CREATE Researchers Complete Report on the Economic Impacts of a Major Earthquake and its Effects on Electric Power and Communications Systems

CREATE Director and Price School Research Professor, Adam Rose, and CREATE Research Fellow and Price School Research Associate Professor, Dan Wei, are co-authors of the recently released report, Economic Consequences of the HayWired Scenario—Digital and Utility Network Linkages and Resilience, published by the U.S. Geological Survey. The study was led by Ian Sue Wing of Boston University and contributed to by Anne Wein of USGS.  This is the fourth USGS disaster scenario that incorporates economic consequence analysis in which USC researchers have played a major role. These include the Great Southern California ShakeOut earthquake scenario on the San Andreas Fault (link), the ARkStorm “atmospheric river” severe winter storm scenario (link), the California tsunami scenario (link), and the current study of a major earthquake on the East Bay Hayward Fault and its relationship to electric power and communication systems.

This study undertakes a comprehensive evaluation of the economic impacts of the HayWired earthquake scenario on the greater San Francisco Bay region’s economy, using a detailed multiregional static computable general equilibrium model, for six months following the event.  Economic impacts are estimated in terms of Gross Regional Product (GRP, or business interruption losses) caused by both capital stock losses and water and electric utility and telecommunications service disruptions after the hypothetical 7.0-magnitude earthquake  The simulations evaluate how the economy is affected, including how it adjusts to damages and disruptions transmitted through price changes, which spur the reallocation of resource use, primarily through substitutions of inputs and geographical redistributions. The capability to implement such substitutions is an important measure of the inherent resilience of the macroeconomy. The study also evaluates the potential effectiveness of various additional inherent and adaptive microeconomic resilience tactics that can greatly reduce business interruption losses from the disaster.  

A special focus of the HayWired scenario analysis was the study of the core of the digital economy, made up of the telecommunications, data hosting and processing, internet publishing and broadcasting, and other related service sectors. This report represents one of the first efforts to comprehensively investigate the economic impacts of disruptions to telecommunications following a major earthquake scenario. The study identifies a few unique features in terms of the impacts, restoration, and resilience potential of telecommunication service disruption. Compared to other common utilities, such as water and power service disruptions, a surge in the demand for telecommunications is observed immediately after the earthquake because of the need to communicate with family, friends, and first responders, which results in a major overload to the networks. The restoration of telecommunication services is very dependent on electric power, so the service restoration of data/voice in general will lag behind power restoration. However, telecommunications has a more flexible infrastructure than other critical lifelines, such as water pipes in the ground, in terms of resilience. This study identifies a few especially effective supplier-side resilience tactics, such as portable backup generators for cell sites and mobile cell sites on wheels or light trucks (COWs or COLTs), to help temporarily restore some capacity of data/voice services.  At the same time, the importance of the recovery of telecommunications is illustrated by assumptions about telework in sectors that reduce economic impacts (which is also evidenced during the current COVID-19 pandemic).  The analysis indicates that telework reduces estimated GRP losses emanating from property damage by a few billion dollars (6% of baseline GRP). 

The study indicates that every resilience tactic, or business continuity practice, implemented by businesses, sector alliances, and governments—including utility and digital economy sectors—preserves economic activity for their organizations, as well as that of others, through sectoral and geographic economic linkages after this potentially devastating scenario earthquake strikes.

Some bottom line results include:

• Total GRP losses without resilience are estimated to be $44.2 billion (or 4.2% of California’s GRP). 

• Total losses could be reduced to $25.3 billion (a reduction of 43%) if various resilience tactics are implemented.

• Business Interruption (BI) losses from property damage represent the dominant cause of economic effects. 

• Losses are concentrated in five San Francisco Bay region counties that are most directly affected by earthquake, accounting for 80% of the total GDP losses.

• Sectors most impacted statewide include real estate, manufacturing, healthcare, and professional, scientific, & technical services.

• Restoration of communications (primarily data/voice) services very much depends on the availability of electric power. 

• The speed and extent of the restoration of data/voice services affect the implementation of some important resilience tactics, such as telework.

• Resilience tactics having the greatest loss reduction potential effect include: 

o BI losses from property damages and power service disruption – production recapture 

o BI losses from water service disruption – production isolation

o BI losses from data/voice service disruption – production isolation combined with the use of portable equipment by telecommunication carriers

The authors point out that the methodology and insights from this report are generalizable to many other types of natural disasters, technological accidents, and terrorist attacks, including the major disruption of the electric power and water systems due to the recent ice storms in Texas.

