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U.S. House of Representatives,
Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 3:00 p.m., in room 2220, Rayburn House Office Building, Hon. Peter T. King, [chairman of the subcommittee], presiding.

    Present: Chairman King; Representatives Grucci, Capito, C. Maloney of New York, J. Maloney of Connecticut, and Capuano.

    Chairman KING. The hearing will come to order.

    I've been advised that Mrs. Maloney will be arriving in a few minutes. She has no objection to starting this meeting.

    The subcommittee is meeting to consider reauthorization of the Defense Production Act of 1950. I will make a brief statement and then I will ask each of the witnesses to testify. Hopefully there will be no major incidents at the subcommittee hearing and we can move forward.

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    The Defense Production Act is a little-known bill of great national significance. It has provided vital support to the United States military in every conflict since it was enacted in 1950 during the Korean War. It also holds the promise of helping to mitigate civil emergencies during peacetime.

    DPA gives the President a vital set of tools to insure the constant readiness of those portions of our industrial base that support national security. The tools include production priorities and financial incentives, but also extend to monitoring the increasing effects of globalization on the defense base. It falls under the jurisdiction of this subcommittee, and I should say that to date the subcommittee is unaware of any significant adverse impact on the economy caused by DPA. All Administrations since President Truman have used it carefully and prudently.

    It's important to note that in the reauthorizing of DPA and monitoring, this subcommittee makes no judgments about particular defense programs. Those decisions are left to the President, who has delegated the job to the appropriate departments: chiefly the Defense Department, of course, but where appropriate the Departments of Commerce, Energy, Transportation, Agriculture and so forth, under the administration of the National Security Council and FEMA.

    At this stage I believe the DPA should be reauthorized virtually unchanged from its current form. Through a mishap of timing, the legislation did lapse briefly in 1990 during the buildup to Desert Storm. That was quickly corrected, however, as the Defense Department used the production priorities extensively to acquire items as diverse as computers and communications equipment, satellite-based mapping systems and materials to help protect our troops against chemical weapons.
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    Fortunately, we do not appear to be in that situation now, but geopolitical situations can change quickly. Also, civil emergencies are particularly hard to predict. For those reasons, I expect a speedy and non-controversial reauthorization process for this year, and that can be almost guaranteed if we finish this hearing before anybody else arrives.


    Chairman KING. It is my hope the subcommittee will see a legislative proposal from the Administration soon. Given the short number of legislative days left in the fiscal year, I would start moving the bill before midsummer.

    I thank all the witnesses for appearing. I will now recognize Mrs. Maloney, who is not here, as soon as she comes to make a statement or insert a statement in the record.

    I will now ask the witnesses to testify. We have copies of all your statements, so I would strongly suggest that you keep your statements under 5 minutes. There is a vote on the House floor probably in about 45 minutes. It will be in everyone's interest, primarily the interest of making sure that ultimately this legislation is reauthorized, to keep your statements under 5 minutes. Your statements will be inserted in the record and considered as read.

    With that, I would call the first witness, the Honorable David R. Oliver, Jr., the Principal Deputy Undersecretary of Defense for Acquisition, Technology and Logistics. Mr. Oliver.
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    Mr. OLIVER. Mr. Chairman, I appreciate the opportunity.

    We'd like to see it reauthorized for 3 years, if possible. The key issue has to do with, under no other legislation are we able to maintain an assured supply for our allies when they buy our equipment and we want them to operate with us. And there are other problems that exist.

    But what I would like to share with you is the Kosovo incident. When we needed to reprioritize some suppliers for various precision weapons, and it was really important to do so, the Act enabled me to get the contractors' attention. Without that authority, we might have been able to work it out, but it was much more effective to have their attention right from the beginning.

    There are other issues that I've looked at in the last 3 years that are directly affected by the Act, but this is a significant facilitator, and we ask that it be reauthorized.

    Chairman KING. How about Bosnia?

