[Senate Hearing 107-354]
[From the U.S. Government Publishing Office]
S. Hrg. 107-354
REAUTHORIZATION OF
THE DEFENSE PRODUCTION ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
THE PROPOSED LEGISLATION AUTHORIZING FUNDING FOR
THE DEFENSE PRODUCTION ACT
__________
JUNE 27, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota ROBERT F. BENNETT, Utah
JACK REED, Rhode Island WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia JIM BUNNING, Kentucky
MIKE CRAPO, Idaho
DON NICKLES, Oklahoma
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Michael J. Solon, Republican Senior Financial Advisor
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Economic Policy
CHARLES E. SCHUMER, New York, Chairman
ROBERT F. BENNETT, Utah JACK REED, Rhode Island
MICHAEL B. ENZI, Wyoming CHRISTOPHER J. DODD, Connecticut
JIM BUNNING, Kentucky JOHN F. KERRY, Massachusetts
Kate Scheeler, Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, JUNE 27, 2001
Page
Opening statement of Senator Schumer............................. 1
Opening statements, comments, or prepared statements of:
Senator Bennett.............................................. 2
Senator Sarbanes............................................. 4
Senator Enzi................................................. 5
Senator Corzine.............................................. 6
Senator Bunning.............................................. 18
WITNESSES
Kenneth I. Juster, Under Secretary for Export Administration,
U.S. Department of Commerce.................................... 6
Prepared statement........................................... 18
Michael D. Brown, General Counsel, Federal Emergency Management
Agency......................................................... 8
Prepared statement........................................... 21
Eric J. Fygi, Deputy General Counsel, U.S. Department of Energy.. 9
Prepared statement........................................... 22
Delores M. Etter, Acting Director, Defense Research and
Engineering, U.S. Department of Defense; accompanied by Paul
Halpern........................................................ 11
Prepared statement........................................... 26
(iii)
REAUTHORIZATION OF
THE DEFENSE PRODUCTION ACT
----------
WEDNESDAY, JUNE 27, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Economic Policy,
Washington, DC.
The Subcommittee met at 2:30 p.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Charles E. Schumer
(Chairman of the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Let me call our Subcommittee hearing to
order, and thank all of our witnesses. I apologize for it being
later than scheduled. As you know, we had a vote on the floor.
I want to thank my colleagues, particularly our Chairman for
being here this afternoon.
This is my first hearing as Chairman of the Economic Policy
Subcommittee and I wanted to take a moment to thank Senator
Bunning, in absentia. He told me a few minutes ago he could not
make it, for his tenure as Chairman. We worked closely together
during that time and I look forward to an excellent working
relationship with him over the next year.
It will come as no surprise, that I am in the process of
planning an active Subcommittee agenda and anticipate holding a
number of hearings in the coming months, although probably none
as scintillating as our hearing today.
[Laughter.]
I have made provisions for an overflow room if anybody
would like to use it.
[Laughter.]
But I look forward, seriously, to working with the
Subcommittee Members on issues of interest to them. I am very
pleased to welcome our witnesses and the New Yorker on our
panel, Under Secretary Juster. There always seems to be a token
New Yorker at the table in our hearing room, so I am glad that
you are meeting our expectation, Mr. Secretary. I also want to
welcome Michael Brown, the General Counsel of FEMA. Eric Fygi,
the Deputy General Counsel for the Department of Energy,
Delores M. Etter, the Acting Director of Defense for the U.S.
Department of Defense, and Paul Halpern. I would just ask that
our witnesses be mindful of time allotments. I know that some
of our Members are going to be called away and I want everyone
to have an opportunity to ask questions.
The purpose of the hearing is to review the Defense
Production Act in preparation of its reauthorization, which
expires in October. It is a little known Act, with tremendous
delegated authority.
The law was enacted at the outset of the Korean War to
ensure the Department of Defense had sufficient industrial
resources available to conduct the war effort. Today, the Act's
most important authority continues to be ensuring that we can
respond immediately to national emergencies and meet all
threats to our national security, from weapons of mass
destruction to cyber or biological terrorism.
DPA continues to be a law necessary to provide for the
common defense and there appears to be no disagreement about
that. Where there is disagreement is about whether legislative
changes are necessary to ensure that the Act is properly
employed.
Last February, the Full Committee under Chairman Gramm held
a hearing into the use of DPA authority during the California
electricity crisis. The hearing examined whether Federal orders
that required natural gas suppliers to continue to supply
California's Pacific Gas and Electric during volatile market
conditions constituted an inappropriate use of the Act.
The Clinton Administration and the current Administration
subsequently affirmed that the threats of black-outs to
California's military bases constituted a threat to national
security and the orders were therefore appropriate. This
instance and the resultant controversy over the orders has led
to the acute concern among some Committee Members that the Act
could be used to intervene in civilian markets when there is
only an indirect threat to national defense.
And if you believe in Adam Smith, it is hard not to be
sympathetic to those Members' concerns since requiring the sale
of goods and services at government-mandated prices can disrupt
and distort markets. I am happy to have the opportunity at this
hearing to explore these issues and any others that Members
might have.
The Administration has asked us to reauthorize the Act for
3 years without legislative changes. I think there are some
Committee Members who will look for some accommodation and I
would ask that the Administration hear the concerns of these
Members and work with them, myself, and the Chairman of the
Full Committee so that we can accomplish the reauthorization of
this Act before its expiration. I am sure we all agree, letting
this Act expire is simply not an option.
Thank you and with the permission of our two Republican
Members, I would recognize Chairman Sarbanes first.
Senator Sarbanes. Thank you, Mr. Chairman. I would defer to
Senator Bennett.
Senator Schumer. Okay. Then we will go to Senator Bennett,
if he would like to make an opening statement.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman. I appreciate your
and Chairman Sarbanes' courtesy. I am one of those who thinks
that simply extending the Act for 3 years without change would
be a mistake. The world has changed very dramatically since
this Act was drawn in 1950. There have been some changes to it
since then. But the world has been changed dramatically in the
last 5 years, not just the last 50 years. And the focus goes
from dealing with weapons of mass destruction to dealing with
weapons of mass disruption.
We had a hearing in the Joint Economic Committee where the
CIA spoke with us about how within the next 5 years nation
states would provide the biggest cyber-threat to the disruption
of U.S. networks and critical infrastructures. And we recognize
that virtually every government agency, including the
Department of Defense, is completely dependent upon the
civilian infrastructure to carry out its work.
There was a time when an officer in the Pentagon could pick
up the phone, get the commander in the field, and it would be
on a secure DoD telephone system. Today, when he picks up the
phone at the Pentagon, he's on Verizon's telephone network.
Future attacks against the United States will not only be
against the government or defense production facilities. These
attacks will be against any part of our infrastructure that an
attacker feels could bring down the U.S. economy and move the
focus from weapons of mass destruction to weapons of mass
disruption.
The bottom line is that the U.S. infrastructure and
computer systems are going to remain the targets of attack well
into the future. We discused these possiblilties in terms of
assessment when we did the Y2K activity. I worked very closely
with John Coscanan, who was the president's Y2K czar. John
Coscanan worked on a review of our vulnerabilities.
Coincidentally, we got to the end of the Y2K situation and we
had solved that particular problem before the review that John
Coscanan worked on could be brought to light with the kind of
publicity that I think it deserved.
There is sufficient confusion about the role that the
Defense Production Act should play in reconstructing our
critical infrastructure if an attack took place, that I would
prefer that we authorize the Act unchanged for one more year
and use that year to examine all of the issues that the Clinton
administration began an examination of and that I was a part
of, that simply did not happen when Y2K came without a problem
and everybody heaved a sigh of relief and said, well, we do not
have to worry about that any more. We do have to worry about
it.
Y2K was an example of what could happen if the computers
failed by accident. We need to pay attention to what could
happen if the computers fail on purpose. And the Banking
Committee, with its jurisdiction over the Defense Production
Act, is near ground zero at the question of protecting and
refinancing a restructuring of the American economy if these
kinds of attacks occur.
For that reason, Mr. Chairman, I will be one to say that it
would be unthinkable to let this law lapse without being
reauthorized. But I would hope that we would not just
reauthorize it for 3 years and go on with the same inattention
that we have shown. I would hope that we would authorize it for
1 year and use that 1 year for a very active reexamination of
its proper role and what we in the Banking Committee can do to
prepare ourselves for the future.
Thank you, Mr. Chairman.
Senator Schumer. Thank you, Senator Bennett. And now our
full Committee Chairman, Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Chairman Schumer.
First of all, I want to commend you for holding today's
hearing and carrying forward a very important responsibility of
the Banking Committee. We are delighted to see you in the Chair
and we look forward to many constructive contributions. And I
also want to state that I am certain that the cooperative
relationship that has existed between you and Senator Bunning
under previous arrangements will continue under the new
arrangements.
The Defense Production Act is one of five statutes under
the jurisdiction of the Banking Committee which will expire
later this year, and on which we have focused right off the
bat. We have been holding hearings on those measures. I hope
that we will be able to proceed with mark-ups for
reauthorizations next month.
The other statutes are the charter of the Export-Import
Bank, the Iran-Libya Sanctions Act, on which there will be a
hearing tomorrow morning, the Multi-Family Assisted Housing
Reform and Affordability Act, the so-called mark-to-market,
which needs an extension of its authorities, and the Export
Administration Act, which has been reported out of the
Committee and Senator Enzi was very much involved in that, and
is now awaiting action on the floor of the Senate. I would hope
that we can move all of these matters next month in terms of
moving along toward enactment.
The Defense Production Act provides the President a number
of authorities to ensure the availability of industrial
resources to meet national security needs and to deal with
domestic civil emergencies. The Administration is requesting a
reauthorization for 3 years of the DPA. Incidentally, the
Administration supports reauthorization of all of these other
measures which I previously outlined as part of our Committee's
work agenda.
Actually, Mr. Brown from FEMA says in his prepared
statement, and I quote him, with respect to the DPA: ``The
expiration of these provisions could have a severe impact on
the Nation's emergency resource preparedness to meet threats to
our national security.'' And then further on, he says: ``We may
also need to use DPA authorities to respond to other
catastrophic civil emergencies. The Administration views the
possibility of such expiration as disruptive to ongoing
programs under the Act.''
As Chairman Schumer outlined in the beginning, the DPA is a
statute that does not attract a great deal of public attention
until some other problem or crisis develops that requires the
use of its authorities and Senator Bennett underlined the
importance of that. Senator Bennett has an ability to focus on
important matters that tend to get overlooked. He was early on
the Y2K problem and, working with Senator Dodd, provided
tremendous leadership here in the Congress in trying to address
that problem.
And, as he just indicated in his statement, he's also
focused on these DPA authorities and their importance. This is
really part of the Committee doing its basic work, and I think
we need to address this issue with a great deal of seriousness
and concern. Chairman Schumer, thank you very much for
scheduling this hearing.
Senator Schumer. Thank you, Mr. Chairman.
Mr. Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. The reauthorization
of the Defense Production Act will require careful thought and
a reevaluation of the role that this Act plays in affecting
different aspects of our Nation's productivity, security, and
ability to respond to moments of national crisis. In my
opinion, there is a question that the Act can benefit our armed
forces in ensuring that they have the latest equipment
available in a timely manner and that they are prepared and
able to defend our Nation's interests.
But the Defense Production Act has another side to it that,
when used improperly, can have a severe rippling effect on many
different areas of the country. In my opinion, the main use of
this has been a misuse.
When the Act was used at the end of last year to require
natural gas sales to California energy producers, at best, a
very tenuous connection was made to the Act's role as a
national security insurance statute. While it is true that
electricity producers in California do supply some energy to
California's military installations, the extent and imminence
of any threat to those installations was not clearly
established before the Act was invoked.
