CONOMIC MPACTS OF 

NFRASTRUCTURE 

AILURES

This report was prepared for the President’s Commission on Critical Infrastructure Protection, 

and informed its deliberations and recommendations. The report represents the opinions and 

conclusions solely of its developer, Booz Allen & Hamilton. 

Report to the 

President’s Commission 

on Critical Infrastructure Protection

1997
1 

TABLE OF CONTENTS 

ES EXECUTIVE SUMMARY ......................................... 2 

I. INTRODUCTION ..................................................... 15 

II. APPROACH .............................................................. 17 

III. WESTERN POWER OUTAGE .............................. 22 

IV. VALUJET CRASH .................................................... 35 

V. AT&T NETWORK OUTAGE ................................ 45 

VI. CONCLUSIONS ....................................................... 53 

VII. RECOMMENDATIONS .......................................... 57 

APPENDIX A CANDIDATE DISASTERS CONSIDERED .......... 59 

APPENDIX B BIBLIOGRAPHY ..................................................... 60 
2 

EXECUTIVE SUMMARY 

Those who cannot remember the past are doomed to repeat it. 

 George Santayana 

INTRODUCTION 

This report is provided as an ancillary analysis to the overall assessment of the physical and cyber 

security of information systems within the U.S. Banking and Finance infrastructure. The initial 

study, entitled U.S. Banking and Finance Infrastructure Security Assessment, uncovered that the 

industry is exceedingly generous in investing in security measures in response to catastrophes or 

“near misses,” but typically does not invest beyond the standards of due care set by regulation, 

industry practice, or legal liability (usually determined by precedence in the courts) to defend 

against the hacker or criminally motivated attack. This report examines empirically the full costs 

of recovery from three analog “disasters” to determine the economic merit in preventative 

initiatives vice reactive solutions. 

OBJECTIVE 

The purpose of this report is to present an estimate of the full economic impact that a disaster has 

on an infrastructure sector1

 and the nation at large. The magnitude of losses in dollar terms are 

provided by recoupment and aid sources, such as local and national charities; local, state and 

federal government agencies; insurance providers; and legal compensatory award fees and 

punitive damages. However, this study also attempts to analyze the spill-over costs on others 

within the infrastructure (including effects such as increased regulation and oversight) and postevent impacts on the general public (such as higher consumer prices and losses in public 

confidence) which leave a lasting, intangible imprint on the quality of life afforded Americans. 

APPROACH 

This report employs inductive reasoning/logic to meet its objective. It uses specific empirical 

evidence from three recent actual events—the August 1996 Western power outage, the 1996 

ValuJet Flight 592 airplane crash, and AT&T’s 1-800 network service failure that affected most 

of the Eastern Seaboard in 1991—to present estimates of the full economic impact a disaster can 

have on an infrastructure sector, and the nation at large. This report also identifies the lessons 

learned by each of the three infrastructures (electrical power distribution, transportation, and 

 

1

 In this study, infrastructure sectors include: Telecommunications; Electrical Power Distribution; Gas and Oil Storage and 

Distribution; Banking and Finance; Transportation; Water Supply Distribution; Emergency Services (including medical, police, 

fire, and rescue); and Continuity of Government. 
3 

telecommunications) which can, and arguably should, be applied to other infrastructure sectors, 

including U.S. Banking and Finance. 

Selection of Events 

Multiple “disasters” were considered2 and the three events ultimately chosen were selected as 

appropriate analogs, or “benchmarks” for the U.S. Banking and Finance infrastructure because 

they were found to have common attributes relative to the: 

• Event 

• Product/service 

• Customers 

• Owners 

• Industry 

Methodology 

To conduct this analysis, the research extended beyond the immediate event and explored the 

spill-over effects a disaster has on the customer, the owner, the industry, and the general public. 

By taking this approach, specific lessons learned from each event surfaced, and commonalities 

among the three formed the basis for the conclusions and recommendations presented herein. 

For each event, the consequences or economic impacts are: 

1. Allocated to event phase

• Primary 

• Secondary 

1. Attributed to affected participants

• Losses to the customer 

• Losses to the owners 

• Losses to the industry 

• Losses to the public/quality of life 

1. Quantified by compensation/recoupment sources and economic indicators

• Private sources, i.e., insurance, charities, stockholder reserves/profits, legal 

damages/awards, etc. 

• Federal, state and/or local governments 

• Passed to the public via product/service prices, taxes, quality of product/service, share 

price, etc. 

• Uncompensated 

 

2

 See Appendix A for a listing of other candidate events.
4 

Sources of Data 

This report is based exclusively on publicly available data and information provided from the 

media, government(s), and other open sources. The turn-around period of this study excludes 

personal interviews and the in-house generation of complex cost estimates. This study focuses 

on collecting and examining publicly available financial data from compensation sources and 

allocating and attributing them to the affected participants and impact phases. While empirical 

analysis is the intent, some of the data presented is anecdotal and is employed to amplify how 

far-reaching the effects of an event can be. 

FINDINGS - GENERAL 

As shown in the following exhibits, the consequences of a disaster occur in two phases, primary 

and secondary. The primary phase begins with the response to the disaster. Within this phase, 

the focus is primarily on the immediate losses suffered by the customers and the owner of the 

failed or impacted product/service (although the industry containing the disaster event and the 

general public might also experience some immediate effects). This primary phase might last 

weeks or even months depending on the nature of the disaster. These losses are generally 

measured by the compensation/recoupment provided by such sources as charities, local, state and 

federal government aid, insurance carriers, profits, legal damages/awards, etc. 

However, the repercussions from an event ripple like waves in a pond over time and can be felt 

years after the event occurs. These spill-over effects are part of a secondary phase that occurs in 

the wake of a disaster. This secondary phase tends to be measured in years, even decades. While 

all participants (i.e., the customers, owners, industry and public) are affected by the secondary 

phase, spill over effects are generally absorbed into our economy and are observed in broad areas 

such as quality of life. 

FINDINGS - WESTERN POWER OUTAGE 

Description and Cause of Event 

Over 7.5 million customers in the Western United States found themselves without power, some 

for as long as 16 hours on August 10, 1996. The outage occurred during a period of record high 

temperatures and electric loads. This, combined with a greater than normal supply of 

hydroelectricity (due to above average water supplies in the Northwest), caused high load 

transfers from and through the Northwest to the Southwest. The high water levels also caused 

the trees in the region to grow faster than anticipated and some of these overgrown trees 

interfered with transmission lines. Without realizing the impact several line outages were 

causing to the overall system, Bonneville Power Administration (BPA) dispatchers monitored its 

individual system and did not take steps to notify other operators in other regions. These 

scattered outages, along with some scheduled maintenance activities, contributed to greater 

system instability. 
5 

According to the Western Systems Coordinating Council (WSCC) investigation, line instability 

and overgrown vegetation were cited as causal factors in the August 10th outage. However, 

when each of the outages occurred, they were not considered “critical” and therefore the 

information about the outages was not shared with other companies. This lack of communication 

between and among the companies that make up the WSCC contributed to, if not caused the 

outages to occur. Each company viewed each outage as independent events, failing to recognize 

the intricacies that made them dependent links in a chain. Once the chain began to break, there 

was no way to stop it. 
6 

Economic Impact 

A listing of losses, as incurred by the affected participants and estimates of the economic losses 

to each participant group are provided in Exhibit ES-1 for the Western power outage. 

Event

Power 

Outage

On Owners

•Disrupted operations

•Decreased sales/

 revenues

•Decreased product

 quality/reliability

•Investigation

•Increased PR

•Increased vigilance

On Industry

•Decreased goodwill

•Increased audit

•Re-regulation

•Capital flight to

 alternative providers

On Public

•Investigation

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased prices

•Drop in share prices

Primary Phase Effects

Compensation Sources

•Customers’ insurance

•Profits (stockholders)

•Uncompensated

On Customers

•Residential loss

 of productive

 & leisure hours

•Commercial loss

 of sales/revenues

•Spoilage losses Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

Aug. 10, 1996 ~$1-4 Ba >$100 Mb See belowc See belowd

a

 Estimates of uncompensated losses of residential and commercial productive and leisure hours 

b

 Net losses in revenues due to regeneration expenses, equipment damage and expenditures for responding to 

governmental investigations and hearings. 

c

 Costs to date, while certain to be significant, are not yet available. To avoid double count costs to owners, other 

infrastructure costs would include the establishment and compliance of nation-wide reliability, coordination, and 

monitoring standards. 

d

 Public costs include changes in the business practices and cost structures of the nation’s electrical power distribution 

systems that are likely to be passed on as additional charges to customers. 

Exhibit ES- 1: The Western Power Outage Cost and Impact Profile 
7 

Based on this study’s conservative estimates, the Western power outage has cost several billion

dollars to date, most of which remains uncompensated. Because of the recent nature of these 

events, the spill-over effects of pending legislation and other proposals to strengthen the 

oversight of this relatively self-regulated industry cannot be accounted for in this total. 

FINDINGS - VALUJET AIRPLANE CRASH 

Description and Cause of Event 

On 11 May 1996, Flight 592, a ValuJet DC-9, crashed into the Florida everglades shortly after 

takeoff from Miami International Airport. All 110 passengers on board perished. 

According to what investigators were able to determine, the forward cargo hold of ValuJet Flight 

592 was packed with over 100 oxygen generators. Although labeled empty on the shipping 

documents, at least some of the canisters were not, and none were equipped with safety caps. 

SabreTech Inc., one of ValuJet’s maintenance contractors, admitted that two of its employees had 

failed to put safety caps for shipping and falsified paperwork indicating that the shipping caps 

had been put in place. 

In addition to the physical cause of the accident, there were many underlying forces that 

contributed to this accident. Not implementing the National Transportation Safety Board 

(NTSB)’s 1988 recommendation to install fire detection equipment is part of the story. While 

outsourcing in and of itself is not unsafe, airline safety requires strong communications and 

accountability among all groups responsible for the various aspects of safety. This coordinated 

communications is often difficult to achieve within a single organization, and can be nearly 

impossible across disparate groups of contractors, especially if no one central figure is 

responsible for its integration. It was clear during the post-crash investigations that this 

communication was lacking. 

Criticism of the FAA’s role in accountability for airline safety has been on the rise since 1993. 

Former Inspector General Mary Schiavo held a meeting with the FAA in February 1996 to 

address critical safety issues with ValuJet. At the time of the accident, ValuJet’s accident record 

was 14 times higher than American or United.3

Today’s low fare airlines compete by offering discounted fares. However, safety is not cheap and 

evidence is growing that the pressures of competition might be affecting even the regulated 

portions of this industry—safety and training. ValuJet employed a fleet of older aircraft 

(averaging 26 years) versus the industry’s standard of 15 years. As pressures to compete 

continue, even the established airlines like Northwest, TWA, and USAirways are using their 

fleets for a greater number of years. 

 

3

 Fumento, Michael, “Frederico Pena: The Teflon Cabinet Official,” February 19, 1997.
8 

Economic Impact 

Exhibit ES-2 presents the cost and impact profile for the ValuJet crash. Based on this study’s 

conservative estimates, the ValuJet crash has cost over $2 billion to date. Because of the relative 

recent nature of this event, the long-term effects (or spill-over costs) of pending litigation and 

other industry-related mandates on ValuJet, and the airline industry as a whole, can not yet be 

determined accurately. 

Event

Airplane 

Crash

On Owners

•Loss of aircraft

•Disrupted operations

•Increased PR

•Increased vigilance

•Decreased sales/

 revenues

•Legal fees &

 punitive damages

On Industry

•Decreased goodwill

•Increased insurance

•Increased regulation

•Capital flight to

 alternative carriers

On Public

•Rescue & inquiry

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased fares

•Increased taxes

•Drop in share prices/

 bankruptcy

Primary Phase Effects

Compensation Sources

•Charity

•FEMA (Federal govt)

•State & local govt

•Customers’ insurance

•Company’s insurance

•Legal awards

•Profits (stockholders)

On Customers

•Loss of life -

 productive &

 leisure hours

•Loss of cargo

•Disruption in

 connecting flights Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

Flight 592 Crash ~$220-550Ma >$550Mb >$350Mc >$400Md

Exhibit ES-2: Airline Crash Disaster Profile 

a

 Estimates from insurance providers on the loss of passenger life and cargo. 

b

 Losses to ValuJet include $400M for the aircraft, plus annual lost revenues of $150M. 

c

 In 1988 the FAA estimated that legislation requiring smoke detectors to be installed in airplane cargo holds would 

cost $350M. Although not yet enacted, similar legislation is likely to occur from the ValuJet incident. The total 

dollar amount will depend upon the extent to which new and/or more stringently enforced regulation are absorbed or 

passed on to customers. 

d

 Public costs include both increases in fares (i.e., those directly passed on to the public) or increased in taxes (i.e., 

those costs subsidized by government). In 1996 Congress appropriated over $400M for security-related 

enhancements, including explosive detection technology, which is likely the tip of the iceberg. 
9 

FINDINGS - AT&T 1-800 SERVICE FAILURE 

Description and Cause of Event 

Similar to the Western power outage, this event was precipitated on a warmer-than-usual day in 

the New York metropolitan area. For days such as this when power consumption loads are 

heavier than normal, AT&T and New York’s Consolidated Edison Power Company had 

negotiated a power sharing agreement that basically states that AT&T will use its own power 

when Consolidated Edison’s facilities are heavily loaded. At approximately 10 a.m. on 

September 17, 1991, at an AT&T switching center in lower Manhattan, AT&T switched to its 

own power. However, critical power rectifiers (devices that change AC power to DC power) 

failed. Power was provided by a battery back-up system which was designed to operate for six 

hours. Alarms that were intended to inform technicians that the power system was functioning 

on back-up battery had been manually disabled and failed to work. 

At approximately 4:30 p.m., the shift back to commercial power was attempted and failed 

because of the same critical power rectifier failure that had gone undetected in the morning 

hours. The back-up batteries expired and all telephone transmission systems in the facility shut 

down and voice and data communications controlled by the facility failed. This included air 

traffic control communications in the New York metropolitan area. 

It took AT&T approximately 8 hours to restore service to its entire customer base. In the ensuing 

8 hours of the failure, it was estimated that over 5 million calls were blocked. 

Based on an internal investigation by AT&T, the September 1991 outage had a strong human 

component, versus any systemic or fundamental failure of the network’s components. According 

to AT&T’s senior vice president-network services, Kenneth L. Garrett, the problem resulted 

when failures of some power equipment and alarm systems went undetected. This was attributed 

to a supervisor failing to follow company procedures and physically inspect each of the 

building’s power plants to insure that they are working properly during a conversion from 

commercial to emergency diesel generator power. Additionally, the alarm bells that should have 

warned technicians of equipment failures had been manually deactivated. Had the alarms been 

armed or had such an inspection occurred, the equipment failures would have been discovered 

and the service disruption averted.4

 

Because this network failure affected so many people and adversely affected air travel, the press 

devoted attention significant to the event, as did state and federal regulators and Congress. 

Industry experts were publicly asking if AT&T was asleep at the wheel. 

Economic Impact 

Exhibit ES-3 presents the cost and impact profile for the AT&T network failure. Based on this 

study’s estimates, the AT&T network failure cost hundreds of millions of dollars yet eventually 

resulted in improved services to the general public. 

 

4

 AT&T News Release, September 30, 1991.
10 

Event

ATT

Service

Outage

On Owners

•Disrupted operations

•Decreased sales/

 revenues

•Investigation

•Increased PR

•Increased vigilance

On Industry

•Decreased goodwill

•Increased audit

•Re-regulation

On Public

•Investigation

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased prices

•Drop in share prices

Primary Phase Effects

Compensation Sources

•Profits (stockholders)

•Uncompensated

On Customers

•Loss of hours -

 productive &

 leisure

Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

East. Seaboard ~$100s Ma >$1Mb See belowc Better serviced

Exhibit ES-3: AT&T Network Service Failure Profile 

a

 Because of the difficulty in estimating the numbers of individuals and business affected by the outage, revenues 

foregone are conservatively estimated in the hundreds of millions. 

b

 Actual costs are likely to be much higher since AT&T (as well as other companies) undertook extensive 

modernization programs to ensure increased network reliability. 

c

 Exact costs to the telecommunications industry are not yet determined, but include substantial administrative costs 

from new FCC regulations and investigations. For example, in 1992 the FCC imposed new regulations requiring all 

telecommunications companies to report outages (type and cause) over a certain threshold. 

d In general, public is better off as a result of the massive improvements and modernization initiatives undertaken by 

AT&T and other telecommunications providers.

