Each city has one PSDL-file. This file defines roads, ground surface and buildings. In addition, the PSDL-file also provides an easy way to automatically place props along roads etc. This is particularly good for placing street lights, parking meters and similar objects.
The geometry of a city is divided into blocks. A block is a small section of the city, similar to the regular definition of a city block. One difference, though, is that roads and intersections are also placed in their own blocks.
The block structure is used for all kinds of things in the game. Most obvious are visible surface identification, collision detection, ambient "intelligence", etc. All of these are calculated with respect of the block structure.