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PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.



U.S. House of Representatives,

Subcommittee on Aviation,

Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to notice, at 9:55 a.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr., (chairman of the subcommittee) presiding.

    Mr. DUNCAN. We're going to go ahead and get started. I know we're a little bit early, but I know that the witnesses are here, and we're going to go ahead and start moving into this, so I'll go ahead and call the subcommittee to order.
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    We have a very distinguished panel of witnesses here this morning, and we thank all of you for being here with us.

    Today we will hear from witnesses regarding the reauthorization of the war risk insurance program. This program was first authorized in 1951 and, over the years, has been improved upon during the reauthorization process. In fact, the program has been reauthorized ten times and was last reauthorized in 1992. It is now scheduled to expire on September 30 of this year, and so we have to take action on it before that time.

    Of course, we rarely hear about this program until either a conflict arises like Vietnam, the Gulf War, Somalia, Haiti, Bosnia, or when the authorization expires. I think, though, by and large, the program has been very successful over the years, and, as we have witnessed in recent years, the ever-present danger of conflict around the world has confirmed the need for an efficient and strong Government aviation war risk insurance program.

    Reauthorization of this program is also very essential for a viable civil reserve air fleet program which meets the Nation's security needs.

    The Department of Defense depends on the CRAF program for over 90 percent of its passengers, 40 percent of its cargo, and nearly 100 percent of its air medical evacuation capability in wartime.

    Today, 35 U.S. airlines commit over 590 aircraft to the CRAF program, which are capable of responding in 24 to 48 hours in order to meet Defense airlift needs.
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    Following the Persian Gulf crisis, several carriers pointed to reimbursement problems experienced under the Act. With strong Congressional action and support, the Department of Defense is now able to rapidly reimburse the FAA in the event of a major claim.

    The subcommittee looks forward to hearing from our distinguished panel of witnesses this morning in order to determine if any additional changes can or should be made to improve this very important element of our overall national security program. I don't believe there's a great amount of controversy. Of course, we may learn something in the course of this hearing in that regard.

    I now recognize the ranking member of the subcommittee, Mr. Lipinski, for any statement he wishes to make.

    Mr. LIPINSKI. Thank you, Mr. Chairman.

    We have several knowledgeable witnesses here today, so I'm going to keep my opening remarks short. I think you've said everything that I was going to say, and, without objection, I'll enter my statement in the record.

    I yield back the balance of my time.

    [Mr. Lipinski's prepared statement follows:]

    [Insert here.]
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    Mr. DUNCAN. Thank you very much.

    Mr. Pease?

    Mr. PEASE. No statement, sir.

    Mr. DUNCAN. Mr. Poshard?

    Mr. POSHARD. Mr. Chairman, I ask unanimous consent to submit an opening statement for the record.

    Mr. DUNCAN. Thank you very much.

    [The prepared statements of Mr. Poshard, Ms. Millender-McDonald, Mr. Costello, and Mr. Cramer follow:]

    [Insert here.]

    Mr. DUNCAN. All right. We're very pleased today to have Mr. Gerald L. Dillingham, who is associate director for transportation issues, resources, community and economic development division of the General Accounting Office, and he is accompanied by Mr. David K. Hooper, who is an attorney from the office of the general counsel of the General Accounting Office.

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    We have Ms. Louise Maillett, the acting assistant administrator for policy, planning, and international aviation of the FAA, accompanied by Mr. John M. Rodgers, who is director of the office of aviation policy and planning.

    We have Major General Gary A. Voellger, who is the director of operations of headquarters, Air Mobility Command of the United States Air Force.

    We have Brigadier General Gilbert J. Regan, who is chief counsel, headquarters, of the United States Transportation Command, and staff judge advocate of the Air Mobility Command of the United States Air Force.

    And we have with us, as we've had several times before, Mr. Edward J. Driscoll, who is president and chief executive officer of the National Air Carrier Association, accompanied by Mr. Steve Gelband, who is general counsel for Tower Air.

    We're honored to have all of you with us, and we'll go ahead and start with the testimony in the order that the witnesses were listed, and that means, Mr. Dillingham, we'll start with you, please.

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    Mr. DILLINGHAM. Thank you, Mr. Chairman. Good morning, Mr. Chairman and members of the subcommittee. We appreciate the opportunity to be here to testify to the subcommittee on the reauthorization of FAA's aviation insurance program.

    The program provides coverage for aircraft operations that are deemed necessary to the foreign policy interest of the United States when commercial insurance is not available on reasonable terms. Essentially, the program makes possible the Government's ability to call on commercial airlines to move troops and supplies and other activities when it needs additional airlift capacity.

    Since 1975, about 5,500 flights have been covered by this insurance program, including Operation Desert Storm and Desert Shield and airlift missions to Bosnia in 1996.

    Our testimony today focuses on changes made to the program since we last reported in 1994 and identifies some issues that the Congress may need to address in this current reauthorization.

    In 1994, we reported that the program did not contain enough funds to pay potential insurance claims in the event of a catastrophic loss. We are pleased to note that significant progress has been made in addressing this matter. Specifically, the National Defense Authorization Act of 1997 made funds available to indemnify the program for losses incurred under DOD-sponsored flights. In the past, those DOD flights have accounted for about 99 percent of the flights that are insured under the program.
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    While our major concern has been addressed, two other concerns which we raised in our 1994 report remain unresolved.

    First, gaps remain in the program's ability to pay claims for non-Defense flights. Although these flights account for only about 1 percent of those that have been insured by the program, a single major loss could liquidate the program's available funds and leave a substantial portion of the claim unpaid.

