The San Francisco Blackout Was Not a Market Failure. It Was the Inevitable Result of a “Frankenstein” Utility.

I spent the last week of 2025 sitting in my apartment in the Sunset district, watching the fog roll in and the temperature drop, while my refrigerator became a graveyard for a $200 grocery run. While the rest of the country was celebrating, San Francisco was plunged into a 72-hour darkness that felt less like a modern metropolis and more like a decaying relic.

You’ve heard the post-mortem from the politicians at City Hall: they blame "unprecedented weather" and "corporate greed." But as I sat there in the dark, it became clear: this wasn't a failure of the weather. It was a failure of a "Frankenstein" entity that we stubbornly refuse to call by its real name.

Or, to be more precise, it is a category error.

To understand why the lights went out in San Francisco and why they will likely go out again, we must stop viewing Pacific Gas and Electric (PG&E) as a business.

If you walk into a bakery and they sell you stale bread, you stop going there. You go to the bakery across the street. The bad bakery goes out of business. That is the discipline of the market.

You cannot fire PG&E. You can not switch to a competitor.

PG&E operates in a suspended reality where the laws of economics do not apply. It is not a private enterprise subject to the discipline of profit and loss. Nor is it a fully public agency subject to voters.

It is a “Government-Sponsored Hybrid” — the illegitimate child of the state. It exists in a twilight zone where it privatizes profits and socializes risks, all under the explicit protection of the very regulators who claim to be holding it accountable.

The blackout of 2025 was not a failure of the free market. It was the predictable, mathematical result of a system where political mandates replace price signals.

Here is the autopsy of a disaster that was designed by committee.

The Myth of the “Private” Monopoly

Let’s start by dismantling the biggest misconception: that PG&E is a “private” company driven by “market forces.”

In a real market, a company must persuade you to part with your money by offering value. If they fail to maintain their equipment, their service drops, customers leave, revenue dries up, and the company dies. Its assets are then bought by someone more competent.

Bankruptcy is the immune system of capitalism. It cleans out the rot.

PG&E has been shielded from this immune system for over a century. It has been granted a Territorial Monopoly by the state of California. The government explicitly forbids competition. If you try to build a power plant and run a wire to your neighbor’s house to sell them cheaper, more reliable electricity, men with guns will eventually stop you.

Because PG&E has no competitors, it has no existential fear.

When a company has no fear of death, it behaves like a zombie. It shuffles forward, decaying, feeding on the living, but never actually dying. The executives at PG&E do not wake up wondering, “How do I keep my customers?”They wake up wondering, “How do I satisfy the California Public Utilities Commission (CPUC)?”

The blackout happened because, for the last decade, satisfying the bureaucrat became more profitable than maintaining the grid.

The Decoupling of Risk: The Lesson of San Bruno

In 2025, we saw the culmination of a concept economists call Moral Hazard. This occurs when someone takes a risk because they know someone else will bear the cost if things go wrong.

We don’t need to look at abstract theory to see this. We just need to look at the ghosts of San Bruno.

In 2010, a PG&E natural gas pipeline exploded, killing eight people and leveling a neighborhood. The subsequent investigation revealed a sickening truth: PG&E had collected millions of dollars from ratepayers specifically earmarked for safety upgrades and pipeline replacement.

In a competitive market, you spend that money on safety because blowing up your customers is bad for business. But PG&E didn’t. They diverted that money to boost corporate profits and executive bonuses.

Why did they do this?

Because the incentive structure was broken. They knew that as a state-protected monopoly, they would not be allowed to fail. Even after the explosion, the fines were passed around, the rates were eventually adjusted, and the monopoly remained intact.

PG&E is driving a rental car, and the taxpayers of California are paying the insurance premiums.

Through mechanisms like the AB 1054 wildfire fund, the state has repeatedly signaled that PG&E is “Too Big to Fail.” Consequently, the company allocates capital toward risk. They defer maintenance on 50-year-old transformers to fund short-term dividends because they know the state will bail them out if disaster strikes.

A true private company would be terrified of a lawsuit that wipes out its equity. PG&E simply views lawsuits as a line item to be managed by the state.

The Distortion of Price Signals

The most insidious part of this “Frankenstein” structure is how it destroys the most important tool in economics: The Price Signal.

In December 2025, electricity demand surged. In a functioning market, prices would fluctuate dynamically. High prices would signal consumers to conserve and producers to generate more power immediately.

But California’s electricity market is a centrally planned labyrinth. Retail rates are fixed and decoupled from the immediate reality of supply and demand.