Testimony that was heard before the Full Committee at its
February 8 hearing indicated that national defense was actually
a secondary justification for the use of the Act, when the true
primary purpose was requiring natural gas suppliers to continue
delivering gas to the California industries, was to provide
fuel at a much lower rate than would have been otherwise
available. otherwise. And that wasn't my biggest concern. It is
kind of a domino effect when some of the small Wyoming
producers had to send gas down there without any definite
assurance that they would be paid for their gas.
The company taking it was perhaps bankrupt and the Federal
Government was accepting no responsibility for it. You cannot
have small businesses left hanging out by an act of the Federal
Government without them taking some responsibility.
The Defense Production Act therefore must be reviewed and
protections need to be put in place to protect consumers and
industries from Defense Production Act abuse. When the Defense
Production Act was invoked, it placed a superior priority on
California Energy Development. Had a conflict arisen between
providing energy for California and any of the company's other
contracts, the Defense Production Act would have required
contractors to fill California's demands first. Only after
California was adequately provided for could any energy left
over be used to fill the needs of other States, including my
State.
This should not occur. The Act also suspends civil remedies
that would have been available to energy suppliers in the event
of a default. The Federal Government required companies to sell
natural gas without any guarantee they would ever receive
payment.
Short-term band-aids and Federal intervention, like the
intervention into the California energy crisis, have the
potential of making matters worse than they currently are. It
is clearly a case of the cure being much worse than the
disease.
I am deeply concerned that the if the Defense Production
Act is not amended to protect industries from abuse, then the
Act itself will become the real threat to our energy supplies,
our jobs, and our industries.
Given the potential for abuse and certain questionable uses
for that authority, I must seriously consider the wisdom of the
proposal of a 3 year extension without a significant
reevaluation of the Act's application. I have allowed a 1 year
extension twice already and I have been bitten once.
Mr. Chairman, I thank you for the opportunity for this
hearing and look forward to the information that will come out
of it and the discussion and debate that will ensue. Thank you.
Senator Schumer. Thank you. And thank you and Senator
Bennett for your real interest in this, as Senator Sarbanes
said.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman. It is a pleasure
to be here in your first Subcommittee hearing. I believe this
is an important discussion we are having about reauthorization.
Some of us can look at the same facts that I think have
been spoken about and wonder about where the trade-offs
actually lie with regard to what is our security interest. And
I hope that these hearings will help clarify that as we go
through this reauthorization process. I think that this is a
fair subject to debate. I am not certain that the outcomes will
always be consistent from the different beholders of the facts.
Senator Schumer. Well, thank you, Senator Corzine. And I
want to thank everybody for being here at least at the initial
hearing where I am chairing this Committee, which is a great
honor.
And now we will call on each of our witnesses and ask them
to try and--there is a little clock here that will change color
from green to yellow when you have a minute left, to red when
your time is up.
Mr. Juster.
STATEMENT OF KENNETH I. JUSTER
UNDER SECRETARY FOR EXPORT ADMINISTRATION
U.S. DEPARTMENT OF COMMERCE
Mr. Juster. Thank you, Mr. Chairman, and Members of the
Subcommittee. I appreciate the opportunity to testify on the
reauthorization of the Defense Production Act. I have submitted
a written statement which I hope could be included in the
record and I will just briefly summarize my comments.
Senator Schumer. Without objection, your statement and the
statements of the other three witnesses as well will be printed
in the record.
Mr. Juster. Thank you. I would like to focus my comments on
those authorities of the Defense Production Act that are
relevant to the Department of Commerce. The Department plays
several roles in implementing those DPA authorities that relate
to the defense industrial base. First, under Title I of the
DPA, the Department administers the defense priorities and
allocations system. Second, under Title III, the Department
reports on defense trade offsets. Third, under Title VII, the
Department analyzes the health of U.S. defense industrial base
sectors. And fourth, also under Title VII, the Department plays
a significant role in analyzing the impact of foreign
investments on the national security of the United States. I
will touch briefly on each of these four roles.
The defense priorities and allocation system, which is
known as DPAS, has two purposes. First, it ensures the timely
availability of products, materials and services that are
needed to meet current national defense and emergency
preparedness requirements, with minimal interference to the
conduct of normal business activity. Second, it provides an
operating structure to support a timely and comprehensive
response by U.S. industry in the event of a national security
emergency.
Under Executive Order 12919, the Department of Commerce
administers this DPAS system in accordance with the priorities
and allocations provisions of the Defense Production Act. Those
provisions provide authority for requiring U.S. companies to
accept and perform contracts for orders necessary to national
defense and civil emergency needs. They also provide authority
for managing the distribution of scarce and critical materials
in an emergency.
Under this system, the Department delegates to several
Federal agencies, including the Departments of Defense and
Energy, the authority to use the system to obtain critical
products, materials and services to meet approved program
requirements. In the vast majority of these cases, the
procuring Federal agency and the contractor quickly come to
mutually acceptable terms for priority production and delivery.
Only if the company and the delegated agency cannot reach
such agreement does the Department of Commerce, as the primary
liaison with U.S. industry, come into the picture and play a
critical role in resolving the issue.
Turning to defense offsets, the Commerce Department
provides Congress with an annual report, which we just
published recently, on the impact of offsets. Defense trade
offsets are industrial compensation practices required as a
condition of purchase in either government-to-government or
commercial sales of defense articles or services. For example,
a foreign government may agree to purchase jet fighters from an
American company, but could insist that the engines for the
jets be produced in the foreign country using local suppliers.
We believe that offsets are economically inefficient
because the foreign customer is basing the purchase decision on
something other than the quality of the product or service
being provided. Any unilateral action on offsets could have a
negative impact on the competitiveness of our prime contractors
in world markets, we believe that we should attempt to address
the issue of offsets in bilateral and multilateral settings.
The third area where the Department of Commerce utilizes
authorities under the Defense Protection Act relates to reports
that we prepare on individual sectors of the defense industry.
These studies are either self-initiated or requested by the
armed services, the Congress or industry itself. The studies
provide a comprehensive review of specific sectors within the
U.S. defense industrial base and they gauge the current
capabilities of these sectors to provide defense items to the
U.S. military services.
The final area where we rely on DPA authorities relates to
the Committee on Foreign Investment in the United States, the
CFIUS. The Department of Commerce is a member of this
Committee, which is chaired by the Department of the Treasury.
In 1988, the President delegated to this Committee certain
of his responsibilities under section 721 of the DPA, which is
known as the Exon-Florio provision. The intent of that
provision is to provide a mechanism for review and, if the
President finds necessary, for suspension and prohibition of a
foreign direct investment that threatens national security. But
it is not the intention of this provision to discourage foreign
investment in the United States.
In summary, the DPA provides essential authorities for a
variety of important programs at the Department of Commerce. We
therefore support extending the Defense Production Act for a 3
year period for purposes of continuity and stability in terms
of these essential authorities.
But I should hasten to add in response to the comments that
have been made already that we are as an Administration
currently reviewing the entire issue of critical infrastructure
assurance and how the government will organize itself on that
matter. We are committed in the context of that review and the
national plan that we are intending to issue by the end of this
year, to analyzing the authorities that we would require to
undertake critical infrastructure assurance and how those
relate to the Defense Production Act. So I want to assure
Senator Bennett that that is something very much on our minds
as well. Thank you very much.
Senator Schumer. Thank you, Mr. Juster.
Mr. Brown.
STATEMENT OF MICHAEL D. BROWN
GENERAL COUNSEL
FEDERAL EMERGENCY MANAGEMENT AGENCY
Mr. Brown. Thank you, Mr. Chairman, Members of the
Committee. I am certainly pleased to be here today to testify
on the DPA on behalf of Director Allbaugh. Rather than go
through my written testimony, I would like to offer just a few
comments, if the Chairman doesn't mind.
The Administration does request a 3 year reauthorization of
the Act. We believe that this continuity is important to carry
out the duties and the obligations of FEMA as the lead
coordinating agency on behalf of both the National Security
Council and the White House.
FEMA is prepared to fulfill our obligations under Executive
Order 12919, which indeed involve things such as coordination.
We are a coordinating agency and, frankly, we think we do
coordination pretty darn well. The expiration of the Act will
hinder us in our full capacity to do that coordinating role and
to carry on that type of activity.
The DPA itself gives us the additional tools and, in fact,
I would say that it gives us the tools of last resort that we
need in the event of what I would call a truly catastrophic
event that goes beyond the Stafford Act, that goes beyond the
capabilities of FEMA to actually react properly, to coordinate
and to do our job. Therefore, we believe that the expiration of
the act does have serious or dire consequences for FEMA.
You may recall that President Bush has tasked Director
Allbaugh with the creation of the Office of National
Preparedness. We have done so. We believe that the
reauthorization of the DPA is vital to the continued function
of that particular office.
We may actually be looking to the DPA for authorities to
respond to consequences of mass destruction or, as we have
heard today, weapons of mass interruption. I think that is a
very poignant term that we ought to focus on.
We believe that the authorities contained in the DPA are
essential as tools of last resort in our management of those
types of incidents. In addition to that, we have within FEMA
undergone a major reorganization and realignment. Within that
realignment, we have created a new office that is tasked with
the responsibility of coming up with plans and procedures to
respond to catastrophic disasters. This office is also tasked
with the function, to study the DPA and how those authorities
might be used in instances of truly catastrophic incidents.
In summary, the linkage between the DPA and the Stafford
Act ensures the availability of needed resources when the
nation is facing a truly catastrophic disaster, whether that
disaster is natural or man-made.
Therefore, we urge the Congress to reauthorize the DPA in
its entirety, as written, for at least 3 years. Thank you, Mr.
Chairman. I would be happy to respond to any questions.
Senator Schumer. Thank you, Mr. Brown.
Mr. Fygi.
STATEMENT OF ERIC J. FYGI, DEPUTY GENERAL COUNSEL
U.S. DEPARTMENT OF ENERGY
Mr. Fygi. Well, thank you, Mr. Chairman. Since much of your
own opening remarks harkened back to the California experience
that was the subject of the February 9 hearing, perhaps I can
summarize for the benefit of those who were not in attendance
at that hearing the factual circumstances that prompted the
resort to the Defense Production Act.
Those factual circumstances comprised a threat, an actual
threat of physical interruptions of deliveries of natural gas
for the entirety of the north and central areas of California,
which happened to be serviced by a major combined gas and
electric utility.
The reasons for the resort to the authorities in the
Emergency Natural Gas Act, as complemented by the authorities
under the Defense Production Act, were not, as was erroneously
stated by Senator Enzi, to control prices. The reasons were to
assure continuity of supply in the extraordinary and
unprecedented circumstance that this country had never
experienced, one where some 3.9 million customers in a
significant portion of the country that includes significant
industrial activity directly relevant to defense security and
defense activities was threatened by dint of an approaching
insolvency and liquidity crisis of a regulated utility.
The immediate problem was not that the utility did not have
the capacity to secure revenues equal to its expenditures for
natural gas acquisition costs. California's tariff for the gas
utilities was more rational than that for electricity provision
at the retail level.
What prompted the emergency was that the overall financial
posture of that utility, including the downgrading of its bond
instruments and credit ratings by the major rating agencies,
prompted gas suppliers to begin terminating delivery of
supplies to the entirety of that region through Pacific Gas &
Electric Company.
Had that occurred, that event in turn under California law
would have prompted the need by that utility to cease delivery
of others' natural gas for electric generating purposes in
order to make continued deliveries to so-called core retail
customers. So that there was a substantial and immediate risk
of a cascading situation that would have resulted in a
significant outage of the already-stressed electricity posture
in California.