    Second, we believe that some uncertainty about the program continues to be caused by ambiguities in the statutory language and FAA's regulations about one of the fundamental bases on which the insurance can be used; namely, whether the President must make a determination that the flight is in the foreign policy interest of the United States before the insurance can be issued.

    I'd like to expand a little bit on those two remaining concerns.

    In the first instance, for those flights for which FAA may extend insurance at the request of the State Department and for which no premium is paid by the airline, and for flights for which FAA provides premium insurance, the fund may still be under-capitalized in the event of a catastrophic loss.

    Today the fund's balance is about $65 million, and, based on FAA data, we estimate that about 15 percent of the aircraft currently registered in the program have hull values that exceed the current balance of the fund. Further, FAA estimates that the contingent liability per incident for a registered plane would be about $350 million.
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    As you can see, with just one major loss in either of these instances, FAA would need to seek supplemental funding to pay the claim, and that delay could cause financial hardship for the affected airline in meeting its obligations with regard to lease or other types of payments for the aircraft. And, in the longer term, the situation may also impact on any liability claims that can arise from that situation.

    With regard to our remaining concern, that of clarifying that the flights are in the national interest, FAA does not see this as a problem. FAA considers Presidential approval of an indemnity agreement between DOT and other Government agencies to constitute the President having determined that the flights covered by these agreements are in the foreign policy interest of the United States. We disagree with the FAA position.

    We believe that, while FAA's current practice has the advantage of being easier to administer, it lacks sufficient foundation in the authorizing legislation and the implementing regulations. We believe that, as the act is currently written, it requires that a Presidential determination be made as a condition for issuing both premium and non-premium insurance.

    In our earlier report, we recommended that the Congress consider legislative changes that would address these two remaining concerns about the program.

    Mr. Chairman, in the final analysis, we continue to believe that the Congress should consider providing a mechanism by which DOT can obtain access to financial resources so that it can pay claims that exceed the fund's balance within the normal time frames of commercial insurance for those flights not sponsored by DOD.
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    The Congress might consider, for example, either a permanent indefinite appropriation to cover potential losses incurred during premium flights or the authority to borrow sufficient funds from the U.S. Treasury to pay losses incurred during non-premium flights made for qualifying Government agencies other than DOD.

    We also continue to believe that Congress should clarify the issue of whether or not a Presidential determination is required before FAA can issue non-premium insurance.

    This concludes our prepared statement. We'll be pleased to answer any questions that you may have.

    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Dillingham.

    I want to apologize. We do have a vote going on on the floor. We're going to take—this should be just a very brief recess, but we'll go into recess so we can have this vote.

    Thank you.


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    Mr. DUNCAN. We will proceed once again with the testimony. The next witness is Ms. Maillett.

    Ms. Maillett, you may begin your testimony.

    Ms. MAILLETT. Thank you, Mr. Chairman and Members of the Subcommittee.

    It is my pleasure to appear before you this morning to discuss the Federal Aviation Administration's aviation insurance program.

    Before I discuss the Administration's reauthorization proposal and the legislative changes that accompany it, I would like to briefly describe the history and purpose of the aviation insurance program in order to assist you in understanding its functions and importance in carrying out U.S. foreign policy.

    Created 46 years ago, the aviation insurance program actually predates the creation of the FAA by 7 years. It originally resided within the Department of Commerce and was a relatively uncomplicated program enabling the Secretary of Commerce merely to insure commercial air carriers in the event of war.

    That original war risk insurance program has today evolved into a multi-faceted program, providing insurance in a variety of circumstances where commercial aviation insurance is not available or not available on reasonable terms.

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    This program is designed to ensure that air transportation in the foreign policy interest of the United States can be carried out.

    The FAA has the statutory authority to issue two types of insurance in furtherance of the foreign policy interest of the United States: non-premium and premium insurance. The basic difference between the two is that non-premium insurance is issued to commercial carriers flying missions in domestic or overseas commerce for Federal agencies such as the Department of Defense or the Department of State, and premium insurance is issued to commercial air carriers flying commercial operations outside the United States.

    The Government is unlike a conventional insurer in that it does not routinely provide coverage. In fact, there are rigorous legal requirements in the law that must first be met before the FAA provides this insurance. They are, first, a determination by the President that the continuation of the air services is necessary to carry out the foreign policy of the United States, and the finding by the FAA administrator that insurance for that operation cannot be obtained on reasonable terms from the commercial market.

    The vast majority of policies that we have issued fall into the category of non-premium insurance, which is that insurance for commercial carriers flying under contract to the Federal Government.

    FAA provides such insurance pursuant to indemnity agreements with other Federal agencies and at present we have two such indemnity agreements, with the Department of Defense and the Department of State.

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    Under these agreements, if these departments request coverage for aircraft operations in support of their activities and commercial insurance is not available or would be unreasonably costly or unduly restrictive, we may provide the necessary coverage. Under that program, air carriers pay a $200 per aircraft registration fee for the coverage at present, although the FAA is proposing in a pending NPRM to increase this registration fee to $550. I'll speak about the NPRM in a few seconds.

    Non-premium insurance coverage issued to carriers flying for the Department of Defense covers operations that take place as part of the Civil Reserve Air Fleet—CRAF—activation, as well as other military-contracted commercial carrier-flown operations for which commercial insurance is not available.

    Many commercial insurance policies contain a clause that provides that activation of CRAF will terminate a carrier's coverage, thereby necessitating the issuance of Government insurance for those flights necessary to further the policies of that department.

    Non-premium insurance has also been issued for hundreds of non-CRAF flights conducted to, from, or through areas experiencing civil unrest, including Vietnam in the 1960s and 1970s, Central America in the mid-1980s, Persian Gulf in the early 1990s, Somalia in 1992, and most recently in Haiti in 1994.

