Hurricane Sandy’s 80 mph winds swept through the Northeast U.S. in late October, destroying coastal homes, flooding buildings and snuffing out power for millions of residents. In the process, it also exposed the vulnerabilities of the nation’s much-vaunted advanced telecommunications and power networks.

Overnight, the digital connectedness that consumers and businesses so prize quickly evaporated. Without power to the cable box and modem, for instance, digital TV did not work and neither did the Internet. And the voice-over-IP (VOIP) phone service that has replaced old-fashioned landlines for many also failed because there was no broadband access. Mobile phones? If the nearby cell phone tower had no power, and no backup generator, those did not work, either. Entire communities were paralyzed.

“As information technology and network communications become more central to business and daily life, we’re more dependent on those connections,” says Kevin Werbach, a professor of legal studies and business ethics at Wharton. Werbach recently spoke before the Federal Communications Commission (FCC) on the economic, technological and policy issues that need to be addressed as consumers rely on new communications technologies. “It increases the vulnerability of not just one system failing, but [the prospect of] taking down other systems with it.”

Whereas at one time, devices such as the telephone functioned on independent networks, today’s technology and communications systems are both interwoven and integrated into our daily lives. These networks give people access to the Internet, cable television and phone services, and connect home security devices, banking systems and even the power grid. But therein lies the danger. “Are we losing flexibility and redundancy by grouping together these technologies through the same network?” asks Kendall Whitehouse, technology and media editor for Knowledge at Wharton. “Are we willing to pay the economic price to have the redundancy that we need?”

The FCC is viewing this topic with a fresh eye. Starting in 2013, it will hold field hearings to gather information about strengthening wired and wireless communications networks to withstand disasters. “This unprecedented storm has revealed new challenges that will require a national dialogue around ideas and actions to ensure the resilience of communications networks,” said FCC Chairman Julius Genachowski in a statement.

Regulators looked into shoring up network resiliency after Hurricane Katrina, but their efforts led nowhere. The stakes are higher now, because public safety personnel such as firefighters, police and paramedics are increasingly using smartphones, tablets and other gadgets that run on 4G wireless cellular networks, and a fully integrated system will likely take years to become operational. Congress has authorized $7 billion to upgrade emergency communications systems for first responders so they will no longer stay in silos. During the September 11, 2001, terrorist attacks, for example, firefighters and police in New York could not communicate directly by radio because they were using different systems.

After Katrina, the FCC tried to adopt rules to require carriers to install backup batteries, but telecom firms sued to block those regulations, and eventually the Commission gave up, according to a November 1 story in The Wall Street Journal. Carriers said they already have batteries at many cell sites, although these typically only last for eight to 12 hours. The paper reported in a November 15 update that Genachowski recently asked whether there is a need for better backup power at the sites, such as generators. Most of Verizon’s cell sites have generators, but less than half of AT&T’s towers possess them. However, AT&T CEO Randall Stephenson noted during a recent appearance that putting “big backup power generators on top of all these buildings … is impractical.”

“The traditional communications systems were built as regulated industries. There was less innovation, but there was a real commitment to robustness and reliability,” Werbach notes. “In an Internet-centric world, there’s more innovation, but not the same reliability.”

End of an Era?

To be sure, the country has seen its share of technological disruptions. The development of nuclear power, for instance, brought much excitement about this “incredible source of energy,” Whitehouse says. But as safety problems cropped up, governments had to ensure the resilience of nuclear power plants in light of disasters such as Chernobyl in the former U.S.S.R and, most recently, Fukushima in Japan. “[Nuclear energy] requires highly redundant systems,” he adds.

Today, the big shift is in telecommunications. “We are going through the most significant transition in over a century in communications, from circuit-switched to IP,” Werbach says. The old landline phone system is circuit-switched, where a phone call is placed using an exclusive, dedicated line for one-on-one conversations. An Internet Protocol-based network, on the other hand, breaks up the call into digital packets of data. As these packets travel, they can share lines with other packets until they reach their destination and are reassembled. Thus, IP is cheaper and more flexible, although data congestion can cause degradation of service. But telecom carriers still are required to maintain their legacy infrastructure, even if they see business shifting to their digital networks. “It increasingly makes no sense for companies to run that legacy network,” Werbach points out.