Now the problems that stemmed, or that I have heard
identified, stemming from this resort to the two authorities--
the emergency natural gas provisions of the Natural Gas Policy
Act, coupled with the Defense Production Act--essentially are
twofold.
First, the criticism suggests an impropriety in resorting
to these authorities when there was a risk of nonpayment of the
natural gas supplies. And granted, there was a risk of
nonpayment.
I am pleased to report that 100 percent of the gas
suppliers whose volumes were made available pursuant to the
emergency orders made at the end of the Clinton Administration
and continued by President Bush for the first 2 weeks of his
Administration, have in fact been paid in full. The threats of
adverse economic consequences to the gas suppliers proved
unfounded.
The reason that they were proven unfounded was that this
small period of reprieve that stopped a run on the bank in
northern California--that is the closest analogy that I can
think of--afforded the State and other institutions sufficient
time to come to grips with the circumstances, including
changing somewhat the tariff posture of the utility in question
that granted additional assurance to gas suppliers that they
would be paid from the revenues received by the utility from
customers buying natural gas, which was the nub of the problem,
such that we have not seen a recurrence.
Finally, as to the appropriateness as a matter of law of
resort to the Defense Production Act here, it is well to
remember that, in addition to defense production in the
classical sense of hard goods, the Defense Production Act
contains a separate subsection dealing with continuity in
provision of energy was specifically amended in 1980 to specify
a statutory linkage between continuity of energy supplies and
maintenance of the national security interests of the United
States. Thank you very much, Mr. Chairman, and I will be
pleased to respond to any questions you may have.
Senator Schumer. Thank you, Mr. Fygi.
Ms. Etter.
STATEMENT OF DELORES M. ETTER
ACTING DIRECTOR
DEFENSE RESEARCH AND ENGINEERING
U.S. DEPARTMENT OF DEFENSE
ACCOMPANIED BY PAUL HALPERN
Ms. Etter. Thank you. I appreciate the opportunity to share
with you the Department of Defense's views regarding the
Defense Production Act and the role it plays in helping to
obtain the goods and services needed to promote the national
defense. I also want to express the Department of Defense's
support for reauthorization of the Act through September 30,
2004. A strong domestic industrial and technology base is one
of the cornerstones of our national security. The Act provides
the department essential tools required to maintain a strong
base that will be responsive to the needs of our armed forces.
Three authorities--Title I, III and VII--continue to be of
vital importance to the Department.
Title I provides the President the authority to require
preferential performance on contracts and orders to meet
approved national defense and emergency preparedness program
requirements. During peacetime, Title I authorities, as
implemented through the DPAS system, and applied via contract
clauses, are important in setting priorities among defense
programs that are competing for scarce resources and backlogged
parts and subassemblies.
Delayed deliveries to producers of weapons systems increase
costs and affect our readiness. DPAS gives DoD an opportunity
to prioritize deliveries and minimize costs and schedule delays
for the department's orders and for allied nation defense
procurements in the United States.
However, in the event of conflict or contingency, DPAS
becomes indispensable. During operations Desert Shield and
Desert Storm, the Department of Commerce, at the request of
DoD, formally took acts in 135 cases to ensure that the
industry provided priority production and shipment of essential
items.
More recently, since 1995, DoD and the Department of
Commerce have worked together to resolve more than a hundred
cases of industrial conflicts among competing U.S. defense
orders and to permit NATO and allied nations to obtain priority
contract performance from U.S. suppliers.
Sixty-eight percent of the cases supported wartime needs in
Bosnia and Kosovo for items such as satellite communication
radios. Thirty-two percent of the cases supported peacetime
requirements.
Finally, I would also note as we use Title I authorities,
they help us engage in multilateral discussions within NATO and
bilateral discussions with key allies to establish reciprocal
priority agreements. Now I would like to turn to Title III.
The primary objective of Title III is to work with U.S.
industry to strengthen our Nation's defense by creating,
expanding and maintaining affordable and economically viable
production facilities. The Title III program meets this
objective through the use of financial incentives that
stimulate private investment and key industrial capabilities.
The DPA also ensures congressional oversight. By law, Title
III projects cannot be initiated until a Presidential
determination has been made and Congress has been notified.
Title III reduces the cost of our weapons systems and promotes
technology transition by improving the capabilities of our
defense industrial base.
Without Title III, the insertion of these technologies in
serveral of these cases would be delayed for years. Title III
reduces this time by first eliminating market uncertainties and
reducing risks that discourage the creation of new capacity and
the use of advanced technologies.
Second, Title III results in reduced costs and increased
demand. And third, it creates information about materials
needed by the design community to incorporate these new
materials into defense systems.
There are currently eight active Title III projects and we
are initiating a new thrust into radiation-hardened
electronics. This new initiative will establish a domestic
production capacity for radiation-hardened electronics
materials and components to support both strategic missile and
space systems.
I would also like to mention one program in Title VII that
is of particular importance to us, section 721. Section 721
allows the President to suspend or prohibit foreign acquisition
of a U.S. firm when that transaction would present a credible
threat to the national security of the United States and
remedies to eliminate that threat are not available under other
statutes. Administration of this section has been delegated to
the Committee on Foreign Investment in the United States--
CFIUS--which is chaired by the Department of the Treasury.
The DoD considers the CFIUS review to be an essential and
effective process for analyzing the national security
implications of foreign acquisitions of U.S. companies in
resolving issues related to these transactions.
The DoD has its own industrial security regulations which
are used to review foreign acquisitions where classified
contracts are involved. However, CFIUS is important because it
provides additional coverage of firms developing dual-use
technologies that are export-controlled, but unclassified.
In addition, the CFIUS review process is an interagency
process which allows all Federal departments to coordinate
their analyses of the national security implications, balance
risks of disclosure against the benefits of foreign investment,
and impose necessary risk mitigation measures to eliminate
threats to national security.
In conclusion, the DoD needs the Defense Production Act. It
contains authorities that exist where no others do, and I hope
I have conveyed to you the significant role that those
authorities play in ensuring our Nation's defense. Thank you.
Senator Schumer. Thank you, Dr. Etter. And now we are ready
for questions. I first want to thank all the witnesses for
their testimony. Let me ask you a question relevant to my
State. I think one of the major concerns that some of the
members of this Committee, and I know Senator Gramm has raised
as well, is the use of DPA in the California situation as it
sets a precedent. So as you are aware, New York is facing the
possibility of energy shortages. Some estimate if we have a
very hot summer, we could run into California-like problems in
August. We do not know the predictability. We cannot predict
the difficulty we will have, but we are taking steps in the
State to address the problem.
My question is, would the Administration consider issuing a
Federal order similar to that issued in California if New York
were facing the threat of a rolling blackout? Dr. Fygi
mentioned that the energy nexus is sufficient to use DPA. We
also have some areas vital to our national defense--Fort Drum,
the Brookhaven National Labs. What is the opinion of the
witnesses on that issue?
Dr. Fygi. Mr. Fygi.
Mr. Fygi. That is all right. Sometimes people call me
doctor. But I think sometimes it is more like a saloon doctor
than an MD.
[Laughter.]
I cannot foresee or predict whether we will be confronted
with a situation like California's. As I indicated in my
opening summary, the California circumstance was quite unlike
anything the Nation has ever experienced--the actual physical
interdiction of gas volumes affecting the entire service area
of a major combined gas and electric utility.
There is nothing that we have seen that I am aware of in
the other areas of the country that might themselves be
experiencing some tension in continuity of electric service,
for example, that approaches the immediate emergency
circumstance that confronted us in California during the
winter. The only really accurate answer I can venture is that I
believe it extremely unlikely that we will be confronted with a
replication of the circumstances in California.
Also, the Administration might well decide to employ
different techniques were any Federal intervention called for.
I would not want to suggest that direct Federal regulatory
intervention would be the first choice in determining courses
of action.
Senator Schumer. Right. But if they determined--that is a
good try, Mr. Fygi.
[Laughter.]
I understand the Administration probably would not want to
do it, although they did in California. My question was: Would
the nexus of the electric grid, in your judgment, and our
military facilities, or military-related facilities, provide
enough justification to use DPA, if the administration were to
determine it wanted to, and if New York's crisis merited it?
Mr. Fygi. In other words, if I might presume to restate the
question, are you asking whether we are creative enough lawyers
to concoct a circumstance in which the DPA could be employed
for New York in such a setting?
Senator Schumer. Yes.
Mr. Fygi. Well, at least my presumptuousness was accurate,
if nothing else. I do not know the answer to that because--
Senator Schumer. It had a real purpose. I would not want,
if, God forbid, we were in the state that California is in in
August and say, here's DPA. And then have one of you folks come
to me and say, well, DPA doesn't really reach here.
Mr. Fygi. Well, the DPA regime does, in fact, by its text,
reach circumstances where the President determines its
invocation is necessary to assure continuity of energy supplies
and actions to enhance continuity and amount of energy
supplies. So that, in one sense, there is a prong of the
Defense Production Act that is not so dependent on a direct
defense production nexus, as perhaps your question implies.
I certainly would not want to rule it out. But I hasten to
add that we are not searching for new ways to employ direct
Federal interventionist techniques in the marketplace.
Senator Schumer. Okay. Anyone else want to comment on that
question?
[No response.]
I did not think they would be lining up.
[Laughter.]
The second question I have is, Senator Bennett and I, and
he mentioned it, have shared a concern about cyber-terrorism.
We have worked together on this issue. Do any of you believe
that additional authority is necessary to address this new type
of threat to national security?
Mr. Juster. As I mentioned in my opening statement, I think
that is an issue that we need to look at closely as we review
critical infrastructure assurance matters generally and as part
of the national plan that we are hoping to issue by the end of
this year.
Certainly, if a cyber-event rose to a catastrophic level, I
think one could say that the DPA would apply because of a
national security. But whether in other circumstances the DPA
would apply or not, or whether there are other authorities
available, is one of the issues that we want to study and
review as part of our overall analysis of critical
infrastructure assurance.
Senator Schumer. Would you be willing to wait 3 years?
Mr. Juster. No, no. As I indicated, we are committed to
doing that review, hopefully, by the end of this year and as
part of our national plan that we are going to be issuing. At
the same time, we would like to see the Defense Production Act
reauthorized for a three-year period because we think the
authorities in the DPA for other purposes, as well as
potentially for the purpose of critical infrastructure
assurance in a catastrophic circumstance, are important and
essential. We need those authorities for purposes of continuity
and stability.
Senator Schumer. I see that my time is expired. So that you
are saying is you may come back with an additional amendment
after we were to renew the Act just to change it, which we
could obviously do if we needed to.
Mr. Juster. Again, in the context of looking at the
critical infrastructure assurance issue overall, that might
possibly be the case.
Senator Schumer. Thank you.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Mr. Juster, I am delighted to know that you are focusing on
the national plan and interested in this. But is there anyone
currently tasked, either in your department or in any other
that you know of, or any other of the witnesses know of, with a
formal review of DPA for either modernization or review with
respect to the critical infrastructure protection problem?
Mr. Juster. I am not aware that anyone at this moment is
tasked to do that. Part of the issue that needs to be resolved
first is the government's own organization for dealing with
critical infrastructure assurance. Once we have that decided by
the President, I believe that the tasking to which you referred
will probably follow shortly thereafter.
Senator Bennett. Well, I agree that that needs to be the
first step. But based on my experience in the Y2K circumstance,
I can see how this can fall between the cracks pretty easily.
Mr. Brown, I do not mean to pick on your agency, but we put
together in cooperation with the Clinton Administration the
rapid response room. I have forgotten what we called it now.
And when it was over and Y2K passed without disaster, the next
question was--what happens to this facility? It cost about $50
million.