    A total of $151,000 in claims has been paid out of the non-premium insurance policies over the history of the program.

    The FAA has standby non-premium war risk insurance policies with 47 air carriers under contract to the Department of Defense, and another 10 policies with air carriers for the Department of State.
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    Standby policies permit the quick coverage of aircraft once a specific operation and aircraft have been determined, thereby enabling those agencies to meet their mission needs in a very quick manner.

    Now let me turn to talk a little bit about the premium insurance.

    As its name implies, commercial air carriers pay for premium insurance. Premiums that are assessed are based on the assessment of risks that cause the commercial insurer to cancel, limit, or raise the premium on the policy. Over the last 30 years, premium insurance has been issued during three periods of foreign civil unrest: Vietnam in 1970 and 1971, and again in 1975; and most recently in 1990 during the August, 1990, invasion of Kuwait by Iraq which caused commercial insurers to increase dramatically their insurance rates.

    After the Presidential determination, FAA provided insurance coverage for some 37 operations in the Middle East at rates that were significantly lower than the commercially-offered $1.25 per $100 of whole value per trip, which pretty much represented the high water mark of the cost of insurance during the Persian Gulf crisis.

    The existence of the program has also been sufficient on many occasions this decade to drive down the commercial insurers' price on war risk insurance without the Government even having to issue the policy.

    On the premium program, the FAA has not paid a premium insurance claim since the inception of the program.
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    Today, this program is self-financed through the aviation insurance revolving fund, which is comprised of the premiums that we charge for premium insurance, as well as the registration fees that I mentioned paid by air carriers under the non-premium program, as well as the interest that's accumulated over the years from the balance.

    The amount that is in the revolving fund as of the end of March of 1997 is $65.2 million.

    In the case of a claim resulting from the issuance of non-premium insurance of DOD carriers, FAA would make an initial payment out of the fund to the carrier and coordinate with DOD to receive reimbursement and funds from DOD sufficient to cover the entire claim.

    As was referenced earlier, public law 104-201 gave DOD the authorization to reimburse FAA for claims from any funds available to DOD for operation and maintenance.

    Payment for other non-premium claims such as one from the Department of State or premium claims would come from the balance of the fund to the extent that the cash balance would cover it. FAA would need to pay any claim exceeding that balance by requesting a supplemental appropriation.

    Claims paid under indemnity agreements with Federal agencies other than DOD would eventually be reimbursed to the fund by the Government agency contracted for that service.
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    FAA has proposed a number of changes and clarifications to the regulations that govern this program. On April 17, we issued a notice of proposed rule-making that does several things. It expands the regulations to reflect statutory authority changes, to expand the issuance of insurance for certain types of flight operations—for example, for domestic flight segments and for necessary ground support.

    It also defines the activation of insurance coverage, revises the processes for amending insurance policies, and, as I mentioned earlier, increases the binders for non-premium insurance coverage from $200 to $550 per aircraft.

    We believe the proposed amendments will allow the FAA to be more responsive to the aviation industry when commercial insurance coverage cannot be obtained on reasonable terms.

    The comment period will end on June 2nd on this proposed rule, and we look forward to receiving comments and subsequently completing our rule-making effort.

    The program's reauthorization lapses at the end of this fiscal year. The FAA proposes a 5-year renewal of the program through the end of the year 2002. Without such authorization, neither premium nor non-premium coverage could be issued or activated after September 30 of this year. The obvious concern is that a situation will arise where commercial insurers will be unable or unwilling to provide coverage for flights in the foreign policy interest of the United States and the FAA would not have the authority or the ability to bridge this gap.
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    Examples could include humanitarian aid flights to a war-torn country, activation of the Civil Reserve Air Fleet, or evacuations of civilians from areas experiencing unrest.

    To ensure this perpetual readiness, reauthorization of this program is highly desirable. The Administration, in its proposal to reauthorize this program, is also proposing two minor changes to the authorizing statute. The first change clarifies that the amount for which an aircraft may be insured may be determined in accordance with reasonable business practices in the commercial insurance industry, since there may be circumstances in which market value may not be the appropriate determinant.

    The second change is a change that was actually referenced in the earlier testimony by Mr. Dillingham, and that is that we propose to clarify that the President's approval of an indemnity agreement between the FAA and another Government agency constitutes a finding by the President that issuance of aviation insurance is necessary to carry out the foreign policy of the United States.

    Although it's our view that that legislation clarification is not legally required, we favor such a change, since its enactment would be in accordance with the General Accounting Office's finding that a more explicit provision is desirable.

    In short, Mr. Chairman, the aviation insurance program has proven its worth over the past half century by providing insurance for aircraft operations that further the foreign policy interests of the United States. When aircraft are needed to accomplish military mission needs, when civilian passenger transfer is needed in times of and in places experiencing civil unrest, and when supplies and foods are urgently needed by a desperate population, this program has stepped in to support the military and foreign policy goals of the United States.
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    We respectfully request that Congress move as expeditiously as possible to reauthorize this program.

    That concludes my prepared remarks, and I would be happy to answer any questions.

    Mr. DUNCAN. Ms. Maillett, thank you very much.

    While I noted earlier that this is an important program that we're required to take action on before September 30th, it is, I think, fairly non-controversial and so, in light of that, I'm very pleased that we have had a large number of Members join us.

    For the record, in case they can't stay to ask questions, I will note that we have been joined by Vice Chairman Blunt, Mr. Ehlers, Mr. Fox, Mr. Pease, Mr. Pitts, Dr. Cooksey, Ms. Granger, Mr. Boswell, Mr. Cramer, Ms. Millender-McDonald, and Ms. Eddie Bernice Johnson of Texas. We appreciate the interest and participation by all the Members.

