[Senate Hearing 108-428]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 108-428


                           REAUTHORIZATION OF
                       THE DEFENSE PRODUCTION ACT

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                                   ON

   THE RELEVANCE OF THE DEFENSE PRODUCTION ACT, AS WELL AS WHATEVER 
   MODIFICATIONS MAY BE REQUIRED AS A PRELUDE TO ITS REAUTHORIZATION

                               __________

                              JUNE 5, 2003

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

             Martin J. Gruenberg, Democratic Senior Council

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         THURSDAY, JUNE 5, 2003

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     3
        Prepared statement.......................................    28
    Senator Corzine..............................................    13
    Senator Sarbanes.............................................    17
    Senator Bennett..............................................    20

                               WITNESSES

Ronald M. Sega, Director, Defense Research & Engineering, U.S. 
  Department of Defense..........................................     3
    Prepared statement...........................................    28
    Response to written questions of:
        Senator Shelby...........................................    40
        Senator Reed.............................................    41
Suzanne D. Patrick, Deputy Under Secretary for Industrial Policy, 
  U.S. Department of Defense.....................................     5
    Prepared statement...........................................    30
    Response to oral questions of Senator Sarbanes...............    40
    Response to written questions of Senator Reed................    42
Karan K. Bhatia, Deputy Under Secretary for Industry and 
  Security, U.S. Department of Commerce..........................     7
    Prepared statement...........................................    33
R. David Paulison, Director, Preparedness Division, Emergency 
  Preparedness and Response Directorate, U.S. Department of 
  Homeland Security..............................................     9
    Prepared statement...........................................    36
Denise Swink, Acting Director, Office of Energy Assurance, U.S. 
  Department of Energy...........................................    11
    Prepared statement...........................................    38
    Response to oral questions of:...............................
        Senator Shelby...........................................    46
        Senator Allard...........................................    48

              Additional Material Supplied for the Record

Prepared Statement of Senator Joseph I. Lieberman with attached 
  ``White Paper''................................................    49

                                 (iii)

 
                           REAUTHORIZATION OF
                       THE DEFENSE PRODUCTION ACT

                              ----------                              


                         THURSDAY, JUNE 5, 2003

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:01 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Richard C. Shelby 
(Chairman of the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    The purpose of this morning's hearing on the Defense 
Production Act is to examine its continued relevance, as well 
as whatever modifications may be required as a prelude to its 
reauthorization.
    The Defense Production Act was originally passed in 
response to the outbreak of war on the Korean Peninsula. 
Following the end of World War II, the United States had 
undertaken a major reduction in the size of its armed forces. A 
combination of the end of war in Europe and the Pacific and the 
role that would be played in
deterring the emerging threat from the Soviet Union by the 
introduction into the American arsenal of nuclear weapons 
seemed to dictate the need for far fewer conventional forces. 
With a much smaller military, industrial facilities that had 
been converted from commercial to military use to support the 
war effort reverted back to their original function. The North 
Korean attack on South Korea, however, jolted the American 
defense establishment back to reality with respect to 
conventional military requirements.
    Increasing the size of the armed forces was one task. 
Equipping existing and emerging units for combat, however, was 
an entirely different matter. It was in that context that the 
Defense Production Act of 1950 was passed. The Department of 
Defense desperately needed American industry, that part of it 
that could support the new war effort, to adapt its production 
lines once again for military needs. The Defense Production Act 
was the statutory vehicle that provided the Government 
authorities it needed to respond to the sudden onset of war. 
Despite innumerable modifications over the decades, the Defense 
Production Act remains in large measure what it was originally 
intended to be: The means by which the U.S. Government ensures 
that commercial industry is responsive to the requirements of 
the military in the event of a crisis.
    Just as the U.S. economy adapted to the end of the Second 
World War by ramping down that part of it involved in the 
production of military equipment, so the economy again 
responded to the end of the cold war. The defense industrial 
base underwent a major contraction. According to the National 
Defense Industrial Association, some 2.5 million defense 
workers left that segment of the economy in the decade 
following the collapse of the Soviet Union, and half of the 
Nation's 60,000 defense companies--30,000 companies--left the 
defense business. Manufacturers of many major weapon systems 
are precariously dependent on decreasingly small numbers of 
suppliers for components. In addition, the mind-numbing number 
of defense mergers and acquisitions over the past 10 years has 
contributed to the evolution of an increasingly precarious 
defense
industrial base. In short, the ability of the economy to 
respond rapidly to emerging national crises has become the 
source of increasing concern to those who follow industrial 
base issues.
    It is in this context that we are here today examining the 
Defense Production Act. The DPA expires at the end of the 
current fiscal year, and it is the responsibility of the 
Committee to draft succeeding legislation. That is why this 
hearing was called, so that we can hear from some of the key 
Federal agencies involved in using the authorities provided by 
the Defense Production Act. Today's panel is composed of 
officials from the Departments of Defense, Commerce, Homeland 
Security, and Energy.
    As the witnesses will illuminate, Defense Production Act 
authorities continue to be used on a regular basis today, more 
than 50 years after the Act's original passage into law. It has 
been used to expedite production and fielding of weapon systems 
that have played a vital role in the conduct of military 
operations. The Act's authority to prioritize was key to the 
rapid fielding of Predator UAV's armed with Hellfire missiles 
and the provision to the British military of satellite 
communications technology essential to the conduct of joint 
operations in Afghanistan. It was used to procure precision-
guided munitions, supplies of which were being exhausted by 
their greater-than-ever rates of expenditure. Other agencies, 
as I have indicated, also utilized DPA authorities, as was seen 
in the Transportation Security Administration's use of them to 
acquire explosive detection devices for the Nation's airports.
    The Administration's budget request for fiscal year 2004 
includes as part of DPA reauthorization $200 million for 
radiation-hardened electronic components, a special request 
that hopefully will not have to be repeated for future 
activities, but the justification of which in this instance 
does, I believe, pass the sniff test. Finally, the 
Administration has requested that Section 707 of the Act be 
made part of a permanent law and no longer subject to periodic 
reauthorization. The Administration's justification for this 
request is the serious need to avoid a recurrence of what 
happened during Operation Desert Shield, when the Civil Reserve 
Air Fleet was activated and commercial aircraft were drafted 
into the war effort. Section 707 provides commercial businesses 
indemnification from lawsuits resulting from their having to 
respond to emergency taskings at the demand of the Federal 
Government.
    While the Departments of Defense, Commerce, and Homeland 
Security are represented here today because of their roles in 
responding to crises, the Department of Energy is principally 
represented here today to discuss a slightly less comfortable 
issue: The possible abuse of DPA authorities by both the 
previous and current Administrations to provide relief to the 
State of California during the period of rolling blackouts. 
This highly questionable use of DPA authorities represents 
precisely the type of Government action that must be very 
closely scrutinized. My predecessor here as Chairman of the 
Committee, Senator Gramm, held a hearing on this subject 2 
years ago. As the DPA expires soon and consequently needs to be 
reauthorized, I felt this was a good opportunity to address the 
matter once more for the purpose of preparing legislation.
    Testifying before the Committee today are Suzanne Patrick, 
Deputy Under Secretary of Defense for Industrial Policy; Ronald 
Sega, Director of the Defense Department's Office of Defense 
Research and Engineering; Karan Bhatia, Deputy Under Secretary 
of Commerce for Industry and Security; David Paulison, Director 
of the Department of Homeland Security's Emergency Preparedness 
and Response Directorate; and Denise Swink, Acting Director of 
Energy Assurance, Department of Energy. We look forward to all 
of your testimony.
    First, I want to recognize Senator Allard.

                COMMENTS OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I do not have any statements 
that I want to make at this time. I do have a statement I would 
like to submit for the record, and I ask unanimous consent that 
it be made part of the record.
    Chairman Shelby. Without objection, so ordered.

    Senator Allard. I want to welcome my good friend, Dr. Sega, 
to the panel. I look forward to hearing your comments.

    Thank you, Mr. Chairman.

    Chairman Shelby. Thank you, Senator Allard.

    All of your written testimony will be made part of the 
hearing record in its entirety, and if you would briefly sum up 
your pertinent, most important remarks.

    We will start with you, Dr. Sega.

                  STATEMENT OF RONALD M. SEGA

            DIRECTOR, DEFENSE RESEARCH & ENGINEERING

                   U.S. DEPARTMENT OF DEFENSE

    Mr. Sega. Good morning, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to share with you the 
Department of Defense views regarding the Defense Production 
Act and the role it plays in helping to obtain 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 Nation's 
defense in the 21st Century.

    The DPA is providing the Department with the tools required 
to maintain a strong response base necessary for our armed 
forces. I want to express the Department's support for 
reauthorizing the Defense Production Act. A key component of 
DPA is Title III, which will be the focus of my testimony. The 
Deputy Under Secretary of Defense for Industrial Policy, Ms. 
Suzanne Patrick, will follow with a discussion of Title I and 
briefly touch on some of the key components of Title VII.
    Title III provides the President unique authorities that 
are being used to establish, expand, and maintain essential 
domestic industrial capacity needed to field advanced systems 
for today and the future. The primary objective of the Title 
III program is to work with U.S. industry to establish viable 
production capabilities for items essential to our national 
security. The Title III program is also being used to 
transition emerging technologies.
    A success story is a good way to highlight the benefits of 
the program. Gallium arsenide is a semiconducting material used 
in the fabrication of advanced electronic devices. At the 
outset of the gallium arsenide Title III project, long-term 
viability of the U.S. gallium arsenide wafer supplier base was 
in doubt. Foreign firms dominated the industry with about 75 
percent of the world's market share.
    With the help of Title III, the U.S. producers made a 
dramatic turnabout. By the year 2000, these contractors 
accounted for 65 percent of wafer sales worldwide. Their 
combined sales of gallium arsenide wafers grew by near 400 
percent. In addition, the wafer prices dropped by approximately 
35 percent. This reduction in wafer prices and improvement in 
wafer quality resulted in significant reductions in defense 
costs for critical electronics.
    DOD is initiating two new projects this year. One of these 
projects will be establishing production capacity for Yttrium 
Barium Cooper Oxide superconductor wire.
    Projects initiated in fiscal year 2002 include a project 
for radiation hardened microelectronics, which you mentioned. 
This project illustrates the key role Title III plays in 
providing our armed forces with the technologies they need to 
be successful on the battlefield. We were in danger of losing 
our last remaining suppliers of these critical components 
needed for our strategic missile and space
systems. Because of the small number of components that the
Department buys and limited commercial demand, our current 
suppliers were unable to generate sufficient revenues to 
purchase the production equipment needed to produce radiation 
hardened microelectronics at the feature size needed to meet 
future defense requirements. Title III is helping these 
companies with equipment purchases and modernization to remain 
viable suppliers, capable of supporting future defense 
requirements. Without Title III, it is likely we would have 
lost this critical production capability.
    Most provisions of the Defense Production Act are not 
permanent law and must be renewed periodically by Congress, as 
you pointed out. The Department supports reauthorization of the 
Defense Production Act until September 30, 2008. In addition, 
we are requesting an increase in the statutory authority limit 
contained in Section 303 to $200 million to correct the 
industrial resource shortfall for the radiation-hardened 
electronics project. The DPA requires the Department to obtain 
specific authorization for any Title III project that exceeds 
$50 million. The expected cost of the radiation hardened 
electronic project is $167 million. However, we are asking for 
authority up to $200 million in the event of unexpected cost 
increases for the project.
    In conclusion, the DOD needs the Defense Production Act. It 
contains authorities that exist nowhere else. Current world 
events make these authorities more important than ever. DPA is 
a proven mechanism. Its array of authorities have helped us 
meet the challenges of the last 50 years. By judiciously 
applying its authorities to the challenges facing us today, the 
DPA will see us to a more secure future. I hope that I have 
conveyed to you the significant role the Defense Production Act 
plays in ensuring our Nation's defense. The Department fully 
supports the bill before the Committee to reauthorize the DPA.
    Thank you very much for the opportunity to discuss the 
Defense Production Act.
    Chairman Shelby. Thank you, Dr. Sega.
    Ms. Patrick.

                STATEMENT OF SUZANNE D. PATRICK

          DEPUTY UNDER SECRETARY FOR INDUSTRIAL POLICY

                   U.S. DEPARTMENT OF DEFENSE

    Ms. Patrick. Good morning, Mr. Chairman, Senator Allard, 
and Members of the Committee, their staff, and other people in 
the audience. I really appreciate the opportunity to share with 
you the DOD views regarding the Defense Production Act.
    As Dr. Sega indicated, this Act provides statutory 
authorities that are vital for DOD, both in time of contingency 
or conflict, as well as during peace. It helps DOD obtain the 
goods and services we need to promote national defense.
    With your permission, I will be summarizing the testimony I 
have submitted for the record. Dr. Sega talked about Title III. 
My testimony today focuses on Title I of the Defense Production 
Act, and I want to briefly mention Title VII of the Act, which 
is also very important to the Department.
    As you know, the Defense Production Act Titles II, IV, V, 
and VI have been repealed. I particularly want to describe to 
you today why Title I authority is important and how we are 
using it today.
    Title I, which addresses priorities and allocations, 
provides the President the authority to require preferential 
performance on contracts and orders, as necessary or 
appropriate to promote the national defense. These authorities 
are important in peacetime and vital in the event of conflict. 
These authorities are implemented through the Defense 
Priorities and Allocations System and applied via contract 
clauses. The clauses are like insurance. They are present in 
nearly all defense system contracts, subcontracts, and orders, 
but actually executed only when absolutely necessary.
    During peacetime, Title I authorities are important in 
setting priorities among defense programs that are competing 
for scarce resources and industrial production of parts and 
subassemblies. Delayed industrial supplies increase costs of 
weapon systems and affect our readiness. DPAS serves as an 
important tool to prioritize and accelerate deliveries and 
minimize cost and schedule delays for the Department's orders.
    During times of conflict, DPAS is vital, indeed, 
indispensable. DPAS gives the Department of Defense the 
necessary power and the flexibility to quicken deliveries in 
order to address critical warfighter needs effectively and 
expeditiously. The role of DPAS to increase interoperability 
and assist allies is also very important.
    I would like to mention three specific cases that 
illustrate the absolutely necessary power that DPAS provides 
the Department, and Chairman Shelby has actually mentioned some 
of these in his opening remarks.
    Predator UAV's armed with Hellfire missiles were used for 
the first time in Afghanistan. They included an upgraded sensor 
package, the Multi-Spectral Targeting System. The contractor's 
original delivery date for these systems was March 2003, just a 
couple months ago. Using DPAS, we jumped this order to the head 
of the production line, and the contractor was able to deliver 
three systems in December 2001, 18 months earlier than 
originally promised. Since that time, we have further used DPAS 
to accelerate 40 additional Multi-Spectral Targeting Systems. 
We are all aware of the dramatic impact that unmanned Predators 
had in waging war in Afghanistan, and most recently in Iraq.
    During Operations Enduring Freedom and Iraqi Freedom, a 
new, lighter kind of body armor proved remarkably effective in 
minimizing fatal battlefield injuries. That latest generation 
Army and Marine body armor is comprised of protective vests 
with inserts made of an extremely tough fiber--Spectra--which 
is bonded to a ceramic plate. We used DPAS authority to direct 
the Spectra manufacturer's production to the highest priority 
Army and Marine requirements in order to maximize small arms 
protection for the warfighters.
    Let me now give you an example for our allies. For 
Operation Iraqi Freedom, the U.K. MOD needed Precision 
Lightweight GPS Receivers. The U.K. requirements were critical 
to the warfighting effort. We used DPAS to give the U.K. order 
an industrial priority rating and it was moved ahead of some 
lesser priority U.S. orders that were not needed for deployed 
forces or for deploying forces. The U.K. received the equipment 
in a timely manner to support their forces and our forces in 
theater.
    I would like to conclude my remarks on Title I of the DPA 
by noting that our warfighters are the real DPAS beneficiaries. 
Limiting our authority to apply these provisions has the 
potential to put their lives at risk.
    Turning now to Title VII, I want to briefly express support 
for these authorities, also very important for the Department. 
Title VII contains miscellaneous provisions, including 
enforcement mechanisms, which help protect the Nation's 
security. For example, Section 707 provides that, ``No person 
shall be held liable for damages or penalties for any act 
resulting from compliance with rules, regulations, or orders 
issued under the Defense Production Act.'' This provision is 
necessary to protect suppliers from breach of contract claims 
when commercial contracts are displaced in the interest of 
national security. This provision should be permanently 
authorized in order to protect contractors during periods when 
the Defense Production Act has lapsed, as has happened 
temporarily.
    Section 721 represents another example of important Title 
VII authorities. Section 721 allows the President to suspend or 
prohibit a foreign acquisition of a U.S. firm when that 
transaction would represent a credible threat to the national 
security of the United States and imposes remedies to eliminate 
that threat that are not available under other statutes. This 
authority is increasingly important in today's globalized, 
industrialized environment.
    In closing, I would like to reaffirm the DPA authorities 
are critical as a tool in the Department of Defense's arsenal. 
Time and again, particularly during times of conflict, we use 
DPA authorities to promote our Nation's security. Given the 
challenges in the current uncertain environment, we urge you to 
remove the uncertainty associated with the short duration of 
these authorizations and reauthorize the Act through September 
30, 2008. It would be very difficult for the Department of 
Defense to meet its national security responsibilities without 
these tools.
    Thank you very much.
    Chairman Shelby. Mr. Bhatia.