OVERALL CONCLUSIONS 

Several common attributes were found among the events examined which have direct 

applicability to other infrastructures of the U.S. economy, including Banking and Finance. 
11 

Attributes of the Customers 

Determination of Responsibility 

When an event appears to be caused by an un-preventable act of God or nature (e.g., 

earthquakes, hurricanes, tornadoes, etc.,), it tends to bring out the best in Americans. 

However, when an event is perceived to be the consequence of someone’s action, 

America quickly demands restitution. 

Public Expectations 

Americans have grown to have strong expectations of entitlement to superior quality, 

availability and reliability of products and services. Failure in an infrastructure such as 

electric power is unacceptable; and is associated with third world nations. Years of 

steady availability and reliability in certain sectors like telecommunications and power 

distribution have caused Americans to believe that these sectors can not be affected by 

disasters. Consequently, failure in these sectors affects the public even more because they 

challenge the very foundation of our expectations, beliefs and values. 

Systemic Failure and the Willingness to Blame “the System” 

The initial event itself does not have to have significant losses to cause public outcry. 

Conversely, large losses do not necessarily result in action. Greatest indignation occurs 

when an event hits the “this-could-have-been-me” nerve of the American public. Once 

system failure is perceived by the public to be possible, political action is demanded and 

inevitably oversight and reform are mandated. 

Additionally, when Americans feel betrayed by “the system” they blame the most 

convenient constituent, regardless of which component is truly responsible. Because the 

general public usually has no or limited understanding of the relationships and processes 

beyond the point-of-sales contact, the public typically holds the point-of-sale provider 

liable. In addition, public response often holds the entire infrastructure/industry 

responsible as well—regardless of the existence of implied and/or explicit assumption of 

risk by consumers. 

Attributes of the Owners 

Outsourcing and the Pursuit of Economies of Scale

Among the most meaningful changes in industry today, technology is providing 

economies of scale in sectors heretofore relatively unaffected by cyber advancements. 

For example, data processing at rates unfathomable only decades ago has made 

outsourcing to mega-processors a necessity to compete in sectors such as 

telecommunications and the banking and finance industry. Consequently, concentration 

among a few major suppliers within a sector has grown, with increasingly extensive, 

intricate and interdependent relationships being the norm. 
12 

Back-Office Operations and Intra-Sector Dependencies 

Specialization has occurred within most sectors, with separate enterprises providing key 

functions to the overall infrastructure, e.g., the payments systems and funds transfer 

networks within the U.S. banking and finance sector. Not surprisingly, there is limited 

appreciation of, or visibility into, these providers, their processes, and the interrelationships and critical dependencies occurring beyond the point-of-sales contact. 

System of Systems and Inter-Sector Dependencies 

Like the ecology system, the dependencies among sectors and infrastructures are 

necessary, critical, and their delicate balance is often overlooked. While some are 

obvious, others are less visible but equally critical. For example, one of the largest 

“victims” of the AT&T network failure was the airline industry, which had to cease 

operations because control towers could not communicate with each other. In these 

instances, entire infrastructures are the customers of other infrastructures and house the 

same feelings of strong entitlement to availability and reliability of services as that of 

individual citizens. 

Laissez Faire Policy and Social Responsibility 

Additionally, many of these efficiency-driven vulnerabilities are enhanced in certain 

sectors by increased de-regulation. In some instances, it can be argued that private 

enterprises are overly concerned with profits and only marginally responsive to their 

societal responsibilities. 

Accelerated Business Cycle and the Pursuit of Profits 

As companies attempt to remain competitive in a world of increased globalization and 

shrinking product life cycles, the enticement to introduce new product/service offerings, 

or to implement cost savings measures, before fully considering the possible 

ramifications is often too great to resist. 

Increased Infrastructure Vulnerability 

The above shifts in the paradigms of business operations result in a net increased vulnerability to 

the overall industry/infrastructure. Ironically, this initial level of vulnerability (due to 

outsourcing, intra- and inter-sector dependencies, reduced regulatory oversight and increased 

competition), is exacerbated as individual participants invest to harden their individual walls and 

limit their individual liability, assuming that others are equally diligent. Consequently, this false 

sense of total security serves to increase the risk of systemic vulnerability. 

Increased Threat Capability 

Technology has not only increased the vulnerability of certain sectors, it has also unwittingly 

increased the capability of threats to those sectors. For example, the World Wide Web, the 

development of international standards and protocols, the de-classification of formerly sensitive 

information, and increased access through the Freedom of Information Act (FOIA) have all 

combined to equip individuals with intrusive, and potentially destructive, capabilities. The 
13 

ramifications of this power in the hands of a well-funded enterprise with an adverse mission is 

cause for concern which should be addressed. 

TOTAL ECONOMIC IMPACT 

In no instance—including those events explicitly excluded from detailed investigation—did the 

cost of prevention come close to approximating the cost of recovery. The cost of recovery (even 

without including the values for uncompensated losses) is orders of magnitude greater than 

rudimentary estimates of preventive measures. 

This analysis found that an event is extensive in whom it affects, costly in its recovery, and 

permanent in its repercussions. Although recovery might not be impossible, the cost to do so is 

so excessive—especially when including the permanent, secondary impacts, such as increased 

regulation and higher prices and taxes—that the event should be avoided as much as possible. 

Even in “recovery” success stories, the opportunity costs alone are sufficiently exorbitant to 

warrant avoidance. Opportunity costs are defined as the valuation of an activity based on the 

value of alternative opportunities that are foregone in undertaking the original activity. In other 

words, opportunity cost are all the things which are not done with the money spent on disaster 

recovery. 

But it is more important to recognize that most losses go uncompensated. Even though hundreds 

of millions of dollars are spent to compensate the hundreds of victims of an airplane tragedy, 

relatively little is provided as compensation to the millions that are affected by a power outage or 

loss of telephone service. Insurance does not reimburse for loss of time and that loss is 

permanent. Albeit of short duration, there is a distinct loss in quality of life. It is these relatively 

small, unremunerated losses that are suffered by many which tend to erode most at our overall 

standard of living. 

RECOMMENDATIONS 

The following recommendations are based primarily on the lessons learned in this analysis of 

“catastrophic events,” and secondarily on issues identified during preparation of the U.S. 

Banking and Finance Infrastructure Security Assessment. 

Determine Appropriate Standard(s) of Due Care 

Most companies, regardless of the infrastructure sector in which they’re housed, attempt to 

proactively manage risk to their enterprises. Unfortunately, they do not always provide sufficient 

or effective risk mitigating measures. Deficiencies in risk management strategies usually occur 

because of systemic undervaluation of: the enterprise’s vulnerability(s), potential threat(s), or the 

asset(s) at risk. 

Recommendation: Companies should determine appropriate standard(s) of due care and develop 

corresponding risk assessment and mitigation measures, including performance metrics to ensure 

that the standard(s) are appropriate and being achieved. 
14 

Government Regulated Standards of Due Care 

In instances where the assets are considered so valuable to our national fiber, governmental 

regulation has historically and correctly been implemented to ensure an appropriate standard of 

due care is employed to alleviate risk. 

Recommendation: The cost of recovery dictates that government interdiction and oversight be 

implemented a priori, and not after the asset is lost. 

Industry/Market Standards of Due Care 

Industry-wide or market-driven standards are almost always reactive. Because there is no 

sanctioned method to pass on information, only the participants directly affected by an incident 

learn from the experience, and no action to shore up vulnerabilities in other industries or 

infrastructure sectors takes place. 

Recommendation: If standards of due care are self-determined, there is an absolute requirement 

for effective communication of new/changing threats and heretofore unexamined vulnerabilities 

at the infrastructure level, not just to individual participants. 

Sharing Information on New/Changing Vulnerabilities and Threats 

The events examined in this study revealed that companies do not ignore risk, but rather they are 

unaware of the vulnerabilities of their enterprises. Obviously, lessons can, and should, be 

learned from successes and not just failures. 

Recommendation: Action should occur not only to make available but proactively disseminate to 

appropriate parties the “best of class” practices, procedures and technologies proven to minimize 

the risk and impact of catastrophic events. 

Enforce the Standards of Due Care with Behavior-Modifying Sanctions 

One aspect of many corporate risk mitigation strategies is to minimize the company’s legal 

exposure/liability. Negligence is typically determined relative to the standard of due care. But if 

there is no sanction resulting from negligent behavior, then setting standards of due care is 

useless. 

Recommendation: Regardless of method, standards of due care must also include sufficient 

sanctions levied on participants who do not follow the prescribed “rules” and put the entire 

industry or infrastructure at risk of a failure. Sanctions need to be significant enough to deter 

non-compliant behavior. 
15 

I. INTRODUCTION 

On the whole, the United States has been extremely fortunate considering the number of natural 

and growing number of physical, manmade, equipment and even cyber threats that face us each 

day. But certainly for some Americans, the unfortunate and even unthinkable has occurred. 

Forever etched in our national psyche are the images: the destruction and property loss caused by 

hurricanes, floods, and earthquakes; the Challenger explosion; and the World Trade Center and 

Oklahoma City bombings. These events, whether we have been direct participants or innocent 

bystanders watching the evening news, have had an emotional and economic impact on us and 

have brought about changes in our lives. 

In the wake of any disaster, charities begin their outreach; local, state and federal agencies 

provide emergency response, aid, investigation and recovery services. The owners of the 

affected product or service are thrown into the media “circus.” We watch as these business 

owners practice “spin control.” After a few days or weeks, the media fervor settles, and we as a 

nation, begin to move on, but the effects of a disaster do not end when the TV cameras go dim. 

I.1 OBJECTIVES 

The purpose of this report is to present an estimate of the full economic impact that a disaster has 

on an infrastructure sector5. This report examines not just the immediate losses in terms of 

dollars (as provided from recoupment and aid sources such as local and national charities; local, 

state and federal government agencies; insurance providers; and legal compensatory award fees 

and punitive damages), but also attempts to describe the “intangibles” (such as loss of public 

confidence) and the spill-over impacts (such as increased regulation and higher consumer prices) 

which leave a lasting imprint on the quality of life afforded Americans. By recognizing these 

post-event effects, this report examines the contention that “an ounce of prevention is worth a 

pound of cure.” 

This report employs inductive reasoning/logic to meet its objective. It uses specific empirical 

evidence from three recent actual events—the August 1996 Western power outage, the 1996 

ValuJet Flight 592 airplane crash, and AT&T’s 1-800 network service failure that affected most 

of the Eastern Seaboard in 1991—to present estimates of the full economic impact a disaster can 

have on an infrastructure sector, and the nation at large. This report also identifies the lessons 

learned by each of the three infrastructures (electrical power distribution, transportation, and 

telecommunications) which can, and arguably should, be applied to other infrastructure sectors, 

including U.S. Banking and Finance. 

I.2 REPORT STRUCTURE 

Following this Introduction, the approach for this economic impact study is described in Section 

II. In the following three sections, the study presents the individual disaster profiles for the 

selected events. In each of these three sections, descriptions of the events are presented, followed 

 

5

 In this study, infrastructure sectors include: Telecommunications; Electrical Power Distribution; Gas and Oil Storage and 

Distribution; Banking and Finance; Transportation; Water Supply Distribution; Emergency Services (including medical, police, 

fire, and rescue); and Continuity of Government. 
16 

by an examination of the immediate and underlying causes for the event. Then, the study 

attempts to summarize the losses for the customers, the owners, the industry, and the general 

public. In Section VI of this report, lessons learned and conclusions are presented. Section VII 

offers recommendations targeted to other infrastructure sectors.
17 

II. APPROACH 

To conduct this analysis, the research extended beyond the immediate event and explored the 

spill-over effects a disaster has on the customer, the owner, the industry, and the general public. 

By taking this approach, specific lessons learned from each event surfaced, and commonalities 

among the three formed the basis for the conclusions and recommendations presented herein. 

In the report that follows, immediate and spill-over effects of three disasters are examined. 

Recoupment and aid sources such as the local and national charities, local, state and federal 

government agencies, and insurance providers were researched to estimate the magnitude of 

reimbursement provided after these events. The cost impacts on others within the infrastructure 

and those in other infrastructures are also investigated in this analysis. Finally, through the 

recognition of “spill-over” and post-event effects, the intangible affects from the “loss in public 

confidence,” are discussed and presented. 

II.1 SELECTION OF EVENTS 

Multiple “disasters” were considered6

 and are referenced throughout this report to supplement 

the conclusions derived from the three primary events under analysis. These three events were 

selected as appropriate analogs to the U.S. Banking and Finance infrastructure because they were 

found to have attributes common to those identified in the U.S. Banking and Finance 

infrastructure. Specifically, the following were found to be characteristics of an event in the U.S. 

Banking and Finance infrastructure: 

Relative to the event

• The public perceives the event to have been preventable. 

• The owner of the affected product or service appears to be ill-prepared or nonresponsive to the event - regardless of who’s at fault. 

• The event warrants nationwide visibility by the media. 

• The event has initial and consequential repercussions of significant magnitude. 

Relative to the product/service

• The product/service is essential to a customer. 

• There are no or few immediate substitutes for the product/service. 

• Failure/disruption of the product/service is considered a breach of public trust. 

• The provision of the product/service is moving from a “private good” to a “public 

good.” 

 

6

 See Appendix A for a listing of other candidate events.
18 

Relative to the customers

• Customers have grown to have implicit expectations of entitlement to superior 

quality, availability and reliability. 

• Customers feel they are “held captive” to indistinguishable, bureaucratic, point-ofcontact owners. 

• Customers have no or limited understanding of relationships and processes of the 

infrastructure occurring beyond their point-of-contact owner. 

Relative to the owners

• Ownership of the product/service is typically a privately-owned vice a governmentowned enterprise. 

• Owners of the product/service experience increased government intervention over 

time and as their product/service moves from the private to the public realm. 

• Owners of the product/service have benefited from economies of scale - either 

historically or, more recently, through technology. 

• Owners have an increasing social responsibility. 

Relative to the industry

• The industry has become concentrated among a few major owners. 

• Extensive, intricate and interdependent relationships exist among participants in the 

industry and potentially within the infrastructure. 

• The industry has been identified as critical to the Nation’s well-being (and therefore, 

is considered by the Presidential Commission). 

The three actual events—the August 1996 power outages across the Western U.S., the 1996 

ValuJet Flight 592 airplane crash, and the September 1991 AT&T’s 1-800 network service 

failure affecting most of the Eastern Seaboard—were chosen as “benchmarks” for analysis in this 

study because they have the same or similar characteristics identified above for the U.S. Banking 

and Finance infrastructure. 

II.2 METHODOLOGY 

For each event, the consequences or economic impacts are: 

1. Allocated to event phase

• Primary 

• Secondary 

1. Attributed to affected participants 

• Losses to the customer 

• Losses to the owners 

• Losses to the industry 

• Losses to the public/quality of life 
19 

1. Quantified by compensation/recoupment sources and economic indicators

• Private sources, i.e., insurance, charities, stockholder reserves/profits, legal 

damages/awards, etc. 

• Federal, state and/or local governments 

• Passed to the public via product/service prices, taxes, quality of product/service, share 

price, etc. 

• Uncompensated 

As shown in Exhibit II-1, expanding consequences occur in the wake of a disaster. Response 

begins immediately in what can be characterized as the primary phase. Within this phase, the 

focus is primarily on the immediate losses suffered by the customers and the owner of the failed 

or impacted product/service (although the industry housing the disaster event and the general 

public might also experience some immediate effects). This primary phase might last weeks or 

even months depending on the nature of the disaster. These losses are generally measured by the 

compensation/recoupment provided by such sources as charities, local, state and federal 

government aid, insurance carriers, profits, legal damages/awards, etc. 