The Administration said, oh, well, we are going to give all
that to FEMA. And I said, FEMA is not the place for that. This
is a unique facility, a unique capability that has been created
and should be preserved as it exists, for use in any kind of
serious interruption of our critical infrastructure.
And because no one was formally tasked with it, a number of
people thought it was a good idea, I got midnight phone calls
from people in the Administration saying, would you please call
OMB and tell them this is what ought to be done? I said, well,
I will be happy to. But the OMB in the Clinton Administration
did not listen to the junior Senator from Republican Utah very
often, and they did not in this case. And I have no idea what
has happened to the equipment. The facility has been
dismantled. The equipment has been handed out.
I assume that you got most of it. And I assume you are
using it appropriately. But it wasn't just the physical
hardware that was the asset. It was the bringing together of
the ability to monitor and respond quickly across
organizational lines that was created there that has now been
lost.
That is why I am focusing on this, Mr. Juster, that I hope
it is not just, oh, we will make it part of the national plan
and, yes, we will look at it, because I have experience of
seeing that the bureaucracy has a way of letting this kind of a
thing sift through its fingers and go back to the inertia of
doing business the way we have always done business and
stovepiping the issue the way we always have stovepiped it. And
if ever there is an issue that does not call for stovepiping,
it is this one. And the Defense Production Act is the ideal
place, I think, to cut across organizational lines, think
horizontally, and say, let's do something about this.
So that--
Mr. Brown. I fully appreciate your point, Senator.
Senator Bennett. Okay. Now I am interested in this
conversation about California and New York. We live between
California and New York.
Senator Schumer. So does everybody else.
[Laughter.]
Senator Bennett. So does everybody else, yes.
[Laughter.]
This is not a hypothetical, Mr. Fygi. In May, hackers broke
into the power grid in California. Fortunately, they were not
able to shut it down. The word hacker in the lexicon I use with
respect to critical infrastructure is almost synonymous with
hobbyist. They are doing it just to prove that they can. They
do not have malevolent ideas other than the fact that they'd
like to shut it down to satisfy their ego. Had the hackers had
a little more resources behind them, and I will be very
specific--had they had the resources of a hostile nation-state
behind them--they might have succeeded in creating a sustained
power outage in California. Now, to keep it interesting, let's
say they did it in New York, so that we can keep the Chairman's
attention.
[Laughter.]
Would you believe that the Department of Energy has the
authority under the Defense Production Act and would use the
authority under the Defense Production Act to try to facilitate
recovery and reconstitution of power delivery in New York under
such circumstances? Or California? Or Utah?
Mr. Fygi. The last part of your question is to try to
rehabilitate, to take certain actions. The kind of action that
we focused our attention to in the actual California experience
was to issue an order to require suppliers to honor orders as
well as existing contracts to supply PG&E with natural gas.
So it was that segment of both sections 101(a) and 101(c)
of the Defense Production Act that were invoked. And it was, as
a transactional matter, rather straightforward and specific
since we knew exactly, by the time we finished our research,
what elements of the orders would be founded on the emergency
provisions of the Natural Gas Policy Act, which is most of
them.
Senator Bennett. I realize that the hypothetical I posed is
a good bit more complicated than that.
Mr. Fygi. Because it is unclear as to what under your
hypothetical you would envision the Energy Department seeking
to do. What kind of order would you envision for, example, the
President directing be issued?
Senator Bennett. Let's say the hackers break into the power
grid. The power grid is not seamless across the country,
however much we might think it is. The very term, power grid,
implies that everything is connected to everything in a
seamless way, and it is not. It is fairly regional.
Let's say an aggressive computer hacker with the
appropriate resources broke into the power grid for the
northeast, and particularly for New York, and succeeded in
shutting down all power in New York, including the New York
Stock Exchange, the Federal Reserve Bank of New York City, and
other vital financial institutions necessary to keep this
country functioning economically.
There is power available elsewhere in the country, in my
theoretical, but it requires some physical changes in terms of
some switches as to where the power would be distributed, and
it requires the kind of order that you talked about here of
suppliers who say, we are going to wheel power into that area
and we are going to get crews out to repair whatever damage is
done. We are going to, I do not know, enlist a group of bright
young hackers from NYU to try to reverse this or go after the
folks at the National Security Agency--we are getting into DoD
now--get into DIA, CIA, other people who monitor this kind of
thing that is going on. Would there be a coordinating role and
who in the government would play it to see to it that under the
Defense Production Act power is restored as quickly as
possible?
Mr. Fygi. Well, let me try to break down the pieces of your
question starting with the last piece. Under the Defense
Production Act, it is ultimately the President who decides
coordination procedures.
The presidents have chosen to do so by promulgation of a
series, or at least currently a pair, of effective executive
orders that specify in some particularity the functioning of
the priority performance of contract elements of the Defense
Production Act and identify FEMA as a coordinating policy
agency. But the President has latitude to deal with a
particular new circumstance to erect his own new structure for
dealing just with that circumstance.
Now, getting to the other elements of your question. It
seems that, were there a need for accelerated acquisition of
certain kinds of physical equipment that were in short supply
and back-ordered, if you will, from suppliers, that is the kind
of circumstance that would seem to fall relatively handily into
the section 101(c), category of the Defense Production Act.
On the other extreme, however, your suggestion about work
crews and the like and the bright young antihackers, as I
recall it, the priority performance of contract authority in
the Defense Production Act has an exclusion for personal
services contracts. It does not seem engineered to deal with
that kind of situation. And therefore, there might well be
under your hypothetical room for application, perhaps even a
robust application, of the Defense Production Act, if all of
the other facts fell into place that would comport with its
provisions.
But I think, again, this is a hypothetical, I have not had
a great deal of opportunity to reflect on the subject matter of
your questions, and therefore I would have to defer obviously
to the ultimate work product of the more studied analyses that
are ongoing and currently planned, to which some of the other
witnesses already have adverted.
Senator Bennett. Thank you, Mr. Chairman. I do not want to
prolong this. I just raise this as an example of why I think
there should be a careful review of the Defense Production Act,
to see if in the new world we confront there ought to be some
changes, including, the one that you focused on that maybe the
acquisition of services might come in under the Act. I just do
not know.
I am not prepared to argue in favor of any particular
changes at all at this moment. I just raise this as an example
of the kind of thing that we ought to be looking at. Thank you,
Mr. Chairman.
Senator Schumer. Thank you, Senator. And I want to thank
all of our witnesses for their testimony and leave the record,
with unanimous consent, open for 5 days in case others on the
committee, or Senator Bennett or myself, wish to submit
additional questions in writing. And I think we will be calling
upon you as we move forward with the reauthorization of the
Act.
Thank you. The hearing is adjourned.
[Whereupon, at 3:30 p.m., the hearing was adjourned.]
[Prepared statements for the record follow:]
PREPARED STATEMENT OF SENATOR JIM BUNNING
Mr. Chairman, I would like to thank you for holding this important
hearing and I would like to congratulate you on presiding over your
first subcommittee hearing as Chairman. Our hearing today is on the
Defense Production Act or DPA.
I do not think there is any debate on whether or not the DPA is a
valuable piece of legislation, that is much needed to preserve our
national defense. However, I and some of my colleagues do have some
concerns over how the DPA has been used, specifically and most recently
in California. I think there is still debate over whether what was done
by invoking the DPA and the Natural Gas Policy Act in January was a
violation of the letter of the law. But it certainly was a violation of
Congressional intent.
I believe we must change the language of the DPA so it is not used
as a de facto price control again. I am very concerned that a clean, 3-
year reauthorization will be too tempting a tool to use again, if, God
forbid, we face more blackouts. The DPA should be used only for
national emergencies, not rolling blackouts.
Mr. Chairman, I do think that Chairman Sarbanes and yourself should
be commended for trying to work in a bi-partisan fashion to move one of
the Bush Administration's bills. I cannot support a 3-year extension
without improvements to the law. Let me say again: the DPA should be
used to protect our national security, not to control prices. I look
forward to working with you, other Members of the Committee and the
Administration to hopefully find a solution that is agreeable to all.
Thank you Mr. Chairman.
----------
PREPARED STATEMENT OF KENNETH I. JUSTER
Under Secretary for Export Administration, U.S. Department of Commerce
June 27, 2001
Mr. Chairman, Senator Bunning, and Members of the Subcommittee, I
appreciate the opportunity to testify on the reauthorization of the
Defense Production Act. The Act expires on September 30 of this year. I
urge the Congress to reauthorize the Act for at least a 3-year period.
The Defense Production Act (DPA) of 1950, as amended (50 U.S. C. App.
2061, et seq.), has enabled the President for more than 50 years to
ensure our Nation's defense, civil emergency preparedness, and military
readiness. The DPA provides the statutory framework to enable the
administration to meet future threats to our national security in light
of a streamlined armed forces, a consolidated defense industrial base,
and a globalized economy.
I will focus my comments on the DPA authorities that are relevant
to the Department of Commerce. The Department of Commerce plays several
roles in implementing those DPA authorities that relate to the defense
industrial base. First, under Title I of the DPA, the Department
administers the Defense Priorities and Allocations System. Second,
under Title III, the Department reports on defense trade offsets.
Third, under Title VII, the Department analyzes the health of U.S.
defense industrial base sectors. And fourth, also under Title VII, the
Department plays a significant role in analyzing the impact of foreign
investments on the national security of the United States. I will
briefly discuss each of these roles.
I. Defense Priorities and Allocations System
The Defense Priorities and Allocation System (known as ``DPAS'')
has 2 purposes. First, it ensures the timely availability of products,
materials, and services that are needed to meet current national
defense and emergency preparedness requirements with minimal
interference to the conduct of normal business activity. Second, it
provides an operating structure to support a timely and comprehensive
response by U.S. industry in the event of a national security
emergency.
Under Executive Order 12919 of 1994, the Department of Commerce
administers this system in accordance with the priorities and
allocations provisions of the DPA. Those provisions provide authority
for requiring U.S. companies to accept and perform contracts or orders
necessary to meet national defense and civil emergency needs. They also
provide authority for managing the distribution of scarce and critical
materials in an emergency.
The DPAS is not used solely for defense items and military crises.
It also may be implemented to meet urgent requirements for energy and
law enforcement programs. Under the DPAS, the Department of Commerce
delegates the authority to use the system to obtain critical products,
materials, and services to meet approved program requirements of
several Federal agencies, including the Departments of Defense and
Energy. To implement this authority, the Department of Defense and the
other agencies--called Delegate Agencies--place what are known as
``rated orders'' on essentially all procurement contracts with
industry. The prime contractors, in turn, place ``rated orders'' with
their subcontractors for parts and components down through the vendor
base. The ``rated orders'' notify the contractors that they are
accepting contracts with the U.S. government that must be given
priority, as necessary, over unrated orders to meet the delivery dates
of the rated orders.
In the vast majority of these cases, the procuring Federal agency
and the contractor quickly come to mutually acceptable terms for
priority production and delivery. If the company and the delegated
Federal agency cannot reach such agreement, the Department of Commerce,
as the primary liaison with U.S. industry, plays a crucial role in
resolving the issue. The Department provides ``Special Priorities
Assistance'' to resolve critical production bottlenecks for many
military and national security emergency requirements. At the same
time, the Department works to ensure that the production requirement
does not pose an undue or unfair burden on the supplier company. I
would like to share some examples of the Department's work in this
important area.
A. Operation Desert Shield and Desert Storm
One of the best examples of the Commerce Department's work was its
support of U.S. and allied requirements for Operation Desert Shield and
Desert Storm in 1990-1991. The Commerce Department worked closely with
U.S. industry and the Department of Defense on 135 Special Priorities
Assistance cases to assure timely delivery of critical items, such as
avionics components for aircraft, precision guided munitions,
communications equipment, and protective gear for chemical weapons. Due
to the Commerce Department's involvement, in the majority of cases
delivery schedules were reduced from months to weeks or from weeks to
days.