                  STATEMENT OF KARAN K. BHATIA

        DEPUTY UNDER SECRETARY FOR INDUSTRY AND SECURITY

                  U.S. DEPARTMENT OF COMMERCE

    Mr. Bhatia. Thank you, Mr. Chairman, and other Members of 
the Committee. I appreciate the opportunity to testify before 
you today on the reauthorization of the Defense Production Act.

    The Commerce Department fully supports extension of the 
DPA. We do so because in our experience the DPA has been a 
critically important tool in enabling Government to work 
effectively with industry to meet contemporary challenges to 
our security. My written statement, supplied for the record, 
discusses in detail the various ways in which the Commerce 
Department is involved in the exercise of DPA authorities and 
provides a number of relevant examples. In the interest of 
brevity, I won't duplicate that
testimony here. But I would like to briefly identify several 
authorities under the Act that facilitate particularly key 
Commerce Department activities.

    First, under Title I of the DPA, the Department administers 
the Defense Priorities and Allocations System, which Ms. 
Patrick just discussed as well. DPAS seeks to ensure the timely 
availability of products, materials, and services that are 
needed to meet national defense and emergency preparedness 
requirements with minimal interference to the conduct of normal 
business activity. It does this by creating a system of 
priority ratings that can be attached to procurement contracts 
by agencies to which Commerce has delegated rating authority, 
such as the Department of Defense. The DPAS
also provides an operating structure to support a timely and 
comprehensive response by U.S. industry in the event of a 
national emergency.

    In addition to the DPAS, the DPA also provides authority to 
the Commerce Department to collect data, perform analysis, and 
prepare reports on critical defense industrial base issues, and 
specifically it requires the submission to Congress of annual 
reports
analyzing offsets in defense trade. It is also the source of 
authority for the reports that Commerce prepares each year, 
commonly at the request of Congress or the armed forces, 
analyzing various sectors of the defense industrial base.

    Let me pause in this context to note the Commerce 
Department for a minor but we believe important amendment to 
the DPA that would clarify that the President's investigative 
authorities under the DPA encompass the authority to obtain 
information necessary to produce such industry studies. The 
current Section 705 of the DPA provides the Commerce Department 
investigative authority regarding the defense industrial base, 
and we have used this authority in the performance of our 
industrial base assessments. And while we are confident that 
this is consistent with Congress' intent, we think it would be 
helpful if that intent were made completely explicit in the 
language of Section 705, and to that end, we support a slight 
amendment that would make clear that the investigative 
authority ``includes the authority to obtain information in 
order
to perform industry studies assessing the capabilities of the 
U.S.
industrial base to support the national defense.'' Such an 
amendment has already been approved by the House Committee on 
Financial Services.
    Finally, the DPA authorizes review of the national security 
implications of foreign acquisitions of U.S. companies and, if 
necessary, the prohibition of acquisitions where there is 
credible evidence that the foreign interest acquiring the U.S. 
company might take action that threatens to impair U.S. 
national security. The Commerce Department is one of the 
Federal agencies that participates in the analysis of such a 
transaction.
    When this Committee last convened at a hearing to consider 
reauthorization of the DPA almost 2 years ago, none of us could 
have predicted the security challenges that the United States 
would soon encounter at home and abroad, nor the important role 
that DPA authorities would play in meeting those challenges. 
But they have played precisely that role. Pursuant to DPA 
authorities, the DPAS has worked to secure delivery of a number 
of items ranging from guidance system components for ``smart 
bomb'' munitions to search and rescue radios for both U.S. and 
allied forces.
    Here at home, the DPA has helped facilitate a number of 
post-September 11 initiatives to secure the homeland. DPAS 
support has been provided to the FBI to upgrade its 
communications and data-processing capability, to the 
Transportation Security Administration, as Senator Shelby 
mentioned, to achieve timely delivery of
explosive detection systems equipment, and we are currently 
working with the Department of Homeland Security regarding 
possible DPAS support for the Customs Service's Automated 
Commercial Environment Port Security System.
    Finally, DPAS authority has facilitated the completion of a 
number of in-depth studies of the defense industry, including 
most recently a comprehensive analysis of the impact of offsets 
on defense trade over a 6-year period, and we understand that 
report has been well received by both Congress and industry.
    In short, thanks to this Committee's work in reauthorizing 
the DPA 2 years ago, we have had in place vitally important 
statutory authority enabling the Federal Government to meet the 
new and diverse challenges to our security. As it has over the 
past 50 years, this statute has again demonstrated its utility 
and value. We strongly support its reauthorization.
    Chairman Shelby. Mr. Paulison.

                 STATEMENT OF R. DAVID PAULISON

                DIRECTOR, PREPAREDNESS DIVISION

        EMERGENCY PREPAREDNESS AND RESPONSE DIRECTORATE

              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Paulison. Thank you, Mr. Chairman and Members of the 
Committee. On behalf of Secretary Ridge, I appreciate the 
opportunity to appear before you this morning to support the 5-
year
reauthorization of the nonpermanent provisions of the Defense
Production Act.
    The DPA is the President's primary authority to ensure 
timely availability of industrial resources for both military 
and civil emergency preparedness and response. Expiration of 
these provisions would severely undermine the Nation's ability 
to prevent, as well as respond to disasters that are truly 
catastrophic--whether natural or manmade.
    The Department of Homeland Security combines many 
Government functions that focus on protecting our Nation's 
borders and airports, among other activities, and ensuring that 
we are prepared for and able to respond to terrorist attacks 
and natural disasters. The Defense Production Act authorities 
are critical to the Department's strategic objectives to 
prevent terrorist attacks within the United States, to reduce 
America's vulnerability to terrorism, minimize the damage, and 
to hasten the recovery from attacks that may occur.
    Since September 11, 2001, we have seen the effectiveness of 
the Defense Production Act in reducing the Nation's 
vulnerability to terrorism. Specifically, the Defense 
Priorities and Allocations System authorized under Title I of 
the DPA, as you pointed out
earlier, Mr. Chairman, was used by the Transportation Security 
Administration to expedite the production of explosive 
detection and communication systems within our major airports. 
Without the use of these priority orders, the manufacturers 
could not have delivered these systems in a timely fashion. In 
addition, we expect to request assignment of a DPA priority 
rating from the Department of Commerce to support the Bureau of 
Customs and Border Protection within our Department to obtain 
equipment that will enable us to track containerized shipping 
arriving at our borders.
    The Defense Production Act can also be used for 
preparedness, response, and recovery activities in catastrophic 
disasters such as an earthquake, a hurricane, or an incident 
involving a weapon of mass destruction. This use is being 
integrated into planning for such catastrophic occurrences now.
    DHS understands the need to have a Priorities and 
Allocations System ready to ensure the timely availability of 
resources to meet our civil emergency requirements. Such a 
priorities and allocations system will enable Federal, State, 
and local governments to acquire items needed urgently to meet 
the needs of affected populations when such items are not 
readily available in the marketplace. Without this system, our 
response and recovery operations could be severely hindered.
    Other DPA authorities are important to the DHS mission. 
These authorities include the use of: Financial incentives, 
subject to Presidential designation, to establish industrial 
capacity for products and services, such as vaccines to protect 
against biological agents, under Title III; industrial 
agreements to enhance preparedness and response capabilities--
for example, critical infrastructure protection, under Section 
708; and also an executive reserve to provide expertise from 
the private sector during an emergency, under Section 710.
    Within the new Department, DPA authorities reside with the 
DHS Under Secretary for Emergency Preparedness and Response. 
DHS is preparing departmental guidance on the use of these DPA 
authorities. Specifically, DHS is implementing its DPA 
responsibilities by: Serving as an advisor to the National 
Security Council on DPA authorities and national security 
resource preparedness issues and reporting on activities under 
Executive Order 12919; providing central interagency 
coordination of the plans and programs under the authorities of 
Executive Order 12919; developing guidance and procedures under 
the DPA for approval by the national Security Council; 
resolving issues on resource priorities and allocations; making 
determinations on use of priorities and allocations for 
essential civilian needs supporting the national defense; and 
coordinating national Defense Executive Reserve program 
activities of departments and agencies in establishing the 
National Defense Executive Reserve units and providing guidance 
for recruitment, training, and activation.
    The Department of Homeland Security National Defense 
Executive Reserve program is being evaluated in terms of what 
private sector expertise can be mobilized when needed to 
respond to today's threats. The national Defense Executive 
Reserve units are valuable assets to several Federal 
departments and agencies, and the reauthorization of the DPA is 
required to continue this program.
    The Department of Homeland Security also recognizes the 
importance of Section 708 of the Defense Production Act that 
provides authority for the creation of voluntary industry 
agreements to support preparedness for national defense and 
civil emergencies. This authority allows industry and the 
Federal Government to work together to solve problems that 
inhibit the availability of resources in an emergency. The 
Homeland Security Act authorizes the use of this provision for 
critical infrastructure protection planning and information 
sharing. Section 708 provides narrow antitrust and limited 
liability protections for infrastructure sectors and industry 
that are asked to prepare preparedness plans. The Department of 
Homeland Security will be reviewing the guidelines of this 
program and determining if they need to be revised or 
streamlined to meet the current environment.
    We will work with the National Security Council, the 
Homeland Security Council, and appropriate Federal departments 
and agencies to ensure that the Department of Homeland Security 
issues proper guidance and procedures for the implementation of 
these DPA authorities. We view the DHS responsibilities under 
the DPA seriously, and we recognize the potential of the Act to 
support the efforts of other departments and agencies to 
prevent, prepare for, respond to, and recover from potential 
terrorist attacks and other emergencies.
    In summary, the Department of Homeland Security is 
committed to fulfilling its responsibilities under the DPA and 
recognizes the potential to significantly enhance the Nation's 
ability to respond to a homeland security threat.
    Thank you for the opportunity to appear today, and I will 
be pleased to answer any questions you might have.
    Chairman Shelby. Thank you, Mr. Paulison.
    Ms. Swink.