Event

On Owners

•Loss of assets

•Disrupted operations

•Decreased sales/

 revenues

•Investigation

•Increased PR

•Increased vigilance

•Legal fees &

 punitive damages

On Industry

•Decreased goodwill

•Increased insurance

•Increased audit/

 regulation

•Capital flight

On Public

•Rescue and inquiry/

 investigation

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Increased prices

•Deceased quality

•Increased taxes

•Bankruptcy of

 company

•Drop in share prices

Primary Phase Effects

Compensation Sources

•Charity

•FEMA (Federal govt)

•State & local govt

•Customers’ insurance

•Company’s insurance

•Legal awards

•Profits (stockholders)

On Customers

•Loss of hours -

 productive &

 leisure

•Loss of assets

Secondary Phase Spill-Over Effects

Exhibit II-1: A “Typical” Disaster Profile 

 
20 

Continuing to use the model drawn in Exhibit II-1, the repercussions from an event ripple like 

waves in a pond over time and can be felt years after the event occurs. These spill-over effects 

are part of a secondary phase that occurs in the wake of a disaster. This secondary phase tends to 

be measured in years, even decades. While all participants (i.e., the customers, owners, industry 

and public) are affected by the secondary phase, spill-over effects are generally absorbed into our 

economy and are observed in broad areas such as quality of life. For example, in the wake of two 

major airplane crashes in as many months, ValuJet Flight 592 and TWA Flight 800, family 

members of the victims of the Pan Am Flight 103 crash in 1988 were interviewed and asked to 

participate in investigative panels such as the White House Commission on Aviation Safety and 

Security, demonstrating how, even years later, there are long-term impacts that continue to occur 

for that disaster. 

As the empirical data is presented in the three specific event profiles selected for this study, it 

generally follows this same timeline, beginning at the event, moving quickly into the primary 

phase, and working out towards the secondary phase, where the spill over effects of a disaster 

such as greater regulation within an industry or infrastructure are assessed a value on the 

economy, and on the nation as a whole. 

II.3 SCOPE OF ANALYSIS AND SOURCES OF DATA 

This report is based exclusively on publicly available data and information provided from the 

media, government(s), and other open sources. The turn-around period of this study excludes 

personal interviews and the in-house generation of complex cost estimates. As provided above, 

the methodology focuses on collecting, examining and allocating publicly available cost data 

from compensation sources to the affected participants and impact phases. 

Putting a price tag on a disaster of any magnitude is difficult. For example, there is an 

understandable hesitation on the part of any owner to disclose to the public damaging data about 

the company’s operation failures and losses. Many owners, because of the regulatory 

environment under which they operate, must make this data available to agencies such as the 

Securities Exchange Commission (SEC), the Federal Aviation Administration (FAA) or the 

Nuclear Regulatory Commission (NRC). Still, this is not the same as directly presenting this 

data to the general public. Thus, some of the data presented in this study has been extrapolated 

and is clearly an estimate, not actual cost data. This study’s authors have been careful to note 

these distinctions so that it will be clear to the audience when actual data is being quoted and 

when data has been extrapolated. 

For all of these disasters, we will never know with certainty the bottom line costs. Dollars 

invested by affected owners and others within the industry in aggressive marketing campaigns 

certainly work to offset the potentially devastating effects a disaster, left unchecked, could have. 

As Exhibit II-1 tries to illustrate, as the waves from an event ripple across time, the larger the 

affected participant circle gets. Attempting to quantify the losses sustained or suffered in these 

outer circles becomes more and more difficult. For example, as a result of TWA airplane crash, 

airline consumers are required to check-in at the airport sooner, allowing time for the additional 

security measures that have been instituted as a consequence of this event. Quantifying the loss 
21 

in “productive time” for these travelers is a subjective determination which is hotly debated on 

both sides of the economic equation. 

Even more difficult to ascertain are the societal costs and yet for this type of analysis, they can 

not be overlooked. Thus, some of the data presented in this report is anecdotal, vice empirical 

and is employed to provide either support or to contradict contentions made. 
22 

III. THE WESTERN POWER OUTAGE 

As Americans we have come to rely on many things. When we board a plane, we expect to 

arrive at our destination safely. When we pick up the phone, we expect a dial tone and after 

dialing, we expect to be connected to the party we are trying to reach. And when we turn on a 

light switch, we expect lights to illuminate the room. Our entire economy and our daily lives 

have become completely reliant on electricity—to make our morning coffee, to open our garage 

door, to power our mobile phones and to run our computers. Because all infrastructure sectors of 

the U.S. economy rely on energy distribution and supply, availability and reliability are essential. 

Unlike other power sources such as oil or gasoline, electricity can not be stockpiled. Therefore, 

when power is disrupted, an immediate cessation of service occurs. 

III.1 DESCRIPTION OF THE EVENT 

During the early afternoon of August 10, 1996, in the area surrounding Portland, Oregon, high 

temperatures and high demand for electricity caused two transmission lines to sag and send arcs 

of electricity into the trees. This caused the lines to short-circuit. This in turn, caused a surge in 

electricity which, over the next hour, knocked out two additional transmission lines. A third line 

was forced out of service due to a circuit breaker failure after the second line outage occurred. 

While none of these line outages were deemed critical by Bonneville Power Administration 

(BPA) dispatchers, the cumulative impact resulted in a weaker system. BPA adjusted voltages, 

but did not reduce schedules. Two additional transmission lines and two circuit breakers were 

out of service for modifications and/or repairs. These out of service outages also contributed to 

the weakening of the system. 

Approximately 45 minutes later, another sagging line short-circuited. Five minutes later, two 

units at the McNary hydropower dam “sensed” system instability and automatically shut down. 

One minute later, voltage fluctuations shut down three of the four main connection lines between 

the Northwest and California. Power was knocked out for up to 16 hours in 10 western states, 

affecting 7.5 million customers. 

In addition to interrupting service on August 10, the outage resulted in the automatic shutdown of 

15 large thermal and nuclear generating units in California and the Southwest, keeping the entire 

region in a compromised condition for several days following the event. Protective relays, which 

can be likened to surge protectors for PCs, are built into power generating systems to sense 

“trouble” and automatically shut off the generators to prevent equipment damage. 

III.2 CAUSE OF THE EVENT 

Background 

The electric power industry is undergoing radical change. Just like the telecommunications 

industry before it, market forces such as competition, privatization, and deregulation are 

challenging the traditional attributes of the power industry, such as monopoly status, government 

ownership, and government regulation. Global competition, increasing customer demands, 
23 

capital liquidity, the relatively low price of natural gas, and environmental concerns are all 

driving forces that, when coupled with deregulation of the industry, are creating great change.7

New players are entering the power generation and delivery market, and existing utilities are 

being required to offer open access to their transmission systems. The functions of power 

generation, transmission, and marketing—which traditionally have been tightly integrated—are 

now being separated within utilities and, in some cases, even spun off into new companies. 

Competition, aging proprietary systems, and reductions in staff and operating margins are leading 

utilities to expand their use of information systems and to interconnect previously isolated 

networks. 

In July 1996, in an effort to complete the deregulation of the power industry, Congress enacted 

the Electric Consumers’ Power to Choose Act. The bill establishes federal mandates for all 

electric utilities to provide retail choice to all classes of customers by December 15, 2000. After 

retail choice in a state has been established, state commissions would be prohibited from 

regulating the rates for retail electricity service. Reasonable and nondiscriminatory access to 

local distribution facilities would be provided on an unbundled basis to any supplier seeking to 

provide retail electricity service. These mandated government actions will soon provide the 

consumers, generation and distribution firms, and power marketers open access to an unregulated 

electric power industry. 

The Western Systems Coordinating Council (WSCC), which is the electrical power distribution 

service provider for the affected region in the August 10 outage (encompassing a geographic area 

equivalent to over half the United States) is one of nine regional electric reliability councils in 

North America. There are 76 electric systems in the WSCC power grid, including Pacific Gas 

and Electric (PG&E), Sacramento Municipal Utility District, the Santa Clara and Palo Alto 

municipals, Southern California Edison and San Diego Gas and Electric. The WSCC power grid 

provides electric service to 59 million people in 14 western states, two Canadian provinces, and 

portions of one Mexican state. 

The western power grid is an intricate web of high-voltage transmission lines. Through careful 

planning and coordinated communications, the WSCC members are able to buy, sell and 

transport energy reliably, 24 hours a day. The system works something like this. In the summer, 

massive volumes of electricity are imported from the Pacific Northwest each day to California to 

meet increased demand for cooling. In the winter, the flow of power reverses, providing the 

Pacific Northwest with energy to warm the area’s colder climate. On a daily basis, system loads 

are forecast, generating plants and transmission availability checked, and buy-sell transactions 

are negotiated between those utilities that have excess power and those that need more power to 

meet customer’s demands. If plants go off line for any unanticipated reason, the load is picked 

up by “spinning reserves.” After peak hours are past, the system is brought down by a sequential 

removal of generators from the grid, maintaining a balance between demand and supply of power 

at all times. 

 

7

 Silverman, Lester, “Electric Power-The Next Generation,” McKinsey Quarterly (January 1, 1994).
24 

Elaborate safeguards have been built into the Western interconnected grid. In what the industry 

calls “islanding,” this technique is used as a safety net to prevent total blackouts, minimize the 

number of customers affected, and minimize the time to restore customer service. During the 

August 10 power outage, the islanded power plants were tripped to prevent equipment damage 

and loads were shed to help stabilize the system, thereby avoiding a complete blackout. 

Investigation by the WSCC 

The WSCC began an immediate investigation into what caused the power to go out on August 

10, 1996. The outage occurred during a period of record high temperatures and electric loads. 

This factor, combined with an abundant supply of water in the Northwest caused high transfers 

from and through the Northwest to the Southwest. These higher than normal transfers or flows, 

stressed the transmission system and reduced reliability margins. 

According to the WSCC investigation, line instability and overgrown vegetation were cited as 

causal factors in the August 10th outage. In their final report investigating the outage, the WSCC 

concluded that BPA was not in fact operating in accordance with Western’s minimum standards.8

 

According to E. James Macias, Vice President and General Manager of the Electric Transmission 

Business Unit of Pacific Gas and Electric (PG&E) Company in sworn testimony given on 

November 7, 1996 to the Congressional Committee on Resources Water and Power Resources 

Subcommittee, “The Western grid in the United States suffered its second major disturbance in 2 

months...the cause of both events was a lack of effective voltage management by exporting 

utilities in the regions. This lack of adequate voltage management caused a series of line and 

equipment failures to escalate into massive voltage collapse and grid instability in the 

Northwest.9” BPA was also faulted in the WSCC’s final report for failing to keep trees trimmed. 

According to BPA Administrator Randal Hardy, another factor was water: 

“This was the highest hydro year we had in 20 years. Normally, run-off 

ends around June 30th and hence you have lower loading in July and 

August, the peak load times in California. This year, the runoff went all the 

way through August, and that created some vulnerabilities that we had not 

fully understood and which we are now working to understand and 

correct.10” 

Additionally, the BPA operators did not fully understand that they were approaching voltage 

instability and were not aware that operating conditions were insecure. When interviewed after 

the event, the operators felt that they were within parameters and procedures defined for them. 

When each the 500 kV line outages occurred, they were not considered “critical” and therefore 

 

8

 National Information Infrastructure Risk Assessment: A Nation Information at Risk, prepared by the Reliability and 

Vulnerability Working Group, 29 February 1996.

9

 Macias, E. James, Vice President and General Manager of the Electric Transmission Business Unit of Pacific Gas and Electric 

Company in sworn testimony given on November 7, 1996 to the Congressional Committee on Resources Water and Power 

Resources Subcommittee, p. 51.

10 Hardy, Randal, in testimony given to Oversight Hearing before the Subcommittee on Water and Power Resources of the 

Committee on Resources, House of Representatives, 104th Congress, 2nd session on Issues and Recommendations Concerning 

the August 10, 1996, Bonneville/Western U.S. Power Outage, p. 10.
25 

the information about the outages was not shared with other companies. This lack of 

communication between and among the companies that make up the WSCC contributed to, if not 

caused the outages to occur. Each company viewed each outage as independent events, failing to 

recognize the intricacies that made them dependent links in a chain. Once the chain began to 

break, there was no way to stop it. 

III.3 TOTAL COST TO DATE OF THE OUTAGE 

Exhibit III-1 presents the cost and impact profile for the Western Power outage. Based on this 

study’s conservative estimates, the Western Power outage has cost several billion dollars to 

date—most of which remains uncompensated. Because of the relatively recent nature of these 

events, the long-term effects (or spill-over costs) of pending legislation and other industry related 

mandates on individual owners like BPA and proposals to strengthen the regulatory arm of this 

relatively self-regulated industry can not be accounted for in this total. 

Event

Power 

Outage

On Owners

•Disrupted operations

•Decreased sales/

 revenues

•Decreased product

 quality/reliability

•Investigation

•Increased PR

•Increased vigilance

On Industry

•Decreased goodwill

•Increased audit

•Re-regulation

•Capital flight to

 alternative providers

On Public

•Investigation

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased prices

•Drop in share prices

Primary Phase Effects

Compensation Sources

•Customers’ insurance

•Profits (stockholders)

•Uncompensated

On Customers

•Residential loss

 of productive

 & leisure hours

•Commercial loss

 of sales/revenues

•Spoilage losses Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

Aug. 10, 1996 ~$1-4 Ba >$100 Mb See belowc See belowd

Exhibit III- 1: The Western Power Outage Cost and Impact Profile 

a

 Estimates of uncompensated losses of residential and commercial productive and leisure hours 

b

 Net losses in revenues due to regeneration expenses, equipment damage and expenditures for responding to 

governmental investigations and hearings. 
26 

c

 Costs to date, while certain to be significant, are not yet available. To avoid double count costs to owners, other 

infrastructure costs would include the establishment and compliance of nation-wide reliability, coordination, and 

monitoring standards. 

d

 Public costs include changes in the business practices and cost structures of the nation’s electrical power distribution 

systems that are likely to be passed on as additional charges to customers.

The remaining portion of this section presents detailed descriptions of the impact the Western 

power outages had and the quantitative data supporting Exhibit III-1. 

III.3.1 Losses to the Customer 

Fortunately, in the case of the August 10, 1996 outage in the Western United States, there were 

no reports of deaths or major injuries. In fact, there are no reports by any of the major charity 

organizations like the American Red Cross or the Salvation Army that indicate that they 

mobilized during this incident. Still, this power outage was more than minor inconvenience for 

WSCC customers. In an emergency session of the California Public Utility Commission Hearing 

the outage was characterized as causing significant harm to the people of California.11 Randy 

Hardy, BPA’s Chief Executive Officer, characterized the outages as a real-time emergency in 

which their number one priority, once service was restored, was to prevent blackouts in 

California. “This is a matter of public health and human safety. California is expecting to see 

record temperatures for the next couple of days. They’ve lost two major generators that serve 

their area and they are calling on the Northwest for help.”12 Human health and safety can be 

threatened during a prolonged power outage. Fire departments, police and hospitals are all 

dependent upon a reliable supply of electricity to be able to respond to emergencies. 

During any power event, public safety personnel are often taxed. According to Capt. Dan Young 

of the Orange County Fire Department,13 there was an exponential increase in traffic accidents, 

tie-ups and delays due to traffic lights rendered inoperable. Hospitals and other critical users had 

to resort to their emergency back-up procedures and emergency power generation to keep critical 

service like life-support devices, operating. 

At San Francisco International Airport, more than 2,000 travelers were stranded Saturday night 

due to the August 10th outage.14 Many restaurants and retail shops and shopping malls had to 

close their doors and even Disneyland temporarily shut down some of its rides due to power 

surges. At one California 7-Eleven, owner Shams Makhami had to close his doors, and most of 

the store’s ice cream, milk and deli products were lost during the 4 hours the store was without 

electricity.15

 

11 Characterized by the Commissioner Conlon during the California Public Utility Commission Hearing on the August 10 

Disturbance, August 21, 1996.

12 “BPA, WSCC Take Steps to Bolster System Reliability,” Joint News Release: Bonneville Power Administration, Western 

Systems Coordinating Council, (PR 58 96), August 13, 1996.

13 Associated Press, “Western Power Outage Affects More Than 4 Million,” Durbin, Dee-Ann, 12 August 1996.

14 Ibid. 15 Ibid.
27 

As stated previously, 7.5 million customers were without power, some for as long as 16 hours. 