B. Coalition Action in the Balkans
The North Atlantic Treaty Organization (NATO) coalition action in
the Balkans resulted in a number of instances of industrial bottlenecks
for critical equipment. Starting in 1993 and continuing through 2000,
the Department of Commerce worked 73 Special Priorities Assistance
cases in support of U.S. forces, allied forces, and NATO command and
control requirements. Although most of these cases pertained to NATO
acquisition in the United States of communication and computer
equipment, Special Priorities Assistance under DPAS also was used to
expedite the production and delivery of such military items as
antennas, positional beacons, and precision guided munitions for both
U.S. and allied forces.
C. Federal Bureau of Investigation
In 1995, the Federal Bureau of Investigation (FBI) urgently
required delivery of special communications equipment to meet the needs
of a critical and classified national defense related antiterrorist law
enforcement program. Accordingly, Commerce staff worked with 4
contractors and their lower tier vendors to achieve timely delivery of
parts and components to meet the FBI deployment requirement in the face
of conflicting customer demands.
D. United Kingdom's Royal Air Force (RAF) Apache Longbow Helicopters
The Commerce Department's involvement in the DPAS supports not only
the requirements of U.S. armed forces, but also the requirements of our
allies. The Department is currently working with U.S. industry, the
Department of Defense, and the United Kingdom's Ministry of Defence to
meet a Royal Air Force requirement for Apache Longbow helicopters.
Without the DPAS, U.S. firms supplying transponders and Hellfire
missile launchers would not be able to meet RAF requirements while also
meeting urgent U.S. Army requirements. It is important to note that the
Department of Commerce will not take action on behalf of an allied
government unless the Department of Defense determines it is in the
U.S. national interest to do so.
As demonstrated by these examples, the DPAS provides the means for
clearing any commercial bottlenecks that might otherwise interfere with
meeting the critical production and service requirements of the U.S.
armed forces, other Federal agencies, NATO, and our close allies.
II. Defense Trade Offsets
Pursuant to section 309 of the DPA, the Department of Commerce
provides Congress with an annual report on the impact of offsets in
defense trade. Defense trade offsets are industrial compensation
practices required as a condition of purchase in either government-to-
government or commercial sales of defense articles and/or services, as
defined by the International Traffic in Arms Regulations. For example,
a foreign government may agree to purchase fighters from an American
company but could insist that the engines for the jets be produced in
the foreign country using local suppliers. We believe that offsets are
economically inefficient when the foreign customer is basing the
purchase decision on something other than the quality of the product or
service being provided. Moreover, offsets do a disservice to the
defense supplier base in the United States by transferring work and
technology overseas. Although any unilateral action on offsets could
have a negative impact on the competitiveness of our prime contractors
in world markets, we believe that we should address the issue of
offsets in bilateral and multilateral settings.
The Department of Commerce's annual report on defense trade offsets
has become an integral part of the U.S. government's effort to monitor
this critical issue for the U.S. defense industry. We have just
published our fiscal year 2000 report. On the basis of the trends that
we have identified through these reports, a Presidential Commission has
been established to investigate more formally the economic and
competitiveness effects of offsets on U.S. prime contractors and their
suppliers.
III. Defense Industrial Base Studies
Under section 705 of the DPA and Executive Order 12656 of 1988, the
Department of Commerce conducts analyses and prepares reports on
individual sectors of the defense industry. These studies are either
self-initiated or requested by the Armed Services, Congress, or
industry. The studies provide a comprehensive view of specific sectors
within the U.S. defense industrial base, and they gauge the current
capabilities of these sectors to provide defense items to the U.S.
military services. The studies provide detailed data that are
unavailable from other sources.
To give you a recent example of one of these studies, the
Department of Commerce has just published a detailed assessment of the
shipbuilding and repair
industry in the United States. This is one in a series of analyses
related to the maritime industry that were requested by the U.S. Navy.
We understand that the Navy is pleased with the quality and
thoroughness of the report and looks forward to future cooperative
efforts. In another instance, the U.S. Air Force requested the
Department of Commerce to conduct an assessment of the ejection seat
sector in the United States. Several of the recommendations in that
report have been implemented by the Air Force and industry.
IV. Committee on Foreign Investment in the United States (CFIUS)
The Committee on Foreign Investment in the United States (known as
``CFIUS'') was originally established by Executive Order 11858 in 1975.
The Department of Commerce is a member of the Committee, which is
chaired by the Department of Treasury. In 1988, pursuant to Executive
Order 12661, the President delegated to CFIUS certain of his
responsibilities under section 721 of the DPA (known as the ``Exon-
Florio'' provision). Exon-Florio provides for a national security
review of
foreign mergers and acquisitions of U.S. companies. The intent of Exon-
Florio is to provide a mechanism to review and, if the President finds
necessary, to suspend or prohibit a foreign direct investment that
threatens the national security, but not to discourage foreign direct
investment generally. The Department of Commerce's contribution to the
CFIUS process includes providing a defense industrial base and export
control perspective to the CFIUS reviews. In the last year, there have
been several contentious CFIUS cases. Although I cannot address the
details of these cases because of the confidentiality extended to CFIUS
reviews by Exon-Florio, the Department of Commerce was actively
involved in each of the reviews, focusing particular attention on the
national security impact of the acquisition. In this period of rapid
globalization, continuation of this interagency review process is
vital.
In sum, the DPA provides essential authority for a variety of
important programs at the Department of Commerce. My remarks illustrate
the importance of the DPAS not only to our military services, but also
to NATO and our close allies that operate our weapons systems. The
Department of Commerce, in its role of primary liaison to U.S.
industry, has been able, through DPAS, to ensure timely delivery of
products and services essential to United States and allied forces with
minimal impact upon normal commercial activities.
The DPA also affords the Department of Commerce the opportunity to
assess fully the economic efficiency of defense trade offsets and the
national security implications of international consolidation of the
defense trade industry. In addition, the DPA enables the U.S.
government to monitor the U.S. defense industrial base in this era of
globalized markets, coalition military campaigns, and electronic
battlefields. For all these reasons, the Department of Commerce fully
supports extending the current Defense Production Act for at least a 3-
year period. Thank you.
PREPARED STATEMENT OF MICHAEL D. BROWN
General Counsel, Federal Emergency Management Agency
June 27, 2001
Good afternoon, Mr. Chairman. I am Michael Brown, General Counsel
of the Federal Emergency Management Agency. FEMA Director Joe M.
Allbaugh asked me to represent him today, and regrets that he is unable
to be here.
FEMA is pleased to appear before you to discuss the reauthorization
of the Defense Production Act--the Nation's major statute for
mobilization readiness. As you know, the nonpermanent provisions in
Titles I, III, and VII will expire on September 30. The expiration of
these provisions could have a severe impact on the
Nation's emergency resource preparedness to meet threats to our
national security--including a terrorist weapon of mass destruction. We
may also need to use DPA authorities to respond to other catastrophic
civil emergencies.
The Administration views the possibility of such expiration as
disruptive to ongoing programs under the Act. FEMA requests that a
reauthorization of at least 3 years be considered by the Congress to
ensure the continuation of these programs.
The President has delegated a number of responsibilities to the
FEMA Director for the coordination and support of the Act under
Executive Order 12919. These responsibilities include the duties to:
Serve as an advisor to the NSC on DPA authorities and national
security resource preparedness issues;
Provide central coordination;
Develop guidance and procedures under the DPA that are
approved by the NSC;
Attempt to resolve issues on resource priorities and
allocations;
Make determinations on the use of priorities and allocations
for essential civilian needs supporting the national defense; and
Coordinate the National Defense Executive Reserve (NDER)
program activities of departments and agencies in establishing NDER
units and provide guidance for recruitment, training and
activation.
There are 8 Federal departments and agencies with units of industry
reservists available for use in emergencies. These reservists could not
be used if the Congress does not reauthorize the DPA.
FEMA supports the NSC in coordinating the updating of Executive
Orders relating to the DPA and supports interagency efforts such as the
President's Report to the Congress on the Modernization of the Defense
Production Act submitted in 1997. In 1997 FEMA aided the Federal Bureau
of Investigation in obtaining equipment in their counter intelligence
role.
At the Federal level, FEMA is the lead agency for coordinating
domestic hazards consequence management. We work with other departments
and agencies to ensure that the Federal Government is prepared to
respond to the consequences or potential consequences of natural and
human-caused hazards, including terrorist incidents, as they relate to
public health, safety, and property. DPA authorities are available to
support consequence management--specifically those all-hazards
emergency preparedness activities defined under Title VI of the Robert
T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford
Act).
The term ``emergency preparedness'' means all those activities and
measures designed or undertaken to:
Prepare for or minimize the effects of a hazard upon the
civilian population, such as procurement and stockpiling of
materials and supplies;
Respond to the hazard; and
Recover from the hazard.
To date, FEMA has not used DPA authorities in its domestic
consequence management role. When confronted with a major disaster or
emergency declared by the President, our first recourse is the Stafford
Act. We intend to use DPA authorities for catastrophic disasters when
resources to respond to such disasters and emergencies are unavailable
in a timely manner.
Circumstances that might warrant use of DPA Title I priorities and
allocations authorities include a massive earthquake or the use of a
terrorist weapon of mass destruction. Such events could have severe
impacts on our population and our
national security that might not be met in the normal course of
business in the marketplace and could warrant use of the Defense
Production Act to effect timely delivery of needed materials and
resources.
One of Director Allbaugh's priorities is to have FEMA, in
coordination with our Federal, State, and local partners, develop
stand-by plans that can be used to
respond to and recover from large catastrophic disasters. A key
authority to obtain resources in such circumstances could be the use of
priority orders authorized under Title I of the DPA. Failure to
reauthorize the Act would severely hamper Federal efforts to respond
and recover with required resources if they were not available in time
to support the health and well being of the affected population.
In this context FEMA's new Office of National Preparedness will be
coordinating and integrating Federal preparedness activities in support
of developing and building the national capability to manage the
consequences of a terrorist incident involving a weapon of mass
destruction. As part of this integration effort, the Office will be
looking at the range of available authorities that can support
terrorism preparedness and response, including DPA authorities as
appropriate.
In summary, the DPA's linkage to the Stafford Act ensures the
availability of needed resources when the Nation is facing a
catastrophic disaster whether natural or manmade. We urge the Congress
to reauthorize the DPA before its expiration on September 30. I thank
you for the opportunity to appear today. I would be pleased to answer
any questions you may have.
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PREPARED STATEMENT OF ERIC J. FYGI
Deputy General Counsel, U.S. Department of Energy
June 27, 2001
Mr. Chairman and Members of the Subcommittee, I am pleased to
appear before the Subcommittee in response to its request for testimony
by the Department on the reauthorization of the Defense Production Act
of 1950. It may be informative in addressing the reauthorization of the
Defense Production Act to describe the most recent use of the Defense
Production Act in responding to an energy crisis situation. I am
referring to the Department's use, as directed by former President
Clinton, of the Defense Production Act as a complement to the emergency
provisions of the Natural Gas Policy Act in responding to actual and
threatened interruptions of natural gas supplies in northern and
central California in January of this year.
The circumstances that gave rise to the interruption of natural gas
supplies in northern and central California actually began with the
cumulative effects of electricity sales within the State under
California's 1996 electricity restructuring legislation. Under that
structure State-regulated electric utilities were required to sell
electricity to their customers at frozen rates that could not be
adjusted upward to reflect increased acquisition costs of wholesale
electric power. At the same time, the State required Pacific Gas and
Electric Company (``PG&E'') and other State-regulated electric
utilities to purchase their electricity supplies in the day-ahead or
real time spot market (in contrast to long-term contracting, which
permits hedging), provided for partial divestiture of the utilities'
fossil generation assets, and required utilities to sell their
electricity into the Power Exchange rather than use it to serve their
customers. In addition, growth in electricity demand far outpaced
growth in electricity supply. Between 1996 and 1999, demand in
California rose 5,500 megawatts (MW), while supply rose only 670 MW.