                   STATEMENT OF DENISE SWINK

          ACTING DIRECTOR, OFFICE OF ENERGY ASSURANCE

                   U.S. DEPARTMENT OF ENERGY

    Ms. Swink. Good morning, Mr. Chairman and Members. I am 
pleased to appear before the Committee in response to its 
request for testimony by the Department on the reauthorization 
of the Defense Production Act. The Committee's invitation 
letter requested the Department to address, in particular, the 
role of the Department of Energy in responding to crises in 
which Defense Production Act authorities are required.
    The DOE Office of Energy Assurance is responsible for 
protecting critical infrastructures and key assets in the 
energy sector. Our
office leads the effort to ensure a secure and reliable flow of
energy to America's homes, businesses, industries, and critical
infrastructure. In carrying out our mission, we work closely 
with the Department of Homeland Security and in partnership 
with industry and State and local governments. The Department's 
energy assurance program is conducted in direct support of the 
President's National Strategy for Homeland Security and the 
President's National Energy Policy.
    A comprehensive discussion of the authorities contained in 
the DPA and of how they might be used in responding to energy 
emergency situations is contained in a 1982 Department of 
Justice memorandum of law for the President which was submitted 
to Congress in compliance with the Energy Emergency 
Preparedness Act of 1982. The memorandum's discussion of the 
DPA remains valid today. As the Justice Department's memorandum 
makes clear, whether the Defense Production Act authorities 
placed in the President might be useful in responding to energy 
crises would be highly fact-dependent. However, we do believe 
that a number of the Act's provisions could be potentially 
useful in addressing energy needs, and I will address their 
past use by the Department and ways in which the authorities 
could be useful in the future.
    Title I of the Defense Production Act contains two separate 
priority contracting provisions authorizing the President to 
require performance on a priority basis of contracts or orders 
in certain circumstances. The Secretary of Energy has been 
delegated authority by the President to exercise the Title I 
priority contracting authorities, in Executive Order Numbers 
11790 and 12919. The first provision, Section 101(a) of Title 
I, deals with priority contracting to ``promote the national 
defense.'' Under Section 101(a), the Secretary may require 
performance on a priority basis of contracts for energy 
supplies that the Secretary deems ``necessary or appropriate to 
promote the national defense.'' This authority could be used, 
for example, to require the acceptance of and priority 
performance under contracts relating to production, deliver, or 
refining of petroleum products or other forms of energy, 
including natural gas, to meet the energy needs of the 
Department of Defense and its contractors. It also could be 
used to facilitate transportation of energy supplies to meet 
national defense needs, for example, by requiring pipelines, 
marine terminals, and other facilities to perform energy 
transport contracts necessary to meet the priority needs of the 
Department of Defense and its contractors.
    In determining what the national defense requires, it is 
clear the Secretary may consider the potential impact of 
shortages of energy supplies. In the Energy Security Act of 
1980, Congress specifically designated energy as a ``strategic 
and critical material'' within the meaning of the Defense 
Production Act and also added language to the DPA 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 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.''
    The second priority contracting provision in Title I of the 
Defense Production Act is 101(c), linked to facilitating 
projects that maximize domestic energy supplies rather than to 
meeting the needs of the national defense. Section 101(c) 
authorizes the Department of Energy to require priority 
performance of contracts for goods and services for projects 
which would maximize domestic energy supplies, if the 
Secretaries of Energy and Commerce make certain findings, 
including that the goods or services are scarce and critical 
and essential to maximizing domestic energy supplies. If world 
circumstances were such that the President directed a drawdown 
of the Strategic Petroleum Reserve, and coincident with that 
direction from the President 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, the 
Department could rely upon Section 101(c) to bring the facility 
back online 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.
    Section 101(c) also might be used alone, or in tandem with 
Section 101(a), to assist in restoring critical energy 
infrastructures following widespread terrorist attacks or a 
natural disaster, for example, to assist electric utilities, 
oil companies, or other energy companies in obtaining equipment 
needed to repair damaged facilities, or to provide fuel oil or 
natural gas to electric utilities to ensure continued supply of 
electricity.
    Section 101(c) was used in the late 1970's and again in the 
1980's and early 1990's to facilitate petroleum production 
development of the Alaskan North Slope. The Department also 
relied on Section 101(c), as well as 101(a), as a complement to 
the emergency provisions of the Natural Gas Policy Act, in its 
January 2001 orders,
directed by former President Clinton, to the Pacific Gas and 
Electric Company and a number of natural gas suppliers to 
ensure the continued supply of natural gas necessary for 
continued availability of electric service in the central and 
northern regions of California.
    A third Defense Production Act provision which has been 
used in the past to address energy supply problems is Section 
708, which, as Mr. Paulison mentioned, provides a limited 
antitrust defense and breach of contract protection for the 
industry participating in voluntary agreements and plans of 
action ``to help provide for the
defense of the United States through the development of 
preparedness programs and the expansion of productive capacity 
and supply beyond levels needed to meet essential civilian 
demand in the United States.'' This provision has its roots in 
our World War II experience and was an important vehicles for 
gaining the help of the oil industry during and after the 
Korean War. For example, in 1951-52, a voluntary agreement 
under Section 708 was used to protect a group of oil companies 
which agreed to provide heating oil to redress a winter 
shortfall in New England. Later, Section 708 was used for the 
first voluntary agreement of U.S. oil companies which had 
agreed to participate in the International Energy Agency's 
standby emergency preparedness programs. Subsequently, in 1975, 
Congress enacted very similar voluntary agreement authority in 
Section 251 of the Energy Policy and Conservation Act.
    In the future, in the event of widespread damage to energy 
production or delivery systems caused by acts of terrorism or 
natural disasters, the DPA's Section 708 voluntary agreement 
authority might be used in establishing a voluntary agreement 
of energy service companies to coordinate the planning of the 
restoration of the damaged facilities.
    Finally, to facilitate communications among stakeholders 
and to broaden our partnerships with the private sector, we 
have established Information Sharing and Analysis Centers among 
energy industry stakeholders to improve infrastructure 
security. We expect to confer with the ISAC's on all of the 
authorities available to the President and to the Department 
that might be useful in protecting and, if necessary, restoring 
critical energy infrastructures.
    The Secretary believes that the authorities the DPA confers 
on the President are important tools that should remain 
available to the President unimpaired to use in appropriate 
circumstances. Accordingly, the Department joins the rest of 
the Administration in supporting a 5-year extension of the 
Defense Production Act.
    I will be pleased to respond to any questions.
    Chairman Shelby. Thank you.
    Senator Corzine, do you have any comments? I know you have 
to go somewhere.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you very much, Mr. Chairman. I do 
have a question.
    Chairman Shelby. Go ahead.
    Senator Corzine. I appreciate it very much. I will be 
brief.
    First of all, I think it is vital what you are doing, Mr. 
Chairman.
    Chairman Shelby. Thank you.
    Senator Corzine. I congratulate you for bringing this 
forward, and I thank the witnesses for their testimony.
    I have a question that really relates to the financial 
services industry and its critical nature with regard to our 
Nation's infrastructure, and particularly some of the large 
dollar payments that are associated with the Federal Reserve 
System and other financial intermediaries that are connected to 
that. I know there is a high interdependence on that. Some of 
it actually is an international interdependence as well. 
Reliable and resilient telecommunications systems make that 
system work, and we saw some issues after September 11 where 
maybe some of those networks were not everything that one would 
have hoped they would be in their backup. A lot of circuit 
diversity might not have been in place.
    I really want to know whether in a large-scale attack or 
other situations whether there is thought of using the DPA in 
those circumstances for building up some of that diversity, 
improving the reliability, whether that has been looked at in 
the Department of Homeland Security, potentially in Commerce. 
And I guess the basic question is: Do you think that this is 
the kind of application that the Act might be readily for--to 
encourage the private sector to participate more fully in 
developing that duplication, that redundancy that we might want 
in the system? Is that an appropriate application of the Act? I 
guess I will leave it there.
    Mr. Paulison. Yes, sir, I think it would be in the case of 
some type of catastrophic incident. We feel like the DPA does 
address our critical infrastructures, and that is part of our 
critical infrastructure. We are currently under HSPD-5 going 
through the DPA to make sure that it does address all of our 
critical infrastructures. Right now we think it does. We want 
to make sure, and we will have that report ready probably right 
around the first week in
September, but definitely if part of our communications 
critical infrastructure was destroyed that we could use this to 
rebuild that.
    Senator Corzine. How about in the forward planning of 
building in that redundancy? It may be for competitive reasons, 
in the same way that we heard other examples that there 
wouldn't be the incentive for the private sector to go into a 
situation where more
monopolistic or at least--and I only mean that in the narrow
geographical context, that there wouldn't be a reason for that 
diversity to develop. Could the Act be used without an 
incident?
    Mr. Paulison. I would have to do some significant research. 
If I am answering your question correctly, with our cooperative 
agreements that we do with the Federal Government and some 
companies, I think the answer is yes. I think that by having 
companies go together and given the limited protection, we 
could use some type of redundancy between different--Company A 
and Company B providing the same types of communications 
systems, the answer is yes. But I can give you a more 
definitive answer after some research. I believe the answer is, 
yes, we can do that.
    Senator Corzine. I would appreciate very much a response in 
writing.
    Mr. Paulison. Absolutely.
    Senator Corzine. I would love to work with you and make 
sure those kinds of incentives are there.
    Mr. Paulison. I realize that is an important issue.
    Senator Corzine. And, really, it probably gets beyond the 
financial services arena in a number of other critical 
infrastructure nodes in the economy where the 
telecommunications industry tends to have one network, because 
there wouldn't be a buyer otherwise, and there may be a real 
need to look at this.
    Mr. Paulison. Yes, and I think part of the answer to your 
question also is our interoperability issue with our radio 
communications, especially with our first responders. We are 
putting monies out in the very near future--in fact, we are 
gathering proposals now from different States and different 
cities to evaluate those, and we have millions of dollars to 
put out there to do some prototype best practices, if you will, 
systems in different cities. I think that is the issue, the 
interoperability issue. And I agree with you, what we do not 
want is a nationwide communications system because that is very 
vulnerable. The system we have now where each city has its own 
communications system has its positives. There is no one point 
of attack. But also the negative is they cannot talk to each 
other. So that is one of the issues we are dealing--totally 
outside the DPA. So, I think there is more than one approach to 
resolving the issue you are talking about.
    Senator Corzine. Okay. I wonder if any of the other 
panelists have thought about this at all.
    Mr. Bhatia. Well, to go back to the immediately preceding 
point, Senator--the question of whether there is the ability to 
use DPA authority proactively--there was a critical amendment 
to the DPA--I think it was in 1994, the Stafford Act--which 
took the phrase ``to promote the national defense'' and defined 
``national defense'' to include ``emergency preparedness.'' And 
if you trace through the definition a little bit, ``emergency 
preparedness'' includes activities that would occur--that you 
would undertake obviously after and during, but also before the 
act itself.
    So while this is always a very fact-driven kind of thing--
you have to look at the particular case--I think it would be 
fair to say that by virtue of that 1994 amendment, it is 
contemplated within DPA that you would be taking activities 
beforehand, or that the authorities would be available to be 
used for activities that might occur beforehand in preparation 
of a hazard or national disaster.
    Senator Corzine. We would very much like to work with you 
on the elements that relate to these payment systems, which I 
think are very critical to our work and our economy.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Corzine.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I would like to inquire a bit about the investigative 
authority that the Department of Commerce was requesting. Could 
you elaborate a little more on that?
    Mr. Bhatia. Sure. We produce studies, Senator, generally 
analyzing the health of specific sectors of the defense 
industrial base, often at the request of Congress. To give you 
just one example, in the fiscal year 2003 appropriations bill 
there was a specific request put into the report language 
asking the Commerce Department to produce a report analyzing 
the health and welfare of the textile and apparel industry and 
the implications of that health and welfare to our national 
defense and to the armed forces. That is just an example. We 
have done other similar studies on other things.
    The investigations that we do to satisfy those requests 
have a number of components to them. We look at open source 
information. We would with trade associations and with members 
of industries. We work closely with the Defense Department and 
the armed forces.
    But one of the things that we do is we issue surveys to 
industries that would be within that area--so, for instance, 
the textile and apparel industry, asking questions such as 
``what is your health and welfare,'' or things designed to get 
to that issue. And we do that under the investigative 
authorities of the DPA. The results of those surveys, the 
responses of the surveys have been very helpful to us in 
producing studies.
    Senator Allard. And your investigation's purpose is to 
establish the criteria to determine whether you want to put 
these incentives toward the private sector?
    Mr. Bhatia. It is not incentives particularly. This would 
just be to do an assessment, really just a study of what the 
health and welfare is, and thereby inform Members of Congress 
or the Defense Department itself as to whether there is a 
problem in the area.
    Senator Allard. How do you look at, for example, exports of 
dual-use military equipment, that type of thing?
    Mr. Bhatia. I happen to wear two hats. We both in the 
Commerce Department do DPA-related activities along the lines 
of what I described in my testimony. We also are the agency 
charged with administering our dual-use export control system. 
That is outside of the scope of the DPA. We do that----
    Senator Sarbanes. So, you are taking off one hat and 
putting on the other.
    Mr. Bhatia. Exactly.
    Chairman Shelby. You do not have anything--but as far as 
this Act is concerned, dual-use is not a consideration or 
anything?
    Mr. Bhatia. Again, we do look at dual-use export licenses 
under the Export Administration Act, but those activities are 
not germane to the DPA.
    Senator Allard. Okay. Now, I think several of you were 
requesting a 5-year reauthorization in the testimony. Do you 
think that is adequate, or do you want more or less?
    Mr. Bhatia. I know the other panelists may have something 
to say on this as well. Our view is that this is a good Act, 
and it provides useful authorities both for our national 
defense and for our armed forces, and it is also useful for 
industry to have the security the DPA provides and to know that 
those authorities are out there.
    I think we would welcome a longer extension, but our sense 
is, just from looking at past history of extensions, that 5 
years is probably what we could expect.
    Senator Allard. I think we need to have adequate oversight 
on the legislative side also.
    Mr. Bhatia. Understood completely.
    Senator Allard. Are you receiving any complaints from your 
businesses about production requirements, whether they are 
unreasonable or unfair? What kind of complaints do you get from 
businesses? I would be interested in hearing each panelist's 
response.
    Ms. Patrick. What kind of production requirements were you
alluding to?
    Senator Allard. Well, do some businesses want to qualify 
for the program and others do not? Are there complaints in that 
regard? Or are there some that think that once they get into 
the program, maybe the requirements are too rigid and 
restrictive? I would like to get a feel of what concerns might 
be coming out of the private sector.
    Ms. Patrick. Yes, let me start with that. First of all, as 
I said in my testimony, the DPA is really a form of insurance 
that works to the benefit of the Department in terms of 
reprioritizing or reallocating under existing contracts. And so 
it is something that really is existing in the vast majority of 
the contracts that we have in the Department. I would say over 
98 percent of them, in fact. And we really have not received 
any complaints, at least in my tenure, or, as I know from the 
historical memory of my staff, in terms of companies 
complaining about DPA authorities.
    We, on the other hand, do work very hard with companies 
when we have specific requirements that we need to prioritize 
to make sure that we do not in some way unnecessarily or 
excessively jeopardize their commercial markets or their 
ability to serve their commercial clients. And so when we 
implement the authority, it is
really subject to some very close negotiations with the 
companies affected.
    One of the examples that I gave you on Spectra, for 
example, involving Honeywell, we worked very judiciously to 
make sure that our warfighters got what they needed, but we did 
not unduly put any strains on Honeywell's production lines for 
other materials. And so it is something that, as I said, has 
worked very collabora-
tively between the companies and the Department. But I am aware 
of no complaints with regard to the actual provision.
    Senator Allard. Mr. Chairman, I see that my time has 
expired. Thank you.
    Chairman Shelby. Senator Sarbanes.

              COMMENTS OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I was not here at the outset when they made their opening 
statements, but I do want to make one observation before I move 
to questions.
    Chairman Shelby. You proceed. Yes, sir.
    Senator Sarbanes. First, Mr. Chairman, I want to commend 
you for holding today's hearing. The DPA is an important part 
of the responsibility of the Banking Committee, and its 
importance has been underscored by the witnesses at the table. 
It is not an issue that gets a lot of public attention, but it 
is a matter of seriousness, and I am pleased that you are 
focusing attention on it.
    I am a little concerned by the transmission of the 
Administration's request to the Congress for the 
reauthorization of the DPA, the one that is up here now.
    Chairman Shelby. Yes, sir.
    Senator Sarbanes. We last reauthorized the DPA in 2001. In 
fact, we had held an oversight hearing ahead of the 
Administration's submission of authorization, which came from 
the Federal Emergency Management Agency and was transmitted to 
this Committee, the reauthorization request.
    This year, the Administration's transmission to the 
Congress requesting a reauthorization came not from FEMA nor to 
the Committee, but came from the Defense Department as part of 
the request for the national defense authorization bill and 
went to the Vice President in his capacity as President of the 
Senate.
    Now, I recognize, of course, that the Department of Defense 
has a central interest in the workings of the DPA, but the DPA 
heretofore--and I hope hereafter--is not under the jurisdiction 
of the Armed Services Committee, and under ordinary 
circumstances wouldn't be considered as part of the defense 
authorization bill.
    I think this Committee has been attentive to its 
jurisdictional responsibilities for the DPA, and, Mr. Chairman, 
I know you asserted our Committee's role.
    Chairman Shelby. Absolutely. We are going to assert our
jurisdiction.
    Senator Sarbanes. Absolutely. But I just wondered why it 
happened this way. Perhaps it is because there was the 
disruption
created by the transfer of FEMA to the Department of Homeland
Security, which I gather now has the lead responsibility for 
the
administration of DPA. And I guess that is really the first 
question I want to ask.
    Ms. Patrick. Senator Sarbanes, let me take that question 
for the record as to why the process by which this particular 
provision came to you was different this time than it had been 
previously. I would rather not speculate on what the reasons 
might have been.
    Senator Sarbanes. Okay, but it was included in the national 
defense authorization bill, which, of course, is the big 
authorization bill handled by the Armed Services Committees.
    Ms. Patrick. Yes, sir, and I am sure it was not an intended 
slight.
    Senator Sarbanes. That is a complete departure from past 
precedent with respect to the DPA, and I was interested to know 
why that occurred.
    Ms. Patrick. We will provide that for the record, sir.
    Senator Sarbanes. All right. I would like to have that. Mr. 
Paulison, I noticed in your statement you said, ``The DPA is 
the President's primary authority to ensure the timely 
availability of industrial resources for both military and 
civil emergency preparedness and response.'' This goes in part 
to the question that Senator Corzine put.
    Does anyone have any doubts that the authorities of the DPA 
can be used for efforts to enhance the preparedness of U.S. 
critical infrastructure, such as the financial or 
telecommunications systems, to withstand disruption that might 
occur from terrorist attacks or, indeed, from other natural or 
manmade events? Is it your reading of the DPA that the 
authorities provided there are adequate for these purposes?
    Mr. Paulison. Yes, sir, that is our understanding. It can 
be either civil or military. The DOD uses it for military, and 
I think the other agencies here would use it for civil 
emergencies or disasters within the United States.
    Senator Sarbanes. What is the view of other members of the 
panel on this rather important question, I think?
    Mr. Bhatia. Again, Senator, from the Commerce perspective, 
we asked our chief counsel's office to look at the issue. They 
believe that the 1994 amendment under the Stafford Act, which 
broadened the definition of ``national defense'' to include 
``emergency preparedness'' is a broad term that encompasses 
many programs that could be used to protect critical 
infrastructure in a preventive, prepa-
ratory, responsive, or recuperative manner.
    I would also point out that a number of the exercises of 
DPA power that I referenced in my testimony are fundamentally 
critical infrastructure protection-related activities--for 
instance, support-
ing the Transportation Security Administration in the 
acquisition of explosive detection equipment, and the FBI, for 
instance, with respect to telecommunication systems.
    So, I think we see it as a statute by virtue of the 
amendments that were wisely adopted 10 years ago to be 
sufficiently flexible, but it is something that we will 
continue to be attentive to.
    Ms. Swink. Yes indeed, with respect to Energy, we are still 
referring to the 1982 Department of Justice memorandum, which 
makes clear that it might be useful to use the DPA authorities 
in responding to energy crises.
    Senator Sarbanes. Thank you.
    Mr. Chairman, I see my time is up. I would like to just 
make one final point.
    Mr. Paulison, you are now the Director of the Preparedness 
Division within the Emergency Preparedness and Response 
Directorate of the Department of Homeland Security; is that 
correct?
    Mr. Paulison. Yes, sir, that is correct.
    Senator Sarbanes. You used to be the Director of the 
Federal Emergency Management Agency; correct?
    Mr. Paulison. No, sir. I was the U.S. Fire Administrator, 
and still hold that title. The Director of the Federal 
Emergency Management Agency was Joe Allbaugh, and then Mike 
Brown.
    Senator Sarbanes. Well, if they were still around, would 
they now be the Director of the Preparedness Division; is that 
what
happened?
    Mr. Paulison. Yes, sir. Mike Brown is now the new Under 
Secretary for----
    Senator Sarbanes. Okay. Now, do you think that our homeland 
security or any security has been enhanced in any marked way
by now having a Preparedness Division within the Emergency
Preparedness and Response Directorate of the Department of
Homeland Security? Why don't we just continue with the Federal 
Emergency Management Agency? We all knew it, and I am not sure 
that we loved it, but we respected it, and it seemed to do its 
job--oh, you do not have to answer that question.
    [Laughter.]
    Chairman Shelby. Well, I think there is more respect than 
love up here.
    Mr. Paulison. I will take that comment back to Secretary 
Ridge.
    Senator Sarbanes. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bennett.