    We'll next go to General Voellger.

    General VOELLGER. Good morning, Mr. Chairman. Thank you for the opportunity to come here and present you with the operators' perspective having to do with the CRAF program.

    As Director of Operations for Air Mobility Command, I'm pleased to confirm the merits of the CRAF program and the absolutely essential contribution that our civil partners make to our national security program.
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    A key part of that program is a strong Title 49 Chapter 443 war risk insurance program, and its need, frankly, has never been greater.

    Mr. Chairman, I'd like to give my short oral statement, like I said, from the operators' perspective on the CRAF program, to include the importance of the aviation war risk insurance.

    Following me, General Regan will give you a perspective of the aviation insurance program in more detail.

    Our Nation's strategic airlift capability is made up primarily of the Air Force active duty, the Reserve, National Guard, and our Civil Air Reserve Fleet partners.

    In the most demanding contingencies, as you correctly stated, over 90 percent of DOD passengers and over 40 percent of the DOD cargo long-range air transportation must be provided by our CRAF partners.

    In an especially unique role, CRAF carriers will also provide a strategic air medical evacuation capability using the Boeing 767 aircraft that are specially configured to carry over 100 litter and ambulatory patients.

    In all, more than 50 percent of the strategic aircraft fleet available to our Nation in the contingency is owned and/or operated by the CRAF carriers.

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    As was mentioned, CRAF was formed during the Truman Administration and has served us well for over 45 years. We have a very clear national airlift policy promulgated by President Reagan and reaffirmed by President Clinton. It outlines the national defense airlift objective to ensure that military and civil airlift resources will be available to meet defense mobilization and deployment requirements in support of U.S. defense and foreign policies.

    Military and commercial resources are equally important and inter-dependent in the fulfillment of this national objective.

    The performance of CRAF during Desert Shield and Desert Storm confirmed our achievement of this objective. The Persian Gulf crisis was the first and only activation of CRAF, and it performed superbly. In fact, CRAF carriers strongly supported DOD operations, despite the threat of scud missile attacks. And I personally can attest to seeing those CRAF carriers on the ramp there at Dhahran and at Riyadh during the Gulf War, and they were very well aware of those scud attacks, and yet were willing to perform their mission.

    In the 10 months that CRAF was activated, the CRAF carriers flew more than 5,500 missions, and this was 20 percent of the total strategic airlift flown by our total force.

    CRAF is a voluntary contractual program, a fact often forgotten. There can be no substitute for the cooperation and leadership and the rapid response that is available under this voluntary program.

    The GAO, in March 1996, in their report, ''Observations on the Civil Reserve Air Fleet Program,'' commented that the major benefit of CRAF is that it provides up to half the Nation's strategic airlift capability without the Government having to purchase additional aircraft, pay personnel costs, or fly and maintain the aircraft during peacetime.
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    According to a 1994 Rand study, replacing the CRAF capability with military aircraft would have cost the DOD from $1 to $3 billion annually over the past 30 years. The cost today to procure the capability of just the CRAF long-range fleet in similar used aircraft is estimated to be $46 billion.

    So CRAF, as we look at it, may be the first case of outsourcing and privatization, and a very successful example, at that.

    Today the CRAF is composed of 683 aircraft provided by 37 carriers that are able to respond to our national security needs within 24 to 48 hours of notification.

    This, of course, is not just a one-way street. Significant benefits also accrue to the CRAF carriers. They receive substantial peacetime and contingency benefits and other benefits such as the use of military bases for commercial operations as weather alternates or as technical facilities.

    The CRAF is a great example of what DOD can do in cooperation with civil industry through outsourcing and privatization.

    The Persian Gulf also clearly demonstrated the need for a strong and viable war risk insurance program. Even before CRAF was activated, the major aviation underwriters served notice to our CRAF carriers that war risk coverage for the Gulf region would be canceled or premium prices would be increased dramatically.

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    While CRAF was not activated until 17 August, 1990, the first war risk insurance policy then under Title 13 was written on August 10.

    But the need for Chapter 443 insurance is not confined to wartime contingencies. Since Desert Storm, we have called upon the provisions of the war risk insurance program five times during peacetime contingencies in Somalia, Haiti, and Bosnia, and also during humanitarian missions in Georgia and Croatia.

    Commercial insurers are increasingly reluctant to provide adequate insurance coverage when they perceive increased risk to the air carriers who support DOD operations, whether in peacetime or in wartime conditions. Without the Chapter 443 insurance program, carriers would not support DOD in a contingency, nor should we reasonably expect them to.

    While the Title 13 war risk insurance program during the Persian Gulf crisis provided a minimum level of insurance coverage, major insufficiencies were clearly evident. Since that crisis, we have worked together very hard to resolve these and other shortcomings, and we have made quite a successful venture of it with the help of Congress and the FAA.

    These efforts reduced many of our carriers' concerns, and we thank you and the strong support of Members of Congress for this insurance program.

    In summary, CRAF is absolutely indispensable to the DOD. It's a cost-effective program that has helped us meet our Nation's defense airlift needs for 45 years. Without CRAF, frankly, we could not meet our mission requirements in a fiscally-responsible manner.
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    The partnership between DOD and the U.S. civil air industry is like no other in the world and has kept this Nation strong and secure. However, without an effective U.S. Government insurance program to assure CRAF carriers of a smooth transition from peacetime commercial insurance to complete war risk coverage, we cannot expect carriers will volunteer their valuable resources and risk the fate of their company in peacetime contingencies or in war.

