know for example PG&E could have moved faster Hawaii electric could have moved faster there are constraints in how quickly these companies can move that being said that the the sides of the risks have been there I mean I'm sure for Hawaii electric well before 2019 for PG&E well before 2017 or even 2015 would have had its first major fire and um you know I think in both cases both the companies and their regular their respective regulatory bodies kind of failed to realize how quickly things were changing and and um kind of uh failed to initiate action at a point in which some of this could have been averted um I'd like to ask you um a little bit more about that so you know what Mark Twain said history does not repeat itself but it often rhymes or at least allegedly he said that why is it that multiple utilities and multiple communities seem to be repeating very similar and preventable catastrophes do you think well I think it's a sad truth that in this industry as well as others it often takes a disaster for it takes a disaster for a company to realize the extent of the problems that it faces not just true of utilities it's true of other other like true of other industries as well um but I also think that you know in particular I mean the utility industry is particularly slow moving for one just because of the regulatory process which under normal circumstances is you know meant to protect customers um protective process I mean things that are ostensibly good but when things are changing in ways that they haven't historically kind of that process gets called into question right um I was talking to Michael Warren at Stanford the other day about all of this and he said something that stuck with me just in terms of a metaphor you know we're talking about how long it takes for utilities to get regulatory approval to recoup spending on things um you know just sort of the typical process he's like yeah this was this was all well and good 20 years ago you know we're talking specifically about utilities in the west he's like it was all well and good when the utility had no competition right that's the whole idea they the it's a um regulated monopoly and you're subject to the regulatory process as a result it's like fire is now the competition fire can come in and take out your business in an instant and I think that that's an interesting way to think about it um and you could you could say that of other you know operational risks and climate risks as well for other utilities um throughout and the the other thing too that's kind of part and parcel of this whole conversation about a changing climate um or just different operational risks as the system ages or however you want to think about it is that the utility industry is pretty backward looking it typically uses historical you know patterns and experiences to try to prepare for what's about to happen next and that relationship seems to be breaking down so I think a lot of utilities have kind of tripped in the last number of years as they as they've um had to confront this and you know have been caught flat footed when something really went awry of their you know typical predictions if you look at I mean considering you're writing you were unmistakably clear that there was equipment dating back many decades in the p-genie infrastructure right that clearly failed and was it should have been obvious or noted and placed at some point and that that constituted negligence on the part of the company which led to bankruptcy and uh in that whole process and I'm wondering if you look at or based on what you reported or know so far or uncovered so far you look at the utility infrastructure on Maui our utility infrastructure across fine electric territories do you have any sense yet as far as just how age it and subpar uh the Maui electric infrastructure is and to what extent Hawaiian electric was aware of this equipment being edgy or beyond edgy? Sure so just to to your point about p-genie that's really quite an extreme case um the issue with the campfire 2018 occurred when a very small hook on a tall remote transmission tower in the Sierra foothills broke almost exactly in half dropped a live wire that swung against the metal tower um and resulted in you know sparks falling on bone dry brush um that hook that was almost exactly 100 years old it had been installed around like 1915 it was original infrastructure and it had been wearing down a little by little for a hundred years and the wear had been visible for decades and yet the company's inspection practices weren't sufficient to catch it with Hawaiian electric in the number of different filings they've alluded to the fact that the poles supporting their distribution wires are pretty old and wouldn't you know not up to the standard of say those in Florida which have been hardened to withstand hurricanes to other strong storms that's an example of something I think the company did know uh exactly what the issue was with the power line that that failed they acknowledged that there was a down power line that started a fire they just don't think it was the one that destroyed the town we will see um this I don't I don't have any direct knowledge into the specific conditions of like that failure but certainly the company in various filings has acknowledged like yeah there's stuff that's not up to snuff a and there's also more that we could do to um you know to make the system stronger generally safer as well and I guess the last time I looked I believe there are 14 lawsuits that have been filed against the company Hawaiian Electric including of course the the one from county of Maui so I mean assuming that one or more of these cases litigation goes to actual before judge and jury you know these these will be questions which will be uh right in the forefront as far as the the condition of the equipment you can trust that the the yeah the trial attorneys will turn over every rock yes Eric Catherine um based on everything you know do you have any advice for the people of Hawaii um you know one thing that what I hope um California burning the book seems to have had um a good deal of impact within uh industry and folks who are close to you know utility companies or work for them uh but it also seems to resonate quite a bit with with people outside the industry and just appreciating the fact that it's helped them understand a bit more about how this really complex industry works and you know whether you read the book or not I think that it's it's a really important time to kind of learn a little bit more about this because it's a nice thing about the regulatory process is that you can participate in it you know you can you I mean it's not certainly not the most fun nor the most convenient and I wouldn't pretend otherwise but it does allow for people to weigh in on utility decision-making and spending and um priorities and you know the ability to I mean everything from your role as a consumer and having rooftop solar and backup storage if that's what you want or you know being able to really oversee the way that the utility is maintaining the centralized system um there are ways to get involved and I think that if this is you know of concern and I think it should be going forward I mean more participation can only be good I have made it's a great place to kind of wind things up I want to read a quote from your page 292 Gauther in which I think it is a question you pose that I'd like to have you take a take a shot at answering and I'll read the quote here the grid had been built to withstand patterns of the past and those patterns were changing fast at a time when electricity had never been more critical every utility would soon face the same question how should its system change to account for future risk how should the system change to account for future risk so obviously a very broad and wide deep question that you pose said you want to take a a crack at answering it sure well I think some of the smartest utilities are investing a substantial amount of money to try to understand what climate risk means for them what new sorts of stresses on the system may appear as a result of you know longer periods of heat longer periods of drought stronger storms whatever it may be and I think that some of it involves repairing the system or upgrading it to meet new standards to be able to withstand those stresses but I think necessarily as well part of it involves probably taking um changing the way the system is configured in some cases you think about we're talking about wildfire you think about some of the most remote areas in California and the foothills maybe it doesn't make sense anymore to be running power lines over many miles to serve these communities they we need some you know micro grids or islands that can operate independently in the grid itself um he's so different ways to supply power and minimize you know the risk that comes from having thousands of miles of wire crisscrossing the forests that's just an example from the west um I mean I mean perhaps it's the same for some storm prone areas it's uh I get it's is does the system need to look exactly the same as it has for the last hundred years I think probably uniformly across the country the answer is no um but also I think for as long as we inhabit this earth we're going to need some form of a centralized system and in which case how do you prepare it then for a future that's likely look the same as it did over the last 100 years for the time at which this this grid has existed yeah yeah very well put I'll let you wrap things up Eric well Catherine thank you so much it's been it's been very instructive we um you know your expertise and your time and you know we look forward to your next book well thank you very much for having me I enjoyed the conversation yeah it was it was great to have you on Catherine and again Mahalo Nui for joining us today and you Eric Gleason joining us from about as far away from Hawaii as one can be in still in the same country and the magic to 5000 5000 5000 long miles wish I was there with you I know you will be before too long so again thank you very much Catherine want Eric Gleason till the next time what we hope I believe