             COMMENTS OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman.
    My questions are going to sound somewhat redundant because 
I am going in the same direction as Senator Corzine and Senator 
Sarbanes. But I have been trying for several years to get a 
firm statement out of the Administration with respect to DPA's 
role in critical infrastructure. I wrote to the President on 
October 31, 2001, following the attack on September 11, trying 
to get a clear answer, and to date, I have not felt that I have 
had one, so let me ask the direct question.
    In the opinion of the Administration, may the President of 
the United States invoke the DPA to address critical 
infrastructure concerns such as critical infrastructure 
protection or critical infrastructure restoration--the kind of 
thing that Senator Corzine was responding to. Is there a 
``yes'' or ``no''?
    Mr. Paulison. Yes, sir, I need to answer that. I have just 
taken over the responsibilities of the DPA for Homeland 
Security, and I do have your letter, and I will offer a 
personal apology that you have not received an answer.
    Senator Bennett. I am not worried about that.
    Mr. Paulison. I understand. But the answer is yes, we do 
feel that the DPA authority gives us the ability to handle 
critical infrastructure, and we are still reviewing that and 
will make sure of that; but right now, the answer is yes.
    Senator Bennett. Good. Then, let me give you a hypothetical 
that will help focus the question from my point of view.
    As you know, my almost obsession up here is cyber-
terrorism, attacks through hackers, the computers going down, 
and so on. So let us assume that a few disgruntled employees of 
a major commercial bank exploit their positions to sabotage and 
take off-line the critical data networks of the entire 
financial sector, and they also
prevent normal redundancy and backup measures from being
implemented. We have had hearings on that very recently in this
Committee.
    So let us establish a worst case scenario where a major 
bank hacks into the network of this financial institution and 
not only shuts it down but also shuts down the redundancy. 
Okay. Now, Company ``X'' is the sole provider of the key 
hardware and software necessary to restore the critical data 
points, so the affected financial institutions all immediately 
call Company ``X'' and say, ``Send us your widgets so we can 
fix this.'' All right. Company ``X'' is loaded with commercial 
and military orders, and they say, ``We cannot supply your 
needs for another 6 months.''
    May the President invoke DPA and use DPA's contract 
priority provisions to override those previous contracts and 
say you can supply what is necessary to get the financial 
sector back up with the software and hardware that you have and 
delay your deliveries someplace else?
    Mr. Paulison. Although I hate hypothetical questions----
    Senator Bennett. We made it as pointed as we could.
    Mr. Paulison. Yes, sir. Based on what you have laid out, my 
understanding would be that yes, we could do that.
    Senator Bennett. Okay. You are answering them all properly.
    If the President may use the DPA, do you believe it would 
be the Administration's policy to do so? In other words, will 
the President as a matter of policy give as much attention to 
critical infrastructure in the cyber world as he might, for 
example, in Ms. Swink's world of energy? I know you cannot 
forecast what the President would do, but what would you 
recommend to the President?
    Mr. Paulison. The answer is yes. How we function in today's
society, our cyber world is extremely important in the 
protection of this country, and obviously, my advice would be 
yes, that we
do that.
    Senator Bennett. Mr. Chairman, I have learned in business 
that when you have made the sale, get out of the room, so, I 
will not ask any more questions.
    Thank you.
    Mr. Paulison. Thank you, Senator Bennett.
    Chairman Shelby. Senator Bennett, you are entitled to stay 
here, and we would welcome you to stay here.
    Senator Allard, do you have any further observations or
any questions?
    Senator Allard. I do not, Mr. Chairman.
    Chairman Shelby. Thank you.
    I have a question for the whole panel. The Defense 
Production Act was passed at a time and under circumstances 
that clearly indicated that it was intended to provide the 
means to respond to emergency contingencies, primarily armed 
conflict. It has been reauthorized and modified more times than 
one can count since its passage in 1950. Over the years, there 
has been a noticeable evolution in the declaratory policy from 
which the Act's authority should reasonably follow toward 
greater apparent concern about the peacetime industrial base 
required to ensure adequate levels of military readiness.
    It can be inferred that the Defense Production Act has 
become more and more oriented toward questions of broader 
industrial policy than perhaps was originally intended. For 
example, the current Section 2062, Declaration of Policy, 
begins with the apparently obligatory finding--and I will 
quote:

    The vitality of the industrial and technological base of 
the United States is a foundation of national security that 
provides the industrial and technological capabilities employed 
to meet national defense requirements in peacetime and in time 
of national emergency.
    In addition, implementing Executive Orders over the years, 
especially Executive Orders 12742 in 1991, and 12919 in 1994, 
have explicitly articulated the importance of maintaining a 
robust defense industrial base.
    Executive Order 12919, for example, stated: ``The U.S. must 
have an industrial and technology base capable of meeting 
national defense requirements and capable of contributing to 
the technological superiority of its defense equipment in 
peacetime and in times of national emergency. The domestic 
industrial and technological base is the foundation for 
national defense preparedness.''

    Can the panel comment on this issue? Executive Order 12919 
was issued under the authority of the Defense Production Act. 
So much of DPA's authorities are intended to provide the 
President the means to respond to an emergency, especially the 
outbreak or imminent outbreak of armed conflict. Hence, the 
establishment of the Defense Priorities and Allocation System 
and the role of the Secretary of Commerce in administering it.
    I know this is long and involved, but you are familiar with 
this.
    In the view of the agencies represented here today, how 
should the DPA's authorities be drafted in order to provide the 
Federal Government the explicit authorities it apparently needs 
in order to better meet the demand set forth in its own 
Declaration of Policy Could you comment on the practical 
utility in terms of defense industrial base preservation of the 
Berry amendment?
    Dr. Sega--I know that was long, but this is technical stuff 
that we are dealing with.
    Mr. Sega. Yes, it is technical. I will start, because I 
will only offer a piece of the answer, I think, and in the area 
of Title III, which is the area of my responsibilities, the 
need for us to prepare in peacetime for wartime is essential.
    In the case of the radiation hardened electronics, we need 
to buy the equipment and design the devices, build the devices, 
and put them into our strategic missile systems.
    Chairman Shelby. Absolutely.
    Mr. Sega. So the need to provide the DPA authorities in 
this realm of bringing forward technologies that are relatively 
unique is important in the area that I have responsibility.
    Now, I will pass it off and have that answer expanded as we 
go forward.
    Chairman Shelby. Ms. Patrick.
    Ms. Patrick. We certainly agree with the spirit of your 
question and some of the implications, but I think it is also 
very important to point out that we vouch for the vitality and 
the responsiveness and the productivity of our defense 
industrial base using a number of means available at our 
disposal.
    The Title I DPAS provisions are particularly imperative in 
times of war or where the prioritization of contracts is not 
suitable for a given contingency during peacetime, and I would 
like to compliment Senator Bennett on his perfect example of 
how it is we would use the DPA authority even in the case where 
the model was not an element of the financial system but a key 
defense contractor, say, who by hacking had lost its critical 
designs or was no longer able to operate its machine tools. It 
is a ubiquitous problem throughout this state-of-the-art 
industrial base that we have in this country, so your example 
was perfect.
    But it is also important to remember that one of the key 
sources of innovation and direction to the defense industrial 
base is the overall defense budget and the way we allocate that 
defense budget and the way we see to it that the defense budget 
expresses the needs and vision of the Department and most 
specifically the needs of the warfighter.
    So there are a number of tools at our disposal for making 
sure we have a vibrant defense industrial base. DPAS in Title I 
is one of them. Title III, of course, is also very important, 
where we see that we have gaps or there is a capability that we 
are not getting otherwise--all very important to the future of 
the country.
    Chairman Shelby. Mr. Bhatia.
    Mr. Bhatia. Mr. Chairman, your question touches on a lot of 
critical parts of the DPA. One that particularly resonated for 
me was the question of industrial policy and whether this is, 
in fact, a form of industrial policy.
    Chairman Shelby. There is a little difference between basic 
industrial policy that a lot of us are very nervous about and 
priorities for defense.
    Mr. Bhatia. Right.
    Chairman Shelby. They are two different things, and I think 
you have to make that----
    Mr. Bhatia. Absolutely, absolutely. We wear two hats--
again, two hats--but play a number of roles in this. On the one 
hand, we are particularly attuned to the concerns of American 
industry and American business. We at the same stage play the 
role of administrator of the DPAS's regulations and the 
mediator between the national defense, armed forces, and 
industry where problems arise.
    One thing I would point out--and I think this touches back 
on a question that Senator Allard raised--is how few instances 
of real problems we see coming up in this area. Last year, my 
understanding was that there were 300,000--or some number like 
that--priorities put on contracts. We had requests for 
mediation assistance in 20, and those were all, I believe, 
resolved amicably between the parties.
    Although it is a statute with very strong powers in 
situations of national emergency--in terms of its day-to-day 
administration, we see it as being something that is not 
market-distorting and not industrial policy being put into 
action.
    Chairman Shelby. Mr. Paulison.
    Mr. Paulison. I think Ms. Patrick laid it out very clearly, 
and I really have nothing else to add. She did a great job.
    Chairman Shelby. Ms. Swink, do you have any comment on 
that, other than what has been said?
    Ms. Swink. I have one comment, and that is the whole 
situation of cascading effects and interrelationships of the 
critical infrastructures are absolutely key for sustaining that 
robust industrial base. So, I think that that is an important 
aspect of the DPA, that when we do have emergencies that appear 
only in one critical
infrastructure, the reality is that you could do major harm to 
the
industrial base without quick response.
    Chairman Shelby. I think so, too.
    I have another question for you, Ms. Swink. Two American 
Presidents have found it appropriate to utilize Defense 
Production Act authorities to provide relief to the State of 
California during its self-imposed energy crisis. The 
justification proffered was that the rolling blackouts were 
impeding the ability of both the Space Agency and the State's 
military installations to execute their missions in support of 
the national defense.
    Two years ago, the Energy Department's then acting general 
counsel provided this Committee a fairly comprehensive 
description of how the energy crisis came about. There was no 
hint of the crisis being the result of anything other than the 
State's own flawed
energy policy.
    Energy security is clearly well within the mandate of the 
Defense Production Act. Section 2076 designates energy as a 
``strategic and critical material,'' placing it alongside less 
abstract strategic and critical materials like cobalt and 
chromium.
    Given the importance of oil-rich regions of the world to 
U.S. foreign and national security policies, I believe this is 
appropriate. What is less clearly appropriate, however, is the 
notion that the
jurisdiction's self-imposed energy problem is within the spirit 
let alone the letter of the DPA. The Department of Energy is 
designated certain responsibilities within the Defense Product 
Act.
    The Committee's purpose in asking the Department to testify 
today was to request a clarification of its understandings of 
the nexus between isolated energy problems that do not result 
from hostile action--unless, of course, one considered 
California State government a threat to its own well-being--and 
that do not affect the entire Nation or threaten its national 
defense.
    Could you now or for the record provide this Committee the
Energy Department's understanding of its role and 
responsibilities in implementing the Defense Production Act and 
what criteria you use at the Department of Energy in 
determining that a threat to national defense has materialized 
warranting its intervention in crises like that which affected 
California?
    If you want to do it now, or you want to do it in more 
detail----
    Ms. Swink. In more detail for the record, please.
    Chairman Shelby. Okay; for the record, if you would do 
that.
    I have another question. Dr. Sega, I will direct this to 
you. The Defense Department has been using the DPA authorities 
to recapitalize the industrial base for radiation hardened 
electronics--you have already mentioned this--and its fiscal 
year 2004 budget request includes $200 million, I believe--is 
that right--to continue this work.
    Mr. Sega. That is right.
    Chairman Shelby. According to the Defense Threat Reduction 
Agency, which is not represented here today, only two vendors 
still make radiation hardened parts. I assume that refers to 
Honeywell and BAE Systems; is that correct?
    Mr. Sega. That is correct.
    Chairman Shelby. I understand, however, that a $275 million 
contract announcement was made last year for Mission Research 
Corporation in support of the DTRA's radiation hardened 
microelectronics program.
    It is also my understanding that Boeing and Peregrine 
Semiconductor have also been awarded contracts in the past few 
years to support this effort. In addition, there is U.S. 
Semiconductor Corporation, Intel, and Lockheed Martin.
    Could our witnesses--and could you, from the Department of 
Defense, too--help us and provide the Committee a sense of the 
state of the industrial base for hardened electronics to date, 
which I think is very important for the national security? How 
has it changed since the end of the cold war, during which we 
were placing a lot of emphasis on hardening weaponry and 
related command, control, and communication systems against the 
threat of electromagnetic pulse?
    I understand the Department currently estimates a total 
cost of $167 million for this project, but how much has been 
spent to date on this effort, both in contracts signed under 
DPA authorities and in total, and what is the anticipated 
requirement for radiation hardened parts, and what is the 
Department's goal for recapitalizing that industry?
    I know that is a lot in one question.
    Doctor, do you want to start?
    Mr. Sega. Yes, Mr. Chairman, I will start to answer the
question.
    The request in fiscal year 2004 for the Radiation Hardened 
Electronics Capital Expansion Project, I believe, is in the 
area of $65, $66 million, and the total cost of this CAPEX 
project on radiation hardened parts to a feature size, which is 
one of the pieces that we have to talk about, of .25 micron and 
capable of going toward .15 micron, is to be at $167 million.
    The request is for $200 million in the event of--we do not 
expect that cost to go beyond $167 million, so it would be the 
flexibility given by the request.
    That is for the equipment for a certain class of components 
that are engaged in this radiation hardened problem. I chair a 
Radiation Hardened Electronics Oversight Council, so it is the 
leaders in the defense community, those that need it, those 
that are producing it, those that are designing chips for the 
production
lines and so forth, and it is from that work that there is a 
road
map built for guiding us forward on the radiation hardened
requirements.
    The ``high/hard'' category generally involves nuclear 
weapons in terms of what effect they would potentially have on 
our electronics. Some of the effects are in the electromagnetic 
pulse area; others are in the particle or dose rate kinds of 
things. The facilities that are being funded, BAE and 
Honeywell, are in that latter category of components. But there 
are many parts of strategic and satel-
lite systems that need radiation hardness, so this is 
addressing
one part of it. We do have a process to get us to the net
requirements----
    Chairman Shelby. You have to get to the whole, don't you?
    Mr. Sega. Yes, absolutely, absolutely.
    Chairman Shelby. Okay.
    Ms. Patrick, will you stay with what he has said?
    Ms. Patrick. I have nothing to add; absolutely.
    Chairman Shelby. I have one more question. Despite the 
Defense Department's emphasis today on incorporating into its 
weapon systems and platforms commercial off-the-shelf 
technologies, there is no question, I believe, that modern 
military requirements are simply too demanding for the 
Department to become dependent on that approach, economically 
attractive though it might be.
    Certainly such an approach is desirable, but presumably, 
the U.S. military seeks capabilities well beyond what is found 
today off the shelf in the commercial market.
    Has the Defense Department formulated a long-range plan for 
preservation of the industrial base necessary to ensure 
adequate levels of military readiness in the years ahead? The 
Committee is aware of the uses to which the Defense Production 
Act authorities are applied, but is it fair to suggest that 
what we have seen to date represents more of an ad hoc, 
piecemeal approach than something representative of a well-
thought-out long-term strategy?
    In addition, would you comment on the defense industrial 
base language included in the House-passed version of the 
defense authorization bill?
    Ms. Patrick, do you want to take that one?
    Ms. Patrick. Yes, I will certainly take a stab at that.
    Chairman Shelby. First of all, the commercial shelf is not 
going to provide all of our needs as much as we would like to 
buy it sometimes because it is cheaper; right?
    Mr. Sega. That is correct, Mr. Chairman.
    Ms. Patrick. I think there is always a balancing act 
between overspecification of military end-items that carries 
with it a presumption that only specific military components 
can fill a given requirement--and on the other hand the cost 
benefits to be gained if indeed you can successfully 
incorporate commercial off-the-shelf equipment into weapon 
systems.
    One of the things that I think is very important in order 
to procure what you need for the warfighter is to get that mix 
right--in other words, not to overpay for things that are 
commercially available. What the Department or our high-
technology companies do is application of fairly routine things 
into very complex solutions or very high-technology systems, 
and to make sure that we do not overpay where we can save money 
by buying commercial off-the-shelf equipment.
    So, I think it is very important to keep an eye on that. 
And the other point that I think----
    Chairman Shelby. Do you keep an eye on it?
    Ms. Patrick. We do keep an eye on it. And I think the other 
thing that bears mention is that in many of the industrial base 
studies that we have done over the last many years, many of the 
key solutions to some of our most demanding challenges are 
likely to come not just from legacy defense companies but from 
commercial suppliers and indeed from emerging defense companies 
that we expect will have their roots as commercial suppliers. 
So, we have to make sure that we get the technology where it is 
most available--and it is not true in all cases that the 
defense applications are that much ahead of the commercial 
market. That is certainly the case in some of the IT 
applications. Some of the applications so critical for homeland 
security and emergency response actually have come to us and to 
Homeland Security from the commercial vendors, and it really 
would be a pity to insist on overspecifying systems that are 
immediately available if you can buy them on the open market.
    Chairman Shelby. Yes. Thank you.
    Senator Allard, do you have any comments?
    Senator Allard. I have just one question. One of the things 
that I see as a possible threat to national security and would 
certainly be an issue is if our rare metals and elements and 
whatnot were to become unavailable. For example, the Endangered 
Species Act may prevent us from extracting a necessary element 
or metal. Is there authority in current law that allows defense 
priorities to override perhaps the Endangered Species Act as 
far as extracting needed minerals from the ground?
    Ms. Patrick. I do not know the specific case of the 
Endangered Species Act, but let me take that----
    Senator Allard. Do you feel you have that authority?
    Ms. Patrick. I think in most cases, we have ample authority 
to manage the defense industrial base to the benefit of the 
warfighter, yes, I do.
    Senator Allard. I was thinking about energy, for example--
maybe I should direct this to Ms. Swink--on energy needs. If a 
shortage of electricity suddenly develops for one of our major 
production manufacturers in California--and California has a 
number of them, and something were to happen to the lines, 
preventing the rebuilding of those lines or perhaps building an 
alternative line system, do you feel that you have the 
authority to override existing law, for example, the Endangered 
Species Act. Would the ESA or other laws prevent you from 
reconstructing the line? I think you could override existing 
law if it were a local community concern, but for something 
that would be a national law like the Endangered Species Act, 
could you override that to reconstruct lines if our national 
security were at stake?
    Ms. Swink. We will have to supply a response for the 
record.
    Senator Allard. Would you do that, please?
    Ms. Swink. Yes.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Allard.
    I want to thank all of you for appearing here today. I 
think what you are doing is very important, and what this Act 
allows you to do is more important.
    Thank you all.
    The hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Prepared statements, response to written questions and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR WAYNE ALLARD
    I would like to thank Chairman Shelby very much for holding this 
hearing on reauthorization of the Defense Production Act. I am pleased 
to see that you are actively exercising the Committee's authorizing 
jurisdiction, and I look forward to the opportunity to working with you 
on reauthorization of the Defense Production Act.
    It would be easy to simply ignore the need for reauthorization. 
After all, we are coming off of major military victories, so there 
would not seem to be any direct need for the Defense Production Act. 
However, it is tools such as the Defense Production Act which can help 
our nation be well prepared for military events or domestic 
emergencies.
    As a member of the Armed Services Committee, I spend a great deal 
of time on the issue of military readiness. It is critical that our men 
and women in uniform have access to the supplies and technology that 
they need in a timely manner. The Defense Production Act gives them 
this capability. Furthermore, it can help promote new technologies that 
will reinforce our military efforts.
    I would like to thank our witnesses for being here today to share 
their comments on reauthorization of the Defense Production Act. I look 
forward to your testimony.