Table III-1 shows a breakdown, by region, or affected “island” of customers and the average 

restoration times for the August 10th outage. 

Table III-1 

Impact by Regional Island of the August 10, 1996 Power Outage 

The WSCC has not prepared a comprehensive economic study to estimate the total costs of this, 

or its previous outage that occurred just six week prior to the August 10th event. Still, cost 

estimates from outages of similar magnitude (e.g., the 1977 New York City outage, the 1996 

Delmarva outage, etc.,) provide reasonable formulas and models to follow. For example, on May 

14, 1996, a single substation suffered an outage which resulted in an 8-hour blackout affecting 

290,000 customer through southern Delaware and across the eastern shores of Maryland and 

Virginia. Michael Conte, an economist at Towson State University estimated the economic loss 

suffered by local and regional businesses to be as high as $30.8 million.16 The 25-hour New 

York City blackout that struck in 1977 cost an estimated $55.54 million in direct costs and over 

$290,000 million in indirect costs to local government, business, and private citizens.17

Using information available about the outage and following a model provided by BPA which 

measures economic impact as a function of cost per customer for each kilowatt per hour lost, 

Table III-2 presents the estimated customer cost, broken out by customer type (i.e., commercial, 

residential, or industrial). 

 

16 Humphrey, Theresa, “Power Outage Darkens Delmarva Peninsula,” The News-Times (May 15, 1996). 17 Office of Technology Assessment figures, as quoted in the National Information Infrastructure Risk Assessment: A Nation 

Information at Risk, prepared by the Reliability and Vulnerability Working Group, 29 February 1996.

Region Customers 

Affected 

(mil) 

Percent of 

Customer 

Affected 

Load Shed 

(mw) 

Generation 

Tripped 

(mw) 

Restoration 

time (hr) 

Alberta .19 3% 968 146 1 

Northwest .21 3% 2,099 5,689 4 

Southwest 4.23 56% 15,982 13,497 6 

No. California 2.86 38% 11,440 7,918 9 

Totals 7.49 100% 30,489 27,250 9 
28 

Table III-2 

Customer Cost by Sector18

Dr. Karl Stahklopf of Energy and Power Research Institute (EPRI) argues these figures 

underestimated the true economic impact because they do not account for: 

• Industrial equipment damage and mandatory costly procedures to purge electricity at 

the customer end; 

• Lost productivity; 

• Opportunity costs from lost sales; or 

• Costs to the public for maintaining order. 

Dr. Stahklopf’s estimates, accounting for these additional cost factors, put the costs to customers 

in the range of between $1—4 billion. This range was seemingly confirmed by testimony 

presented by PG&E. PG&E estimated that the indirect costs to its serving area, which accounted 

for two million affected customers during in the August 10th outage, could be roughly assessed 

at $400 million or ten times PG&E’s direct costs.19

Still, there is very little compensation (e.g., rebates) to the consumer when a service such as 

power goes out. When recoupment sources such as the insurance industry were contacted for this 

study, little data was made available. Certainly some consumers placed claims for lost 

equipment such as microwaves, TVs, VCRs, telephones, air conditioners etc., that were “fried” 

during the outage. However, many more did not because of high deductibles on their 

homeowner’s policy. 

III.3.2 Losses to the Owner(s) 

Impact to BPA 

BPA is the largest agency to market power from federal dams in the Columbia River basin. As a 

power wholesaler in the WSCC region, it has an annual budget of approximately $2.5 billion and 

 

18 Obtained from conversations with Bill Mittlestaff, Engineer, BPA. The BPA model assumes a 50% residential, 30% 

commercial, and 20% market breakout.

19 As given by E. James Macias, Vice President and General Manager, Electric Transmission Business Unit, Pacific Gas & 

Electric Company, in sworn testimony given on November 7, 1996 to the Congressional Committee on Resources, Water and 

Power Resources Subcommittee.

Customer 

Type 

Customers 

Affected 

(mil) 

Load Not 

Served (mil) 

Average Cost to 

Customer Per 

Hour (kw/h) 

Customer Cost 

($ mil) 

Commercial 3.74 12.35 $15.82 $ 195.4 

Residential 2.25 20.58 $1.42 $ 29.2 

Industrial 1.50 8.23 $23.57 $ 194.0 

Total 7.49 41.16 $13.60 $ 418.6
29 

has 3,200 employees. BPA owns and operates approximately 80 percent of the high-voltage grid, 

including some 15,000 miles of transmission lines in the Northwest. As a result of the August 

10, 1996 outage, BPA, in voluntarily cooperation with the WSCC, agreed to take the following 

actions20: 

• Remove all trees involved in the August 10 disturbance; 

• Implement a more aggressive effort to remove additional trees that pose a potential 

threat to BPA’s primary high voltage transmission lines; 

• Work with the National Marine Fisheries Service and the Corps of Engineers to 

temporarily waive fish spill requirements fish operations at the Dalles Dam; 

• Report all outages of 500,000 volt transmission lines and other key facilities on its 

system; 

• Conduct a comprehensive study to assess voltage support capability of its system; 

• Initiate a review with the U.S. Corps of Engineers to understand the loss of the 

McNary generators and to prevent their loss in the event of a future disturbance; and 

• Work a request from the Secretary of Energy to all power marketing agencies to 

review reliability issues. 

To help offset the fact that two units at PG&E’s Diablo Canyon Nuclear Facility continued to be 

out of service in the days following the outage, BPA, with the concurrence of the U.S. Corps of 

Engineers and the National Marine Fisheries Service, curtailed spill and allow additional 

generation to be sent to California. Spill refers to a practice used at dams to meet the Endangered 

Species Act requirements. Rather than running fish-laden water through turbine generators to 

produce electricity, the water flows through spillways at the dam. Even without spill, about 25 

percent of migrating juvenile fish would travel through sluiceways avoiding the turbines. Of 

those fish that pass through the turbines, about 15 percent are killed. At the time this event 

occurred, the National Marine Fisheries Service estimated that 107,000 juvenile fall chinook 

salmon would pass the dam each day during the three-day emergency period. The overwhelming 

majority of these fish are hatchery-produced salmon, with only about 20 wild fish listed under the 

Endangered Species Act passing through the dam on a daily basis. Based on these estimates, the 

Fisheries Service estimated that in the worst case scenario, a total of four to six listed fish may 

have been killed due to the spill cutback.21 

This controversial stand cost BPA much in public ill-will. Especially in the Northwest, advocates 

of the Endangered Species Act widely portrayed the action as killing endangered fish for powerhungry Californians and stirred a political controversy that lasted over a week. 

In 1995, BPA estimated that the spill program resulted in lost revenues averaging $38.3 million 

per year. During the declared emergency period (August 12-15), BPA increased generation at the 

 

20 “BPA, WSCC Take Steps to Bolster System Reliability,” Joint News Release: Bonneville Power Administration, Western 

Systems Coordinating Council, (PR 58 96), August 13, 1996.

21 “Northwest Helps California Deal With Emergency,” Bonneville Power Administration, (PR 59 96), August 14, 1996.
30 

Dalles dam approximately 60,600 megawatts or 361 average megawatts for the 7 day period. At 

the prevailing rates for surplus energy during that period, this amount of energy resulted in about 

$1.0 million in sales. Following the emergency, BPA provided spill for an additional four days 

resulting in an offsetting loss in sales.22

BPA Administrator Randal Hardy provided some insight as to the cost to BPA for implementing 

just a few of these actions, which are summarized in Table III-3.23 For nearly two weeks after the 

August 10th outage, BPA was still operating at 67% of its maximum capability, below the limit 

set by WSCC to ensure that no further outages would be suffered at the hand of BPA.24 This 

reduced operating capability was estimated to cost BPA over $1 million in lost revenues. 

Table III-3 

BPA’s Cost to Implement Required Actions 

Required Action Steps Taken or To be Taken Estimated Cost 

Tree Trimming • Immediate and system-wide 

check of vegetation on all 

critical lines (~2,000 miles) 

• Adoption of a more aggressive 

tree trimming program and 

resumption of selective use of 

herbicide and right-of-way 

management control 

$ 0.25 million 

$ 1.5 million additional cost in FY97 

Reduce Capacity • Cut operations to 67% of 

capacity 

$ > 1.0 million 

Curtail Fish Spill • Additional generation of power 

and resulting sale to PG&E 

• Additional 4 days of spill after 

the declared emergency period 

was over 

($1.0 million) in sales revenue 

$1.0 million 

Voltage Support Review • Add additional system reactive 

capability on the Bonneville 

system 

$ 10-50 million in new costs 

 

22 Submitted data presented in the Oversight Hearing before the Subcommittee on Water and Power Resources of the Committee 

on Resources, House of Representatives, 104th Congress, 2nd session on Issues and Recommendations Concerning the August 

10, 1996, Bonneville/Western U.S. Power Outage, p. 25.

23 Hardy, Randal, in testimony given to Oversight Hearing before the Subcommittee on Water and Power Resources of the 

Committee on Resources, House of Representatives, 104th Congress, 2nd session on Issues and Recommendations Concerning 

the August 10, 1996, Bonneville/Western U.S. Power Outage, pp. 10-11. 

24 Brazil, Eric, “Utilities Dissect Recent Outage: Hostilities Evident Between PG&E, Federal Agency at Hearing in San 

Francisco,” The San Francisco Examiner, August 22, 1996.
31 

Impact to Other Power Companies 

PG&E estimated that the indirect costs to its serving area, which accounted for two million 

affected customers during in the 10 August outage, could be roughly assessed at $400 million or 

ten times PG&E’s direct costs.25 Most of PG&E costs were related to the Diablo Canyon 

Nuclear facility being down for several days after the outage. Company representatives 

estimated that it cost PG&E an additional $250,000 a day in energy management cost to purchase 

energy to make up the delta caused by Diablo being down. Even when PG&E brought Diablo 

Canyon back on line, they agreed to operate at 67% capacity, which cost them an additional 

$100,000 a day.26

In addition to the actions described earlier taken by BPA (whose actions and operations were 

found responsible for the August 10, 1996 outage), the WSCC required that: 

• Power flows on the Pacific AC Intertie be limited to 75 % of maximum capacity 

pending further study and review by the WSCC; and 

• All its members review their tree trimming programs and report any changes that have 

been or will be implemented. 

Further, the WSCC recommended that all utilities review their transmission system’s ability to 

maintain appropriate system voltage levels during system disturbances. 

While most utility companies involved in this outage lost revenues, one utility, San Diego Power 

and Electric actually reporting an off-setting gain by selling over 750 megawatts of capacity off 

system to PG&E.27 Still, the majority of power owners involved in this outage lost revenues as 

summarized in Table III-4. 

Table III-4 

Estimated Lost Utility Company Revenue (by Region) 

 

25 Macias, E. James, Vice President and General Manager, Electric Transmission Business Unit, Pacific Gas & Electric 

Company, in sworn testimony given on November 7, 1996 to the Congressional Committee on Resources, Water and Power 

Resources Subcommittee.

26 Ibid., p. 178. 27 Mr. Guiles, from San Diego Gas and Electric, in sworn testimony before the California Public Utility Commission hearing, 

August 25, 1996. 

Region/Island Affected Load Not 

Served per 

kw/hr 

(millions) 

Average revenue 

per kw/h28

Resellers’ Lost Revenue 

($) 

Alberta .42 n/a n/a

Northwest 1.39 4.4 cents $60,793

Southwest 33.30 6.2 cents $2,066,667

Northern California 5.80 10.0 cents $579,666

Total 40.91 8.3 cents $2,707,126

(exc. Alberta)
32 

III.4 LOSSES TO THE INDUSTRY 

America’s electric power industry has annual revenues of $185 billion and is larger than the 

automobile, computer or semiconductor industries.29 In what one industry representative called 

“a great wake-up call to put first things first,”30 the 1996 Western Power outages both hurt and 

helped this largely self-regulated industry. 

Each time a region suffers a major outage, such as occurred in the Northeast in 1965 or in New 

York City in 1977, the result tends to be that the Government becomes concerned about the 

reliability of the interconnected systems within the U.S. For example, shortly after the Northeast 

blackout in 1965, the Federal Power Commission attempted to get legislation passed to give 

federal regulators a much stronger role in enforcing reliability, but this legislation did not pass. 

Instead, the industry, in voluntarily cooperation with the Government, formed nine regional 

councils and the North American Electric Reliability Council. Especially in the WSCC operating 

arena, the power distribution grid relies on robust interconnected transmission systems to save 

costs through increased efficiencies. However, these interdependencies also mean that when one 

or more participants fail to maintain their end of the reliability bargain, the burden is borne by 

electric consumers and industry resellers throughout the region. 

Membership, even today, is not mandatory and the reliability councils such as the WSCC, do not 

have the authority to sanction members for failures that cause outages. However, in the face of 

future changes within the industry, almost all share the view that voluntary compliance will no 

longer be adequate. In fact, throughout the testimony given November 7, 1996, industry leaders 

consistently recommended:31

• Mandatory compliance with established standards, policies and procedures; 

• Mandatory membership in regional reliability councils and the NERC; and 

• Expanded compliance monitoring, with appropriate incentives, sanctions, or fines. 

As a result of the major outage(s) that struck the Western U.S. in 1996, the industry has begun to 

identify and implement strategies to minimize the potential for more severe outages. 

Additionally, the cost associated with standardizing the information technology (IT) systems and 

data is being researched as a viable method to ensure communications and better modeling and 

simulation across these independently owned and operated utilities. 

 

28 Average revenue per kw/h is calculated by the Energy Information Agency, Department of Energy. To derive the average 

revenue, the operating revenue reported by the electric utility is used. Utility operating revenues cover—among other costs of 

service—State and federal income taxes and taxes other than income taxes paid by the utility. EIA, Electric Power Annual 1995, 

Energy Information Agency, Vol. 1, Chapter 5.

29 Beck, Bill, “Electric Utility Industry Faces Future Challenges,” Area Development Online, Sites and Facility Planning, Vol. 

VII, February, 1996.

30 Jennings, Renz D, Chairman, Arizona Corporation Commission, in sworn testimony given on November 7, 1996 to the 

Congressional Committee on Resources Water and Power Resources Subcommittee.

31 Congressional Committee on Resources Water and Power Resources Subcommittee, November 7, 1996.
33 

III.5 LOSSES TO THE PUBLIC 

At this early juncture, it is difficult to assess the public losses. The data presented in the previous 

sections does hint that this outage will not be without consequences to the public. Based on the 

large number of findings and recommendations in the WSCC Final Report,32 utility companies 

such as BPA will see an increase in operating costs which eventually will get passed on to 

customers in the form of rate increases. 

Stockholders in companies such as PG&E are seeing smaller dividends. While PG&E and other 

utility companies have a host of reasons for lowering stock dividends, including new legislation 

that marks lower earnings and greater pressure from the competition,33 part of the reason has to 

be the additional cost of implementing all of the recommendations that resulted from the August 

10 outage and investigation. 

Still, because the Pacific Northwest/Southwest Intertie takes advantage of seasonal diversities 

between the Northwest and the Southwest to maximize the economic benefits for both regions, it 

is estimated that it has saved California consumers $1 million a day for the past 30 years. The 

Intertie is also attributed with significantly reducing pollution, particularly in the Los Angeles 

basin.34

Consumers, once able to make a choice about the utility companies they buy from, may choose 

those with environmentally friendly policies and procedures, versus lowest cost. Time will only 

tell, but the long-term impact to BPA for choosing to curtail fish spill operations may be far 

greater than the four to six wild fish that perished in the days following the August 10, 1996 

outage. 

Media Handling 

The Western outages received intense media and governmental scrutiny. The industry at large 

suffered from the lack of coordinated communications among the affected utilities. For 

reporters, there was no central place to contact for information about the outage that was spread 

across so many states. Because the local utilities did not know the cause, speculation grew in the 

media and in other communications networks, such as the Internet. When a clearly articulated 

reason is not given, the door is opened wide for “conspiracy theorist” and others to raise doubts 

and impact public confidence in the service provider.35 The complexity of the integrated network 

worked against the industry’s participants in this time of crisis. At one point, there was 

speculation that fires caused the outage, so official had to later disclaim this as not being a 

contributing factor to the outage. 