    It is, therefore, vitally important that you reauthorize the FAA aviation insurance program so that we can continue to maintain a strong and viable CRAF program that will meet our Nation's security needs today and in the years to come.

    Thank you, sir. I stand by for your questions.

    Mr. DUNCAN. General Voellger, thank you very much. That's certainly a very significant couple of statements you've made here to say that this CRAF program has saved this country $30 to $90 billion over the last 30 years, and that it would cost $46 billion at least to give it similar capability if we had to do it all at once. But thank you very much for your testimony.
    General Regan?

    General REGAN. Thank you very much, Mr. Chairman. Good morning to you and the members of the committee.
    We are grateful to you for inviting the Department of Defense to provide its views on the aviation insurance program and the Civil Reserve Air Fleet, or CRAF program.
    The program began in 1952 to address delays in obtaining commercial air support, given a shortfall in organic military strategic airlift. Since then, CRAF has proven its tremendous value to address these concerns, and our partnership with the Department of Transportation and the FAA has ensured the strength and vitality of this program.
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    Certainly, experience has led to program refinements, both in FAA's aviation insurance program and in DOD's contractual program supporting the CRAF. There has been one constant: we need a reliable Government insurance program to support and protect those CRAF carriers meeting DOD requirements.
    Aviation assets represent an extremely high capital investment. A new aircraft can cost over $160 million. Major disaster liabilities to third parties can exceed $1 billion.
    The aviation industry, from investors to management, is particularly sensitive to insurance issues. Many aircraft today are leased. Prompt payment to investors in the event of a loss, a requirement of most leases, is a crucial concern.
    In our view, a carrier should not fear bankruptcy while awaiting payment from us on a loss from a mission flown in support of our people. If we cannot provide CRAF operators with adequate insurance, we simply risk losing access to critical strategic assets.
    There has been some references made to commercial war risk insurance. I must say to you that commercial war risk coverage simply does not live up to its name. It is often terminated on short notice, commonly 7 days. If it's not canceled, the price of the insurance can become cost prohibitive during military operations or times of international tension.
    Additionally, some major insurance underwriters continue to arbitrarily insert CRAF clauses in their insurance contracts. They exclude any and all CRAF operations from coverage under the war risk policy, even if the CRAF operation is similar to or parallels commercial operations which receive full coverage. These exclusions even preclude commercial coverage for the domestic segments of CRAF operations. As a result, commercial insurance will likely be unavailable for any CRAF activation.
    From our perspective, FAA's insurance program has a very favorable claims history. For example, over 5,500 CRAF missions supported Persian Gulf operations, with only 3 claims submitted. None of the three were a result of war risk, and all ultimately were paid by the carriers' commercial war risk policy.
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    During Vietnam, only four war risk claims were paid.
    Considering the thousands of missions flown over these decades, the war risk program is a success story, saving hundreds of millions of dollars in the Persian Gulf, alone, in avoided insurance premium cost.
    To ensure its continued viability, the aviation insurance program was modified in 1992 to provide coverage for domestic mission legs. Legislative changes in 1996 enabled us to rapidly reimburse FAA if a major accident involves a CRAF carrier, fixing a significant problem which caused some carriers to temporarily leave CRAF.
    Current law allows DOD to indemnify contractors engaged in ''risks that are unusually hazardous or nuclear in nature.'' If Chapter 443 were not reauthorized, indemnification would be available, but only as a stop-gap measure. It cannot substitute for the aviation insurance program. Indemnification creates an entitlement to a claim against the Government, but the airlines would bear the delays in resolving any injured third party claims and in pursuing any claim against us.
    Indemnification also is limited in the coverage it provides, as it does not cover non-air-carrier insurance problems such as life insurance for air crews, and it cannot cover ''all risks.''
    FAA, with its insurance and safety oversight functions, is our valuable partner and is the single face to the aviation industry, providing both premium and non-premium coverage. DOD reimburses FAA in the event of any loss. We believe that any losses of aircraft, organic or commercial, due to war risk while flying in support of the national defense are the ultimate responsibility of the Department of Defense.
    The Administration's proposal that Chapter 443 insurance be reauthorized for another 5 years will provide substitute insurance coverage for contract air lift operations whenever commercial insurance is unavailable or requires unreasonably high premiums.
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    Indemnification is not an adequate substitute. At best, it's a good backup. And it does not meet all of CRAF's needs. Its provisions are restrictive and its claims process may not allow prompt payments.
    In contrast, the aviation insurance program uses the same commercial practices which the carriers are accustomed to for day-to-day operations. It is responsive to the needs of carriers and compatible with commercial insurance programs. It can be adopted to cover ''all risk'' liability issues and air crew life insurance lapses.
    We believe that the national interests are best served by extending FAA's aviation insurance programs. By protecting CRAF carriers when adequate commercial insurance is not available, the aviation insurance program is a critical mainstay for the continued good health of the civil reserve air fleet.
    Mr. Chairman, that concludes my statement. I would be pleased to answer any questions that you or members of the committee may have.
    Mr. DUNCAN. General Regan, thank you very much for your very, very helpful testimony.
    Mr. Driscoll?