                               ----------
                  PREPARED STATEMENT OF RONALD M. SEGA
                Director, Defense Research & Engineering
                       U.S. Department of Defense
                              June 5, 2003

    Good morning, Mr. Chairman and Members of the Committee. I 
appreciate the opportunity to share with you the Department of 
Defense's (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.
    Let me start by saying a few words on why the Defense Production 
Act (DPA) is important to the Department of Defense. A strong domestic 
industrial and technology base is one of the cornerstones of our 
national security. The DPA provides the Department the tools required 
to maintain a strong base, responsive to the needs of our armed forces. 
A key component of the DPA is Title III which will be the focus of my 
testimony. The authorities contained in the DPA continue to be of vital 
importance to our national security and I want to express the 
Department's support for reauthorizing the Act through September 30, 
2008. The Deputy Under Secretary of Defense for Industrial Policy, Miss 
Suzanne Patrick, will discuss Title I and Title VII.
    Title III provides the President unique authorities that are being 
used to establish, expand, and maintain essential domestic industrial 
capacity needed to field advanced systems for today and the future. The primary objective of the Title III program is to work with U.S. industry 
to establish economically viable production capabilities for items 
essential to our national security. The Title III program meets this 
objective through the use of incentives to 
stimulate private investment in key industrial capabilities. The 
incentives most used by the Department include sharing in the costs of 
capital investments, process improvements, 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 or maintaining a commercially viable production 
capacity.
    The Title III program is also being used to transition emerging 
technologies. Title III can facilitate the transition of new 
technologies by first eliminating market uncertainties and reducing 
risks that discourage potential producers from creating new capacity. 
Second, Title III incentives can create more efficient, lower cost, 
production capabilities, which reduce prices and increase demand. 
Third, Title III projects can generate information about the 
performance characteristics of new materials and support testing and 
qualification to promote the incorporation of these materials into 
defense systems. Without a program like Title III, the insertion of 
these new technologies, at best, could be delayed for many years.
    As a means of assuring Congressional oversight, Title III projects 
may not be initiated until a Presidential determination has been made 
and the project has been identified in the Budget of the United States. 
The Presidential determination verifies that: 1. the shortfall being 
addressed by the Title III project is essential for national defense; 
2. industry cannot or will not on their own establish the needed 
capacity in a timely manner; 3. Title III is the most cost effective or 
the most expedient method for meeting the need; and 4. defense and 
commercial demand exceed current domestic supply.
    A success story is the best way to highlight the benefits of the 
program. Gallium arsenide is a semiconducting material used in the 
fabrication of advanced electronic devices. It can provide advantages 
in terms of speed, power consumption, performance, and reliability over 
more commonly used semiconductor materials, such as
silicon. 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, the B-2 Bomber, the 
Longbow Apache helicopter, fighter aircraft (including F-15, F-16, and 
F-18), 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. United 
States 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. Foreign firms led the way on 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 35 percent. This reduction in wafer prices and 
improvement in wafer quality resulted in significant reductions in 
defense costs for critical electronics.

Title III Projects
    There are currently eight active Title III projects and DOD is 
initiating two new projects this year, one of which is to establish 
production capacity for Yttrium Barium Copper Oxide (YBCO) 
superconductor wire. This initiative will establish a domestic 
production capacity for YBCO, a high temperature superconductor 
material, which could significantly enhance the development of future 
directed energy weapons and electric power generation. Title III 
projects address a variety of advanced materials and technologies and 
generally fall into the following two categories:

Electronic Materials and Devices
    Projects in this category include recently completed projects in 
gallium arsenide, and indium phosphide wafers and ongoing projects for 
silicon carbide wafers, and radiation hardened electronics. These 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 can enable 
new capabilities for defense systems and improvements in old 
capabilities.

Advanced Structural Materials
    Recently concluded projects established production capabilities for 
discontinuous reinforced aluminum, aluminum metal matrix, and titanium 
metal matrix composites. These new structural materials offer 
improvements in terms of the strength, weight, durability, and 
resistance to extreme temperatures. These benefits are particularly 
important in aerospace applications.

    Projects initiated in fiscal year 2002 include:

Radiation Hardened Microelectronics
    This project illustrates the key role Title III plays in providing 
our armed forces with the technologies they need to be successful on 
the battlefield. We were in danger of losing our last remaining 
suppliers of these critical components needed for our strategic missile 
and space systems. Because of the small number of components that the 
Department buys and limited commercial demand, our current suppliers 
were unable to generate sufficient revenues to purchase the production 
equipment needed to produce radiation hardened microelectronics at the 
feature size needed to meet future defense requirements. Title III is 
helping these companies through equipment purchases and modernization 
to remain viable suppliers, capable of supporting future defense 
requirements. Without Title III, it is likely we would have lost this 
critical production capability.

Radiation Hardened Microprocessors
    Complimentary of the radiation hardened project for 
microelectronics is a project for radiation hardened microprocessors. 
Current radiation hardened microprocessors are several generations 
behind commercial microprocessors. Defense space systems require high 
performance and protection against high radiation environments. This 
project will enable the production of an advanced commercial 
microprocessor capable of meeting the processing and radiation hardened 
requirements for military applications. The radiation hardened 
microprocessors will be based on current commercial microprocessors. 
Benefiting most from this project will be advanced defense satellite 
systems.

Rigid-Rod Polymers
    The goal of this project is to establish a domestic production 
capacity for Rigid-Rod Ultra-High Strength Polymeric Materials. Rigid-
rod polymeric materials can be used as metal substitutes for critical 
electronic, weapon, and personnel protection systems. The focus of the 
project is to transition the technology from a small scale R&D process 
and establish an initial production capacity of approximately 100,000 
pounds annually. Potential applications include replacement for brass 
shell casing in small arms ammunition, foam core to replace honeycomb 
core in aircraft, replacement for metal castings, and lightweight 
thermal barriers and doors.

Wireless Vibration Sensors
    The goal of this project is to establish an affordable domestic 
production capacity for high-quality wireless vibration sensors. The 
project could improve the timely production and fielding of affordable 
smart sensors for Condition-Based Maintenance. Condition-Based 
Maintenance is a key enabling tool to lower asset lifecycle cost by 
providing online measurement and quantification of the condition and 
maintenance needs of mechanical systems such as engines and power 
trains on aircraft, vehicles, and ships.

Reauthorization of the DPA
    Most provisions of the Defense Production Act are not permanent law 
and must be renewed periodically by the Congress. We are requesting a 
reauthorization of the authorities contained in the Defense Production 
Act until September 30, 2008. In addition, we are requesting to 
increase the statutory authorization limit contained in Section 
303(a)(6)(C) to $200 million to correct the industrial resource 
shortfall for the radiation hardened electronics project. The DPA 
requires the Department to obtain specific authorization for any Title 
III project that exceeds $50 million. The expected cost of the 
radiation hardened electronic project is $167 million. However, we are 
asking for authority up to $200 million in the event of unexpected cost 
increases for the project.
    We are also requesting to make Section 707 permanent law to provide 
continued liability protection to contractors executing priority 
contracts in compliance with the Defense Production Act.
Conclusion
    In conclusion, the DOD needs the Defense Production Act. It 
contains authorities that exist no where else. Current world events 
make these authorities more important than ever. The DPA is a proven 
mechanism. Its array of authorities has helped us meet the challenges 
of the last 50 years. By judiciously applying its authorities to the 
challenges facing us today, the DPA will see us to a more secure 
future. I hope that I have conveyed to you the significant role the 
Defense Production Act plays in ensuring our Nation's defense. The 
Department fully supports the proposed bill to reauthorize the DPA.
    Thank you for the opportunity to discuss the Defense Production 
Act.

                               ----------
                PREPARED STATEMENT OF SUZANNE D. PATRICK
              Deputy Under Secretary for Industrial Policy
                       U.S. Department of Defense
                              June 5, 2003

    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). This Act is 
critical to DOD, both in time of contingency or conflict, as well as 
during peace. It helps DOD 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 
Department's support for reauthorizing the Act through September 30, 
2008.
    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 Department of Defense tools 
required to maintain a strong base that will be responsive to the needs 
of our armed forces. Specifically, it provides the President the 
authority to: (1) direct priority performance of defense contracts and 
allocate scarce materials, services, and industrial facilities; and (2) 
establish, expand, or maintain essential domestic industrial capacity. 
The authorities in this Act continue to be of vital importance to our 
national security.
    My testimony today focuses on one specific provision of the Defense 
Production Act, Title I. I particularly want to describe for you why 
Title I authority is important and how we are using it today.
Title I
    Title I (Priorities and Allocations) of the DPA provides the 
President the authority to: 1. require preferential performance on 
contracts and orders, as necessary or appropriate to promote the 
national defense; and 2. allocate materials, services, and facilities 
as necessary or appropriate to promote the national defense.
    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, the Department of Commerce 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 Department of Commerce has delegated to the Department of 
Defense authority under the DPAS to: 1. apply priority ratings to 
contracts and orders supporting approved national defense programs. 
(However, the Department of Defense 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 the Department of Commerce to provide 
Special Priorities Assistance 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 Department of Defense contracts are 
authorized an industrial priority rating. The authorities, applied via 
contract clauses, are like insurance, always present but only executed 
when absolutely necessary. The Department of Defense 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 
Department of Defense can request the Department of Commerce provide 
Special Priorities Assistance to resolve the problem.
    Although, important in peace, the DPAS is indispensable in the 
event of conflict or contingency. DPAS gives the Department of Defense 
the necessary power and flexibility to address critical warfighter 
needs involving the industrial base effectively and expeditiously. 
While the Department of Defense has used Title I since the 1950's, 
recent history, and operations such as Desert Shield/Storm, Bosnia, 
Kosovo, Enduring Freedom, and Iraqi Freedom have demonstrated its 
continued importance.
    Predator Unmanned Aerial Vehicles (UAV's) armed with Hellfire 
missiles were used for the first time in Afghanistan. They included an 
upgraded sensor package, the Multi-Spectral Targeting System (MTS). The 
contractor's original delivery date for three systems was March 2003. 
Using DPAS, we jumped this order to the head of the production queue 
and the contractor was able to deliver three systems in December 2001, 
18 months earlier than originally promised. Since that time, we have 
used DPAS to accelerate forty additional Multi-Spectral Targeting 
Systems. We all are aware of the dramatic impact manned Predators had 
in waging war in Afghanistan, and most recently in Iraq.
    During Operations Enduring Freedom and Iraqi Freedom, a new lighter 
kind of body armor proved remarkably effective in minimizing fatal 
battlefield injuries. That latest generation Army and Marine body armor 
is comprised of protective vests with inserts made of an extremely 
tough fiber--Spectra--bonded to a ceramic plate. We used DPAS authority 
to direct the Spectra manufacturer's production to the highest priority 
Army and Marine requirements in order to maximize small arms protection 
for the warfighters.
    For Operation Iraqi Freedom, the U.K. Ministry of Defence needed 
Precision Lightweight Global Positioning System GPS Receivers. The U.K. 
requirements were critical to the warfighting effort. We used DPAS to 
give the U.K. order an industrial priority rating and move it ahead of 
some lesser priority U.S. orders that were not needed for deployed or 
deploying forces. The U.K. received the equipment in a very timely 
manner to support their forces in theater.
    The authority to provide preferential treatment for foreign defense 
orders in the United States when such treatment promotes national 
defense interests is 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 non-U.S. defense suppliers will be 
in a position to provide timely supplies to DOD during both conflict/
contingency situations and peacetime.
    NATO has in place a NATO-wide agreement to encourage reciprocal 
priorities support within the alliance.
    In addition to a NATO-wide agreement we are establishing formal 
bilateral agreements with key allies and trading partners. 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 3 years, DOD representatives have had 
discussions about such bilateral agreements with several allies and 
friends. The Department of Defense and United Kingdom Ministry of 
Defence representatives have now negotiated a formal bilateral 
agreement that commits each nation to establish and maintain a 
reciprocal priorities system and to provide the other nation reciprocal 
access to that system. Similar agreements are being discussed with 
Australia, Spain, Norway, the Netherlands, Italy, and Sweden.
    During peacetime, the DPAS is important in setting priorities among 
defense programs that are competing for scarce resources and industrial 
output. Delayed deliveries of production parts and subassemblies to 
producers of weapon systems have consequences in terms of system cost 
and ultimately on the readiness of operational forces. DPAS gives the 
Department of Defense an opportunity to prioritize deliveries and 
minimize cost and schedule delays among DOD orders, and to support 
other agencies and allied Nation defense procurements in the United 
States. For example: 1. U.S. State Department: DPAS was employed to 
accelerate deliveries on multiple programs as part of the embassy 
security protection upgrade program worldwide; 2. United Kingdom: The 
U.K. contractor experienced delays in receiving Integrated Helmet Units 
needed for U.K. WAH-64 Apache Longbow helicopters. DOD/DOC
authorized the use of a DO rating priority that permitted the 
manufacturer to ship the Integrated Helmet Units sooner than would have 
been possible without the rating authority, which allowed the 
contractor to meet its production delivery requirements to the U.K. 
Ministry of Defence.
    DPA Title I provisions are a critical tool in DOD's arsenal. It 
would be very difficult for the Department of Defense to meet its 
national security responsibilities without that tool.
    I want to briefly express support for the Title VII authorities, 
also very important to the Department of Defense. Title VII contains 
miscellaneous provisions, including enforcement mechanisms, which help 
protect the Nation's security.
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, 2003. We fully support reauthorizing the DPA 
through September 30, 2008.
Conclusion
    In summary, the Department of Defense 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.