 

32 WSCC Final System Disturbance Report, August 10, 1996.

33 “PG&E Lowers Common Stock Dividend, Reports Third Quarter Earnings,” PG&E News Release, October 16, 1996.

34 Hardy, Randal, in testimony given to Oversight Hearing before the Subcommittee on Water and Power Resources of the 

Committee on Resources, House of Representatives, 104th Congress, 2nd session on Issues and Recommendations Concerning 

the August 10, 1996, Bonneville/Western U.S. Power Outage, p. 9.

35 Cauley, Gerry and Stahlkopf, Karl, “Technical Issues Raised by the Western System Outages of July 2 and August 10, 1996, 

EPRI
34 

In the wake of the outage, it also became apparent that there was no set of prescribed or de facto 

data standards. This lack of standardization made the job of investigators even more 

cumbersome as they attempted to gather, assimilate, and coordinate all of the event data that was 

recorded. 
35 

IV. VALUJET FLIGHT 592 CRASH 

Perhaps no event can make us pause, take stock, and question, are we doing enough to ensure 

safety like a plane crash. Unfortunately, in 1996, this question was asked more than once, and 

the answer in the wake of the ValuJet crash, was no. 

IV.1 DESCRIPTION OF THE EVENT 

On May 11, 1996, Flight 592, a ValuJet DC-9, crashed into the Florida everglades shortly after 

takeoff from Miami International Airport. All 110 passengers and crew on board perished. 

According to Jim Hall, Chairman of the National Transportation Safety Board (NTSB), “about 5 

minutes after takeoff, the crew of Flight 592 decided to return to Miami after hearing a noise and 

reporting smoke in the cabin to air traffic controllers.36” The plane plunged nose first into the 

Everglades, creating an enormous crater. 

IV.2 CAUSE OF THE EVENT 

Background 

Just like the other industries profiled in this study, the completely regulated airline industry 

underwent great change as it was deregulated over the past two decades. When airlines were 

regulated, flying was cheaper because the airlines were guaranteed a stable profit—profits they 

could roll over and use to invest in newer generation aircraft and technology. In the now 

deregulated marketplace, profits are maximized through cost-cutting measures while 

deregulation was not intended to adversely affect safety or training, pressures to be competitive 

in this marketplace have placed a strain on these areas. 

The Department of Transportation (DOT), the National Transportation Safety Board (NTSB) and 

the Federal Aviation Administration (FAA) all provide an important role in ensuring safety and 

promoting air travel. The NTSB makes safety recommendations to the FAA as a result of its 

investigations; however, the FAA is not mandated to accept or implement any of these 

recommendations. This flaw in the system often puts the FAA in a difficult position, promoting 

the airlines use (i.e., helping to keep consumer prices low) while attempting to ensure safety. 

Too often, critics state, the FAA takes the side of the airlines, and does not require safety 

measures that could save lives. Notably, this includes the FAA’s rejection of the NTSB’s 1988 

recommendation to install fire detectors and fire suppression systems in cargo holds which would 

have likely averted the ValuJet crash. 

ValuJet burst onto the public scene in 1993, offering low-fare, no-frills, short-haul passenger air 

service. At the time of the crash, its stock had increased sixfold and ValuJet had established itself 

 

36 Testimony of Jim Hall, Chairman National Transportation Safety Board, before the Committee on Transportation and 

Infrastructure, Subcommittee on Aviation, House of Representatives, Regarding Issues Raised by the Crash of ValuJet Flight 

592, June 25, 1996.
36 

as the most profitable airline in the U.S.37 ValuJet was able to be profitable, due mainly to their 

simple operation strategy. 

New Economic Model 

ValuJet’s simple operating strategy was based on the following elements:38

• Low cost structure, including low-cost aircraft acquisition, selective outsourcing of 

maintenance and training; generally a non-union workforce with a flexible wage 

structure for salaried employees based upon Company profitability and performance; 

and utilization of proprietary technology, like its customer-direct ticketless reservation 

system, to minimize operating and administrative costs. 

• Labor advantage, providing incentives to relatively low base waged employees, 

including bonuses and stock options, tied to company performance and profits. 

• Targeted fleet acquisition of low cost and complementary aircraft, which provided 

commonality of parts and training. 

• Simplified products and distribution, of single class, no-frills, non-refundable 

ticketless service that reduced administrative costs, provided real time performance 

data, and provided a substantial database containing customer information. 

Additionally, the promotion of its 1-800 line for direct reservations, eliminated the 

cost of participating in computerized reservation systems and the Airline Reporting 

Corporation. 

• Low fare structure, targeted at leisure and cost conscious business travelers who 

might otherwise use ground transportation and walk-up business, avoiding direct 

competition with existing carriers. 

By following this simple operating strategy, ValuJet had been able to amass large profits, but 

industry analysts warned that the cost of these profits might be safety—and unfortunately, they 

were right. 

Causes of the Crash 

According to what investigators were able to determine, the forward cargo hold of ValuJet Flight 

592 was packed with over 100 oxygen generators. Although labeled empty on the shipping 

documents, at least some of the canisters were not, and none were equipped with safety caps. 

SabreTech Inc., one of ValuJet’s maintenance contractors, admitted that two of its employees had 

failed to attach safety caps for shipping and falsified paperwork indicating that the shipping caps 

had been attach in place. 

In addition to the physical cause of the accident, there were many underlying forces that 

contributed to this accident. As alluded to earlier, not implementing the NTSB’s 1988 

recommendation to install fire detection equipment is only part of the story. While outsourcing 

 

37 Frank, Allen Dodds, “Safety Issues May Hurt No-Frills Airlines-Discount Carriers Have to Prove their Reliability to Continue 

Profits,” CNN, May 13, 1996.

38 ValuJet Prospectus, filed with the Securities and Exchange Commission, October 12, 1996.
37 

in and of itself is not unsafe, airline safety requires strong communications and accountability 

among all groups responsible for the various aspects of safety. Coordinated communications are 

often difficult to achieve within a single organization, and can be nearly impossible across 

disparate groups of contractors, especially if no one central figure is charged with integration. It 

was clear during the post-crash investigations that critical communication was lacking. 

Criticism of the FAA’s role in being the accountability arm of this equation has been on the rise 

since 1993. Former Inspector General Mary Schiavo held a meeting with the FAA in February 

1996 to address critical safety issues with ValuJet. At the time of the accident, ValuJet’s 

accident record was 14 times higher than American or United airlines.39

Today’s low fare airlines compete by offering discounted fares. However, safety is not cheap and 

evidence is growing that the pressures of competition might be affecting even the regulated 

portions of this industry—safety and training. ValuJet employed a fleet of older aircraft 

(averaging 26 years) versus the industry’s standard of 15 years. As pressures to compete 

continue, even the established airlines like Northwest, TWA, and USAirways are squeezing more 

years of service out their fleets. 

Airline Management and Corporate Culture 

ValuJet’s corporate culture has been likened to that at NASA, prior to the launch of the 

Challenger. There was tremendous pressure to “tow the company line.” Bad news of any kind 

could have had a disastrous affect on the company’s astounding financial performance by making 

market analysts worried. Because ValuJet rewarded its employees with bonuses and incentives 

based on profits and company performance, there was little tolerance for dissent. And with 

profits so high, the costs associated with safety were sacrificed. Flight attendants were hired 

through temp agencies; hiring was done by outsiders, and maintenance was outsourced. Even 

with the FAA raising concerns about its safety record prior to the May 11 accident, ValuJet’s 

overwhelming success as a start-up, low-fare airline made all involved slow to act. 

Total Cost to Date of the Crash 

Exhibit III-1 presents the cost and impact profile for the ValuJet crash. Based on this study’s 

conservative estimates, the ValuJet crash has cost over $2 billion to date. Because of the 

relatively recent nature of this event, the long-term effects (or spill-over costs) of pending 

litigation and other industry-related mandates on ValuJet, and the airline industry as a whole, the 

total cost of this plane crash can not be, at this time, accurately determined. 

 

39 Fumento, Michael, “Frederico Peen: The Teflon Cabinet Official,” February 19, 1997.
38 

Event

Airplane 

Crash

On Owners

•Loss of aircraft

•Disrupted operations

•Increased PR

•Increased vigilance

•Decreased sales/

 revenues

•Legal fees &

 punitive damages

On Industry

•Decreased goodwill

•Increased insurance

•Increased regulation

•Capital flight to

 alternative carriers

On Public

•Rescue & inquiry

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased fares

•Increased taxes

•Drop in share prices/

 bankruptcy

Primary Phase Effects

Compensation Sources

•Charity

•FEMA (Federal govt)

•State & local govt

•Customers’ insurance

•Company’s insurance

•Legal awards

•Profits (stockholders)

On Customers

•Loss of life -

 productive &

 leisure hours

•Loss of cargo

•Disruption in

 connecting flights Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

Flight 592 Crash ~$220-550Ma >$550Mb >$350Mc >$400Md

a

 Losses to ValuJet include $400M for the aircraft, plus annual lost revenues of $150M. 

b

 In 1988 the FAA estimated that legislation requiring smoke detectors to be installed in airplane cargo holds would 

cost $350M. Although not yet enacted, similar legislation is likely to occur from the ValuJet incident. The total 

dollar amount will depend upon the extent to which new and/or more stringently enforced regulation are absorbed or 

passed on to customers. 

c

 Public costs include both increases in fares (i.e., those directly passed on to the public) or increased in taxes (i.e., 

those costs subsidized by government). In 1996 Congress appropriated over $400M for security-related 

enhancements, including explosive detection technology, which is likely the tip of the iceberg. 

Exhibit IV-1: Airline Crash Disaster Profile 

IV.3 LOSSES TO THE CUSTOMER 

One hundred and ten people perished on May 11, 1996 in the ValuJet Flight 592 crash. Putting a 

value on these lives is difficult but there are formulas that the insurance industry has applied. To 

date, this has not yet occurred as litigation regarding the crash is still pending. How much 

ValuJet finally pays out in settlement costs will be determined by the ages and the occupations of 

each of the passengers who died, expert say. For example, the family of the San Diego Charger 
39 

running back who was onboard Flight 592 could be paid tens of millions of dollars based on his 

potential earnings. Every airline is required to carry liability insurance of at least $600 million 

per event—ValuJet’s liability coverage was $750 million. Most individual claims will be settled 

for between $2-5 million, making the range $220-550 million in compensation to family 

members. 

Other customers who held reservations with ValuJet had to make alternative arrangements with 

other airlines. While ValuJet did rebate these customers, those that went to alternative airlines 

had to pay the delta between ValuJet’s average ticket price of only $72.75 and walk-up and last 

minute fares that could be in the range of $150-$1500 per passenger, per ticket. 

IV.4 LOSSES TO THE OWNER 

Stockholders saw their profits dwindle. In the period April-June 1995, profits were $16.9 

million, or 28 cents a share, compared to the same period in 1996, where stocks were valued at 

10 cents. On May 18, 1996, ValuJet was the most actively traded issue on the Nasdaq market, 

with more than 23 million shares traded, a 10 fold increase in volume.40 By May 21, ValuJet 

stock had lost 39 percent drop from its $17.88 price on May 10, 1996, one day before the crash.41

ValuJet, since its first public stock offering in 1994 had increased a remarkable 784 percent in its 

first 16 months, making it the most successful start-up, low fair airline of all time.42 In 1995 

alone, ValuJet saw its profits triple to $68 million while their revenues soared to $368 million. 

By March 31, 1996, ValuJet was operating 47 aircraft and providing 286 daily flights.43 But on 

June 30, 1996, after the fatal crash on May 11th and a suspension of service order on June 17, 

1996, the economic demise had begun to occur. (See Table IV-1.) The carrier had $207 million 

cash-on-hand, $185 million in working capital, a current assets to current liability ratio of 2.7 to 

1, total assets of $521.5 million, and retained earnings and stockholders’ equity of $88.6 million 

and $165.4 million, respectively.44 ValuJet paid the FAA $2 million to compensate for the costs 

of the special inspections conducted. To reduce costs during this period of suspension, ValuJet 

furloughed more than 90 percent of its personnel (Approximately 3,600 of 4,000 employees). 

While the FAA approved resumption of service by September 30, 1996, the losses suffered by 

ValuJet were significant. 

Table IV-1 

ValuJet’s Economic Performance Changes Drastically After the Crash 

Period ending 

Date 

Operating Income 

(millions) 

Net Income in 

millions

Revenues in 

millions

31 Dec 1995 $ 107.7 $ 67.7 $ 367.7

30 June 1996 $ (8.7) $ 1.1 $ 191.0

 

40 Pilgrim, Kitty, “ValuJet Shares Plunge-Carrier Works to Stave Off Bankruptcy,” CNN, June 18, 1996.

41 “ValuJet Co-Founder Sells 1.5 Million Shares, CNN, May 21, 1996.

42 Namie, Gary, “Lessons Form the ValuJet Crash,” 1996.

43 Data found in the Financial Position section of FAA filing order 96-8-45.

44 Ibid.
40 

Table IV-2 illustrates additional data that supports the economic ramifications associated with 

the May 11, 1996 crash. According to the consolidated unaudited statement of operations filed 

with the Securities and Exchange Commission for the period ending September 30, 1996, 

ValuJet reported the following:45

Table IV-2 

ValuJet’s Reporting Earning/Losses as of September 30, 1996 

Three months 

ending 

9/30/1995 

Three months 

ending 

9/30/1996 

Delta 

Total Operating Revenues $ 109,295,882 $ 310,919 $ 

(108,984,963)

Total Operating Expenses $ 72,624,306 $ 30,257,322 $ (42,366,984)

Total Other Expenses (income) net $ 654,275 $ 4,923,421 $ 4,269,146

Net Income (loss) $ 22,661,139 $ (21,944,824) $ (44,605,963)

Net Income (loss) per share $ 0.38 $ (0.40) $(0.78)

According to ValuJet, other effects of the accident included: 

• ValuJet sold off or leased a large portion of its fleet to reduce operating expenses; 

• ValuJet had to refund fares paid by customers affected by the airline’s shutdown and 

those whom opted for other travel plans; 

• ValuJet laid-off or furloughed most of its employees and could not guarantee future 

employment because of the its uncertainty about reestablishing previous service 

levels; 

• ValuJet was unable to meet certain financial covenants under certain of the 

Company’s secured debts; 

• The expansion of ValuJet’s operations will be subject to FAA and Department of 

Transportation approval for an indefinite period of time; and 

• ValuJet’s inability to predict how the accident would affect load factors and yield; 

For the period ending December 31, 1996, ValuJet’s flight operations expenses were higher, due 

to the extended period of time that the Company’s operations were suspended, additional training 

costs incurred at the restart, and changes to the Company’s compensation structure to reduce the 

percentage of compensation represented by bonuses. Flight attendants salary levels were 

adjusted upward and the regular quarterly bonus portion of their compensations was eliminated. 

The cost of hull insurance also increased substantially on October 1, 1996. Additionally, the 

airlines maintenance costs were higher, again due to the suspension of operations. These cost 

included storage fees for aircraft not being utilized in the suspension period. Advertising cost 

 

45 Form 10-Q for ValuJet, Inc., filed on 1996-11-14, Securities and Exchange Commission.
41 

were also higher, attributed to the resumption of operations being spread over a reduced revenue 

base caused by lower service levels and load factors. ValuJet placed a value related to the 

shutdown and other nonrecurring expenses at $67,994,000. 

The DC-9 lost in the Everglades was insured for $4 million, more than its book value. In 

addition, ValuJet liability insurance for an accident is $750 million, which is anticipated to be 

enough to cover all claims from the accident, although at this time, it is impossible to say for 

certain. In addition to the claims brought forth by victims families, other lawsuits against 

ValuJet are pending, including some brought against the company by shareholders, who claimed 

to be misled by ValuJet. 

While every airline crash investigation has its own unique characteristics, the ValuJet crash was 

followed by an unprecedented month-long recovery effort to locate victims and aircraft parts. 

The NTSB investigation was complicated by the extremely hot temperatures and the fragile 

environment of the Everglades. According to the NTSB, the ValuJet investigation was the most 

challenging on scene investigation in its history. NTSB spokespeople had to convey the 

destruction of the impact, the remoteness of the site, and the difficulty of the recovery to family 

members.46 Highlighting the need for a single source of data at such a highly emotional time for 

family’s, Congress passed the Aviation Family Disaster Act of 1996 giving the NTSB the 

responsibility for aiding families of aircraft accident victims and coordinating the federal 

response to major domestic aviation accidents. 