    Mr. DRISCOLL. Mr. Chairman, members of the committee, I am very pleased to be here this morning representing the air carriers who do provide commitments to the civil reserve air fleet.
    Our group of carriers operates under part 121 of the FARs. They provide both scheduled and charter service. They operate both cargo and passenger aircraft.
    We have been part of the civil reserve air fleet and in volunteer status when that has not been called up in almost every contingency that you can name, going back 30 or better years.
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    We are pleased to be part of this and to provide the necessary support to the Department of Defense to meet the contingencies of the United States and to have the capability to perform.
    As has been stated by all of the prior witnesses here, I must say that, for the first time in all of the years that I've appeared before the committee, I am pleased to hear the statements that have been made as to the value that the civil carriers provide to the Defense interests of the United States and the fact that their continued support and necessity for the aviation insurance provided under chapter 443 is essential.
    Following the Persian Gulf incident, the military and the air carriers sat down to determine what lessons had been learned. Under that, the future contracts that we now are involved in were changed to provide various additional assurances to the air carriers.
    At the same time, we looked at the war risk insurance program, and, meeting with the FAA and the Department of Defense representatives, it was determined that many things should be done to enhance the civil aviation insurance program, and the FAA has been, along with Defense, very cooperative in bringing these things into being.
    In addition, over the past year there has been an aviation subcommittee of the National Defense Association formed to look at the war risk insurance programs, what has to be done to improve that, and we are pleased to report that, due to the cooperation of the military, the FAA, and the air carriers, we have made substantial progress in various areas.
    Thank God, during the Desert Shield/Desert Storm no aircraft were damaged substantially that required major repair, there were no losses of aircraft as had happened in other contingencies, because we would have been in a claims process that would have been very difficult to solve.
    Since that time, we have been working with the military and the FAA and we've come up with a loss of use formula that is currently under study and, if enacted, would become part of the 443 so that, from a loss of use standpoint, if an aircraft is lost it would be carried under the insurance program rather than as a claims process.
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    There are, however, certain things we think the committee should consider when it reauthorizes its legislation. One is binding arbitration. The statute that permitted the United States to enter into binding arbitration lapsed, and the initial decision from the Department of Justice was that the United States did not have authority to enter into binding arbitration.
    A subsequent opinion by the Department of Justice said you do have authority.
    We believe that the binding arbitration, where the commercial insurer and the Government—where the cause of the accident, whether it be under an all-risk or a war risk, is undetermined, that we need the binding arbitration legislation to be part of 443 so that they can enter into a 50/50 proposition pending the determination of the proximate cause of that loss.
    We therefore recommend binding arbitration and we recommend the program be extended for a multi-year purpose.
    We also, as FAA, recommend that the commercially-insured values or values that we commercially insure for today be those items that are recognized under the chapter 443, which we believe is consistent with the FAA approach, and that engines, which are also leased separate and apart from aircraft, be covered, as well as other high-valued items.
    On the items that we're working on as a committee, I don't think we need the Congressional activity on, because it is being worked in committee with the DOD and the FAA, and we feel that we have made substantial progress there.
    There is one aspect, though, that bothers us considerably, and that is premium insurance. And, as the first witness has testified, there is only $55 to $60 million in the fund, and if premium insurance is to be issued for carriers that would continue to operate into high-risk areas in furtherance of the foreign policy of the United States, that insurance must be available.
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    I think, as your minority counsel will report to you, she did a very extensive job of trying to determine how to fund the non-premium insurance 5 years ago. No way could we get an appropriation for that. It was finally decided to allow the Department of Defense to use its operating funds to reimburse FAA for any losses.
    We believe something similar to that has to be done on the premium side. FAA does not have a fund sufficient to pay any losses. There are operations such as there were during Desert Shield/Desert Storm that had to continue to operate, such as tower had to continue to operate from Tel Aviv to the United States, not to Tel Aviv. That was not considered to be in the foreign policy interest of the United States to operate outbound. And they were covered under some premium insurance.
    That we believe you'll find in future contingencies. Operations of that nature must be continued. And, as I think General Regan has stated here, carriers cannot be waiting to be paid for the loss, because airplanes are leased. Those that finance airplanes require that they be paid within 60 days. If not in 60 days, they can call up all loan agreements and everything else the carriers may have, which could bankrupt a carrier if that contingency happened.
    We therefore ask the committee to look specifically at the premium basis and possibly follow a recommendation that was made some time in the past that the DOT/FAA be authorized to borrow money from the Treasury of the United States to cover the exposure that will exist when they issue non-premium insurance and, if losses occur, at that time to have the power to pay them immediately and then to seek supplemental appropriations to cover those losses.
    All in all, Mr. Chairman, we are very pleased with the way the program is going and we thank you very much for holding these hearings, and we trust that the reauthorization will come forward with some of the recommendations we have made.
    I would ask that my detailed statement be part of your record.
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    Mr. DUNCAN. Yes, sir. Your full statement will be made a part of the record, and we thank you and all of the witnesses for your testimony. I can assure you that your recommendations—many of these recommendations will be in the final legislation.
    But we will go first for any questions to Vice Chairman Blunt.
    Mr. BLUNT. Thank you, Mr. Chairman, and thank each member of the panel for being here today.
    Certainly this is a great example of the private sector working with the Government to make things happen that couldn't happen otherwise. The Desert Storm illustration of the strength of this and the value of it is significant.
    My belief is that the interest of this committee and of the Congress will be just to be sure that this works as smoothly as possible.
    I only have a couple of questions. One is, Mr. Dillingham, on the issue of arbitration. I think that's not in the legislation yet. Do you have anything you want to say about that? Mr. Driscoll brought up arbitration as a binding part of new legislation.
    Mr. DILLINGHAM. Mr. Blunt, we really haven't studied that issue, but, from what we understand, the idea of binding arbitration could leave the Federal Government open to significant expenses with the 50/50 pay in advance kind of orientation.
    Again, we really haven't done a detailed look at that.
    Mr. BLUNT. Can you look at that and get back to us with some thoughts on that?
    Mr. DILLINGHAM. Yes, sir.
    Mr. BLUNT. Okay.
    [The information received follows:]