    Mr. OLIVER. The same thing, sir. In both cases, within a few days after we started hostilities, we were finding areas that we needed the Act's legislation in order to take immediate action. We even went with flat panel displays—I'm not sure the Chairman is aware of that problem over the last few years.
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    But essentially, small key businesses and key technologies I don't think about 2 years in advance. And then something comes up in terms of a problem, and it is a very small area, but it's terribly important to the military, and the Act permits us to take action.

    Thank you, sir.

    Chairman KING. The Under Secretary for Export Administration in the Department of Commerce and a fellow New Yorker, Ken Juster.


    Mr. JUSTER. Mr. Chairman, I appreciate the opportunity to be here today to testify on reauthorization of the Defense Production Act. As with Mr. Oliver, we too would like to see the DPA reauthorized for at least a 3-year period.

    Let me briefly discuss the aspects of the DPA that are relevant to the Department of Commerce. We really have four areas that are relevant to us.

    First, under Title I of the DPA, we administer the defense priorities and allocation system. Second, under Title III, the Department reports on defense trade offsets. Third, under Title VII, the Department analyzes the health of U.S. industrial base sectors. 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 cover these areas in my written statement.
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    Briefly touching on each of these points for a minute or two, the Defense Priorities and Allocation System, which is known as DPAS, has two primary 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 a national emergency situation.

    The Commerce Department administers the 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 time of emergency.

    The second area is the defense trade offsets. The Department provides Congress with an annual report on the impact of offsets in defense trade. The 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.

    We believe that offsets generally are not efficient economically, because the foreign customer bases the purchase decision on something other than the quality of the product or service being provided.

    The third area applies to the Department of Commerce's defense industrial base studies under Section 705 of the DPA. The Department of Commerce conducts analyses and prepares reports on individual sectors of the defense industry. These studies provide a comprehensive review of specific sectors within the U.S. defense industrial base, and they analyze the current capabilities of these sectors to provide defense items for the U.S. military services.
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    The final area that's relevant to the Commerce Department is the Committee on Foreign Investment in the United States, known as CFIUS, which was originally established by executive order in 1975. The Department of Commerce is a member of the CFIUS process chaired by the Department of the Treasury.

    The provision that provides for CFIUS relates to a national security review of foreign mergers or acquisitions of U.S. companies. The intent of the provision is to provide a mechanism to review and, if the President finds it necessary, to suspend or prohibit a foreign direct investment that threatens the national security, but not to otherwise discourage foreign direct investment. The Department of Commerce's contribution to the CFIUS process includes providing a defense industrial base perspective as well as export control perspective.

    In sum, we believe all of these are very important authorities to the Department in terms of the programs we carry out. And as I mentioned at the outset, we fully support reauthorization of the Defense Production Act for at least a period of 3 years.

    Thank you.

    Chairman KING. Thank you, Mr. Secretary.

    We've been joined by Ranking Member, Mrs. Maloney. Do you want to make an opening statement at this time?

    Mrs. MALONEY. In the interest of time—and I want to hear from the panelists—I request permission to put my opening statement in the record.
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    Chairman KING. Without objection.

    Chairman KING. I call on the Honorable Eric Fygi, Deputy General Counsel for the Department of Energy.


    Mr. FYGI. Thank you, Mr. Chairman, and Congresswoman Maloney.

    As you suggested, I will summarize very briefly the prepared statement which responded to particular elements of the subcommittee's invitation to address the Energy-related experiences of the Defense Production Act. Most prominent of these recent events, of course, was our use—that is to say, the President's use—of the Defense Production Act in January of this year to avoid a very serious breakdown in the northern California natural gas distribution system that was prompted by the insolvency of the combined gas and electricity utility that services that part of the state. Those particulars are described thoroughly in the prepared statement, and I will not now repeat them here.

    But, I think it's fair to note that there were two particularly controversial aspects of our use of the Defense Production Act authority in that setting. The common thread of them was that the authority is being used to compensate for financial breakdown rather than a shortage, and because the authority was used in a novel way that placed at risk the economic circumstances of the natural gas providers who were ordered to continue making their deliveries to Pacific Gas & Electric.
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    In the event, however, I am pleased to report that the apprehensions about the gas producers—and even more significantly on a volumetric basis, the natural gas resellers, which included some major financial institutions— proved ill-founded. The overall approach that was hammered out to deal with that emergency resulted in each natural gas supplier being paid in full within the normal business cycle that hitherto had obtained for all of PG&E's natural gas purchases.