This combination of factors put the utilities in the position of buying
wholesale power for as much as 30 cents per kilowatt-hour, while only
being allowed to sell it for 3 cents.
Beginning in May 2000, State-regulated electric utilities began to
accumulate-huge debts in the form of unrecovered wholesale power costs
as a result of the rate freeze. These unrecovered wholesale power costs
significantly weakened the financial health of the utilities and, in
many cases, the utilities approached insolvency. PG&E's debts alone
totaled $6.6 billion. The reluctance of electricity generators and
marketers to sell to PG&E and Southern California Edison, the other
major State-regulated electric utility that accumulated large
unrecovered wholesale power costs, deepened as the financial condition
of the utilities worsened. In order to prevent loss of electricity
supplies to the customers of the utilities, then-Secretary of Energy
Richardson issued an emergency order under the Federal Power Act on
December 14, 2000, directing certain electricity generators and
marketers to continue to sell electricity upon request by the
California Independent System Operator, a nonprofit corporation
established by the 1996 California electricity restructuring law
charged with operation of the transmission system and assuring system
reliability in California. This type of emergency order ultimately was
extended to 3:00 am EST on February 7, 2001.
The poor financial condition of PG&E also led some natural gas
suppliers to terminate sales to the utility, out of concern that the
losses the utility was incurring in its electricity operations would
lead to insolvency, notwithstanding the fact that PG&E's gas operations
themselves could recover costs under its tariff. Unlike Southern
California Edison, PG&E is both a gas and electric utility. On January
9, 2001, one supplier, which supplied approximately 14 percent of
PG&E's core gas supplies, terminated sales to PG&E. Other gas suppliers
soon followed suit and still others threatened to stop deliveries
absent prepayments or credit guarantees. About 25 percent of PG&E's
January baseload supply of natural gas was terminated and substantial
additional volumes were threatened.
PG&E serves 3.9 million ``core'' gas customers in California, both
residential consumers and small businesses. PG&E also transports
natural gas to about 5,000 ``noncore'' customers, including industrial
consumers and electricity generators. If PG&E experienced a shortage in
gas deliveries, it would have to increase withdrawals from gas already
in storage and divert gas from noncore customers. Diversion from
noncore customers would exacerbate the California electricity shortage,
since two-thirds of PG&E's noncore gas is used for electricity
generation.
PG&E and Southern California Edison first sought redress at the
State level by applying to the California Public Utilities Commission
for retail electricity rate increases. On January 4, 2001, the
California Public Utilities Commission increased retail electricity
rates by a surcharge of one cent a kilowatt-hour among its classes of
customers. It did so for a period of 90 days, and did not otherwise
alter the rate freeze under which PG&E and Southern California Edison
were operating. PG&E also sought action from the State to prevent a
loss of gas supplies. PG&E asked the California Public Utilities
Commission for emergency authorization to draw on the gas supplies of
the other major gas utility in the State. The California Public
Utilities Commission never acted on this request.
On January 10, 2001, PG&E and its parent filed a Form 8-K with the
Securities and Exchange Commission in which they announced suspension
of dividend payments and postponement of release of financial results
for the fourth quarter of 2000. The stated reason for postponing
release of financial results was that the outcome of then on-going
State and Federal efforts involving the California electricity market
could result in measures that ``significantly and adversely affect''
PG&E Corporation's financial results.
Beginning the first week in January, the Department was advised by
PG&E's General Counsel that debt rating agencies had reacted negatively
to the California Public Utilities Commission's January 4 Order, and
that if PG&E's outstanding debt were reduced to junk status that event
would constitute a default under PG&E's various natural gas supply
contracts. Were that event to occur it would accelerate the payment
obligation of all of PG&E's natural gas supply contracts. While we
understood that at the time PG&E had acquiesced in prepaying some of
its natural gas suppliers, the normal payment schedule of PG&E was that
its contracts required payment in full on the 25th day of each month
for the entire prior month's deliveries of natural gas to PG&E for sale
to its gas customers. While PG&E's tariff with the California Public
Utilities Commission enabled it to recover the full amount of increased
acquisition costs for natural gas resold by PG&E (unlike the case for
electricity), because of PG&E's precarious operating revenue posture
stemming from the electricity market, PG&E indicated that it could not
continue to purchase the needed volumes of natural gas if it were
required to prepay for them.
At about the same time, beginning January 9, 2001, then-Treasury
Secretary Summers and then-Energy Secretary Richardson participated in
extensive meetings that included the Governor of California, California
legislative leaders and the President of the California Public
Utilities Commission, the CEOs or Presidents of the major California
electricity suppliers, and the CEOs of the California investor-owned
utilities or their parents. While the objective of these meetings was
to assist the State of California in formulating a solution to the
evolving situation, no such solution was announced.
On January 12, 2001 the CEO of PG&E formally requested President
Clinton to invoke emergency authorities in order to assure continuity
of natural gas supplies through PG&E to its service territory in
northern and central California. That letter was accompanied by an
affidavit executed the same day by the Chief Financial Officer,
Treasurer and Senior Vice President of PG&E that described in detail
the circumstances giving rise to the threatened interruption of natural
gas supply through PG&E to northern and central California. On January
13, 2001 Governor Davis sent a letter to President Clinton in which the
Governor described his inquiry into the circumstances, his finding that
there was an ``imminent likelihood that natural gas supplies in
northern and central California will be interrupted,'' and requested
the assistance of the President and the Secretary of Energy on an
urgent basis.
On January 15, 2001 then-Deputy Energy Secretary Glauthier
conducted a telephone conference that included operational executives
of PG&E in order to ascertain further the logistical and operational
circumstances that necessitated immediate action at the Federal level.
On January 16, 2001 Reuters reported that Standard & Poor's had
downgraded PG&E's debt to ``low junk'' status. President Clinton's
instructions to the Secretary of Energy, and the Secretary of Energy's
accompanying Order to PG&E and its natural gas suppliers, were issued
on January 19, 2001. As the text of each document indicates, their
issuance was based not only on the emergency provisions of the Natural
Gas Policy Act of 1978, but also on the Defense Production Act of 1950.
I now turn to the reasons that prompted the Department to formulate
this approach.
When it appeared in early January that it might prove necessary to
formulate emergency orders for continued delivery of natural gas
through PG&E, we first examined the emergency provisions of the Natural
Gas Policy Act of 1978, 15 U.S. C. 3361-3364. Those provisions appeared
useful in that they authorized designation of continued use of natural
gas for electricity generation as a ``high-priority use'' in an
emergency, and authorized specification by the Federal Government of
the ``terms and conditions'' including ``fair and equitable prices''
for natural gas delivered under an order. The ability to determine that
continued use of natural gas was a ``high-priority use'' under the
Natural Gas Policy Act was important because, without such Federal
action, under California law, any reduction in gas volumes available to
PG&E as merchant impairing its ability to serve its ``core customers''
(residences and small businesses) would result in mandated redirection
of gas volumes delivered through PG&E (but not owned by it) destined
for noncore customers, including most significantly electricity
generators. Were such redirection to occur it would have further
reduced the volumes of natural gas available for electricity generation
in California.
Despite the technical utility of section 302 of the Natural Gas
Policy Act, 15 U.S. C. 3362, in these respects, we remained concerned
that it only would ``authorize'' purchase, rather than also to require
deliveries, of natural gas to enable PG&E to continue to distribute
sufficient volumes of natural gas. During January PG&E advanced
arguments asserting that the allusion to an ``order'' in section 302
suggested that it embraced an ability to impose a supply mandate. Based
on textual analysis of the Natural Gas Policy Act we remained
unpersuaded on this point. In forming our view of this question we also
consulted with an attorney of the Federal Energy Regulatory Commission
who had been designated by the Commission's General Counsel to aid us
in our examination of this question. Our textual analysis coupled with
that of the Federal Energy Regulatory Commission attorney, together
with our understanding of the provenance of section 302 as having had
the original objective simply of permitting emergency sales into
interstate commerce by nonjurisdictional gas producers without becoming
subject to then-existing wellhead price controls, prompted us to
conclude that the Natural Gas Policy Act's emergency provisions,
standing alone, would not suffice if the Federal Government were to
mandate continuity of natural gas deliveries through PG&E to all of its
service territory in northern and central California.
We considered whether the Defense Production Act provided the
authority to complement the emergency provisions of the Natural Gas
Policy Act such that the entities (largely resellers and not producers)
that had recently provided PG&E with natural gas could be directed to
continue to make similar volumes available to PG&E. We concluded that
the Defense Production Act would provide this authority.
Title I of the Defense Production Act authorizes the President to
require the priority performance of contracts or orders in certain
circumstances. Under section 101(a), 50 U.S. C. App. 2071(a), the
President may require performance on a priority basis of contracts or
orders that he deems ``necessary or appropriate to promote the national
defense.'' In determining what the national defense requires, the
President may consider the potential impact of shortages of energy
supplies. In the Energy Security Act Congress specifically designated
energy as a ``strategic and critical material'' within the meaning of
the Defense Production Act and also added language to its Declaration
of Policy that establishes a link between assuring the availability of
energy supplies and maintaining defense preparedness. The Defense
Production Act's Declaration of Policy, 50 U.S. C. App. 2062(a)(7),
states:
[I]n order to ensure national defense preparedness, which is
essential to national security, it is necessary and appropriate
to assure the availability of domestic energy supplies for
national defense needs.
PG&E's customer base in northern and central California includes a
number of defense (including ``space,'' as the term ``defense'' is
defined in the Defense Production Act) installations and defense
contractors that use natural gas and electricity and that clearly would
be adversely impacted by interruption of natural gas service.
Continuity of supply to these facilities was threatened in the same
fashion as other industrial natural gas consumers in PG&E's service
territory.
Section 101(c) of the Defense Production Act, 50 U.S. C. App.
2071(c), authorizes the President to require priority performance of
contracts or orders for goods to maximize domestic energy supplies if
he makes certain findings, including that the good is scarce and
critical and essential to maximizing domestic energy supplies. In the
situation existing in California in mid January, natural gas supplies
would have become acutely scarce had the withholding by PG&E's
suppliers continued and expanded to more suppliers than those that
already had terminated deliveries. Moreover, continuity of natural gas
supply is critical and essential in PG&E's service area to electric
energy generation, petroleum refining, and maintaining energy
facilities. These factors seemed directly to bear on the terms of
section 101(c) of the Defense Production Act relating to continuity of
energy production.
Accordingly, we structured the emergency natural gas order to
include the supply obligation authorized by the Defense Production Act.
Our understanding of the Defense Production Act regime was that it is
broad enough to embrace mandates for priority performance of new orders
to vendors, as well as priority performance of existing contracts. Thus
this authority fit well in a transactional sense in which some vendors'
contracts to supply gas might have expired by their terms just before
the order was issued.
This aspect of the Defense Production Act regime permitted the
Department to impose a temporary supply assurance for natural gas to
northern and central California comparable to that done with the
electricity orders for the area of the State served by the California
Independent System Operator by the Department's prior orders under
section 202(c) of the Federal Power Act. The emergency natural gas
order issued by former Secretary of Energy Richardson on January 19,
2001 and extended by Secretary Abraham on January 23, 2001, was
directed just to the group of suppliers that had provided PG&E natural
gas on commercial terms during the 30-day period prior to issuance of
the order. This approach was chosen as the least intrusive means that
would achieve the public health and safety and defense preparedness
objectives of continuing for the near term natural gas supplies into
PG&E's service area. The order is best understood as an emergency,
temporary action designed to afford California the opportunity to abate
the emergency by its necessary further actions.