                               ----------
                 PREPARED STATEMENT OF KARAN K. BHATIA
            Deputy Under Secretary for Industry and Security
                      U.S. Department of Commerce
                              June 5, 2003

    I appreciate the opportunity to testify today before the Committee 
on the reauthorization of the Defense Production Act, also known as the 
DPA.
    When this Committee last convened at a hearing about the importance 
of the DPA and its relevance in the post-cold war era in June 2001, 
none of us could have then predicted the challenges that the United 
States would soon encounter. Nor, of course, could we have predicted 
the important role that DPA authorities would play in meeting those 
challenges.
    What we did know--and what Under Secretary Juster testified to--was 
that for more than 50 years, the Defense Production Act has enabled the 
President to ensure our Nation's defense, civil preparedness, and 
military readiness. The use that has been made of DPA over the past 2 
years--to facilitate the country's response to
September 11, to strengthen the security of our homeland and our 
embassies abroad, and to support the deployment of troops in the Middle 
East, in both Afghanistan and Iraq, has demonstrated that the DPA 
continues to be a critically important tool in meeting contemporary 
threats to our security. During that same period, the DPA has also 
facilitated important analyses of our defense industrial base,
defense trade practices, and foreign investments in U.S. companies that 
may pose national security issues.
    Accordingly, the Commerce Department strongly supports 
reauthorizing the DPA for a 5-year period. We also urge Congress to 
adopt a minor clarifying amendment to the Act that I will discuss 
shortly.
    I will focus my comments on the DPA authorities that are relevant 
to the Department of Commerce and the activities of the Department 
under those authorities. The Department of Commerce plays several roles 
in implementing 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 to Congress on defense trade offsets. Third, under 
Title VII, the Department analyzes the health of U.S. industrial base 
sectors. And fourth, also under Title VII, the Department plays a 
significant role in analyzing the impact of foreign investment on the 
national security of the United States. I will briefly discuss each of 
these roles.

Defense Priorities and Allocations System
    Title I of the DPA authorizes the President: (i) to require the 
priority performance of contracts and orders necessary or appropriate 
to promote the national defense over other contracts or orders; (ii) to 
allocate materials, services, and facilities as necessary or 
appropriate to promote the national defense; and (iii) to require the
allocation of, or the priority performance under contracts or orders 
relating to, supplies of materials, equipment, and services in order to 
assure domestic energy supplies for national defense needs. These 
authorities to prioritize contracts and require allocations for industrial resources are delegated to the Secretary of Commerce by Executive Order 
12919.
    Commerce has implemented these authorities through the Defense 
Priorities and Allocations System (known as ``DPAS''). DPAS has two 
broad purposes. First, it seeks to ensure the timely availability of 
products, materials, and services that are needed to meet 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 emergency.
    Under the DPAS, the Department of Commerce delegates the authority 
to use the system to obtain critical products, materials, and services 
as quickly as needed by several Federal agencies including the 
Department of Defense. To implement this authority, these agencies--
called Delegate Agencies--can place what are known as ``rated orders'' 
on essentially all procurement contracts. 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 rated by the U.S. Government. The contractors then 
must give these orders priority over unrated commercial orders to meet 
the delivery dates of the rated orders. The Department has also 
authorized use of this authority to meet certain critical Homeland 
Security requirements as I will discuss with you in just a few minutes.
    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 Delegate agency cannot reach agreement, the Department of Commerce provides ``Special Priorities Assistance''--essentially, it functions as intermediary--to 
resolve disputes and ensure that production bottlenecks for many military 
and national emergency requirements are resolved.
    Let me briefly highlight a few examples of the Department's work in 
this important area.

Operations Desert Shield and Desert Storm
    In 1990 and 1991, Commerce worked actively to administer the DPAS 
in support of U.S. and allied requirements for Operations Desert Shield 
and Desert Storm. We handled 135 Special Priorities Assistance cases to 
assure timely delivery of critical items, including avionics components 
for aircraft, precision guided munitions, communications equipment, and 
protective gear for chemical weapons. In the majority of cases, due to 
the Commerce Department's involvement, delivery schedules were reduced 
from months to weeks or from weeks to days.

Coalition Action in the Balkans
    From 1993-2000, Commerce handled 73 Special Priorities Assistance 
cases in support of U.S. forces, allied forces, and NATO coalition 
action in the Balkans. 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. Priorities authority may be used to support 
allied defense requirements when such support is deemed by the 
Department of Defense to be in the interest of U.S. national defense.

Operations Enduring Freedom and Iraqi Freedom
    The DPAS was again used extensively and successfully to secure 
delivery of a number of items for both the United States and allied 
forces to support the troop deployments both in Afghanistan under 
Operation Enduring Freedom and then in Iraq under Operation Iraqi 
Freedom. For U.S. forces, the Commerce Department worked closely with 
U.S. suppliers to obtain guidance system components for ``smart bomb'' 
precision guided munitions, targeting and sensor equipment for our 
Predator and Global Hawk Unmanned Aerial Vehicles, SATCOM radio 
equipment, and ballistic material for body armor. For our allies such 
as the United Kingdom, the Commerce Department worked to obtain 
deliveries of such items as satellite communication radios and search 
and rescue radios, helicopter equipment avionic displays and navigation 
systems, night vision devices, and GPS receivers for both ground troop 
use and as a ``smart bomb'' guidance system component. For the 
Australians, we secured timely delivery of infrared laser targeting 
equipment.

Homeland Security
    In 1994, the DPA priorities and allocations authority under Title I 
was extended to cover civil emergency preparedness activities by the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
(Stafford Act). This extension of authority has been relied upon to 
support several post-September 11 homeland security initiatives. For 
example:

 The Federal Bureau of Investigation was granted the DPAS 
    authority for the Trilogy program to upgrade nationwide FBI 
    communications and data processing
    capabilities;
 The Transportation Security Administration was granted the 
    DPAS support to achieve the timely delivery of explosive detection 
    systems equipment to screen checked baggage for explosives at more 
    than 400 U.S. commercial airports. This was followed by a grant of 
    DPAS authority for TSA's 7-year, $1 billion aviation security 
    Information Technology Managed Services program to upgrade airport 
    and airline security data processing and communications 
    capabilities.
 Currently, the Commerce Department is working with the 
    Department of Homeland Security to review a request by the Customs 
    Service for DPAS support of its 5-year, $1.3 billion port security 
    Automated Commercial Environment (ACE) system to enhance port 
    security, especially as it pertains to the tracking and the 
    identification of containerized cargo.

    While these examples represent only a small fraction of the total 
number of exercises of the DPAS, I believe they demonstrate how DPAS 
remains critically relevant to meeting increasingly complex 
contemporary national defense, emergency preparedness, and homeland 
security needs.

Defense Trade Offsets
    Pursuant to Section 309 of the DPA, the Department of Commerce 
reports to the Congress on the use of offsets in defense trade. Offsets 
are industrial compensation practices required by foreign governments 
as a condition of purchase of defense articles and/or services. For 
example, a foreign government may agree to purchase fighter aircraft 
from an American manufacturer, but can require that some of the 
aircraft components be produced in the foreign country using local 
suppliers. Foreign governments may also demand technology transfer, 
local investment, and countertrade as part of the agreement.
    In February of this year, Commerce sent its sixth report on offsets 
to Congress covering the period of 1993 through 1999. From the 
anecdotal reports we have received, the report appears to have been widely read and well-received by Congress and by industry. The report found that, during the covered time period, U.S. defense exports were increasingly affected by the use of offsets as part of defense sales, especially in 
light of a global retrenchment in military expenditures. Specifically, we found that offsets have become an increasingly important factor in 
determining contract awards, and have a direct bearing on U.S. defense contractors' access to foreign markets. Offset agreements in excess of 100 percent of the contract value are occurring with increasing frequency, and 
in some cases have exceeded 300 percent of the contract.
    As a matter of policy, the U.S. Government is not involved in the 
development of offset proposals by U.S. defense firms as they bid on 
international defense weapons projects. However, as the report 
expresses, the Department of Commerce is concerned that the level of 
offsets required by foreign governments appears to be rising and that 
the offset package is becoming a signal factor in determining a 
contract award. In the event that U.S. defense firms are prevented from 
competing on a level playing field in the international marketplace, 
the U.S. industrial base at both the prime and the subcontractor levels 
will suffer. Accordingly, the Department of Commerce is committed to 
working with U.S. industry, the Department of Defense, and foreign 
governments to analyze the impact of offsets on all parties and to seek 
ways to mitigate the adverse effects of offsets on competition.

Defense Industrial Base Studies
    Under Section 705 of the DPA and Executive Order 12656, the 
Department of Commerce conducts surveys and analyses, and prepares 
reports on specific sectors of the U.S. defense industrial base. These 
studies are usually requested by the Armed Services, Congress, or 
industry. Using these industrial base studies, the Departments of 
Commerce and Defense can, for example, measure industry capabilities in 
an area such as high-performance explosives or measure industry 
dependence on foreign materials in manufacturing U.S. defense systems. 
The studies provide a competitive benchmark of critical sectors within 
the U.S. defense industrial base and gauge the capabilities of these 
sectors to provide defense items to the U.S. military. The studies also 
provide detailed data that are unavailable from other sources.
    Currently, the Department of Commerce has a number of studies 
underway, including assessments of the air delivery (parachute) 
industry, the munitions power sources (batteries) industry, the 
shipbuilder's subcontractor base, and the textile and apparel industry. 
When completed, these assessments will provide the Government with 
information needed to understand the health and viability of each 
sector.
    Section 705 of the DPA provides the Department of Commerce 
investigative authority regarding the defense industrial base and we 
have used this authority in the performance of industrial base 
assessments. While we are confident that this is consistent with 
Congress' intent, it would be helpful if that intent were made explicit 
in the language of Section 705. To that end, we support a slight 
amendment to Section 705 to make clear that the investigative authority 
``includes the authority to obtain information in order to perform 
industry studies assessing the capabilities of the United States 
industrial base to support the national defense.'' This amendment to 
Section 705 was included in the DPA reauthorization legislation 
reported out by the House Committee on Financial Services.

Foreign Investments in the United States
    Finally, Commerce is involved in the exercise of authority under 
Section 721 of the DPA, known as the ``Exon-Florio Provision'' (which 
unlike the other provisions described above, would not expire without 
reauthorization, but I describe for the sake of completeness). Section 
721 authorizes the President to prohibit foreign investments in U.S. 
companies that would result in foreign control when there is credible 
evidence that the foreign person exercising control ``might take action 
that threatens to impair the national security,'' and no other laws are 
adequate and appropriate to deal with the threat. Pursuant to Executive 
Order 12661, the President has designated an interagency Committee on 
Foreign Investment in the United States (``CFIUS'') to assist in the 
exercise of this authority. The Department of Commerce's contribution 
to the CFIUS process includes providing a defense industrial base and 
export control perspective to the CFIUS reviews. While the United 
States remains generally very much open to foreign investment--and the 
Exon-Florio authority to prohibit an investment has been used quite 
rarely--in this period of rapid globalization, the existence of this 
authority and the interagency review process are important.

Summary
    In sum, the DPA provides authority for a variety of programs at the 
Department of Commerce of substantial importance to our Nation's 
security. Through DPAS, it facilitates the timely and effective 
provision of necessary supplies to our military, to our close allies, 
and increasingly, to meet Homeland Security requirements. The DPA also 
facilitates valuable assessments of the impact of offsets in defense 
trade and the health of key sectors of the defense industrial base. 
Finally, it affords the U.S. Government the opportunity to assess--and 
if necessary, take steps to limit foreign investments in U.S. companies 
that could threaten U.S. national security.
    Most provisions of the Defense Production Act are not permanent law 
and must be renewed by Congress. For all these reasons, the Department 
of Commerce fully supports extending the Defense Production Act for a 
5-year period.
    Thank you.

                               ----------
                PREPARED STATEMENT OF R. DAVID PAULISON
                    Director, Preparedness Division
            Emergency Preparedness and Response Directorate
                  U.S. Department of Homeland Security
                              June 5, 2003

    Good afternoon, Mr. Chairman and Members of the Committee, I am 
David Paulison, Director of the Preparedness Division within the 
Emergency Preparedness and Response Directorate of the Department of 
Homeland Security (DHS). On behalf of Secretary Ridge, I appreciate the 
opportunity to appear before you today to support the 5-year 
reauthorization of the nonpermanent provisions of the Defense 
Production Act (DPA).
    The DPA is the President's primary authority to ensure the timely 
availability of industrial resources for both military and civil 
emergency preparedness and response. Expiration of these provisions 
would severely undermine our Nation's ability to prevent, as well as to 
respond to a disaster that is truly catastrophic--whether natural or 
man-made.
    The Department of Homeland Security combines many Government 
functions that focus on protecting our Nation's borders and airports, 
among other activities, and ensuring that we are prepared for and able 
to respond to terrorist attacks and natural disasters. The Defense 
Production Act authorities are critical to the Department's strategic 
objectives to prevent terrorist attacks within the United States,
reduce America's vulnerability to terrorism, minimize the damage and 
hasten the recovery from attacks that may occur.
    Since September 11, we have seen the effectiveness of the Defense 
Production Act in reducing the Nation's vulnerability to terrorism. 
Specifically, the Defense Priorities and Allocation System authorized 
under Title I of the DPA was used by the Transportation Security 
Administration to expedite the production of explosive detection and 
communication systems for our major airports. Without the use of these 
priority orders, the manufacturers could not have delivered these 
systems in a timely fashion. In addition, we expect to request 
assignment of a DPA priority rating from the Department of Commerce to 
support the Bureau of Customs and Border Protection within our 
Department to obtain equipment that will enable us to track 
containerized shipping arriving at our borders.
    The Defense Production Act can also be used for preparedness, 
response, and recovery activities in catastrophic disasters such as an 
earthquake, a hurricane, or an incident involving a weapon of mass 
destruction. This use is being integrated into planning for such 
catastrophic occurrences.
    DHS understands the need to have a priorities and allocations 
system ready to ensure the timely availability of resources to meet 
civil emergency requirements. Such a priorities and allocations system 
will enable Federal, State, and local governments to acquire items 
needed urgently to meet the needs of the affected population when such 
items are not readily available in the marketplace. Without this system 
our response and recovery operations could be severely hindered.
    Other DPA authorities are important to the DHS mission. These 
authorities
include the use of:

 Financial incentives, subject to Presidential designation, to 
    establish industrial
    capacity for products and services, such as vaccines to protect 
    against biological agents (under Title III);
 Industry agreements to enhance preparedness and response 
    capabilities--for example, critical infrastructure protection 
    (under Section 708); and
 An executive reserve to provide expertise from the private 
    sector during an emergency (under Section 710).