The FAA, which stepped up its investigations of the airline in the wake of the May 11 tragedy, 

listed 34 different problems found with the carrier, including work signed off but not performed 

and safety problems discovered but not fixed. That led the FAA to allege 14 specific violations 

related to inspection, maintenance and recordkeeping. These finding caused the FAA to shut 

down ValuJet. 

IV.5 LOSSES TO THE INDUSTRY 

Fatal accidents in commercial aviation in the US is less than .3 per million departures. “The 

infrequency of commercial aviation accidents has complicated the response to such disasters. 

For example, when TWA Flight 800 crashed on July 17, 1996, it had been over twenty years 

since that airline’s last fatal accident. Most crashes overwhelm state and local response teams, 

and take a tremendous toll on airline employees, who must immediately begin addressing the 

concerns of family members at the same time that they are coping with the loss of their own 

colleagues.”47 The ValuJet and the TWA crashes forced the industry to look carefully at their 

media relations and their ability to respond compassionately to distressed consumers. 

While ValuJet’s stock values plummet, other major carriers stock performed better, indicating 

that the public’s faith was being placed in the more established airlines with strong safety 

records. Yet, much of these profits had to be rolled over into stepped up marketing campaigns to 

 

46 Testimony of Jim Hall, Chairman National Transportation Safety Board, before the Committee on Transportation and 

Infrastructure, Subcommittee on Aviation, House of Representatives, Regarding the Treatment of Families After Airline 

Accidents, June 19, 1996.

47 Ibid.
42 

distinguish other low-cost airlines from ValuJet. For example, Southwest Airlines, whose safety 

record is one of the best in the industry, found themselves defending their record and making the 

distinction between low-cost and safety. Kiwi Airlines, which in the immediate wake of the 

ValuJet crash, saw increased sales, ultimately lost a great deal. Primarily due to the increased 

media focus on low-cost airlines, Kiwi’s safety record was scrutinized by the public press and the 

FAA. Today, Kiwi International is virtually out of business, operating just a fraction of its 

former routes. 

McDonnell Douglas, the manufacturer of the doomed aircraft also suffered, as most aircraft 

manufacturers do in the wake of a crash and in the ensuing investigation. For example, prior to 

the crash, ValuJet had planned to purchase 50 new aircraft from McDonnell Douglas for $1 

billion. This plan was put in peril by the accident. While McDonnell Douglas was still trying to 

avert having the deal voided by offering financing assistance late last year, it appears unlikely 

that ValuJet will be able to live up to the original terms of the agreement. 

Contract Maintenance/Outsourcing 

The White House Commission on Aviation Safety and Security found that outsourcing, in and of 

itself, is not a problem if performed by qualified, and FAA certified companies.48 Still, 

outsourcing, in this case, and in general terms, has been the found to be a contributing factor, if 

not a cause in other major accidents and incidents reported by the NTSB and FAA. 

In 1988, a similar accident involving undeclared and improperly packaged hazardous materials 

inside the fiber drums. During a flight to Nashville, TN, smoke was detected in the passenger 

cabin and the floor above the cargo compartment was hot and soft. Flight attendants moved, 

passengers away from the affected area, the aircraft landed safely, and the passengers were 

evacuated. After this incident, the NTSB recommended that the FAA require: 

• Fire detection systems 

• Fire extinguishing systems 

• Better fire blocking materials in cargo compartments 

The FAA rejected these recommendations, saying that its $350 million cost was too much for the 

airline industry.49 On May 31, 1996, NTSB again found themselves issuing urgent safety 

recommendations that the FAA prohibit the transportation of oxidizers and oxidizing materials in 

cargo compartment that do not have fire or smoke detection systems.50

In the wake of the accident, long-time FAA administrator Anthony J. Broderick, associate 

administrator for regulation and certification, took an early retirement, rather than being asked to 

leave his post. FAA Administrator David Hinson acknowledged bearing some responsibility for 

 

48 Ibid. 49 “FAA Said to Refuse to Release Airline Safety Rankings,” Reuters, March 25, 1997.

50 Testimony of Jim Hall, Chairman National Transportation Safety Board, before the Committee on Transportation and 

Infrastructure, Subcommittee on Aviation, House of Representatives, Regarding Issues Raised by the Crash of ValuJet Flight 

592, June 25, 1996.
43 

the accident and stated that the “FAA did not accurately judge the airworthiness of ValuJet 

before the crash.51” 

As early as 1976, after a crash of a DC-6 in Van Nuys, CA, the NTSB was urging the FAA to 

“remind airlines of their responsibility for ensuring the adequacy of the maintenance of their 

aircraft and components, even if the maintenance is contracted to outside repair stations.52” The 

NTSB also recommended that the FAA review its surveillance procedures for certified repair 

stations. This review was urged to ensure these facilities were following proper maintenance 

manuals. Again, in 1982 after the Air Florida crash into the 14th Street Bridge in Washington, 

D.C., the NTSB found that there was not sufficient communications between the airline and the 

maintenance contractor, specifically about de-icing 737s. 

“The ValuJet tragedy has shone a spotlight on an evolution that has occurred in segments of the 

airline industry. The Board has traditionally been expressing its concerns about airlines carrying 

our their own maintenance programs properly. Now, we are looking at what some have dubbed a 

“virtual airline”—one that provides transportation but conducts none of its own maintenance or 

training.53” 

IV.6 LOSSES TO THE PUBLIC 

Commercial aviation generates over 300 billion annually, and accounts for close to 100 million 

American jobs.54 According to then Secretary of Transportation, Frederico Pena in 1995, “startup airlines were providing tremendous savings to the American public—indeed $ 6.3 billion over 

the last year.55” However, in the face of devastating accidents like ValuJet’s, and serious 

questions about the airworthiness of other low fare airlines like Kiwi, the public’s confidence in 

air travel is shaken. This lack of confidence causes some degree of flight from the industry to 

alternative, “safer” modes of transportation. 

The lack of confidence also manifest itself in calls for more stringent controls for the industry. In 

its final report, the White House Commission on Aviation Safety and Security urged government 

and industry cooperation, communications and partnership. Additionally, it urged performance 

monitoring and measurement as key ways to ensure that its recommendations for change are 

implemented.56 In 1996 alone, several major pieces of legislation were enacted that change the 

airline industry. More legislation is pending. Some of this legislation will result in increased 

security measures that will ultimately increase the price of an airline ticket and increase the 

amount of time a traveler will need to devote to airline travel (i.e., getting to the airport a half 

hour earlier than required before). These additional security related procedures are not without a 

price tag. In 1996, Congress appropriated over $400 million for security-related enhancements, 

including explosive detection technology.57

 

51 Meckler, Laura, “Under Fire For ValuJet Crash, FAA Announces Big Shakeup,” Associated Press, June 18, 1996.

52 Ibid. 53 Ibid. 54 White House Commission on Aviation Safety and Security, “Final Report to President Clinton, 12 February 1997.

55 Fumento, Michael, “Frederico Pena: The Teflon Cabinet Official,” February 19, 1997

56 Ibid. 57 Ibid.
44 

Still, there is a price to pay for safety, whether in time or in additional cost, and in general, 

Americans are willing to pay the price rather than facing the consequences of not. While we 

gamble, we want the odds to be stacked in our favor. 
45 

V. SEPTEMBER 1991 AT&T NETWORK OUTAGE 

Ironically, it took a disaster to launch the telephone’s popularity and place in American society. 

In 1878, a train crashed in Tarriffville, CT. Forward-looking doctors in nearby Hartford had had 

Alexander Graham Bell’s “speaking telephone” installed. A local druggist who learned of the 

crash telephoned the entire community of doctors, who rushed to the scene and administered aid. 

This event, as all disasters do, garnered the attention of newspaper journalist, and the positive 

coverage of the telephone’s usefulness made it famous—an item everyone had to have. 

Since the late nineteenth century, Americans have relied on the telephone as a convenient and 

accessible means of communications. Just as we rely on telephones being available (whether 

private or public), we rely on their performance. However, during the latter part of the 1980s and 

the beginning part of this decade, the telecommunications industry, and AT&T in particular, 

experienced a rash of outages. For this study, the September 17, 1991 outage was selected, not 

because it was the longest outage, or the largest, but because of its impact to another critical 

infrastructure sector, transportation. 

V.1 DESCRIPTION OF THE EVENT 

Similar to the Western power outage described in earlier, this event was precipitated on a warmer 

than usual day in the New York metropolitan area. For days such as this when power 

consumption loads are heavier than normal, AT&T and New York’s Consolidated Edison Power 

Company had negotiated a power sharing agreement that basically states that AT&T will use its 

own power when Consolidated Edison’s facilities are heavily loaded. Power sharing agreements 

such as these are commonplace and the transition from commercial power to AT&T’s internallygenerated power was considered routine. 

At approximately 10 a.m. on September 17, 1991, at an AT&T switching center in lower 

Manhattan, AT&T switched to its own power. However, critical power rectifiers (devices that 

change AC power to DC power) failed. Power was provided by a battery back-up system which 

was designed to operate for six hours. Alarms that were intended to inform technicians that the 

power system was functioning on back-up battery had been manually disabled and failed to work. 

At approximately 4:30 p.m., the shift back to commercial power was attempted and failed 

because of the same critical power rectifier failure that had gone undetected in the morning 

hours. The back-up batteries expired and all telephone transmission systems in the facility shut 

down and voice and data communications controlled by the facility failed. This included air 

traffic control communications in the New York metropolitan area. 

It took AT&T approximately 8 hours to restore service to its entire customer base. In the ensuing 

8 hours of the failure, it was estimated that over 5 million calls were blocked. 

V.2 CAUSE OF THE EVENT 

Background 

The telecommunications industry has undergone drastic changes in the past two decades. 

Through the landmark 1984 restructuring of or divestiture of the Bell System (Ma Bell), the 
46 

industry has seen the telecommunications market expand and grow. The introduction of 

emerging technologies such as fiber optics, cellular communication and now, information 

technology and information management systems has helped change the telecommunications 

industry. AT&T operates a large, switched network providing long-distance service to 

residential and business customers. This network is controlled by customizable software to 

provide a wide-range of services. Considerable redundancy is built into the AT&T network as a 

means of achieving reliable service. The growing reliance on computerized programs and 

computer equipment has removed some of the human element involved in providing 

telecommunications services. Gone are the days of party lines and local operators that direct 

calls via switchboards. Still, human error was blamed for the outage on September 17, 1991. 

Investigation of the Event 

Based on an internal investigation by AT&T, the September 1991 outage had a strong human 

component, vice any systemic or fundamental failure of the network’s components. According to 

AT&T’s senior vice president-network services, Kenneth L. Garrett, the problem resulted when 

failures of some power equipment and alarm systems went undetected. This was attributed to a 

supervisor failing to follow company procedures and physically inspect each of the building’s 

power plants to insure that they are working properly during a conversion from commercial to 

emergency diesel generator power. Additionally, the alarm bells that should have warned 

technician that there were equipment failures had been manually deactivated. Had the alarms 

been armed or had such an inspection occurred, the equipment failures would have been 

discovered and the service disruption averted.58 

Because this network failure affected so many people and adversely affected air travel, the press 

devoted attention to the event, as did state and federal regulators and Congress. Industry experts 

were publicly asking if AT&T was asleep at the wheel. 

Total Cost to Date of the Outage 

Exhibit V-1 presents the cost and impact profile for the AT&T network failure. Based on this 

study’s estimates, the AT&T network failure cost hundreds of millions of dollars yet resulted in 

improved services to the general public. 

 

58 AT&T News Release, September 30, 1991.
47 

Event

ATT

Service

Outage

On Owners

•Disrupted operations

•Decreased sales/

 revenues

•Investigation

•Increased PR

•Increased vigilance

On Industry

•Decreased goodwill

•Increased audit

•Re-regulation

On Public

•Investigation

•Loss of confidence

•Decrease in quality

 of life

Economic Indicators

•Delays in service

•Increased prices

•Drop in share prices

Primary Phase Effects

Compensation Sources

•Profits (stockholders)

•Uncompensated

On Customers

•Loss of hours -

 productive &

 leisure

Secondary Phase Spill-Over Effects

Event Customers Owners Industry Public

East. Seaboard ~$100s Ma >$1Mb See belowc Better serviced

a

 Because of the difficulty in estimating the numbers of individuals and business affected by the outage, revenues 

foregone are conservatively estimated in the hundreds of millions. 

b

 Actual costs are likely to be much higher since AT&T (as well as other companies) undertook extensive 

modernization programs to ensure increased network reliability. 

c

 Exact costs to the telecommunications industry are not yet determined, but include substantial administrative costs 

from new FCC regulations and investigations. For example, in 1992 the FCC imposed new regulations requiring all 

telecommunications companies to report outages (type and cause) over a certain threshold. 

d The general public is better off as a result of the massive improvements and modernization initiatives undertaken 

by AT&T and other telecommunications providers.

Exhibit V-1: AT&T Network Service Failure Profile 

V.3 LOSSES TO THE CUSTOMER 

Air Travelers 

Consumers, especially air travelers, lost on September 17, 1991. These 85,000 stranded 

passengers in New York and New Jersey could not even notify loved ones or business associates 

of their delays because the telephones were down, frustrating and infuriating even the calmest of 

in the crowd. (One of these 85,000 passengers happened to be the FCC Chairman.) 
48 

AT&T network failure disrupted FAA voice and data communications serving air route traffic 

control centers in the Northeast U.S. The FAA leased private lines from AT&T to interconnect 

airports with the New York Air Traffic Control Center in Ronkonkoma, Long Island. This center 

handled all airline flights within a 200 mile radius of New York, and was linked by telephone 

lines to radio transmitters, which relay instructions and final approach procedures to pilots in the 

air. 

According to the Common Carrier Bureau, the Ronkonkoma center lost 84.2% of its primary 

radar sites, 84% of its radio channels, 86.8% of its telephone lines, and 58.8% of its computer 

links to Westbury, Boston, and Washington, D.C. Controller-to-controller links were cut 85.7%, 

and radar data lost 53.3% of its computers, a partial back-up system lost 62.5% of its telephone 

line and 55.5% of its emergency sites.59

The Ronkonkoma center lost power at 4:35 p.m. and FAA immediately issued “ground stop 

programs” throughout the nation for planes bound for the New York area, either diverting the 

planes or landing them through the limited available channels. 

Three New York/ New Jersey area airports, LaGuardia, Kennedy, and Newark, closed for several 

hours, air traffic at Boston and Washington’s National airports were severely disrupted, and 

delays occurred nationwide. Over 1,100 flights were directly affected. The FAA estimated that 

the air traffic service disruption in New York resulted in 516 aircraft delays, with an additional 

119 delays of flights en route to New York occurring at other airports. The Air Transport 

Association determined flight delays to total 688 hours.60 There were also 658 flights that had to 

be canceled because of the outage.61 Table V-1 estimated the cost to air travelers, based on delay 

cost data from the FAA. 

Table V-1 

Estimated Cost to Air Travelers Based on AT&T Network Failure 

Number 

Affected 

Total 

Hours of 

Delay Time

Average 

Delay Per 

Person 

Average Delay 

Cost Per Hour* 

Total Cost 

Impact to 

Travelers 

Passengers 85,000 688 1.2 hours $42 $4,760,000** 

Table V-2 presents an estimate of the cost to the airline industry for this 8 hour disruption, which 

rippled through to Washington, D.C. and Boston, and still was not resolve until late the next day 

 

59 “Report by the Common Carrier Bureau on the January 4, 1991 AT&T Network Disruption”, given before the Subcommittee 

on Telecommunications and Finance, Committee on Energy and Commerce, U.S. House of Representatives, October 1, 1991, 

April 7, and May 13, 1992

60 Lavitt, Michael, “AT&T Switching Station Power Failure Wreaks Havoc with NY Area Traffic”, Aviation Week and Space 

Technology, Sept. 23, 1991

61 Statement of Norbert A. Owens, Deputy Associate Administrator for Air Traffic, Federal Aviation Administration, Before the 

Subcommittee on Telecommunications and Finance, Committee on Energy and Commerce, U.S. House of Representatives, 

October 1, 1991, April 7, and May 13, 1992
49 

(Airlines had to reroute traffic and move planes around because they had not arrived at their 

destinations the night before). 