As a result of the Department's emergency orders natural gas
supplies continued to flow through PG&E into northern and central
California, averting a natural gas supply crisis. Despite the
apprehensions about payment by PG&E that had prompted the threatened
interruptions of natural gas deliveries, every natural gas supplier
named in the emergency orders was paid in full by PG&E on the schedule
required by those orders.
Prior to its use in the emergency natural gas supply orders
described above, the Department used section 101(a) of the Defense
Production Act from time to time during the accelerated weapons
production period in the 1980's, and section 101(c) was used in the
1970's and again the in the 1980's and early 1990's to facilitate
petroleum and natural gas production development of the Alaskan North
Slope.
Whether the Defense Production Act authorities placed in the
President might be useful in addressing energy needs of the country in
the future would be highly fact-dependent. Because the Act's use would
require a fact-dependent judgment, it would be difficult to predict
whether circumstances might arise that would prompt the President to
conclude that direct Federal action under this authority was warranted.
While I do not expect us to confront in the near future an event and
set of circumstances as peculiar as the emergency in California, there
are other instances that our experience indicates are very plausible in
which these authorities would be of crucial importance.
For example, if world circumstances were such that we had to draw
down the Strategic Petroleum Reserve, and coincident with that
realization and direction from the President to take that action there
was a significant breakdown in the Strategic Petroleum Reserve
facilities, that would be the type of circumstance where, if it were
urgent to replace scarce and backlogged specialized pumps and other
apparatus, we could rely upon the Defense Production Act to bring the
facility back on-line in an operational sense as promptly as possible.
Absent the Defense Production Act, it would be exceedingly difficult to
persuade vendors to put our order at the head of the line for fear of
third-party contract liability that they otherwise might expose
themselves to, even if they were otherwise willing to cooperate with
the Department in the interests of the country.
In conclusion, the Department fully supports extending for 3 years
these Defense Production Act authorities which have proven so useful in
a variety of circumstances in making a contribution to the national
security, including energy security. This concludes my prepared
statement. I will be pleased to respond to any questions the
Subcommittee may have.
PREPARED STATEMENT OF DELORES M. ETTER
Acting Director, Defense Research and Engineering
U.S. Department of Defense
June 27, 2001
Good morning, Mr. Chairman and Members of the Committee. I
appreciate the opportunity to share with you the Department of Defense
(DoD) views regarding the Defense Production Act (DPA) and the role it
plays in helping to obtain the goods and services needed to promote the
national defense. Although enacted originally in 1950, the Act provides
statutory authorities still relevant and necessary for the national
defense in the 21st century. I also want to express the
administration's support for reauthorizing the Act through September
30, 2004.
Let me start by saying a few words on why the Defense Production
Act is important to the Department of Defense. A strong domestic
industrial and technology base is one of the cornerstones of our
national security. The Act provides the DoD tools required to maintain
a strong base that will be responsive to the needs of our armed forces.
It provides the President the authority to (1) establish, expand, or
maintain essential domestic industrial capacity; (2) direct priority
performance of defense contracts and allocate scarce materials,
services, and industrial facilities; and, suspend or prohibit a foreign
acquisition of a U.S. firm when that acquisition would present a threat
to our national security. The authorities in this Act continue to be of
vital importance to our national security. My testimony today focuses
on the three remaining provisions of the original Defense Production
Act, namely Title I, Title III, and Title VII.
Title I
Title I (Priorities and Allocations) of the Defense Production Act
provides the President the authority to:
1. require preferential performance on contracts and orders,
as necessary, to meet approved national defense and emergency
preparedness program requirements; and
2. allocate materials, services, and facilities as necessary
to promote the national defense in a major national emergency.
Executive Order 12919 delegates these authorities to the Federal
Departments and Agencies. The Department of Commerce (DoC), is
delegated responsibility for managing industrial resources. To
implement this authority, DoC administers the Defense Priorities and
Allocations System (DPAS). The DPAS:
1. establishes priority ratings for contracts;
2. defines industry's responsibilities and sets forth rules
to ensure timely delivery of industrial products, materials and
services to meet approved national defense program
requirements; and
3. sets forth compliance procedures.
The DoC has delegated to DoD authority under the DPAS to:
1. apply priority ratings to contracts and orders supporting
approved national defense programs. (However, DoD is precluded
from rating orders for end items that are commonly available in
commercial markets and for items to be used primarily for
administrative purposes, for example, office computers); and
2. request DoC provide Special Priorities Assistance (SPA) to
resolve conflicts for industrial resources among both rated and
unrated (for example, nondefense) contracts and orders; and to
authorize priority ratings for allied nation defense orders in
the United States when such authorization furthers U.S.
national defense interests.
Except as noted above, all DoD contracts are authorized an
industrial priority rating. DoD uses two levels of rating priority,
identified by the rating symbols ``DO'' or ``DX.'' All DO rated orders
have equal priority with each other and take preference over unrated
orders. All DX rated orders have equal priority with each other and
take preference over DO rated orders and unrated orders. If a
contractor cannot meet the required delivery date because of scheduling
conflicts, DO rated orders must be given production preference over
unrated orders and DX rated orders must be given preference over DO
rated orders and unrated orders. Such preferential performance is
necessary even if this requires the diversion of items being processed
for delivery against lower rated or unrated orders. Although the DPAS
is largely self-executing, if problems occur, the contractor or the DoD
can request the DoC provide SPA to resolve the problem.
During peacetime, the DPAS is important in setting priorities among
defense programs that are competing for scarce resources and backlogged
parts and subassemblies. Delayed deliveries to producers of weapon
systems have consequences in terms of system cost and ultimately on the
readiness of operational forces. DPAS gives DoD an opportunity to
prioritize deliveries and minimize cost and schedule delays among DoD
orders and for allied nation defense procurements in the United States.
For example:
1. U.S. DoD: Production resource conflicts for canopy
transparencies from Sierracin Aerospace impacted program
schedules for the F-22, F-18A/B/C/D, and F-18E/F aircraft. Navy
and Air Force DPAS and program office personnel met with the
contractor, evaluated production resource shortfalls and
delivery conflicts, and made delivery modifications that
minimized program delays.
2. NATO: The German and Belgian Air Force, on behalf of
NATO's Tactical Leadership Program, were unable to obtain
global positioning system navigational processors from Rockwell
Collins in a timely manner, adversely impacting pilot training.
DoD/DoC authorized ratings authority that enabled the contracts
to be filled in advance of lesser priority US DoD orders.
3. United Kingdom (U.K.): GKN Westland Helicopters
experienced delays in receiving identification friend or foe
transponders from Raytheon Systems Company that were needed for
U.K. WAH-64 Apache helicopters. DoD/DoC authorized GKN Westland
to use a DO rating priority that permitted Raytheon to ship the
transponders sooner than would have been possible without the
rating authority, which allowed and permit GKN Westland to meet
its production delivery requirements to the U.K. Ministry of
Defence.
In the event of conflict or contingency, however, the DPAS becomes
indispensable. While DoD has used Title I since the 1950's, recent
history, including that associated with Operation Desert Shield/Storm,
Bosnia, and Kosovo, illustrates its continued importance. Title I
authorities proved invaluable during Operation Desert Shield/Storm and
ensured that industry provided priority production and shipment of
essential items urgently needed by the coalition forces. At the request
of DoD, DoC formally took action to provide SPA in 135 cases during
Operation Desert Shield/Desert Storm. For example:
1. Global Positioning System Receivers: When demand for these
receivers outstripped the capacity of suppliers, DoD/DoC used
DPAS to expedite shipments and to provide available systems to
units in the coalition force that had the most urgent
requirement.
2. Activated Charcoal for Gas Masks: When the demand for
activated charcoal filters for gas masks outstripped the
production capacity of Calgon Corporation (the sole producer of
activated charcoal filters for military use gas masks), DoD/DoC
used DPAS to direct Calgon to ship all charcoal filters
produced to meet military requirements.
3. Search and Rescue Radios: Motorola, the producer of these
radios, had closed its production line and anticipated it would
take several months to restart production; vendor supply of
component parts was the pacing item. Using its DPAS authority,
DoC worked with Motorola's supplier base and reduced the time
to restart production of the radios by more than half.
Even more recently, since 1995, DoD/DoC has used SPA on more than
100 occasions to resolve industrial conflicts among competing U.S.
defense orders and to permit NATO and specific allied nations to obtain
priority contract performance from U.S. suppliers. These SPA cases can
be categorized in two ways:
1. Wartime vs. Peacetime Support: 68 percent of the cases
supported ``wartime'' needs (50 percent Bosnia and 18 percent
Kosovo) for items such as Satellite Communication (SATCOM) and
walkie-talkie radios, secure facsimile
machines, Joint Direct Attack Munitions (JDAMs), and computer
equipment for NATO command and control infrastructure. 32
percent of the cases supported ``peacetime'' requirements.
2. U.S. vs. nonU.S. Support: 37 percent of the cases
supported U.S. defense requirements (32 percent for DoD and 5
percent for defense-related activities of NASA, NSA, and the
FBI), 47 percent for NATO (NATO monies used), 9 percent for the
United Kingdom, 3 percent for Canada. In addition, there were 2
cases for Israel, and 1 case each for Japan and Germany.
The authorities contained in Title I that permit DoD to provide
preferential treatment for foreign defense orders in the United States
when such treatment furthers U.S. national defense interests are
increasingly important. Among the consequences of globalization and
industrial restructuring are the creation of multinational defense
companies and an increasing degree of mutual defense interdependence.
Reciprocal industrial priorities systems agreements with our allies
encourage them to acquire defense goods from U.S. suppliers, promote
interoperability, and simultaneously provide increased assurance that
the DoD's nonU.S. defense suppliers will be in a position to provide
timely supplies to DoD during both conflict/contingency situations and
peacetime.
Such reciprocity considerations have been a topic of discussion
within NATO for some time. The DoC has the U.S. lead to develop and
negotiate a NATO-wide agreement to provide reciprocal priorities
support within the alliance.
In addition to a NATO-wide agreement we are exploring formal
bilateral agreements with key allies of the United States. These
provide an opportunity to establish stronger government-to-government
agreements for reciprocal priority support, more quickly. The United
States has a longstanding bilateral priorities support agreement with
Canada. Within the past year, DoD representatives have had discussions
about such bilateral agreements with United Kingdom, German, French,
Italian, Dutch, Norwegian, and Swedish goveniment representatives. As a
matter of fact, DoD and United Kingdom Ministry of Defence
representatives now are negotiating a formal bilateral agreement that
would commit each nation to establish and maintain a reciprocal
priorities system; and provide the other nation reciprocal access to
that system.
DPA Title I provisions are an important tool in DoD's arsenal. It
would be very difficult for DoD to meet its national security
responsibilities without that tool. Now, I will turn my attention to
Title III of the Defense Production Act.
Title III Program
The primary objective of the Title III Program is to work with U.S.
industry to strengthen our national defense posture by creating or
maintaining affordable, and economically viable production capabilities
for items essential to our national security. The Title III Program
meets this objective through the use of financial incentives to
stimulate private investment in key production resources. These
incentives include sharing in the costs of capital investments, process
improvements and material qualification, and providing when necessary,
a purchase commitment that will ensure a market for their product.
Through these incentives, domestic industry is encouraged to take on
the business and technical risks associated with establishing a
commercially viable production capacity.
The focus of the Title III Program is on the transition of emerging
technologies that will provide technological superiority on the
battlefield and support defense wide programs. The Title III
partnership with industry ensures DoD access to critical technologies,
usually much sooner than would otherwise occur.
