Lessons from Short-term Supply Disruptions
Providing Confidence and Context to FEMA
Methodology
Craig P. Aubuchon, Analysis Group
Kevin M. Morley, PhD, American
Water Works Association
Prepared for Industrial Economics Incorporated under EPA Contract Number EP-W-10-002, Subcontract
Number 8070-Aubuchon. The views expressed in this article are those of the author(s) and do not
necessarily represent the views of the Analysis Group or the American Water Works Association.
Hazard Mitigation Grant Program
• Ex Ante Mitigation grants
to prevent supply
disruption from natural
disasters (flood, fire,
earthquake)
• Application requires use
of Benefit Cost Toolkit
– B/C ratio greater than 1
• Project specific costs, BUT
standard National Benefit
• Important to get B/C right
because of opportunity
cost of public funds!
Standard Value of Complete Disruption
Value of Total Loss
Equals:
Estimated Loss to
Businesses
PLUS
Estimated Loss to
Residents
Key Assumption:
Complete Loss of
Service
Final BCA Reference Guide (FEMA, 2009)
Project Goals
• 1. Down Scale Benefit
Methodology to local,
project level
• 2. Partial Sensitivity
Analysis
– OMB Circular A-94
• 3. Estimate value by
region and industry
Standard Value Methodology: Business Loss
• Value Added, Indirect Estimate
– Based on ‘Resiliency’ factor
– Percent of Output available during total disruption
• Back up water source, etc
𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 𝑃𝑒𝑟 𝐷𝑎𝑦 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐿𝑜𝑠𝑠
1
=
365 ∗ 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑛
𝐺𝐷𝑃𝑖 ∗ (1 − 𝑟𝑖 )
𝑖=1
FEMA uses this
Sensitivity
Analysis
Table 3: Resiliency Factors by Industry
Industry
Utilities
Construction
Durable goods
Wood product manufacturing
Nonmetallic mineral product manufacturing
Primary metal manufacturing
Fabricated metal product manufacturing
Machinery manufacturing
Computer and electronic product manufacturing
Electrical equipment and appliance manufacturing
Motor vehicle, body, trailer, and parts manufacturing
Other transportation equipment manufacturing
Furniture and related product manufacturing
Miscellaneous manufacturing
Nondurable goods
Food product manufacturing
Textile and textile product mills
Apparel manufacturing
Paper manufacturing
ATC-25 (1991) Chang et al. (2002)
0.6
0.65
0.5
0.68
0.4
0.42
0.5
0.42
0.5
0.42
0.1
0.42
0.2
0.42
0.4
0.42
0.1
0.42
0.1
0.42
0.4
0.42
0.4
0.42
0.5
0.42
0.4
0.42
0.2
0.42
0.3
0.42
0.3
0.42
0.3
0.42
0.4
0.42
Difference
0.05
0.18
0.02
-0.08
-0.08
0.32
0.22
0.02
0.32
0.32
0.02
0.02
-0.08
0.02
0.22
0.12
0.12
0.12
0.02
Standard Value Methodology: Residential Loss
• Area under the constant
elasticity consumer
demand curve:
𝜂
𝐵𝑊𝑅 1+𝜂
=
∗𝑃∗𝑄∗ 1−(
) 𝜂
1+ 𝜂
𝑄
• Basic Water Requirement
(BWR) provided by the
government, P and Q are
equilibrium price and
quantity, n is price elasticity
• Sensitivity on n and Q
FEMA Standard Values
• Business Loss:
– US GDP (yr2008)
– ATC (1991) Resiliency
Factors
$40 pcpd
• Residential Loss:
– US consumption: 172
gallons per person per day
(1999 Residential End Use
study – 12 cities)
– Price: $3.15 per 1000
gallons
– Elasticity: -0.41 (mean value
from Meta-Analysis)
$53 pcpd
Partial Sensitivity Analysis
• Use state level data
(downscale)
– Residential Consumption
(USGS)
– GDP (industry mix)
• Vary resilience and elasticity
– Resilience: changes due to
improvements in capital
technology or estimation
methodology
– Elasticity: time preference
• WTP to avoid large, short term
disruptions > WTP to avoid
frequent, small disruptions
• Median (-0.35) and Short Run (0.26) from same meta-analysis
Impact to Economic Activity
Table 2: Impact to Business Economic Activity, Per Capita Per Day $2008
U.S. Total
ATC-25 (1991)
Resiliency Factors
Chang et al (2002)
Resiliency Factors
Current Value
1
State Level
GDP
State Level GDP,
Population Weight
$40
$39
$40
$66
$65
$66
Recommended Value = $53
Textile and textile product mills
Apparel manufacturing
Paper manufacturing
Printing and related support activities
Petroleum and coal products manufacturing
Chemical manufacturing
Plastics and rubber products manufacturing
Wholesale trade
Retail trade
Transportation and warehousing, excluding Postal Service
Information
Finance and insurance
Real estate and rental and leasing
Professional and technical services
Management of companies and enterprises
Administrative and waste services
Educational services
Health care and social assistance
Arts, entertainment, and recreation
Accommodation and food services
Other
Government
MEAN
0.3
0.3
0.4
0.7
0.5
0.2
0.5
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.6
0.6
0.2
0.2
0.8
0.75
0.50
0.42
0.42
0.42
0.42
0.42
0.42
0.42
0.51
0.46
0.65
0.65
0.44
0.44
0.45
0.45
0.45
0.45
0.27
0.45
0.45
0.45
0.45
0.45
0.12
0.12
0.02
-0.28
-0.08
0.22
-0.08
-0.29
-0.34
-0.15
-0.15
-0.36
-0.36
-0.35
-0.35
-0.35
-0.15
-0.33
0.25
0.25
-0.35
-0.3
-0.04
Downscaling may be more beneficial – especially for high value added states!
Impact to Residential Customers
Table 3: Impact to Residential Customers, Per
Capita Per Day $2008
Includes the FEMA cost for Basic Water Requirements
(6.6 gal @ $1.85/gal)
Elasticity of Demand:
Per Capita Per Day
Consumption (gal):
172
State Level USGS
estimate
State Level,
Population Weight
Current Value
1
-0.41
$53
-0.35
$136
-0.26
$2,046
$22
$37
$246
$24
$43
$371
Recommended Value = $146
Residential value is highly sensitive to elasticity and level of BWR
η = -1
η = -1/3*
η = -1/4*
* Approximate
Future Research Questions
• National Assessment of Industry Resilience
– By Industry
– By Time
• Extend Simplistic Methodology to Partial Loss of
Service (?)
Conclusions
• Benefit is highly sensitive to
elasticity, state level GDP and
state level consumption
• Using the same methodology,
with reasonable data
assumptions from reliable
sources, standard value could
be 2x greater!
• Two Solutions:
– Update Standard Value to
reflect uncertainty
– Allow calculation using local
data
Thank you and Questions
Craig P. Aubuchon
Associate, Analysis Group
617-425-8498 (office)
[email protected]
Kevin M. Morley, PhD.
Security and Preparedness Program Manager, American
Water Works Association
202-628-8303
[email protected]