AT&T has petitioned the FCC to relax the rules around its responsibilities as a regulated former Baby Bell, such as the obligation to provide low-cost phone service to every American who wants it. Carriers do not want to be stuck with maintaining miles of aging copper wiring as more customers disconnect traditional landlines for mobile phones and VOIP services, which are faster-growth businesses. “Customers are abandoning obsolescent (legacy) services, but AT&T and other incumbent carriers still must be prepared to serve every household in their service territories on demand,” AT&T’s filing said.

But disasters like Sandy exposed inherent vulnerabilities in digital networks: One point of failure can take down multiple services, and shoring them up can be costly. “It’s hard for the carrier to justify spending to prevent rare, but potentially catastrophic, events,” Werbach notes. “It’s hard to envision an industry-wide commitment without a regulatory framework.” The legacy systems are more reliable because the government mandated them to be so. However, Werbach says, a discussion is starting to spring up in Washington about the implications of the end of the telephone network. “The industry is not dead-set against reliability, but it needs to make sense.”

Capital expenditures to prevent mishaps are tougher to justify than spending on initiatives that will increase revenue. “The difficulty in information security is the need to demonstrate a negative — the absence of bad things happening rather than a value-add,” according to Andrea Matwyshyn, a professor of legal studies and business ethics at Wharton. She would include data security on the list of factors that could undermine network resiliency, since cyber-attacks can take down whole systems.

One problem is the lack of specialized technical knowledge among people in public policy, Matwyshyn says. Vendors that are selling these systems are reluctant to share any information about flaws — to no one’s surprise. The potential for security violations also could escalate as consumers use more Internet-connected gadgets. “Each device we connect up is another potential security [hole],” she notes. “The security of the entire system will be determined by the least secure device.”

Right now, consumers are enamored with technology and choose to focus on its benefits while downplaying mishaps such as data breaches. “We have an irrational exuberance around technology and code,” Matwyshyn says. “Code is not a magic potion. Humans write it…. Every code has flaws. You need to test, always, and to fix” any problems that arise.

While cyber-attacks are serious threats, a connected society also has to contend with less grave, but highly annoying, snafus. As systems become more interdependent, “errors get quickly replicated,” Whitehouse points out. Network outages at a select group of corporate giants that offer services for many consumers and businesses, such as Amazon and Google, can quickly halt the activities of multiple companies. In a less connected world, such outages would have a smaller radius of impact.

Meanwhile, all these networks are powered by electricity, and increasingly the nation’s power grid is being connected to the Internet. This “smart grid” automates tasks that used to be manually performed and adds new technologies, such as two-way digital communications, to devices associated with it. But the connected power grid now becomes vulnerable to hackers who can potentially take it down remotely. “Sandy proved — and many New Yorkers experienced — the reliance of our society to a great extent on our power grid and electrical system working properly,” Matwyshyn says. “Serious vulnerabilities exist in the smart grid system.”

The Dynamic IP Network

So what is the solution? Here, the government can play a pivotal role by getting representatives from the public and private sectors together. “Have a central place for everyone to [meet],” Werbach suggests. They can discuss issues such as setting industry requirements and guaranteeing a minimum level of service for phone users. Second, the market should encourage more businesses to offer services that act as redundant systems. For instance, during the September 11 attacks, Research in Motion’s BlackBerry network stayed up while landlines and other cell phone services were down, Werbach says.

Although IP networks have their flaws, they have fairly significant virtues as well. The traditional phone network routed calls through central switching hubs. If the lines in the hub went down, service was disrupted. “The Internet can route data around [problems]; there’s not one central switching [point],” Werbach notes. If the Internet goes down in one part of the country, unaffected parts of the IP network can work around it. Moreover, several companies offer similar alternatives for some communications services. If one provider isn’t up to par, people can switch to another. In contrast, the local phone company was the only game in town for decades.

Because of the IP network’s dynamism, Whitehouse is bullish about its future, despite the flaws. “Overall, the trend is quite positive,” he says. “Digital technology gives us the capability to establish multiple levels of redundancy…. There will be periods of anxiety, but the long-term trend is toward greater security and reliability.”