    In terms of other prior instances in which the Energy Department has employed this scheme set forth in Sections 101(a) and (c) of the Defense Production Act, this has been sporadic with respect to our organization, in contrast to for example the Defense Department. These authorities were used from time to time during the nuclear weapons buildup and production acceleration period in the early 1980's, and likewise were used in the early 1980's to accelerate development of Alaska North Slope energy reserves, particularly natural gas reserves.

    In conclusion, as the chair observed a moment ago, we regard the Defense Production Act as an extremely important element of the toolbox that's available for utilization by the President, in addition to being the foundation for the priorities and allocation systems that were described a moment ago. And therefore we wholeheartedly join in the recommendation that the statute be extended for a period of 3 years.

    Thank you very much.

    Chairman KING. Thank you very much, Mr. Fygi.

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    Mr. Michael Brown, General Counsel to FEMA.


    Mr. BROWN. Thank you, Mr. Chairman, Congresswoman Maloney.

    I'm honored to be here today and appreciate the opportunity to testify today on behalf of Director Allbaugh, the new director of the Federal Emergency Management Agency, and to tell you I'm a little intimidated and overwhelmed by the expertise in this room regarding DPA.

    I've learned all that I can in the past 120 days in coming on with Director Allbaugh, and find out that I have much, much more to learn. They've tasked me well and they've advised me well.

    Rather than go through my prepared statement, I'd like to just make a few comments that I think reflect the views of the Administration and Director Allbaugh.

    We also request a 3-year extension of the Act, reauthorization of the Act. We believe it is important to carry out the duties and obligations of FEMA as the lead coordinating agency for consequence management in the United States. We are prepared to carry out our responsibilities under Executive Order 12919, which indeed involve such things as coordinations.

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    We are a coordinating agency. We think we do that job very well. The expiration of the Act would hinder us in our full capacity to do that type of activity.

    The DPA itself gives us the additional tools we need in the event of a catastrophic event that goes beyond the Stafford Act and goes beyond the capability of FEMA to react properly. Therefore, we believe that its expiration will have dire consequences for us.

    In addition, you may recall that the President has tasked the Office of National Preparedness, and we believe the reauthorization of the DPA is important to the continued function of that particular office. We may be looking to authorities under the DPA to respond to the consequences of weapons of mass destruction or other terrorist attacks on the United States, and believe that these authorities are vital to our coordinating function in that consequence management role.

    On behalf of the Administration, we would ask for reauthorization for 3 years. Thank you, Mr. Chairman.

    Chairman KING. We're joined by Mr. Maloney from Connecticut. Do you have any opening statement?

    Mr. MALONEY. No, sir.

    Chairman KING. I have a series of questions, but in the interest of speed, I will submit these questions to you in writing.

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    I have one question I would ask each of the four of you. Just turn this around and ask you, what would be the situation if this Act were not reauthorized?

    Mr. Oliver.

    Mr. OLIVER. We have certain authorities that we don't have in any other way, Mr. Chairman. We do not have something that applies to service contracts. We don't have something that applies to maintaining continuity or surety of supply. Or, let's say I've sold England U.S. helicopters, which gives us a significant interoperability. It gives us significant military capability in addition to maintaining the defense industrial base. I have to be able to then make sure they have the parts, particularly if I'm going to ask them to do something.

    Take, for example, the Australians in East Timor, where it's in the United States' best interest for them to go do something essentially all by themselves, although they used equipment they had bought from the United States, which was essential. If they have a problem with supply, it's in our best interest to be able to divert support for that, and I don't have that capability without this Act.

    In addition, there's a legal problem if they're not provided complete liability coverage to the contractors if I ask them to divert from one source to another.

