Multiplier Effects

By Catherine Carver
North Carolina State University


Examine Hidden Costs of Utility Hits When Allocating Damage Prevention Dollars

In support of the industry’s need to get a better handle on how much money companies can consider as a prudent allocation for damage prevention, the Construction Automation and Robotics Laboratory (C.A.R.L.) at NCSU has produced a study which identifies factors that have to be considered. Two models have been developed. One reflects the total economic impact of utility damages, and the other shows how to optimize on damage prevention dollars.

A previous investigation by NCSU (1996) revealed that in one case, the cost to repair the utility damage was only four percent of the economic impact to local businesses and to the neighborhood that had to be evacuated for six hours. The first model of this year’s study went much further. It generated areas of impact not considered in the 1996 report. In fact, the new study shows that the total economic impact of an incident can vary widely based on the type of utility that is damaged, the number and type of consumers affected, and even the time of day the damage occurs.

In the event that a damage resulted in an injury, the calculated costs could include medical treatment plus the cost of personal lost wages and extended child care expenses, for example.

In the new study, a generic list of possible cost categories are visually defined using a

3-tiered set of costs. The three tiers consist of 1) Direct Cost, 2) Consequential Cost, and 3) Damage Mitigation Cost. Each tier is further subdivided into categories.

Direct Costs

Under the direct costs are five categories: emergency rescue, death/injury, repair, property damage and lost construction time.

Emergency rescue services and ambulance services may be dispatched to deal with both actual injuries and a threat to public safety. HAZMAT people may be called out to the scene of a pipeline hit that spills liquids into the ground.

When a telephone line is cut, emergency service agencies are seldom deployed at the scene as with a gas line cut. However, costs of emergency services can be incurred in other ways. In the case where a phone line transmitting signals to in-home medical equipment is severed (e.g., kidney dialysis equipment), a patient might require emergency services.

In the event that a damage resulted in an injury, the calculated costs could include medical treatment plus the cost of personal lost wages and extended child care expenses, for example.

Accident-related deaths bring other factors into play. It is nearly impossible to determine the value of human life, but courts use wrongful death or liability processes to determine the loss to a family. The value is often calculated to be in the millions of dollars.

There is also economic loss to society from a tax contribution perspective.

Construction downtime costs take into account idle crews and equipment. The construction company will be forced to wait for the damaged line to be examined and fixed by the utility company. In many cases, construction crews will need cleanup time before the work can continue.

Finally, the cost of property damages needs to be addressed as part of the direct costs. Such damages can be significant in cases where a major water pipe breaks, or a gas line explodes. Cutting power or communication lines will seldom lead to property damage unless digging or trenching as part of repair work is considered to be a damage. There can be a wide variety of costs, depending on the type of property affected and the concentration of property around the accident site. Part of the modeling done through the new study can better be seen in a basic equation where each specific element is identified and added together to yield the total property damage costs.

During a utility outage, spoilage costs can occur when a production process is interrupted, causing raw materials and other inputs to be ruined.

These five categories of direct costs are linked to any accident. The economic impact, however, is considerably increased when the indirect or consequential cost factors are totaled.

Consequential Costs

Consequential Cost subdivides into 10 sub-categories and identifies customer groups that include private homes, governmental agencies, service companies, schools, hospitals, industrial firms, transportation systems (like airports, taxi services, freight trains, and trucking), retailers, and utilities themselves. Under the consequential cost, the following areas are considered: machinery damage, lost production time/restart/spoilage costs, overtime/added wear and tear, lost sales for businesses, consumer losses, multiplier effect, health and safety effects, legal cost, lost utility sales, and disruption of normal activities. The following is a brief overview of the information studies by C.A.R.L.

The cost of production loss takes into account expenses associated with company adjustments to production schedules to recover the lost production. Accelerating production to recover output generally means higher unit costs.

During a utility outage, spoilage costs can occur when a production process is interrupted, causing raw materials and other inputs to be ruined. Even if an entire batch is not destroyed, it is likely that the rate of defects will rise as a result of the interruption and restart period when the process is not functioning normally.

Sudden disruptions of a utility service may cause damages to sensitive electronics or mechanical equipment. Companies will incur additional costs when attempting to get production started again following production stoppage. Many processes require that machinery be readied or calibrated before a process can begin again.

Sometimes companies are forced to use emergency response crews during a utility outage when sensitive information is threatened. Information from computer systems, bank accounts, travel agencies can be lost if not protected by a well orchestrated back-up plan. These back-up plans are costly, and NCSU's investigation, found that one local bank paid nearly $8,000/month for insurance against an outage. If the plan needed to be implemented, the cost was then by the hour.

When power is interrupted, warning systems may not function properly. Toxic materials could be inadvertently released due to machinery malfunction. Contamination might occur in sewer lines or water supplies that directly affect the safe health of the community.

Many companies operate on the "just in time" (JIT) materials management system. If the supplier of critical material needed in a company’s production process is affected by a utility outage, the company suffers losses due to production delays. This is just one example of the trickle down and ripple effects of a major outage.

New tools and technologies are being developed that make the worker and the work site more safe.

Recovery of damages from a contractor, locator, or utility at fault will involve legal fees. When death or injuries are involved, there will most definitely be a jury trial. Data on dollar amounts of lawyer fees, punitive damages, and court costs in specific cases are difficult to obtain, but numbers that are released are substantial.

Damage Mitigation

Damage prevention can be executed at many different levels and in a variety of ways. By taking steps to prevent a major outage or accident, the moral hazard factor/public impact can be reduced.

Next, education and training are a must not only for the industry personnel, but the general public. Programs for school aged children need to be designed as well. A seven-year-old can be a parent’s worst conscience if daddy is digging a hole in the yard without calling first. It is the desire of CARL to design and integrate a curriculum into the high schools and junior colleges which train locating technicians, excavation equipment operators, site supervisors and maintenance persons. This approach would not be utility specific, but rather take on the idea that the underground utilities are a national asset and deserve equal respect.

For the industry, there are few universal standards established that regulate the skill requirements of the worker. There are, however, training programs in the country that help the worker become more aware of damage prevention while enhancing their skill. If locating technicians, excavation contractors and others in construction would be held responsible for securing a certain number of continuing education credits, then the industry would be assured of quality workers.

New tools and technologies are being developed that make the worker and the work site more safe. Sharing experiences using these new tools and learned techniques is a large part of the education process.

The cost of education/training has to include the net lost production during training. Since workshop participants are spending time to learn ways to avoid causing damages, there will be some lost production as a result. This lost time in production, however, should result in dollars saved by preventing an accident. Damage mitigation efforts could see insurance premiums reduced, the cost of backup services decline and lowered cost of inconvenience to the general public.

Overall, damage prevention expenses need to be balanced against a variety of apparent and not so apparent accident costs. These costs can detract more than a company’s profits than the expense of effective damage prevention efforts.

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