    [Insert here]
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    Mr. BLUNT. The only other thing I'd like to ask, down at the other end of the table, General Voellger mentioned and General Regan and, of course, Mr. Driscoll, that there were some obvious shortcomings and some problems. I believe I heard all of you say that, with the exception of the specific things mentioned here today, you think those are being worked out internally.
    Is there anything that comes to mind right now that we shouldn't overlook that you hadn't thought about previously?
    General VOELLGER. No. I think we covered most all those issues that came up out of the Gulf War. In fact, the majority of them were handled by about 1992. Those that remain on the table Mr. Driscoll has eloquently addressed. We'll continue to work those through, and we're seeing great cooperation between the carriers and all the agencies of the Government right now.
    Mr. BLUNT. Well, certainly I think it was just a proud day for American aviation and for the private sector partnership when we saw that dramatic effort during Desert Storm and Desert Shield, and we're grateful to the airline industry and also to the military for seeing that that worked so smoothly that it almost was as if it was just happened. We want to be sure that those problems that did crop up are taken care of.
    We're grateful to you all for being here today.
    Mr. Chairman, thank you.
    Mr. DUNCAN. Thank you very much, Mr. Blunt.
    Mr. Boswell?
    Mr. BOSWELL. No questions.
    Mr. DUNCAN. Mr. Lipinski?
    Mr. LIPINSKI. Thank you, Mr. Chairman. I have no questions of this panel, but I certainly appreciate them being here and I particularly appreciate all the work that they have done amongst themselves resolving these particular issues. I am sure that, with the work of our great staff on this great subcommittee, we'll be able to resolve the rest of these issues and all have a very successful reauthorization bill.
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    Thank you, Mr. Chairman.
    Mr. DUNCAN. Thank you, Mr. Lipinski.
    Let me ask one of the generals: if we did not have this program, does the military have any authority any place to force airlines to provide this type of service?
    General REGAN. No, sir, we don't. The simple answer is that we need the CRAF program. There is no adequate substitute for it. It's a voluntary program. It's a contractual obligation. If we don't have the CRAF program, we don't have the capability of getting those assets.
    And that's why I also mentioned about indemnification. We have the stop gap measure, but there is no substitute for the FAA's program. That is, I think, one of the clear lessons of Desert Shield/Desert Storm.
    We did get some help on indemnification. I can relate a personal example. I was the military assistant to the Air Force General Counsel. We had a 747 on the ground in Rhein Main, and they had just received short notice termination of their war risk coverage.
    They were not going to move off that runway until we got some adequate coverage for them, which we got through the Secretary signing up to indemnification, but indemnification is not the right answer.
    It's clear, as I mentioned in my testimony, that the entire industry is very sensitive to insurance issues, and I don't think we have a viable CRAF without the 443 program.
    Mr. DUNCAN. Speaking of the sensitivity of the industry to the insurance issues, Mr. Gelband, could you just step up there? I understand that Tower Air had some problems during the Gulf War getting insurance. Can you tell us a little bit about that?
    Mr. GELBAND. I can. Thank you very much. I'm Steve Gelband. I'm general counsel of Tower.
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    The problem was basically that our insurance carriers told us that our premiums were going to double and triple within days, and it became totally unfeasible to be able to operate. This is on the premium side. This would have been for flights not for the military. The military programs were in place.
    Our basic concern was with the continuation of flights to and from the Middle East that we had been operating regularly-scheduled service. Ultimately it was determined that it was in the country's best interest only to allow to pay for flights in one direction, which were from Israel to the United States, and not in the return, so it was very difficult to route the aircraft.
    It was a combination of flights for the military through the Middle East, and then routing them to Europe and back into Israel, from which we then picked up the premium insurance.
    But the general was quite right—the war risk insurance disappears. It dries up immediately upon any crisis taking place. It either is terminated and not available or it is at exorbitant prices, which make it totally unfeasible to operate.
    Mr. DUNCAN. I'm not familiar really with all the details of this particular program. Is there any coverage under this insurance for pilots and flight attendants?
    Mr. GELBAND. I'm not sure. I believe it covers—
    General REGAN. The 443, sir, is available to do such things as provide life insurance coverage that would otherwise be provided and gets canceled. We can do that within 443. We cannot do that with indemnification.
    Mr. DUNCAN. How did Tower Air and how do the other airlines—do they ask for volunteers to go into these war zones? How do you select the pilots and the flight attendants? Do you have any problems in that regard?
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    Mr. DRISCOLL. Mr. Chairman, from an industry standpoint, I believe that you will find that the majority of the pilots had no problem flying into Desert Shield/Desert Storm or flying into Vietnam or wherever we've operated in the past.
    However, in some cases the pilots did ask for additional insurance coverage, and that was either provided by the company directly or through cooperation with the FAA, and we have now worked out a program where the chapter 443 can be used to provide the additional insurance coverage for the crews and so forth.
    But I think, by and large, with minor exception, the pilots had no problem flying in.
    I would point out, however, that Desert Shield/Desert Storm was supposed to be a United Nations undertaking, and the U.S. did go out and ask its foreign partners to make aircraft available and crews available to fly into the Gulf. Unfortunately, there were very few, if any, airplanes made available or crews to fly into the Gulf. In one case, one of the carriers that volunteered its airplanes and a contract was let by the military subsequently said, ''We'll only fly you as far as Germany. We will not fly into the Gulf.''
    That gets to the point that I would make that the U.S. operated the Desert Shield/Desert Storm almost exclusively with United States aircraft, and that's why we believe, under the Fly America Act, that the Fly America Act should be continued so that Government traffic, and especially military traffic, is only available for movement by U.S. carriers and not by foreign carriers.
    You notice here recently, under negotiations in the bilateral process, foreign carriers have tried to come in and say, ''We want part of that pie in peace time that is put out by the Department of Defense.''
    We, the carriers, have taken a strong view against that. Fortunately, the Department of Defense has, also. And that's why we believe that, with the ability of the U.S. carriers to support Defense, without question we believe, since no one volunteered in the past to come in and operate under wartime conditions, that it should be the Fly America.
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    One other aspect on Tower that you mentioned—and this is where, in order to continue to fly, even though you're certificated under a route by the Department of Transportation between, let us say, New York and Tel Aviv, and you have that authority, in order to make premium insurance available there has to be a finding that the continuance of that is in the public interest and the foreign policy interest of the United States.
    We believe that should be reversed—that unless the President makes a determination that it isn't in the foreign policy interest to allow a carrier to continue to operate to Tel Aviv, the same as the Israeli carriers continued to operate to the U.S., that should be permitted and premium insurance made available for that.
    The ranking minority member of your committee was involved with the Tower episode involving Israel during all these situations. We were on the phone up until midnight trying to get adequate coverage during the Desert Shield/Desert Storm, and only because the military cooperated and routed Tower into Desert Shield/Desert Storm, the Persian Gulf, and there they were able to be positioned to Tel Aviv, were they able to operate what was considered to be in the public interest from Tel Aviv to the United States to bring Americans out. But they weren't permitted to operate and get Government insurance from the U.S. to Tel Aviv, which we question because, except for the military, Tower wouldn't have been able to operate. It couldn't just ferry an airplane over to bring people back. The cost would have been prohibitive.
    Mr. DUNCAN. Sure. Well, I'll tell you this: I certainly understand your position in regard to the foreign airlines, considering their lack of cooperation and assistance during the Gulf War, and I can foresee that if you've gone into a really explosive situation that was much more dangerous, let's say, than the Gulf War, then there would be even more problems in regard to this program.
    Ms. Maillett, let me ask you this: Mr. Driscoll recommended borrowing authority for the Department of Defense, but there was a recommendation like that. In fact, the GAO mentions in their report that in 1994 the OMB turned down the FAA's request in that regard. Are you familiar with that? And can you tell us what the objection of the OMB was at that time?
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    Ms. MAILLETT. I'm aware of the fact that there were discussions prior to the recent DOD legislation about how to handle GAO's concerns about the lack of funding for purposes of a claim or potential claim.
    I think that, with the DOD language that was passed last year, that takes care of the vast majority of the problem in this program, but I'm not familiar with the specific reasoning of why that was not pursued at that point.
    I do know that we did support and were very pleased with the legislation that went through on the DOD part of the program to allow prompt payment through DOD for their part of the program, which is the vast majority, over 95 percent of the program.
    Mr. DUNCAN. All right.
    Well, thank you very much for being with us today. Your testimony has been very helpful, and we will proceed with legislation on this.
    I think, as I said earlier, we will take into consideration all of your testimony and your recommendations on this very, very important program.
    Thank you very much.