    The other thing that's terribly important to me is that, when we have issues come up, for example—flat panel displays or radiation-hardened chips for these satellites coming in—when a problem comes up, I don't have authority without this Act to take the necessary quick action to get industry's attention and keep them alive until such time as I can consult.
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    Mr. JUSTER. Let me just reiterate what Mr. Oliver has said.

    The loss of the Defense Production Act would significantly weaken our ability to support national defense programs and civil emergency preparedness, and our overall industrial base capability. I think as you had mentioned earlier, without the DPA, we'd still have some authority under the Selective Service Act of 1948, but it is very limited. And in addition to what Mr. Oliver mentioned, we would have no allocation authority for possible use in a national security emergency without the Defense Production Act.

    Also, there would be no civil emergency preparedness programs that we could draw upon, or defense-related programs for agencies such as the FBI or the National Security Agency.

     In addition, from the perspective of the Department of Commerce, we would not have the authority that we need to collect the necessary data for our analyses of industrial base sectors or defense offsets. So again, we regard the DPA as a very critical authority that's essential to our programs.

    Chairman KING. Mr. Fygi.

    Mr. FYGI. Well, I don't expect us to confront in the near future an event, a set of circumstances as peculiar as the earlier emergency in California. But there are other instances that our experience indicates are very plausible, in which these authorities would be of crucial importance.
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    Let us suppose, for example, that world circumstances were such that we had to draw down the Strategic Petroleum Reserve, and coincident with that realization, directions from the President to take that action. Then there's a significant equipment breakdown in the facility on that installation.

    That would be the type of circumstance, if it were urgent to replace scarce and backlogged specialized pumps and other apparatus, where we rely upon the Defense Production Act to bring the facility back on line in an operational sense as promptly as we could. And absent the Defense Production Act, it would be exceedingly difficult, as has been pointed out by the prior witnesses, to persuade vendors to let our order come to the head of the line for fear of the third-party contract liability that they might otherwise expose themselves to, even if they were willing to cooperate with us in the interests of the country.

    So that's one example that occurs to me.

    Chairman KING. Mr. Brown.

    Mr. BROWN. Mr. Chairman, Members of the subcommittee, from FEMA's point of view, if we were to experience a truly catastrophic event, something beyond the magnitude of the Northridge Earthquake or Hurricane Hugo—a Northridge expanded all the way from San Diego to Seattle and truly devastated the West Coast—a terrorist attack, a truly frightening situation like the WMD situation, it would limit our ability to really coordinate and provide the kinds of coordinating responses that we could in terms of consequence management. It is a piece of legislation that allows us to do what we need to do to respond appropriately.
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    I can't imagine an event—I don't want to imagine an event—of that size. But if an event of that size were to occur, the DPA is necessary for us to make that type of coordinating effort beyond the Stafford Act to do what we need to do to respond appropriately.

    Chairman KING. Thank you, Mr. Brown.

    I have no further questions today. As I say, I will be submitting questions to you, and I'd appreciate your response to them.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you, Mr. Chairman. Here's my opening statement.

    I would just like to state that I am supporting this bill, and I support the 3-year reauthorization. But there are some Members of Congress who don't support it, most notably Senator Gramm. He objected publicly.

    I understand he's held public hearings on it, and he expressed concern apart from the crisis about, and I quote, ''expansive reach of the statute.'' And he announced that he is going to continue to look at it.

    I would like to know your responses to his concern. He's a serious leader in our legislature.
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    Mr. FYGI. Perhaps I can begin, because I spent several hours with Senator Gramm having an interesting conversation on this point on the 9th of February.

    His concerns were directed to the use of the Defense Production Act to deal with the California emergency that I have described extensively in our prepared statement. His concerns seemed directed primarily to the prospect that some of the gas vendors assumed a risk of uncompensated losses of property by reason of the orders.

    As I indicated earlier in a summary of my statement, those risks proved unfounded in that all vendors were, in fact, paid by Pacific Gas & Electric.

    I think it fair to say that his descriptions during that hearing indicated a philosophical view that was broader than just those sorts of adverse consequences, in which he felt it an inappropriate power for the Government to retain—to direct individual participants in the private marketplace to contract with others in the private marketplace.