Table V-2 

Cost Estimates for Air Traffic Disruptions 

Number of Flights Affected Total Number of 

Hours Telephone 

Service Out 

Average Cost Per 

Hour Per 

Delay/Cancellation* 

Financial 

Impact 

 635 delayed ~ 8 $1,570 $ 1,033,060 

 658 canceled ~ 8 $ 1-2 million62 $8-16,000,000 

Total 1,298 Flights ~ 8 $9-17,000,000 

Cost Impact to Other Operating Businesses 

While area airports were most affected, many large New York businesses faired better. 

Corporations and brokerage houses which depend heavily on long-distance and voice 

transmission had backup plans in place that provided at least some network redundancy.63 And 

since the outage occurred after the formal close on Wall Street, the impact was not as great as it 

could have been. It has been estimated that the value of telephone transactions that take place 

daily on Wall Street exceed one trillion dollars.64

According to Contingency Planning Resource, many types of businesses are negatively affected 

when service, such as telecommunications or a power failure occurs. Table V-3 summarizes 

average cost per business per hour. These figures begin to give us a glimpse of what other 

industries might have lost as a result of this outage. 

Table V-3 

Business Losses Due to Service Disruptions

Business Type Financial Impact of System Failure 

Per Hour 

Brokerage Operations Finance $ 5,600,000—7,300,000

Credit Card/Sales Authorization Finance $ 2,200,000—3,100,000

Pay-Per-View Media $ 67,000—233, 000

Home-Shopping (TV) Retail $ 87,000—140,000

Business Type Financial Impact of System Failure 

P H

 

62 “Information Superhighway--An Overview of Technology Challenges,” Report to the Congress, United Stated General 

Accounting Office, January 23, 1995, p. 17.

63 Lavitt, Michael O. “FAA Planning Lapses Linked to AT&T-Caused Flight Delays”, Aviation Week & Space Technology, 

January 13, 1992, p. 52

64 “Information Superhighway--An Overview of Technology Challenges,” Report to the Congress, United Stated General 

Accounting Office, January 23, 1995. 
50 

Per Hour 

Catalog Sales $ 60,000—120,000

Airline Reservations $ 67,000—112,000

Tele-Ticket Sales $ 56,000—82,000

Package Shipping $ 24,500—32,000

ATM Fees $ 12,000—17,000

V.4 LOSSES TO THE OWNER 

Perhaps AT&T’s Chairman, Robert E. Allen, stated it best in a letter he prepared to the 272,000 

AT&T employees in the wake of the September 17, 1991 network failure event. 

Clearly, communications has become so critical an element to the functioning 

of society and the economy, as well as to the assurance of public safety, that 

any breakdown at all has serious consequences for someone, somewhere. 

Disruptions to service are not new. But, now that modern technology lets our 

systems carry such high volumes of calls and because people are so dependent 

on communications, a communications problem today affects far more people 

and many more activities than ever before. In short, service reliability has 

never been more important. 

In addition to losing customer confidence, the outage had significant economic 

ramifications. As summarized in Table V-4, AT&T lost an estimated three quarters 

of a million dollars of revenues from calls in that 8 hour period. 

Table V-4 

Lost Revenue From Blocked Calls 

Calls Blocked Calls Blocked 

Adjusted for 

Retries65

Revenue* Adjusted to 

Account for Retries 

International 471,000 287,310 $68,954.40

Domestic 4,556,000 2,779,160 $666,998.40

Operation Services 155,000 94,550 $22,692.00

Total 5,182,000 3,161,020 $758,644.80

* Lost Revenue assumes an average revenue per long distance call of $.06 per minute where average length of call is 4 

minutes indicating $.24 of revenue per call. 

Even prior to the September 17, 1991 failure, AT&T had embarked on a $150 million effort to 

replace all older power plants, including those in the New York region by year’s end. As a direct 

result of the failure, AT&T conducted a thorough check of all alarm systems and procedures at 

all critical office and at all other locations with the same power plant configuration as the 

 

65 The January 4, 1991 outage reported that about 39% of the calls blocked represented retries.????
51 

affected switching center in lower Manhattan. Additionally, AT&T intensified employee training 

to ensure that all employees understand how to respond to alarms and that they closely follow 

company procedures was embarked as an immediate consequence of this network failure. 

This event, on the heels of several other major telecommunications service disruptions in the 

industry focused the nation’s attention on the issue of reliability of today’s, and tomorrow’s, 

telecommunications networks. 

When AT&T experienced a failure on January 15, 1990, it was clearly an embarrassment to the 

company. Within days of the service interruption, AT&T’s CEO Robert Allen officially 

apologized in full page ads in major newspapers across the nation. In his letter, Allen said, 

“AT&T had a major service disruption last Monday. We didn’t live up to our 

own standards of quality, and we didn’t live up to yours. It’s as simple as that. 

And that’s not acceptable to us. Or to you. We understand how much people 

have come to depend upon AT&T service, so our AT&T Bell Laboratories 

scientists and our network engineers are doing everything possible to guard 

against a recurrence. We know there’s no way to make up for the 

inconvenience this problem may have caused you.” 

After this event, AT&T announced their plan to offer a rebate of service on Valentine’s Day to 

make up for the loss during the January 15, 1990 failure. 

Not missing the opportunity to turn this event towards competitive advantage, rival MCI took out 

full page advertisement in New York offering their own long distance services for the “next time 

that AT&T goes down.” The offering did entice some, and to this day, AT&T continues 

advertising campaigns luring customers back. 

In the wake of the September 17, 1991 network failure, Allen again used the a media campaign 

to express his regret and his commitment to management practices, that should have ensured that 

AT&T systems worked reliably. This time; however, he fell short of offering any rebates to 

affected customers. 

The AT&T outage sparked renewed concerned and surprise that the FAA relied solely on one 

carrier. The FAA did not have a private back-up system outside the public switched network and 

did not have redundant, alternative facilities or a dedicated and secure primary or back-up 

systems. Largely as a result of the September 17, 1991 incident, AT&T lost its sole source 

contract with the FAA. The GSA approved the installation of the Leased Interfacility National 

Airspace System Communications System (LINCS).66 With LINCS, backup routes would be 

available in case of a cable failure and problems at a central office would now affect only one or 

two radars or radios in that area. 

 

66 “Report by the Common Carrier Bureau on the January 4, 1991 AT&T Network Disruption”, given before the Subcommittee 

on Telecommunications and Finance, Committee on Energy and Commerce, U.S. House of Representatives, October 1, 1991, 

April 7, and May 13, 1992
52 

V.5 LOSSES TO THE INDUSTRY 

Recognizing that a catastrophic failure ultimately affects everyone and the common good is best 

served by cooperation at a time of emergency, the telecommunications industry took a stand. In 

February 1992, a consortium of about 15 major telecommunications carriers signed an agreement 

of mutual aid to restore service in the case of “critical disruption to their telecommunications 

networks supporting the New York City Metropolitan Region.” This landmark agreement 

stipulates the procedure to be followed during a network emergency affecting high-capacity 

transmission facilities. 

Further, as a direct result of the September 17, 1991 outage, the Federal Communications 

Commission (FCC) established the Network Reliability Council, a federal advisory committee 

charged with making recommendations aimed at preventing telephone network outages and 

limiting their impact. Government regulators and legislatures took up the call for increased 

assurances of reliability. 

In February 1992, the FCC adopted rules that required local and long-distance telephone 

companies to notify FCC within 90 minutes of its onset, any outage that affects at least 50,000 

customers and that last 30 minutes or longer. The FCC further required a complete written report 

on the incident within 30 days. By the end of the year, the FCC had lowered the reporting 

threshold to 30,000 customers, where it remains today. 

V.6 LOSSES TO THE PUBLIC 

While the public’s confidence in AT&T was definitely challenged, AT&T’s long tradition of 

performance allowed it to weather the “storm” of this failure relatively well. Certainly, AT&T 

did lose customers to rival long distance companies as a result of the September 17, 1991 failure. 

Still, on the whole, people did not begin to seek out alternative methods to communicate. 

Some will argue that even the Telecommunications Act of 1996 is an indirect result of the 

failures in the early 1990s. Given the magnitude of the telecommunications industry and its 

criticality to other infrastructures, the wake up call AT&T received on September 17, 1991 

actually has been a gain for the public at large. 

Now, the FAA’s critical communications have built in redundancies, which help to ensure our 

safety and provide a greater degree of reliability of service. 
53 

VI. CONCLUSIONS 

Several common attributes were found among the events examined which have direct 

applicability to other infrastructures of the U.S. economy, including Banking and Finance. 

VI.1 ATTRIBUTES OF THE CONSUMERS 

Determination of Responsibility 

To begin, when an event appears to be caused by an un-preventable act of God or nature, 

(e.g., earthquakes, hurricanes, tornadoes, etc.,) it tends to bring out the best in mankind in 

general, and Americans in particular. The nation responds immediately and charitably, 

without provocation and without thoughts of requital. (Clearly, hurricane Andrew, last 

year’s floods of the Mississippi River valley, and the recent flooding in North Dakota are 

evidence of Americans’ generosity and compassion.) 

But the underlying issue is not preventability; it is responsibility. As Americans, we 

defend greatly the right of individual choice - even if those choices put us in harm’s way. 

(For example, legislation is not enacted to prevent re-building on flood plains even 

though it would obviously prevent future damage. Likewise, motorcycle helmet laws are 

being repealed at the state level, contrary to the medical evidence of their value.) 

However, when an event is perceived to be the consequence of someone’s action, 

America quickly demands restitution. 

Public Expectations 

Some of this outrage is due to that fact that Americans have grown to have strong 

expectations of entitlement to superior quality, availability and reliability of products and 

services. Americans have come to believe that our planes don’t crash, our electricity does 

not falter, and our telephones always ring. Failure in these infrastructures is 

unacceptable; equivalent to that of a third world nation. Consequently, failure in certain 

sectors scares us even more because they affect the very foundation of our beliefs and 

values. 

Systemic Failure and the Willingness to Blame “the System” 

We also found that the initial event itself does not have to have significant losses and that 

large losses do not necessarily cause action. (While the “losses” to Rodney King were 

limited, the ensuing backlash was clearly the result of perceived systemic violations of the 

Afro-American community’s public trust in the nation’s law and order system. 

Conversely, thousands of Americans had died as a result of AIDS, but not until the media 

highlighted deaths resulting from the systemic failure of the nation’s blood supply to 

remain free from HIV contamination, did significant action occur. Likewise, thousands 

of Americans were killed annually as the result of drunk drivers, but not until habitual 

offenders - whom “the system” could not remove - were made visible by MADD’s media 

blitz, did action occur.) By tapping into the this-could-have-been-me nerve of the 

American public, the media clearly highlights systemic failure and helps to flame the 
54 

embers of retribution. Once system failure is the product of public perception, political 

action is demanded and inevitably oversight and reform are mandated. 

Additionally, when Americans feel betrayed by “the system” we blame the most 

convenient constituent, regardless of which component is truly responsible. Because the 

general public usually has no or limited understanding of the relationships and processes 

beyond the point-of-sales contact, the public typically holds the point-of-sale provider 

liable. In addition, public response often holds the entire infrastructure/industry 

responsible as well - regardless of the consumers assumption of risk. (For example, even 

though ValuJet’s calamity was attributed in part to the outsourced baggage handlers and 

maintenance providers, ValuJet was held liable in the public’s eye, with the responsibility 

shared across all of the air travel industry - including airports, travel agents, baggage 

handlers, etc., regardless of their immediate involvement.) 

Finally, there is also a growing willingness to blame others in general (re: “the system”) 

regardless of actual fault and the assumption of risk. With the increased lottery mentality 

associated with legal suits and damage awards, Americans “want their cake and to eat it 

too” when it comes to bearing the consequences of an event. (While the law suit against 

McDonalds for serving hot coffee seemed frivolous, the message these legal awards send 

to providers of services and products do not go without consequence.) 

VI.2 ATTRIBUTES OF THE SUPPLIERS 

Outsourcing and the Pursuit of Economies of Scale 

There are several meaningful changes in the underlying means of providing products and 

services to the end consumer. For example, technology is providing economies of scale 

in industries heretofore relatively unaffected by cyber inroads. (For example, data 

processing at rates unfathomable only decades ago has made for outsourcing to megaprocessors a necessity to compete in sectors such as telecommunications and the banking 

and finance industry). Consequently, concentration among a few major suppliers within a 

sector has grown, with increasingly extensive, intricate and interdependent relationships 

among participants being the norm. (Ironically, while much of the Emergency Services 

infrastructure, i.e., medical, police, fire and rescue services, is being outsourced to reduce 

costs and increase quality, the increasing numbers of 911 failures and overuse suggests 

that outsourcing can have severe negative consequences if not managed properly.) 

Back-Office Operations and Intra-Sector Dependencies 

Not surprisingly, there is also limited appreciation of, or visibility into, the relationships 

and processes occurring beyond the point-of-sales contact, e.g., the telephone company’s 

routing/switching networks, or the inter-company sales of energy among supposedly 

“competing” utilities providers. Interestingly, it is not just average citizens who have 

trouble comprehending the complexity of back-office operations. The heads of many of 

the point-of-sales services don’t fully recognize these relationships either, as 

demonstrated in the lessons learned by the banking and finance community from the 

World Trade Center bombing. 
55 

System of Systems and Inter-Sector Dependencies 

Like the ecology system, the dependencies among sectors and infrastructures are 

necessary, critical, and oft overlooked as to how delicately balanced. Obviously, the 

telecommunications infrastructure is highly dependent on electrical power distribution, 

and a significant portion of gas and oil storage and distribution relies heavily on the 

transportation infrastructure. But as technological advances, so too do the dependencies 

on other sectors. For example, one of the largest “victims” of the AT&T network failure 

was the airline industry, who had to cease operations because control towers could not 

communicate with each other. The inter-dependencies are highlighted even more when 

one considers how air travelers could not even call their connections to inform them of 

their predicament. In these instances, entire infrastructures are the customers of other 

infrastructures and house the same feelings of strong entitlement to availability and 

reliability of services as that of individual citizens. 

Laissez Faire Policy and Social Responsibility 

Additionally, these efficiency-driven vulnerabilities are enhanced in certain sectors by 

increased deregulation. For example, one can assert that the 1996 summer power outages 

throughout the Midwest and AT&T’s 1-800 network service failure to the Eastern 

Seaboard were due, in part, to decreased or non-existent government oversight. In some 

instances, it can be argued that private enterprises are overly concerned with profits and 

only marginally responsive to their societal responsibilities. Did Exxon feel that the costs 

of policing their own “licensed” carriers were outside their business responsibilities 

before the Exxon Valdez accident? 

Accelerated Business Cycle and the Pursuit of Profits 

As companies attempt to remain competitive in a world of increased globalization and 

shrinking product life cycles, the enticement to introduce new product/ service offerings, 

or to implement cost savings measures, before fully considering the possible 

ramifications is too great to resist. Certainly the unchecked sales of derivatives by 

Bearing’s Hong Kong office in 1996 and AOL’s recent “Unlimited Access” debacle 

indicate that the rush to profits is fraught with peril. 

VI.2.1 Increased Infrastructure Vulnerability 

The above shifts in the paradigms of business operations result in a net increased 

vulnerability to the overall industry/infrastructure. Ironically, the initial level of 

vulnerability (due to outsourcing, intra-sector dependencies, reduced regulatory oversight 

and increased competition), is exacerbated as individual participants invest to harden their 

individual walls and limit their individual liability, assuming that others are equally 

diligent. Consequently, this false sense of total security serves to increase the risk of 

systemic vulnerability. 
56 

VI.2.2 Increased Threat Capability 

Technology has not only increased the vulnerability of certain sectors, it has also 

unwittingly increased the capability of threats to those sectors. For example, the World 

Wide Web, the development of international standards and protocols, the declassification of formerly sensitive information, and increased access through the 

Freedom of Information Act (FOIA) have all combined to equip individuals with 

intrusive (and destructive) capability beyond their intentions. The ramifications of this 

power in the hands of a well-funded enterprise with a destructive mission is cause for 

alarm. 

