. "8 Integrating the Benefits--Conclusions and Recommendations." Improved Seismic Monitoring - Improved Decision-Making: Assessing the Value of Reduced Uncertainty. Washington, DC: The National Academies Press, 2006.
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Improved Seismic Monitoring Improved Decision-Making: Assessing the Value of Reduced Uncertainty
equipment occur—compared with later years when most of the costs will be for operations and maintenance. Similarly projections of benefits are likely to increase over time as practitioners learn to make the best use of data generated by improved seismic monitoring.
Because it is difficult to make plausible forecasts of the costs and benefits over the relevant future time horizon, we can proceed by considering a prototypical year. First, based on a presumed 10-year life for the new equipment, the annual costs would be the annualized equivalent of $194 million plus the annual $53 million annual O&M costs. This annual combined cost comes out to $96 million.1 Second, what amounts of benefits are needed to justify these expenditures? The Federal Emergency Management Agency (FEMA, 2001a) reported that the expected annualized building-related earthquake losses to U.S. society are $4.4 billion. These figures include the repair and replacement costs for structural and nonstructural components, building content loss, business inventory loss, and direct business interruption loss. Based on the Consumer Price Index, these estimates were converted to 2003 dollars to give an annualized earthquake loss of $5.6 billion. FEMA’s studies are conservative in that they do not include losses to utility and transportation systems, the costs of loss of life and injury, or indirect business interruption costs. Although other studies have estimated earthquake losses to be higher (e.g., Gordon et al., 2004), FEMA’s more conservative estimates can be used here to evaluate whether the potential benefits can justify the anticipated improved seismic monitoring costs. If they pass this test with FEMA’s data, then the investment will be even more attractive when compared with estimates from other more comprehensive studies.
One way to proceed with this discussion of whether the anticipated economic benefits from improved seismic monitoring justify the cost to the nation is to ask how large a reduction in expected annual earthquake losses would be required to justify the investment in improved seismic monitoring. Using the FEMA estimates of annualized buildings and building-related earthquake losses of $5.6 billion, if an annual 2 percent reduction in losses resulted from mitigation measures based on improved seismic monitoring data—a seemingly achievable result in light of the broad range of potential benefits described in this report—then avoided losses would be greater than the maximum expected annual costs of investing in increased seismic monitoring. A brief recap of the benefits elaborated in earlier chapters suggests that the investment in improved
The annual opportunity cost of $194 million (4 percent cost of capital at 10 years) is approximately $24 million and the annual (straight-line) depreciation cost is approximately $19 million.