    Mrs. MALONEY. I guess another part of it is, it's very clear that he thought it was an inappropriate time to use the DPA. But why did the situation in California warrant the use of the DPA by the Clinton and Bush Administrations?

    Mr. FYGI. Those circumstances were described, as I said, extensively in our prepared statement.

    Briefly summarized, they included the unique coincidence of a major investor-owned utility on the brink of insolvency, which investor-owned utility was a combined gas and electric utility; and that even though, unlike its electricity sales, it was guaranteed reimbursement for its natural gas acquisition costs. Noneless, its otherwise parlous financial situation resulted in its natural gas vendors threatening and beginning to curtail service to PG&E, which culminated on the 19th of January.
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    The prospect of curtailments of all deliveries to PG&E presented the real likelihood that the electricity crisis in California would further be exacerbated, because under California law, if PG&E experienced a significant shortfall in its natural gas supplies, it—PG&E—would have to seize natural gas supplies not owned by PG&E, but owned by others, but being delivered to industrial facilities through PG&E's system. That in turn would have provoked a cutoff of those continued industrial supplies, which in turn would have provoked the cessation of substantial amounts of electricity generation in the entire northern California area.

    Never before had we in this country confronted such a circumstance, which also had dire immediate prospects for public health and safety throughout the entirety of northern California.

    Mrs. MALONEY. I'd like to ask Mr. Brown, and then Mr. Oliver—unfortunately, the State that I live in and the city that I live in, New York City, has been a target repeatedly of major terrorist attacks in recent years. Could you provide an example of how the DPA could be used in the event of such an attack, or a major natural disaster?

    Mr. BROWN. The primary example I can think of is, if it was devastating to Manhattan—just destroys all of Manhattan—and we need to make sure, in terms of consequence management, we're going to get food, water, electricity, everything we need to get in to a population of that size and magnitude, where we cannot draw upon ordinary suppliers, ordinary contractual agreements, ordinary arrangements of the staff, DPA would allow us to do that.

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    That's the kind of event that we think, in terms of a catastrophic event, the DPA may come into play. To take it down to a slightly lower level, I've heard examples of where Hurricane Hugo has been utilized to that purpose. We just could not get enough tarps to prevent further damage, which would further exacerbate the problem. DPA could be utilized in that type of situation.

    We would want to be prudent and very conservative in our approach and use. That's why I keep throughout this hearing using the term, a truly catastrophic event, which is the type of situation we would utilize it.

    Mr. OLIVER. I have nothing to add to Mr. Brown.

    Mrs. MALONEY. Just finally, very briefly, Mr. Brown: In 1997, FEMA produced a report recommending modernization of DPA. One of the report's recommendations was to change the Act to reflect economic globalization and not to leave the term ''domestic'' as the sole focus of defense industrial capabilities.

    Would you like to comment on that? Do you think we should expand the definition?

    Mr. BROWN. I would like to comment to this extent. I will go back and ask the staff to give me this report, and I will look at it and see what it says.

    Mrs. MALONEY. Get back to us in writing.

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    I have other questions, but I'll place them in writing. Thank you, Mr. Chairman.

    Chairman KING. Thank you, Mrs. Maloney.

    Mr. Grucci.

    Mr. GRUCCI. I have no questions at this time, Mr. Chairman.

    Chairman KING. Mrs. Capito.

    Mrs. CAPITO. I have no questions at this time.

    Chairman KING. The distinguished gentleman from Massachusetts, Mr. Capuano.

    Mr. CAPUANO. I never have any questions, Mr. Chairman.


    Chairman KING. Again, I want to thank the panel for your testimony today. I believe there is consensus for reauthorization. As Mrs. Maloney mentioned, there have been questions raised by some Members and some Senators, but mostly there is strong bipartisan consensus for reauthorization.

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    With that, I would thank you for your testimony today. Members may have additional questions for the panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for those Members to submit written questions to the witnesses and place their responses in the record.

    The hearing is adjourned.

    [Whereupon, at 3:30 p.m., the hearing adjourned.]