VI.3 TOTAL ECONOMIC IMPACT 

This analysis found that an event is extensive in who it affects, costly in its recovery, and 

permanent in its repercussions. The costs of recovery are momentous, if not unbearable. 

Although recovery might not be impossible, the cost to do so is so excessive - especially 

when including the permanent, secondary impacts, such as increased regulation and 

higher prices and taxes - that it should be avoided as much as possible. 

Even in “recovery” success stories, such as the public relations campaign the American 

Red Cross undertook to recapture the goodwill lost when the nation‘s blood supply was 

suspect of contamination by the HIV/AIDS virus, the opportunity costs alone are 

sufficiently exorbitant to warrant avoidance. The opportunity cost to regain public image 

is startling, even in non-critical sectors. For example, AOL’s share price remains almost 

30 percent below its “pre-event” value, despite significant investments in spin control. 

But it is more important to recognize that most losses go uncompensated. Even though 

hundreds of millions of dollars are spent to compensate the hundreds of victims of an 

airplane tragedy, relatively little is provided as compensation to the millions that are 

affected by a power outage or loss of telephone service. Insurance does not reimburse for 

loss of time and that loss is permanent. Albeit of short duration, there is a distinct loss in 

quality of life and it seems nothing can be done. It is these relatively small, 

unremunerated losses that are suffered by many which tend to erode most at our overall 

stand of living. 

In no instance - including those events explicitly excluded from detailed investigation - 

did the cost of prevention come close to approximating the cost of recovery. The cost of 

recovery (even without the uncompensated losses) is orders of magnitude greater than 

rudimentary estimates of preventive measures. 
57 

VII. RECOMMENDATIONS 

The following recommendations are based primarily on the lessons learned in this 

analysis of “catastrophic events”, and secondarily on exposure to issues uncovered in the 

performance of the U.S. Banking and Finance Infrastructure Security Assessment. 

VII.1 DETERMINE APPROPRIATE STANDARD OF DUE CARE 

Most companies, regardless of the sector in which they’re housed, attempt to manage 

proactively risk to their enterprises. Unfortunately, they do not always provide sufficient 

or effective risk mitigating measures. Deficiencies in risk management strategies usually 

occur because of systemic undervaluation of: the enterprise’s vulnerability(s), potential 

threat(s), or the asset(s) at risk. 

VII.1.1 Government Regulated Standards of Due Care 

In instances where the assets are considered so valuable to our national fiber, 

governmental regulation has historically and correctly been implemented to ensure an 

appropriate standard of due care is employed to alleviate risk. For example, air travel is 

obviously regulated, i.e., the standard of due care is explicitly specified and universally 

applied to all participants, to ensure the public’s safety (i.e., that American lives are 

protected). Additionally, utility providers have been regulated, in large part, to ensure 

that uninterrupted availability and reliability of service is not jeopardized. Therefore, in 

many instances the asset value mandates that government interdiction and oversight be 

implemented a priori, and not after the asset is lost. 

VII.1.2 Industry/Market Standards of Due Care 

However, in many instances, the standard of due care is not set by the government, but 

rather, it is determined by the market forces on, and the (limited) experience of, 

individual enterprises whose behaviors are witnessed by others. Consequently, industrywide or market-driven standards are rarely proactive, and are almost always reactive. For 

example, the World Trade Tower bombing could be classified as a near-miss event from 

which certain banking and finance providers quickly revised their security position 

because of previously unrealized vulnerabilities. 

Because there is no sanctioned method to pass on information, only the participants 

directly affected learn from the experience, and no action to shore up vulnerabilities in 

other sectors takes place. Thus, if standards of due care are self-determined, there is an 

absolute requirement for effective communication of new/changing threats and heretofore 

unexamined vulnerabilities at the infrastructure level, not just to individual participants. 

VII.1.3 Sharing Information on New/Changing Threats 

As an analogy, America On Line (AOL) clearly underestimated the external demand 

(threat) to its existing capacity (vulnerability), and the consequences to its corporate 

image (value of its goodwill asset). Could they have learned anything from AT&T’s 
58 

service disruption (due in part to overwhelming demand against underestimated response 

capacity) to have helped prevent their predicament, had that information been made 

available? 

VII.1.4 Sharing Information on New/Changing Vulnerabilities 

The events examined in this study revealed that companies do not ignore risk, but rather 

they are unaware of the vulnerabilities of their enterprises. ValuJet did not realize how 

vulnerable they were to the competence of subcontracted/outsourced cargo handlers and 

maintenance providers. Likewise, the Western power outages could have been prevented 

had the consortium looked at service provision from a holistic perspective; and thus 

removed the vulnerability to single point failure and put into place redundancy at the total 

system (or infrastructure) level. 

VII.1.5 Sharing Information on Countermeasures 

Obviously, lessons can, and should, be learned from successes and not just failures. 

Action should occur to make available and fully disseminate to appropriate parties the 

“best of class” practices, procedures and technologies proven to ensure the avoidance of 

catastrophic events. 

VII.2 ENFORCE THE STANDARDS OF DUE CARE WITH BEHAVIORMODIFYING SANCTIONS 

On aspect of many corporate risk mitigation strategies is to minimize the firm’s legal 

exposure/liability, with negligence typically determined relative to the standard of due 

care set by regulation, industry practice, or legal liability (usually determined by 

precedence in the courts). But if there is no sanction afforded by negligent behavior, then 

setting standards of due care is useless. 

The sanctions associated with ignoring standards of due care vary greatly among sectors. 

For example, the sanctions applied to ValuJet are severe, especially when viewed against 

the sanctions utility companies receive when they fail to provide expected service. To 

overcome the extreme pressure to ignore vulnerabilities and threats in the pursuit of 

profits and monetary reward is difficult to say the least. Candidate sanctions include 

holding individual CEOs and stockholders legally liable for corporate violations. 

Regardless of method, to be effective, standards of due care must also include sufficient 

sanctions, such that non-compliance will motivate participants to modify their behavior. 
59 

APPENDIX A 

Telecommunications 

• AOL’s Unlimited Access Debacle 

• AT&T’s 1-800 Service Eastern Seaboard Network Failure 

Electrical Power Systems 

• Summer 1996 Western Power Outages 

• 1977 New York City Blackout 

Gas and Oil Storage and Distribution 

• Exxon Valdez Accident 

Transportation 

• TWA Flight 800/ValuJet Crashes 

• Midwestern Floods 

• Drunk Driving Fatalities 

Water Supply System 

• Midwestern Floods 

Emergency Services (Medical, Police, Fire and Rescue) 

• HIV/AIDS-Scare in Red Cross Blood Supply 

• Rodney King Riots 

• Overuse/Failures of 911 

Continuity of Government 

• Unabomber/U.S. Postal System 

• Oklahoma City Bombing
60 

APPENDIX B

Bibliography

Section III: Western Power Outages

“The Dominoes Fall on August 10”, EPRI Journal, (Nov./Dec. 1996), Vol. 21, No. 6 

Bonneville Power Administration, “BPA, WSCC Take Steps to Bolster System 

Reliability”, Public Affairs, Media Relations, (August 13, 1996) 

_____, “Northwest Helps California Deal With Emergency”, (August 14, 1996), PR 59-

96 

_____, “BPA Keeps the Faith with the U.S. Treasury”, (October 22, 1996), PR 66-96 

_____, “Recent Power Outages Caused By Trees”, (August 21, 1996) 

Brazil, Eric, “Utilities Dissect Recent Outage: Hostilities Evident Between PG&E, 

Federal Agency at Hearing in San Francisco:, (August 22, 1996) 

CPUC, “Hearing on the August 10, 1996 Disturbance”, California Public Utilities 

Commission, (August 21, 1996) 

Carpinelle, G et Al. “Probabilistic Evaluation of the Economical Damage Due to 

Harmonic Losses in Industrial Energy System”, IEEE Transactions on Power Delivery, 

(April 1996), Vol. 11, No. 2 

Cauley, Gerry and Karl Stahlkopf, “Technical Issues Raised by the Western System 

Outages of July 2 and August 10, 1996”, EPRI, (1996) 

Durbin, Dee-Ann, “Western Power Outage Affects More Than 4 Million”, Associated 

Press, (August 12, 1996) 

Energy Information Administration, Electric Power Annual 1995: Electric Sales and 

Revenue, US Department of Energy, (Washington: December 1996) 

Eyres, Dennis, “Press Release-58 96”, Western Systems Coordinating Council, (August 

13, 1996) 

Foster, David, “Blackouts on the Western Grid: Are More Dark Days Ahead?”, San 

Diego Daily Transcript, (August 15, 1996) 

GAO Report, Federal Power: Outages Reduce the Reliability of Hydroelectric Power 

Plants In Southeastern US, General Accounting Office, (1996), GAO/T-RCED-96-180 
61 

Golden, Tim, “2D Power Failure in 6 Weeks Creates Havoc for the West”, New York 

Times, (August 12, 1996) 

Hoffman, Steve, “Enhancing Power Grid Reliability”, EPRI Journal, (Nov/Dec 1996), 

Vol. 21, No. 6 

Humphrey, Theresa, “Power Outage Darkens Delmarva Peninsula”, The News-Times

(May 15, 1996) 

Langie, Carolene, “Huge Power Outage Hits Western U.S.”, The Seattle Times, (August 

11, 1996) 

Lonie, Bruce, “Utility Deregulation and Its Opportunities”, PowerCET Corp., 1996 

Office of Technology Assessment, Physical Vulnerability of Electrical Systems To 

Natural Disasters and Sabotage, US Congress, (1993). 

PG&E Press Release, “The Ties That Bind the Western Interconnected Power Grid”, 

(August 14, 1996) 

______, “Oregon Voltage Glitches Trigger Outages in Western States”, (August 14, 

1996) 

______, “PG&E Customers Set Record Electric Demand”, (August 13, 1996) 

______, “PG&E Transmission System Back to Normal Operation”, (August 11, 1996) 

Silverman, Lester, “Electric Power-The Next Generation”, McKinsey Quarterly, (January 

1, 1994) 

US Congress, “Issues and Recommendations Concerning the August 10, 1996, 

Bonneville/Western US Power Outage”, Subcommittee on Water and Power Resources, 

US House of Representatives, (November 7, 1996), 104th, 2nd Session 

Western Systems Coordinating Council, “WSCC Issues Preliminary Report On August 

Power Outage”, (September 25, 1996) 

______, “BPA, WSCC Take Steps to Bolster System Reliability”, (August 13, 1996) 

______, “WSCC August 10 Disturbance”, (August 11, 1996) 

______, “WSCC Technical Experts Discover Cause of Western U.S. Electrical Outage”, 

(July 21, 1996) 

______, “Team Formed to Investigate Western Electrical Disturbance”, (July 10, 1996) 

______, “Initial Location Determined for Western Electrical Disturbance”, (July 3, 1996) 
62 

______, “WSCC Investigating Cause of Western Electrical Disturbance”, (July 3, 1996) 

WSCC Investigative Task Force, “WSCC Preliminary System Disturbance Report 

(Draft)”, Western Systems Coordinating Council, (1996) 

______, “Final Report on August 10, 1996 Disturbance”, Western Systems Coordinating 

Council, 1996 
63 

Section IV: ValuJet

“ValuJet Loses $9.6 Million in Second Quarter”, Associated Press, (August 7, 1996) 

“PR Costs More of a Concern for ValuJet Than Financial Costs”, Cox News Service, 

(May 14, 1996) 

CNN, “Cheap Airline Woes Weigh on Budget Travelers”, (June 22, 1996) 

CNNfn, “Heavy Buying Send Airline Stocks Soaring: Saturdays Crash Takes Its Toll on 

ValuJet Shares”, (May 13, 1996)

_____, “Safety Issues May Hurt No-Frills Airlines”, (May 13, 1996)

_____, “Wall Street Higher at Midday: Transportation Stocks Rise Despite ValuJet 

Crash”, (May 13, 1996)

_____, “ValuJet Co-Founder Sells 1.5 Million Shares”, (May 21, 1996) 

_____, “Kiwi Flying High Above ValuJet Crash Flak”, (May 28, 1996) 

_____, “Shareholders Sue ValuJet”, (May 30, 1996) 

_____, “ValuJet Shares Plunge”, (June 18, 1996) 

_____, “ValuJet Co-Founder Sells More Stock in Discount Airline”, (October 9, 1996) 

_____, “ValuJet Worker: Oxygen Canisters Were Labeled Empty”, (November 19, 1996) 

CSI Data Source, “ValuJet: Historical Chart”, CSI, (1997) 

_____, “ValuJet: Historical Table”, CSI, (1997) 

Frank, Allan Dodds, “Legal Ordeal Begins For Families of ValuJet Crash Victims”, CNN, 

(June 3, 1996) 

Hall, Jim, Chairman of the NTSB, “Testimony Re: The Treatment of Families After 

Airline Accidents”, before the Subcommittee on Aviation, Committee on Transportation 

and Infrastructure, US House of Representative, (June 19, 1996) 104th Congress, 1st

Session 

______, “Testimony Re: Issues Raise by the Crash of ValuJet Flight 592”, before the 

Subcommittee on Aviation, Committee on Transportation and Infrastructure, US House 

of Representatives, (June 25, 1996), 104th Congress, 1st Session 

Meckler, Laura, “Under Fire for ValuJet Crash, FAA Announces Big Shakeup”, 

Associated Press, (June 18, 1996) 
64 

PR Newswire, “ValuJet Airlines Reports March 1997 Traffic”, (April 3, 1997) 

Reuters, “ValuJet March Load Factor Down to 62.1”, (April 3, 1997)

_____, “ValuJet says Executives Got No 1996 Bonus”, (April 9, 1997) 

_____, “ValuJet Mechanics Win Tentative Wage Pact”, (March 26, 1997) 

_____, “FAA Said To Refuse To Release Airline Safety Rankings”, March 25, 1997 

Rochelle, Carl, “ValuJet, If It Flies Again, Will Be Smaller and Poorer”, CNN, (June 20, 

1996) 

White House, “Final Report to President Clinton”, White House Commission on Aviation 

Safety and Security, (February 12, 1997) 
65 

Section V: AT&T Outage 

AT&T, “September 30 1991 Press Release”, Public Relations Department, (September 30 

1991) 

______, “September 20 1991 Press Release”, (September 20 1991) 

______, “September 18 1991 Press Release”, (September 18 1991) 

Lavitt, Michael, “FAA Planning Lapses Linked to AT&T-Caused Flight Delays”, 

Aviation Week and Space Technology, (January 13, 1992) 

______, “FAA Moves to Keep Phone Problems From Crippling Air Traffic Control 

Again”, Aviation Week and Space Technology, (November 18, 1991) 

______, “AT&T Switching Station Power Failure Wreaks Havoc with NY Traffic”, 

Aviation Week and Space Technology, (September 23, 1991) 

Lindstrom, Ann, “Potential for Disasters Keep Telcos Alert”, Telephony, (September 28, 

1992) 

______, “Outage Hits AT&T in New England”, Telephony, (November 11, 1991) 

Mason, Charles F., “GAO says Network Outages Hurt Productivity”, Telephony, (March 

22, 1993) 

______, “AT&T Outage Puts More Heat on Network Reliability”, Telephony, (September 

23, 1991) 

McKenna, James, “Controllers Used Many Tricks to Keep Aircraft Flying During AT&T 

Failure”, Aviation Week and Space Technology, (October 7, 1991) 

National Communication Systems, National Information Infrastructure Risk Assessment, 

Reliability, Vulnerability Working Group, (February 29, 1996) 

Noll, A. Michael, “Network Security and Reliability: Emergencies in Decentralized 

Networks”, (January 10, 1996) 

US Congress, “Telephone Network Reliability”, Subcommittee on Telecommunications 

and Finance, Committee on Energy and Commerce, US House of Representatives, , 

(October 1, 1991, April 7 and May 13, 1992), 102nd Congress. 

US General Accounting Office, “Information Superhighway: Overview of Technologies”, 

(January 1995), GAO/AIMD-95-23, #B-259205 

Wilson, Carol and Richard Karpinski, “The Network Reliability Council’s Best LEC 

Recommendations”, Telephony, (June 14, 1993)
66