    [Whereupon, at 11:10 a.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

    [Insert here.]



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MAY 1, 1997

Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
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JOHN L. MICA, Florida
SUE W. KELLY, New York
RAY LaHOOD, Illinois
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
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J.C. WATTS, Jr., Oklahoma

NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ROBERT E. (BUD) CRAMER, Jr., Alabama
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi
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BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania

Subcommittee on Aviation

JOHN J. DUNCAN, Jr., Tennessee, Chairman

ROY BLUNT, Missouri Vice Chairman
RAY LaHOOD, Illinois
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
JOSEPH R. PITTS, Pennsylvania
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CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
J.C. WATTS, Jr., Oklahoma
BUD SHUSTER, Pennsylvania
(Ex Officio)

NICK J. RAHALL II, West Virginia
ROBERT E. (BUD) CRAMER, Jr., Alabama
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
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(Ex Officio)




    Dillingham, Gerald L., Associate Director, Transportation Issues, Resources, Community and Economic Development Division, U.S. General Accounting Office, accompanied by David K. Hooper, Attorney, Office of the General Counsel

    Driscoll, Edward J., President and CEO, National Air Carrier Association, accompanied by Steve Gelband, General Counsel, Tower Air

    Maillett, Louise E., Acting Assistant Administrator for Policy, Planning and International Aviation, Federal Aviation Administration, U.S. Department of Transportation, accompanied by John M. Rodgers, Director, Office of Aviation Policy and Planning

    Regan, Brigadier General Gilbert J., Chief Counsel, U.S. Transportation Command (USTRANSCOM), and Staff Judge Advocate, Air Mobility Command, U.S. Air Force

    Voellger, Major General Gary A., Director of Operations, Air Mobility Command (AMC) U.S. Air Force
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    Costello, Hon. Jerry F. Costello, of Illinois
    Cramer, Hon. Bud, of Alabama
    Lipinski, Hon. William O., of Illinois
    Millender-McDonald, Hon. Juanita, of California
    Poshard, Hon. Glenn, of Illinois


    Dillingham, Gerald L

    Driscoll, Edward J

    Maillett, Louise E

    Regan, Brigadier General Gilbert J

    Voellger, Major General Gary A


    Dillingham, Gerald L., Associate Director, Transportation Issues, Resources, Community and Economic Development Division, U.S. General Accounting Office, response to question from Rep. Blunt
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    Slater, Rodney E., Administrator, Federal Highway Administration, letter and draft bill Sectional Analysis

    H.R. 2036, bill