In addition to establishing production capacity, Title III helps to
improve the quality, and reduce the acquisition and life cycle cost of
defense systems and improves defense system readiness and performance
by promoting the use of higher quality, lower cost, technologically
superior parts and components.
By law, Title III projects cannot be initiated until a presidential
determination has been made and Congress has been notified. The
presidential determination verifies that:
1. the material shortfall being addressed by the Title III
project is essential for national defense;
2. domestic industry can not or will not on their own
establish the needed capacity in a timely manner;
3. Title III is the most cost effective or expedient method
for meeting the need; and
4. defense and commercial demand exceed current domestic
supply.
Our recent report to Congress entitled ``Annual Industrial
Capabilities Report to Congress'' (January 2001) affirmed Title III's
unique importance as one of the programs we execute to maintain our
industrial readiness. Title III is a key element in our Industrial
Capabilities Improvement Activities.
Title III Projects
Title III projects transition new materials and technologies from
research and development to production. These projects reduce the costs
and facilitate the insertion of advanced technologies by improving the
capabilities of our defense industrial base.
Without Title III, the insertion of these technologies would be
delayed for many years. Title III reduces this time by first,
eliminating market uncertainties and reducing risks that discourage
potential producers from creating new capacity and potential users from
incorporating new materials in their products. Second, Title III
financial incentives create more efficient, lower cost production
capabilities which reduces prices and increases demand. Third, Title
III projects generate information about the performance characteristics
of new materials and promote dissemination of this information to the
design community, which would otherwise lack sufficient knowledge to
incorporate these materials into defense systems. Fourth, Title III
projects support testing and qualification of new materials in defense
applications, reducing the delay and cost that might otherwise
discourage consideration of new materials by defense programs.
Current Program
There are currently eight active Title III projects and DoD is
initiating a new thrust into radiation hardened electronics. This
initiative will establish a domestic production capacity for radiation
hardened, high-performance electronics materials and components to
support the National Missile Defense Program and other strategic space
systems.
These projects, plus recently completed projects, address a variety
of advanced materials and technologies. These include:
1. electronic materials and devices, such as gallium
arsenide, indium phosphide, high-purity silicon, silicon
carbide, silicon on insulator, and power semiconductor
switching devices;
2. structural materials, including discontinuous reinforced
aluminum, aluminum metal matrix, and titanium metal matrix
composites.
The advanced electronic materials supported by Title III are
enabling technologies, without which potential advances in
microelectronics would be far more limited. These materials offer
advantages in terms of faster device performance, greater resistance to
radiation and temperature, reduced power requirements, reduced circuit
size, increased circuit density, and the capability to operate at
higher frequency levels. Advances in electronic materials enable new
capabilities for defense systems and improvements in old capabilities.
The new structural materials supported by Title III generally offer
significant improvements in terms of strength, weight, durability, and
resistance to extreme temperatures. These benefits are particularly
important in aerospace applications. Lighter-weight components in
aircraft and missiles reduce fuel consumption and increase range,
payload, and maneuverability. Increased durability and reliability of
aircraft structures reduce inspection, maintenance, repair, and
replacement requirements, improve force readiness, and extend system
life. Increased strength and
enhanced resistance to extreme temperatures enable more powerful
engines that increase speed and payload. Continued advances in
aerospace technologies would be severely constrained without improved
materials to enable these advances.
Title III Success Stories
Two recent Title III projects highlight the benefits of the
program.
Gallium Arsenide Wafers
The first was for gallium arsenide semi-insulating wafers. Gallium
arsenide is a semiconducting material used in the fabrication of
advanced electronic devices. It provides advantages in terms of speed,
power consumption, cost, and reliability over more commonly used
semiconductor materials, such as silicon. It is also resistant to
radiation and is routinely used in ``hardened'' electronic devices.
Electronic devices built on gallium arsenide semiconductors are
enabling technologies for a wide variety of defense weapon systems,
including radars, smart weapons, electronic warfare systems, and
communications. These semiconductors can be found in such systems as
the Airborne Early Warning/Ground Integration System (AEGIS), the
B-2 Bomber, the Longbow Apache helicopter, fighter aircraft (including
F-15, F-16, F-18, and F-22), missiles (including Patriot, Sparrow, and
Standard), and various radar systems.
At the outset of this Title III project, the long-term viability of
U.S. gallium arsenide wafer supplier base was in doubt. Foreign firms
dominated the industry with a 75 percent world market share. U.S. firms
were discouraged from competing more vigorously by the relatively small
market for these wafers, by the dominant market position of the foreign
suppliers, and by the high capital investment required to remain
competitive in this market. Foreign firms controlled pricing,
availability, and the pace of technological advancement.
With the help of Title III, the U.S. producers made a dramatic
turnabout. By 2000 these contractors accounted for 65 percent of wafer
sales worldwide. Their combined sales of gallium arsenide wafers grew
by nearly 400 percent. In addition, wafer prices dropped by
approximately thirty 5 percent. This reduction in wafer prices and
improvement in wafer quality resulted in significant reductions in
defense costs for critical electronics. More importantly, the
performance of dozens of major defense systems was enhanced through the
use of gallium arsenide semiconductors. Gallium arsenide components can
also be found in a variety of commercial wireless applications such as
cellular phones, direct broadcast television and collision avoidance
radar.
Discontinuous Reinforced Aluminum Project
The second Title III project involved Discontinuous Reinforced
Aluminum (DRA). This project was also successful, in terms of reduced
defense costs, accelerated use of a superior material in defense
applications, and improved domestic production capabilities for a high-
tech material. DRA is a metal matrix composite that is significantly
stiffer, stronger, lighter weight, more wear-resistant and more
dimensionally stable than aluminum alloys and many other composite
materials. This material has potential applications in virtually every
type of aircraft, missile, and armored vehicle.
Prior to the Title III initiative, DRA was produced only in small
quantities at high cost. When this Title III project was completed,
domestic production capacity was increased by more than 150 percent and
the price was reduced by 60 percent from $40 per pound to less than $16
per pound. The reduced price and improved qualities stimulated a
substantial increase in demand for this material. DRA is currently
being used for F-16 Fighter airframe and engine parts. Use of DRA for
the F-16 ventral fin has increased the meantime between failure rate
for this structure from 1,450 hours to over 6,000, and will save $60
million in maintenance and repair costs for the F-16 fleet. The savings
for this one defense system alone are triple the Title III investment.
Pratt & Whitney has forecasted savings of $100 million over the next 10
years from the use of DRA in aircraft engine parts. DRA also flies on
the Boeing 777, forming the Fan Exit Guide Vanes in its Pratt & Whitney
4000 engines.
New Projects
During the last year, we began three new projects involving silicon
on insulator wafers, laser eye protection, and microwave power tubes.
Silicon-on-Insulator (SOI) Wafer technology, like other
semiconductor materials targeted by Title III, offers enhanced
performance capabilities, including greater resistance to radiation,
reduced power consumption, and faster device performance. The goals of
this project are to create a domestic, source for SOI wafers, to
improve wafer quality and reduce wafer cost. This will promote
insertion of SOI devices into defense systems and expand potential
applications to include telecommunications, laptop computers, and
automotive and medical diagnostic and control equipment.
The Laser Eye Protection (LEP) project is establishing a large
volume, domestic production capacity for near-infrared filters on laser
eye protection spectacles and goggles. The modem battlefield is seeing
increased use of lasers for target designators, range finders, and
target illuminators by both friendly and unfriendly forces. Exposure of
the eye to these lasers can cause harm ranging from temporary
disorientation to permanent blindness. Over 99 percent of the lasers
currently fielded operate in the near-infrared spectrum. Spectacles and
goggles with thin-film dielectric near-infrared filters are the best
way to protect personnel from the accidental or purposeful exposure to
these lasers. Without this project this protection will not be
available in a timely manner to our forces in the field.
The Microwave Power Tubes Supplier Base Initiative addresses
critical components and materials used in the manufacture of microwave
power tubes (MPT). MPTs are vital to the operations of military radar,
electronic counter measures, communication systems and satellites. The
project goal is to maintain a supplier base for critical components
used in the manufacture of MPTs. This project will drive down the
production and life cycle costs of MPTs to the DOD, while ensuring
continued long-term supply of these critical components. The future
effectiveness of U.S. military forces is dependent on access to
affordable high power microwave power tubes.
Title VII
Title VII contains general provisions including authorization of
appropriations, termination of authorities, definitions, and
enforcement, as well as a number of other authorities relating to the
defense industrial base and emergency preparedness. Section 721 is of
particular importance to DoD.
Section 721 allows the President to suspend or prohibit a foreign
acquisition of a U.S. firm when that transaction would present a
credible threat to the national security of the U.S. and remedies to
eliminate that threat are not available under other statutes.
Administration of this section has been delegated to the Committee on
Foreign Investment in the U.S. (CFIUS) which is chaired by the
Department of the Treasury and includes the departments of Defense,
Commerce, State, and Justice as well as several organizations in the
Executive Office of the President.
The DoD considers the CFIUS review to be an essential and effective
process for analyzing the national security implications of foreign
acquisitions of U.S. companies and resolving issues related to these
transactions. While the DoD has its own Industrial Security regulations
which are used to review foreign acquisitions and provide a regulatory
basis for imposing measures to reduce the risk of unauthorized
disclosure of classified information and controlled technology, CFIUS
is important in several ways:
First, the DoD Industrial Security regulations which control the
granting of facility clearances generally apply only to firms with
classified contracts. Therefore, they do not normally cover
transactions in which dual use firms with export controlled but
unclassified technology are acquired by a foreign firm.
Second, the initial CFIUS review has a 30-day deadline which
facilitates an efficient DoD review under its Industrial Security
regulations because the Department does not want to approve a
transaction under CFIUS unless adequate risk mitigation measures have
been agreed to under the Industrial Security regulations.
Third, the CFIUS process is structured to require explicit
determinations which are not part of the Industrial Security review.
These include whether the acquired firm possesses critical defense
technology under development or is ``otherwise important to the defense
industrial and technology base'' as well as development and
distribution of a Risk of Technology Diversion Assessment by the
intelligence community.
Fourth, the CFIUS review is an interagency process which allows all
Federal departments to coordinate their analyses of the national
security implications of a review and balance risks of disclosure
against the benefits of foreign investment.
The DoD believes the CFIUS review process is working well. The
effectiveness of the CFIUS process should be judged on the quality of
the risk mitigation measures which the various CFIUS members, including
DoD, negotiated during the review process. The threat of a Presidential
Investigation prohibiting the transaction is a major incentive for the
firms to agree to the risk mitigation measures in a timely fashion.
These mitigation measures can include a Special Security Agreement
which imposes DoD-approved outside directors, visitation requirements,
export licensing compliance procedures and Technology Control Plans as
well as National Interest Determinations where the acquired firm holds
contracts with Proscribed Information. Other mitigation measures are
available under the DoD's Industrial Security regulations as well as
the export licensing regulations of the Departments of Commerce and
State. CFIUS has provided a timely review of the national security
implications of 1,358 foreign acquisitions of U.S. firms since the
enactment of section 721 in 1988.
Extension of the DPA
As you know, most provisions of the Defense Production Act are not
permanent law and must be renewed periodically by Congress. The Act has
been renewed many times since it was first enacted. The current law
will expire September 30, 2001. We fully support reauthorizing the
Defense Production Act through September 30, 2004.
Conclusion
In summary, the DoD needs the Defense Production Act. It contains
authorities that exist no where else and I hope that I have conveyed to
you the significant role those authorities play in ensuring our
Nation's defense. Thank you for the opportunity to discuss the DPA with
you today. We look forward to working with you to ensure a timely
reauthorization of the DPA.