    Within the new Department, DPA authorities reside with the DHS 
Under Secretary for Emergency Preparedness and Response. DHS is 
preparing departmental guidance on the use of these DPA authorities. 
Specifically, DHS is implementing its DPA responsibilities by:

 Serving as an advisor to the National Security Council (NSC) 
    on DPA authorities and national security resource preparedness 
    issues and reporting on activities under Executive Order 12919;
 Providing central interagency coordination of the plans and 
    programs incident to the authorities under Executive Order 12919;
 Developing guidance and procedures under the DPA for approval 
    by the NSC;
 Resolving issues on resource priorities and allocation;
 Making determinations on use of priorities and allocations for 
    essential civilian needs supporting the national defense; and
 Coordinating the National Defense Executive Reserve (NDER) 
    program activities of departments and agencies in establishing NDER 
    units and providing guidance for recruitment, training, and 
    activation.

    The DHS National Defense Executive Reserve (NDER) program is being 
evaluated in terms of what private sector expertise can be mobilized 
when needed to respond to today's threats. NDERs are valuable assets to 
several Federal departments and agencies. The reauthorization of DPA is 
required to continue this program.
    DHS also recognizes the importance of Section 708 of the Defense 
Production Act that provides authority for the creation of voluntary 
industry agreements to support preparedness for national defense and 
civil emergencies. This authority allows industry and the Federal 
Government to work together to solve problems that inhibit the 
availability of resources in an emergency. The Homeland Security Act 
authorized the use of this provision for critical infrastructure 
protection planning and information sharing. Section 708 provides narrow antitrust and limited liability protections for infrastructure sectors and industry that are asked to prepare preparedness plans. DHS will be reviewing the guidelines for this program and determining if they need to be revised or streamlined to meet the current environment.
    We will work with the National Security Council, the Homeland 
Security Council, and the appropriate Federal departments and agencies 
to ensure that DHS issues proper guidance and procedures for the 
implementation of these DPA authorities. We view DHS responsibilities 
under the DPA seriously and recognize the potential of the Act to 
support the efforts of other departments and agencies to prevent, 
prepare for, respond to, and recover from potential terrorist incidents 
and other emergencies.
    In summary, the Department of Homeland Security is committed to 
fulfilling its responsibilities under the DPA and recognizes the Act's 
potential to enhance significantly the Nation's ability to respond to a 
homeland security threat.
    Thank you for the opportunity to appear today. I would be pleased 
to answer any questions that you may have.

                   PREPARED STATEMENT OF DENISE SWINK
              Acting Director, Office of Energy Assurance
                       U.S. Department of Energy
                              June 5, 2003

    I am Denise Swink, Acting Director of the Office of Energy 
Assurance at the U.S. Department of Energy. I am pleased to appear 
before the Committee in response to its request for testimony by the 
Department on the reauthorization of the Defense Production Act of 
1950. The Committee's invitation letter requests the Department to 
address, in particular, the role of the Department of Energy in 
responding to crises in which Defense Production Act authorities are 
required.
    The DOE Office of Energy Assurance is responsible for protecting 
critical infrastructures and key assets in the energy sector. Our 
office leads the effort to ensure a secure, reliable flow of energy to 
America's homes, businesses, industries, and critical infrastructures 
(e.g., telecommunications, transportation, water supply, banking and 
finance, manufacturing, education and public health systems). In 
carrying out our mission, we work closely with the Department of 
Homeland Security and in partnership with industry and State and local 
governments. The Department's energy assurance program is conducted in 
direct support of the President's National Strategy for Homeland 
Security and the President's National Energy Policy.
    A comprehensive discussion of the authorities contained in the DPA 
and of how they might be used in responding to energy emergency 
situations is contained in a 1982 Department of Justice memorandum of 
law for the President which was submitted to the Congress in compliance 
with the Energy Emergency Preparedness Act of 1982 (Public Law 97-229). 
The memorandum's discussion of the DPA remains valid today. As the 
Justice Department's memorandum makes clear, whether the Defense 
Production Act authorities placed in the President might be useful in 
responding to energy crises would be highly fact-dependent. However, we 
do believe that a number of the Act's provisions could be potentially 
useful in addressing energy needs, and I will address their past use by 
the Department and ways in which the authorities could be useful in the 
future.
    Title I of the Defense Production Act contains two separate 
``priority contracting'' provisions authorizing the President to 
require performance on a priority basis of contracts or orders in 
certain circumstances. The Secretary of Energy has been delegated 
authority by the President to exercise the Title I priority contracting 
authorities, in Executive Order Numbers 11790 and 12919. The first 
provision, Section 101(a) of Title I, deals with priority contracting 
to ``promote the national defense.'' Under Section 101(a), the 
Secretary may require performance on a priority basis of contracts for 
energy supplies that the Secretary deems ``necessary or appropriate to 
promote the national defense.'' This authority could be used, for 
example, to require the acceptance of and priority performance under 
contracts relating to production, delivery, or refining of petroleum 
products or other forms of energy, including natural gas, to meet the 
energy needs of the Department of Defense and its contractors. It also 
could be used to facilitate transportation of energy supplies to meet 
national defense needs, for example, by requiring pipelines, marine 
terminals, and other facilities to perform energy transport contracts 
necessary to meet the priority needs of the Defense Department and its 
contractors.
    In determining what the national defense requires, it is clear the 
Secretary may consider the potential impact of shortages of energy 
supplies. In the Energy Security Act of 1980, Congress specifically 
designated energy as a ``strategic and critical material'' within the 
meaning of the Defense Production Act and also added language to the 
DPA 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 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.

    The second priority contracting provision in Title I of the Defense 
Production Act, Section 101(c), is linked to facilitating projects that 
maximize domestic energy supplies rather than to meeting the needs of 
the national defense. Section 101(c) authorizes the Department of 
Energy to require priority performance of contracts for goods and 
services for projects which would maximize domestic energy supplies, if 
the Secretaries of Energy and Commerce make certain findings, including 
that the good or service is scarce, critical, and essential to 
maximizing domestic energy supplies. If world circumstances were such 
that the President directed a drawdown of the Strategic Petroleum 
Reserve, and coincident with that direction from the President 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, the Department could rely upon Section 101(c) to bring the 
facility back online 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.
    Section 101(c) might be used alone, or in tandem with Section 
101(a), to assist in restoring critical energy infrastructures 
following widespread terrorist attacks or a natural disaster, for 
example, to assist electric utilities, oil companies, or other energy 
companies in obtaining equipment needed to repair damaged facilities, 
or to provide fuel oil or natural gas to electric utilities to ensure 
continued supply of electricity.
    Section 101(c) was used in the late 1970's and again in the 1980's 
and early 1990's to facilitate petroleum production development of the 
Alaskan North Slope. The Department also relied on Section 101(c), as 
well as 101(a), as a complement to the emergency provisions of the 
Natural Gas Policy Act, in its January 2001 orders, directed by former 
President Clinton, to Pacific Gas and Electric Company and a number of 
natural gas suppliers to assure the continued supply of natural gas 
necessary for continued availability of electric service in the central 
and northern regions of California.
    A third Defense Production Act provision which has been used in the 
past to address energy supply problems is Section 708, which provides a 
limited antitrust defense and breach of contract protection for industry participating in voluntary agreements and plans of action ``to help provide for the defense of the United States through the development of preparedness programs and the expansion of productive capacity and supply beyond levels needed to meet essential civilian demand in the United States.'' This provision had its roots in our World War II experience and was an important 
vehicle for gaining the help of the oil industry during and after the 
Korean War. For example, in 1951-52, a voluntary agreement under 
Section 708 was used to protect a group of oil companies which agreed 
to provide heating oil to redress a winter shortfall in New England. 
Later, Section 708 was used for the first voluntary agreement of U.S. 
oil companies which had agreed to participate in the International 
Energy Agency's standby emergency preparedness programs. Subsequently, 
in 1975, Congress enacted very similar voluntary agreement authority in 
Section 251 of the Energy Policy and Conservation Act as the vehicle 
for U.S. oil company participation in the energy emergency preparedness 
activities of the International Energy Agency.
    In the future, in the event of widespread damage to energy 
production or delivery systems caused by acts of terrorism or natural 
disasters, the DPA's Section 708 voluntary agreement authority might be 
used in establishing a voluntary agreement of energy service companies 
to coordinate the planning of the restoration of the damaged 
facilities.
    To facilitate communications among stakeholders and to broaden our 
partnerships with the private sector, we have established Information 
Sharing and Analysis Centers (ISAC's) among energy industry 
stakeholders to improve infrastructure security. We expect to confer 
with the ISAC's on all of the authorities available to the President 
and to the Department that might be useful in protecting and, if 
necessary, restoring critical energy infrastructures.
    The Secretary believes that the authorities the DPA confers on the 
President are important tools that should remain available to the 
President unimpaired to use in appropriate circumstances. Accordingly, 
the Department joins the rest of the Administration in supporting a 5-
year extension of the Defense Production Act.
    This concludes my prepared statement. I will be pleased to respond 
to any questions the Committee may have.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 
                      FROM RONALD M. SEGA

Q.1. What steps can be taken to ensure the retention of 
domestic semiconductor chip manufacturing capabilities, as well 
as research and design capabilities?

A.1. The Department is continuously assessing the health of the 
domestic defense industrial base to ensure that it can meet 
national security goals such as maintaining the technological 
superiority of defense systems and providing a more timely 
response to crisis needs. Should a shortfall in production 
capability for semiconductors or other materials essential for 
national defense be identified, the Defense Production Act 
(DPA) provides an array of authorities that could be employed. 
The Department continues to have a strong research and 
engineering semiconductor program. The current year's 
investment in semiconductors ensures that the Department's 
current and future military systems will have technological 
superiority.

Q.2. Is this an issue that the department feels could or should 
be addressed within the context of the DPA?

A.2. DPA authorities could be used to address a shortfall in 
semiconductor manufacturing capability. For example, the 
Department is currently executing a DPA Title III project to 
modernize and maintain the production capabilities of the 
remaining domestic producers of Radiation hardened 
microelectronics to enable them to meet the requirements of 
defense space and missile systems. Other Title III projects 
(current and previous) supporting the domestic semiconductor 
industry include: Radiation hardened microprocessor for space, 
radiation hardened cryogenic temperature microelectronics, 
silicon carbide substrates, semi-insulating gallium arsenide 
wafers, high purity float zone silicon, and semi-insulating 
indium phosphide substrates.

         RESPONSE TO ORAL QUESTION OF SENATOR SARBANES 
                    FROM SUZANNE D. PATRICK

Q.1. During the hearing the following question was asked: We 
last reauthorized the DPA in 2001. In fact, we had held an 
oversight hearing ahead of the Administration's submission of 
authorization, which came from the Federal Emergency Management 
Agency and was transmitted to this Committee, the 
reauthorizaton request.
    Now, this year, the Administration's transmission to the 
Congress requesting a reauthorization came not from FEMA nor to 
the Committee, but came from the Defense Department as part of 
the request for the national defense authorization bill and 
went to the Vice President in his capacity as President of the 
Senate.
    That is a complete departure from past precedent with 
respect to the DPA, and I was interested to know why that 
occurred.

A.1. The information follows:
    Executive Order 12919 designates FEMA as the lead federal 
agency responsible for providing central coordination and 
support of a variety of Defense Production Act (DPA) matters to 
include plans and programs incident to the authorities under 
the order; and developing guidance and procedures under the DPA 
that are approved by the National Security Council (NSC). As 
such, FEMA has the primary responsibility for leading an 
interagency effort to develop a legislative proposal for 
submission to Congress.
    During the fourth quarter of 2002, Department of Defense 
representatives made a number of inquiries to FEMA and NSC 
staff regarding the need to initiate an interagency effort to 
develop a legislative proposal to reauthorize the Defense 
Production Act prior to its expiration on September 30, 2003. 
However, little action was taken. By early January 2003, with 
conflict in Iraq imminent and the need to meet Congressional 
schedules for timely consideration of legislation, it was 
imperative that reauthorization legislation be submitted at the 
earliest possible opportunity. Consequently, the Department of 
Defense, with the knowledge and acquiescence of the NSC and 
FEMA, drafted legislation to reauthorize the Defense Production 
Act. The legislative proposal was included in the DOD National 
Defense Authorization bill that was forwarded to Congress on 
March 3, 2003. The Authorization bill was deemed to be the most 
practical way of submitting the legislation to Congress. This 
was done with the full expectation that the proposed 
legislation would be provided to the Senate Committee on 
Banking, Housing, and Urban Affairs and the House Committee on 
Financial Services for consideration. In the future, we fully 
expect the Department of Homeland Security to take the lead in 
efforts regarding the Defense Production Act.
    We apologize for any confusion this action may have 
engendered. It was never the intent of the Department of 
Defense to circumvent the jurisdiction of the Senate Committee 
on Banking, Housing, and Urban Affairs and the House Committee 
on Financial Services over the Defense Production Act.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                      FROM RONALD M. SEGA

Q.1. A number of experts have recently raised concern over the 
future of the domestic semiconductor microelectronics industry 
and its ability to compete with China and other nations. As you 
know, microelectronics are at the heart of almost all of our 
advanced weapon systems, so, I am concerned that without some 
action the United States will lose the ability to supply the 
electronics it needs for our own defense systems. In your 
testimony, I know you highlight some past work that has 
supported the semiconductor industry. What are your future 
plans to make use of the authorities of the Defense Production 
Act to preserve this critical national capability?

A.1. The authorities of Title III of the DPA provide an 
extremely valuable tool by which the Department can apply 
financial incentives to either maintain an essential domestic 
defense industrial capability or encourage private industry to 
undertake the creation of new domestic sources of supply. 
Whenever an industrial base shortfall jeopardizes our defense 
capabilities, whether it is microelectronics or other 
technology items, DPA authority can be used to resolve the 
shortfall. One semiconductor related project being considered 
for Title III assistance is a next generation radiation 
hardened microprocessor.

Q.2. I know that the Defense Production Act program tries to 
address technology areas in which U.S. industry lags behind 
foreign producers. How exactly do you measure how U.S. industry 
stands relative to foreign industry when it comes to the 
development and manufacture of defense technologies?

A.2. The Department relies on existing industrial base, 
technical, and market studies/assessments to gain insight into 
specific technical areas or industries and to determine whether 
or not the
criteria set forth in the DPA are fully satisfied. Sources of 
this information often include: Industrial base assessments 
prepared by DOD; specialized technical assessments authored by 
the military services; and commercially available market and 
technology studies. The principal focus of any assessments or 
investigations undertaken directly by the DPA program is to 
better understand the composition and nature of competition 
within a specific industry. Emphasis is placed on identifying 
the business and technical factors that contribute to 
diminishing production capability, lack of investment, and 
financial weakness that often foretell the need for application 
of the DPA authorities. To the maximum extent feasible, 
findings are used to formulate an acquisition strategy to 
address and overcome these factors in order to strengthen the 
production capabilities and economic viability of domestic 
producers.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                    FROM SUZANNE D. PATRICK

Q.1. I know that in our fiscal year 2004 bill, the Senate Armed 
Services Committee has requested a report from DOD on plans to 
address the future of domestic supplies of semiconductor 
microelectronics needed for defense systems. I look forward to 
seeing that report. I hope you will be involved in its 
development and make sure that the DPA programs are highlighted 
in DOD's plans?

A.1. Yes, my office has already been studying the semiconductor 
industrial base. We are involved in a coordinated effort across 
the Department to respond to the fiscal year 2004 Senate Armed 
Services Committee language in addition to other Congressional 
tasks addressing semiconductors. The Defense Production Act 
(DPA) Title III program is already playing a critical role in 
improving the radiation hardened segment of the semiconductor 
industrial base. The Department will consider DPA for other 
uses as our broader plans develop.

Q.2. I note that in the Senate Armed Services Committee, we 
proposed that Dr. Sega establish a Global Research Watch 
program to help him make assessments of foreign scientific 
capabilities and help make investment decisions for DOD science 
and technology. Do you think that a similar effort should be 
made to address industrial base issues and assess foreign 
manufacturing capabilities of defense systems?