Because the price mechanism is broken, there is no organic way to balance the grid. Instead of Prices, the system relies on commands. The grid operator issues “Flex Alerts” and begs people to turn off appliances. When begging fails, they use the blunt instrument of the blackout.

A blackout is simply a shortage. And as any student of history knows, shortages are the hallmark of price controls. Whether it is bread in the Soviet Union or electricity in San Francisco, whenever a bureaucracy tries to set the price and quantity of a good, the result is inevitably scarcity.

Malinvestment: The “Gold-Plating” Trap

If PG&E were a private company, its capital allocation would be simple: Spend money on the most efficient way to deliver power.

But as a regulated utility, PG&E makes money based on its Return on Equity (ROE). Essentially, the state allows them to charge a guaranteed profit percentage on every dollar they spend on new capital assets. spending

This creates a perverse incentive known as “Gold-Plating.” It is more profitable to build new, expensive things than to fix old, cheap things.

Look at the recent obsession with “Undergrounding.”

After its equipment started massive wildfires, PG&E announced a plan to bury 10,000 miles of power lines. It sounds heroic. But economically, it is insanity.

Underground lines cost roughly $3 million to $5 million per mile. Compare that to “hardening” existing lines (insulating them), which costs a fraction of that amount — around $800,000 per mile.

Why would PG&E aggressively push for the option that costs 5x more?

Because they earn a guaranteed profit on the spend.

If they spend $800,000 insulating a line, they earn a return on $800,000. If they spend $4 million burying it, they earn a return on $4 million. The “Frankenstein” structure incentivizes the most expensive, slowest solution because it pads the “rate base,” even if it means fewer miles are made safe each year.

The grid in San Francisco collapsed because capital was allocated to expensive, flashy projects that maximize guaranteed returns, rather than the unsexy, gritty work of maintaining the existing network.

The “Profit” Illusion

Critics will point to PG&E’s profits and say, “See! They took the money and ran!”

But strictly speaking, they didn’t “take” the money. The government gave it to them.

In a free market, profit is proof of value creation. It means you took resources and combined them in a way that people valued more than the sum of the parts.

In the regulated utility world, profit is a regulatory grant. It is a fee collected by the tax collector (PG&E) on behalf of the state, a portion of which is kept as a handling fee.

When we see PG&E failing to innovate or failing to maintain the grid, we see the logical result of an entity that gets paid regardless of performance. Innovation is risky. Innovation requires failure. Why would a monopoly risk failure when mediocrity is guaranteed a 10% return?

The Solution Nobody Wants to Hear

So, what is the fix?

The standard response from San Francisco politicians has been predictable: “We need more oversight. We need to take it over completely.”

They want to turn the “Government-Sponsored Hybrid” into a full-blown government agency. They argue that if we just remove the “profit motive,” everything will be fine.

This is the ultimate delusion.

If you think PG&E is inefficient now, wait until it is run at the same speed and accountability as the Department of Motor Vehicles (DMV). Removing the last vestige of private ownership removes the last vestige of economic calculation.

The real solution is the one thing California refuses to try: A Free Market.

Imagine a San Francisco where:

1. The Monopoly is Abolished: PG&E loses its exclusive right to serve you.
2. Competition is Legalized: Micro-grids, local co-ops, and competitors like Tesla are allowed to run lines or beam power.
3. Full Liability is Restored: If a utility starts a fire, they are fully liable. No state caps. They must buy insurance on the open market.
4. Price Signals are Unleashed: Rates reflect reality.

In this world, a company that diverts safety funds to bonuses (like in San Bruno) goes bankrupt. A company that chooses expensive undergrounding over efficient hardening gets undercut by a competitor.

The “Frankenstein” monster dies, and a responsive ecosystem takes its place.

The Trap of the Middle Road

The lesson of the 2025 San Francisco blackout is not that we need more government control. It is the “Middle Road” that leads to a cliff.

We have tried to engineer a system that is half-socialist and half-capitalist. We wanted the efficiency of the market but the control of the state.

We ended up with neither.

We got the greed of a corporation without the discipline of competition. We got the bureaucracy of the state without the accountability of the ballot box.

PG&E is not a rogue private actor. It is a faithful servant of the perverse incentives the state created. It is the government’s own reflection staring back from the mirror.

As long as we protect this monopoly from the consequences of its actions, the infrastructure will continue to rot. And the next time the wind blows, we will be sitting in the dark again, cursing the wrong villain.

The lights didn’t go out because of corporate greed. They went out because we tried to suspend the laws of economics, and reality finally called our bluff.