[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 
                                Affairs


78-384              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001


            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.
                               ----------

                   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.