A.2. The Department's ongoing process of assessing foreign 
manufacturing capabilities generally is decentralized, being 
performed at the individual program level. At that level, the 
Department surveys the potential suppliers domestically and 
internationally. A formal,
global assessment process would not be as responsive or as 
timely to the requirements of programmatic decisions.
    The competence of off-shore manufacturing is of interest, 
but the truly important thing is that we continue to have 
access, either through domestic manufacturers or through our 
friends and allies, to the capabilities necessary to deliver 
the world-class equipment to the warfighter that America 
expects. To better focus our efforts, we are conducting a 
series of studies across the Joint Warfighting Capabilities 
Assessment architectures to catalog which operational 
capabilities require national industrial leadership to maintain 
an asymmetric operational advantage and to identify the key 
industries critical to those capabilities. We then will make an 
overarching assessment of the ability of domestic and foreign 
industry to provide those capabilities for defense systems. 
This assessment will allow us to bring our resources to bear to 
sustain our industrial leadership or to gain it in these key 
industries. As the industrial base then continues to evolve we 
can update our assessments to put priority on efforts to 
maintain national leadership on critical industries while 
depending on the global marketplace for our other requirements. 
The results of these studies will be carefully coordinated 
within the Department, most particularly with Dr. Sega's staff, 
to ensure maximum synergies among our collective efforts.

Q.3. Are you aware of any systems, subsystems, components, or 
materials that the United States requires for current or future 
defense needs that cannot currently be produced domestically?

A.3. The Department procures a wide range of products and 
services to meet its national defense responsibilities. 
Sometimes these products, subsystems, components, and materials 
are procured from foreign sources. DOD generally does not 
mandate supplier selections to its contractors. We expect our 
contractors to select
reliable, capable suppliers consistent with obtaining best 
value, encouraging effective competition, and meeting national 
security
requirements. Our prime contractors and first and second tier 
suppliers indicate they select foreign subcontractors for 
specific items because those subcontractors offer the best 
combination of price, performance, and delivery.
    The plain fact is that DOD and its contractors have been 
very conservative in using foreign sources. This reality is 
born out in a ``Study on Impact of Foreign Sourcing of 
Systems'' that we submitted to Congress in October 2001. The 
study findings showed that less than 2 percent of the 
subcontracted efforts went to foreign sources, that none of 
these foreign sources represented a threat to national 
security, and that the vast majority of the foreign sources 
were located in NATO-member nations. The study identified only 
six instances where domestic sources were not then available to 
compete for items subcontracted to foreign suppliers. These 
instances were associated with a single source. United States 
sources are or could be available if needed without significant 
additional cost, time, and risk.
    We know that the U.S. defense industrial base does not have 
the global monopoly on good ideas and technology innovation. In 
fact, the smaller scale, the faster pace, and the relatively 
lower cost of the individual warfighting elements of net-
centric systems will provide unique opportunities to allies 
willing to focus ever-limited budgetary resources on ``niches'' 
that are the key to net-centric
solutions.

Q.4. I know that there are a number of DOD programs that 
attempt to address the issue of maintaining the industrial base 
necessary to support our national security requirements. Could 
you quickly list those different activities? Also, could you 
describe to us how these programs are coordinated within DOD 
and with other Federal agencies? Who is the overall program 
coordinator within DOD?

A.4. It is our view that the competitive pressure of the 
marketplace is the best vehicle to shape and sustain an 
industrial base that supports our national security 
requirements. DOD takes action to intervene in that marketplace 
only when necessary to develop and/or to preserve industrial 
and technological capabilities essential to defense that the 
marketplace, left unattended, would not. As the principal 
customer, DOD research and development and acquisition plans, 
budgets, evaluations, and decisions play a significant role in 
shaping the defense industry.
    The Under Secretary of Defense for Acquisition, Technology 
& Logistics has the overarching responsibility to coordinate 
such programs, working through the Military Departments, the 
Defense
Advanced Research Projects Agency, and also DOD's Small and 
Disadvantaged Business Utilization organization. Within this 
overall framework, the DOD also employs several programs to 
develop or improve defense-critical industrial and 
technological capabilities,
including the authorities of Title III of the Defense 
Production Act; and the Manufacturing Technology, Small 
Business Innovative Research, and Technology Transfer programs.
    One of our major areas of emphasis is to ensure that 
barriers to enter the defense business do not discourage 
innovative, smaller suppliers from offering creative solutions 
to defense problems. To this end, we have established a 
clearinghouse within the Office of the Director, Defense 
Research and Engineering to help the nontraditional suppliers 
navigate the defense enterprise; and we are developing search 
engines to help such firms access available DOD
information.
    Finally, we conduct assessments of selected segments of our 
industrial base to determine if industrial and technological 
capabilities are sufficient to meet current and projected 
defense requirements. We summarize these assessments in our 
annual industrial capabilities reports to Congress. This year, 
as I noted in response to an earlier question, we also are 
conducting studies to identify
industrial base needs in light of transformational warfare 
requirements, highlighting the potential contribution of 
nontraditional suppliers, both domestic and global.

Q.5. I understand that in the House Armed Services Committee's 
bill, that we are about to begin conferencing, they established 
a $100 million Defense Industrial Base Capabilities Fund that 
would be used to address perceived shortfalls in our domestic 
industrial base. Have you had a chance to review this 
legislation?

A.5. Yes, I have had an opportunity to review the legislation.

Q.6. Can this provision be viewed as duplicative to the Defense 
Production Act or do you think a fund like this would be a 
valuable tool in addressing some of the industrial base issues 
we are discussing today?

A.6.: The Defense Industrial Base Capabilities Fund established 
by section 814 of title VIII, subtitle B of H.R. 1588, is 
intended to develop capabilities for the production of critical 
items available only from foreign contractors or from a limited 
number of U.S. manufacturers. I believe the proposed fund would 
duplicate many aspects of the current Defense Production Act 
Title III program. Current Title III authorities give the 
Department a powerful tool with which it can provide domestic 
industry with a variety of financial incentives to either 
maintain, modernize, or expand an essential domestic defense 
industrial capability or encourage private industry to 
undertake the creation of new domestic sources of supply for 
advanced materials and technology items and accelerate the 
deployment of new products and manufacturing process technology 
into and across the U.S. industrial base. The Department has 
used this program to facilitate the transition of state-of-the-
art materials and products from development to production, to 
strengthen key domestic industrial sectors, and to reduce U.S. 
dependency on foreign sources for materials and technologies 
critical to national defense. I believe the House provision 
would impose unnecessary
administrative and staff burdens on the Department without 
providing any additional benefits.

Q.7. As we go into our conference, I hope that you can give us 
your views and insights on this language so that we can amend 
or perfect it so that it can address the industrial base 
shortfalls that
may exist.

A.7. I would urge that this provision, and all of the other 
provisions of Subtitle B of Title VIII of H.R. 1588, be 
rescinded. The
provisions in this subtitle seem to be based on the inaccurate 
presumption that the U.S. defense industrial base needs to be 
revitalized and that U.S. defense systems are vulnerable due to 
foreign dependencies. Collectively, I believe the provisions 
likely would have a catastrophic impact on the Department's 
ability to meet its national security responsibilities. DOD 
weapons programs would have to be reexamined and restructured 
to eliminate foreign content, thereby significantly increasing 
costs and delaying fielding dates, degrading military 
capabilities, reducing interoperability, and inviting trade 
retaliation from allies. U.S. defense contractors would be 
required to expend hundreds of millions of dollars to replace 
non-U.S. machine tools. Burdensome and expensive reporting 
requirements would be placed on tens of thousands of U.S. 
contractors, subcontractors, and offerors to collect 
proprietary information, the primary purpose of which would be 
to establish a baseline to eliminate non-U.S. suppliers and 
machine tools. These provisions also would have the unintended 
consequence of discouraging U.S. suppliers from participating 
in the defense business.

          RESPONSE TO ORAL QUESTION OF SENATOR SHELBY 
                       FROM DENISE SWINK

Q.1. During the hearing the following question was asked: Could 
you now or for the record provide the Committee the Energy 
Department's understanding of its role and responsibilities in 
implementing the Defense Production Act and what criteria you 
use at the Department of Energy in determining that a threat to 
national defense has materialized warranting its intervention 
in crises like that which affected California?

A.1. A comprehensive discussion of the authorities contained in 
the Defense Production Act of 1950 (DPA) and of how they might 
be used in responding to energy emergency situations is 
contained in a 1982 Department of Justice memorandum of law for 
the President which was submitted to the Congress in compliance 
with the Energy Emergency Preparedness Act of 1982 (Public Law 
97-229). The memorandum's discussion of the DPA remains valid 
today. As the Justice Department's memorandum makes clear, the 
question of when the authorities conferred on the President by 
the DPA can be used in responding to energy crises is highly 
fact-dependent.
    Title I of the Defense Production Act contains two separate 
and distinct ``priority contracting'' provisions authorizing 
the President to require performance on a priority basis of 
contracts or orders in certain circumstances. The first 
authorizes action to ``promote the national defense.'' The 
second authorizes action to ``maximize domestic energy 
supplies'' as a general matter, not only when defense 
activities are directly implicated. The Secretary of Energy has 
been delegated authority by the President, through Executive 
Order Numbers 11790 and 12919, to exercise the Title I priority 
contracting authorities.
    The first provision, section 101(a) of Title 1, deals with 
priority contracting to ``promote the national defense.'' Under 
section 101(a), the Secretary may require performance on a 
priority basis of contracts for energy supplies that the 
Secretary deems ``necessary or appropriate to promote the 
national defense.'' This authority could be used, for example, 
to require the acceptance of and priority performance under 
contracts relating to production, delivery or refining of 
petroleum products or other forms of energy, including natural 
gas, to meet the energy needs of the Department of Defense and 
its contractors. It also could be used to facilitate 
transportation of energy supplies to meet national defense 
needs, for example, by requiring pipelines, marine terminals, 
and other facilities to perform energy transport contracts 
necessary to meet the priority needs of the Defense Department 
and its contractors.
    In determining what the national defense requires, it is 
clear the Secretary may consider the potential impact of energy 
shortages. In the Energy Security Act of 1980, Congress 
specifically designated energy as a ``strategic and critical 
material'' within the meaning of the Defense Production Act and 
also added language to the DPA 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 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.

    The second priority contracting provision in Title I of the 
Defense Production Act, section 101(c), is linked to 
facilitating projects that maximize domestic energy supplies. 
Section 101(c) authorizes the Department of Energy to require 
priority performance of contracts for goods and services for 
projects which would maximize domestic energy supplies, if the 
Secretaries of Energy and Commerce make certain findings, 
including that the good or service is scarce and critical and 
essential to maximizing domestic energy supplies. For example, 
if the President directed a drawdown of the Strategic Petroleum 
Reserve and if there was a significant breakdown in the 
Strategic Petroleum Reserve facilities, that could be the type 
of circumstance where the Department might have to rely upon 
section 101(c) to obtain equipment needed to bring the facility 
back online as promptly as possible. Absent the Defense 
Production Act, it might be impossible to persuade vendors to 
put our order at the head of the line for fear of third-party 
contract liability, even if they were otherwise willing to 
cooperate with the Department in the interests of the country.
    Section 101(c) also might be used alone, or in tandem with 
section 101(a), to assist in restoring critical energy 
infrastructures
following widespread terrorist attacks or a natural disaster, 
for example, to assist electric utilities, oil companies or 
other energy companies in obtaining equipment needed to repair 
damaged facilities, or to provide fuel oil or natural gas to 
electric utilities to ensure continued supply of electricity. 
Section 101(c) was used in the late 1970's and again in the 
1980's and early 1990's to facilitate petroleum production 
development of the Alaskan North Slope.
    In responding to the actual and threatened interruptions of 
natural gas supplies in California in January 2001, the 
Department relied on both section 101(a) and 101(c), as a 
complement to the emergency provisions of the Natural Gas 
Policy Act, in its orders to Pacific Gas and Electric Company 
and a number of natural gas suppliers to assure the continued 
supply of natural gas necessary for continued availability of 
electric service in the central and northern regions of 
California. Defense considerations were an important factor in 
the invocation of the DPA 101(a) authority. 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 interruptions 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. In short, it was 
clear that a host of serious problems likely would have 
resulted if significant portions of California were to lose 
their natural gas supply and that potential harm to the 
national defense was an important part of this myriad of 
concerns.
    In determining to rely on section 101(c), as well as 
101(a), the Department recognized that in the situation 
existing in California in mid-January 2001, 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 supply was 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 and maximizing domestic energy supplies.

          RESPONSE TO ORAL QUESTION OF SENATOR ALLARD 
                       FROM DENISE SWINK

Q.1. During the hearing the following question was asked: If a 
shortage of electricity suddenly develops for one of our major 
production manufacturers in California--and California has a 
number of them, and something were to happen to the lines, 
preventing the rebuilding of those lines or perhaps building an 
alternative line system, do you feel that you have the 
authority to override existing law, for example, the Endangered 
Species Act? Would the ESA or other laws prevent you from 
reconstructing the line? I think you could override existing 
law if it were a local community concern, but for something 
that would be a national law like the Endangered Species Act, 
could you override that to reconstruct lines if our national 
security were at stake?

A.1. The Defense Production Act does not contain any authority 
which might be used to override the requirements of laws such 
as the Endangered Species Act, which you noted possibly could 
impede rapid restoration of damaged critical infrastructures. 
The Endangered Species Act does include a process, in Section 7 
of the Act, for seeking an exemption from the Act's 
requirements regarding threatened or endangered species. 
However, the exemption process is lengthy, and it does not 
appear to be useful as a basis for an expedited override of the 
Act's requirements.

           PREPARED STATEMENT OF SENATOR JOSEPH I. LIEBERMAN

    Mr. Chairman, I want to compliment you and the Banking, Housing and 
Urban Affairs Committee for holding a hearing on this very important 
issue. I share your concerns about the loss to the U.S. economy of most 
of our high-end semiconductor chip manufacturing sector, the threat of 
the subsequent loss of the semiconductor research and design sectors, 
and the resulting serious national security implications. And I would 
like to add a few thoughts on the subject to your discussion.
    The composition of the global semiconductor industry has changed 
dramatically in recent years. East Asian countries are leveraging these 
changing market forces through their national trade and industrial 
policies to drive a migration of semiconductor manufacturing to that 
region, particularly China, through a large array of direct and 
indirect subsidies to their domestic semiconductor industry. If this 
accelerating shift in manufacturing overseas continues, the U.S. will 
lose the ability to reliably obtain high-end semiconductor integrated 
circuits from trusted sources, at a time when these advanced processing 
components are becoming a crucial defense technology advantage to the 
U.S. Experts in the military and intelligence sectors, have made clear 
that relying on semiconductor integrated circuits fabricated outside 
the United States (for example in China, Taiwan, and Singapore) is not 
an acceptable national security option. The economic impact in the 
United States of the loss of manufacturing, research, and design has 
equally serious implications.
    I would like to direct the Committee's attention to the White Paper 
that I am asking be included in the Senate Banking Committee Hearing 
Record, which outlines the fact that this off-shore migration of high-
end semiconductor chip manufacturing is a result of concerted foreign 
government action, through an effective combination of government trade 
and industrial policies which have taken advantage of opportunities 
resulting from market forces and changes in the semiconductor industry. 
This White Paper lists a number of possible actions the defense and 
intelligence communities should consider to prevent this serious loss 
of U.S. semiconductor manufacturing and design capability. I have also 
requested that the Department of Defense, the National Security Agency, 
and the National Reconnaissance Office submit a report and plan of 
action to respond to this impending national security threat. I have 
asked that this report provide an analysis of the semiconductor 
manufacturing issues that relate to defense and national security, as 
well as an analysis of the
potential solutions that are discussed in the White Paper. I hope that 
the report will detail the steps that will be taken to counteract this 
loss of critical components for U.S. defense needs, as well as a 
timetable for the implementation of such steps. I hope that the Banking 
Committee could consider similar steps. I note that the Armed Services 
Committee Report on the bill we passed yesterday requests similar 
information.
    I hope that we can act promptly to avoid a potential national 
security crisis in terms of reliable access to cutting edge technology 
necessary to the critical defense needs of our country. The loss goes 
beyond economics and security. What is at stake here is our ability to 
be preeminent in the world of ideas on which the semiconductor industry 
is based. A prompt, concerted effort by the defense and intelligence 
community in cooperation with industry can reverse this trend of off-
shore migration of manufacturing, research, and design that 
is now under way and that will
become essentially irreversible if no action is taken in the next few 
months.