The full report can be accessed here.

Sue Wing, I., D. Wei, A. Rose, and A Wein. 2020. “Economic Consequences of the HayWired Scenario—Digital and Utility Network Linkages and Resilience," in S. Detweiler and A. Wein (eds.), The HayWired Earthquake Scenario—Societal Consequences,  U.S. Geological Survey Scientific Investigations Report 2017–5013–R–W, Reston, VA.  

Additional CREATE publications on electric power, water, and cyber service disruptions include:

Sue Wing, I. and A. Rose. 2020 “Economic Consequence Analysis of Electric Power Infrastructure Disruptions: An Analytical General Equilibrium Approach,” Energy Economics 89: 104756. Link 

Ba, Q. and K. Savla. 2020. “Computing Optimal Control of Cascading Failure in DC Networks,” IEEE Transactions on Automatic Control 65(6): 2402-17. Link

Kusumastuti, S., H. Rosoff, J. Blythe, and R. S. John. 2020. “An Empirical Behavioral Study of Deterrence: An Analog Cyber-Attack Simulation Game,” Risk Analysis 40(3): 476-93. Link

Rose, A. and Z. Chen. 2020. “Resilience to a Cyber-Attack on the Detroit Automobile Industry: A Computable General Equilibrium Approach,” in P. Nijkamp, E. Glaeser and K. Kourtit (eds.), Urban Empires, Heidelberg:  Springer. Link

Eyer, J. and A. Rose. 2019. “Mitigation and Resilience Tradeoffs for Electricity Outages,” Economics of Disasters and Climate Change 3(1): 61-77. Link

Rose, A., N. Miller, J. Eyer, and J. Banks.  2019. “Economic Mitigation of and Resilience to Cyber Threats,” in A. Kott and I. Linkov (eds.), Cyber Resilience of Systems and Networks. Heidelberg:  Springer.

Cui, J., H. Rosoff, and R. S. John. 2017. “Deterrence of Cyber Attackers in a Three-Player Behavioral Game,” in S. Rass, B. An, C. Kiekintveld, F. Fang, & S. Schauer (eds.), Decision and Game Theory for Security: GameSec 2017 (pp. 718-736), New York: Springer. Link

Ryutov, T., M. Orosz, J. Blythe, and D. von Winterfeldt. 2015. “A Game Theoretic Framework for Modeling Adversarial Cyber Security Game Among Attackers, Defenders, and Users,” Security and Trust Management (pp. 274-282), London: Springer International. Link

Rose, A., S. Liao, and A. Bonneau. 2011. “Regional Economic Impacts of a Verdugo Earthquake Disruption of Los Angeles Water Supplies:  A Computable General Equilibrium Analysis,” Earthquake Spectra 27(3): 881-906. Link 

Rose, A. and G. Oladosu. 2008. “Regional Economic Impacts of Natural and Man-Made Hazards Disrupting Utility Lifeline Services to Households,” in H. Richardson, P. Gordon and J. Moore (eds.), Economic Impacts of Hurricane Katrina, Cheltenham, UK:  Edward Elgar. Link

Rose, A., G. Oladosu, and S. Liao. 2007. “Business Interruption Impacts of a Terrorist Attack on the Water System of Los Angeles:  A Computable General Disequilibrium Analysis,” in H. Richardson, P. Gordon, and J. Moore (eds.), Economic Costs and Consequences of Terrorist Attacks, Cheltenham, UK:  Edward Elgar. Link

Rose, A., G. Oladosu, and S. Liao. 2007. “Business Interruption Impacts of a Terrorist Attack on the Electric Power System of Los Angeles: Customer Resilience to a Total Blackout,” Risk Analysis 27(3): 513-31. Link

Rose, A., K. Porter, K. Tierney, et al. 2007. “Benefit-Cost Analysis of FEMA Hazard Mitigation Grants,” Natural Hazards Review 8(4): 97-111. Link

Rose, A. and S. Liao. 2005. “Modeling Regional Economic Resilience to Disasters:  A Computable General Equilibrium Analysis of Water Service Disruptions,” Journal of Regional Science 45(1): 75-112. Link