[The slides referred to by Mr. Krueger are from a report prepared by the Federal Emergency Management Agency entitled Defense Production Act Programs: An Overview," and appear in the appendix.] I'd like to focus a little on the authorities, particularly the authorities for priorities and allocation, which are referred to as the title I authorities. The purpose of title I and section 101(A) is to permit the Department of Defense to use priorities when they contract. I'd like to clear up a little misunderstanding. It's said that the Department of Defense stands first in line, and that is not quite correct. If a company signs a contract to provide the Department of Defense with a weapons system, or signs a contract with the Department of Energy, and if that company finds out later on as it's performing on that contract that it cannot meet its contract due dates, then it must reorder its priorities within its production line in order to meet that due date. The Defense order does not get to the front of the line unless the company is unable to meet its original contractual obligations as to terms of delivery. [Slide.] I'm sorry. This is where title I is currently being used today, those activities-all major military programs, the atomic energy programs, military assistance to foreign nations, stockpiling, space programs, and some directly related activities. Mr. SHUMWAY. Could I interrupt just a moment? If I understood your last comment correctly, contracting for defense purposes doesn't really take any priority among the various activities a contractor might be pursuing. But if the contractor falls behind a production schedule or otherwise comes in default, then at that point is priority afforded? Then he has to relegate everything else to a secondary position? Mr. KRUEGER. Yes. Mr. SHUMWAY. But it's only in that situation? Otherwise, no priority under this act? Mr. KRUEGER. That's correct. He doesn't have to reorder his production schedule, but if he is falling behind, he must reorder to meet the original due dates. Mr. SHUMWAY. And whether he's falling behind or not is measured by the language in the contract? There will be a schedule or some contingency factors in the contract that he has to measure up to? Mr. KRUEGER. Yes. The other part of that is when, let's say, the Department of Defense signs a contract with Boeing, then Boeing must pass that priority rating down through its contracting chain. Mr. SHUMWAY. Through all the subcontractors? Mr. KRUEGER. Yes. Mr. SHUMWAY. So they're all subject to the same requirement, then? Mr. KRUEGER. Yes. As was mentioned earlier, and I'll have a slide that shows the impact of this, in the late 1970's, this system had fallen into misuse. A lot of the long lead times we heard about were directly attributable to not really pursuing the use of these priorities by defense contractors. The contractors, in fact, did not pass them on. There's also two types of defense priorities. There are DO—that is, defense orders-and DX orders, which are extraordinary orders, that take priority over all other orders. [Slide.] And those include the F-18. [Slide.] And the M-1 tank. So we're talking really about using these authorities for the current timely delivery of weapons systems. Mr. SHUMWAY. These two DX items are given priority by DPA. Is that correct? Otherwise, they would not have priority? Mr. KRUEGER. What this DX item says is that if a contractor has two different types of defense work in its plant, that it must give priority to the DX orders over and above what they would give to the other defense orders. Mr. SHUMWAY. But is that pursuant to the Defense Production Act? Mr. KRUEGER. Yes. Mr. SHUMWAY. Okay. [Slide.] Mr. KRUEGER. We talked about lead times. Because the Defense Production Act authorities were not being used, the lead time for aluminum forgings between 1976 and 1980 went from 20 weeks to 120 weeks. For landing gears, 52 to 120 weeks. And so forth as you read down the chart, down to titanium extrusions that went out to 108 weeks. As this started to occur, DOD was paying more money because it couldn't get prompt delivery of the weapons systems. And, in fact, the DOD contracting people did not push for timely delivery. Since then, DOD, working with the Department of Commerce, has gotten back in there and has reeducated defense contractors so that these lead times are significantly reduced, partly because of the status of the economy, but also because of stricter enforcement of the procurement regulations. Mr. SHUMWAY. Well, why in contracts that are critical to the defense effort couldn't there be some kind of a damage provision so that if the contractor does fall behind his schedule, he would be required to pay so much per day and thereby have incentive to meet the deadlines? Is that done in Defense Department contracts? Mr. KRUEGER. I do not know. Mr. MARVIN. That isn't in defense contracts. They don't operate under that procedure. Mr. SHUMWAY. Why? Mr. MARVIN. I don't really know that. That's a procurement matter. We have to check with Defense on that. It's not part of the priority system. There are several things that aren't included in the priority system. That is one. The money is another. [Slide.] Mr. KRUEGER. We talk about knowing priorities for something called allocation. That is Section 101(b) of the act. What that allocation says is that if, because Defense is using the priority system and the Defense take of materials from the economic system then starts causing economic hardship and indirectly affects the national security, the President may allocate the marketplace by taking material away from the Defense Department, if you will, overriding section 101(a) of the act, and allocating between classes of con sumers. I'd like to make a distinction here between allocation and rationing. Allocation does not affect individual consumers, but rationing does. Allocation just would make distinctions between broad classes of consumers. [Slide.] This has been used in the past. We've now allocated argon, which is a gas, and titanium to the civil market; and section 101(b) has been used to establish priorities during the transportation strikes in the early 1970's. Now let me give you an example of why you might want to use this in a transportation situation. Let's suppose that because of unavailability of transportation, things are difficult. You would want to make sure that, for instance, chlorine gas got delivered to municipal water systems, perhaps in preference to an industrial use or in preference to use for swimming pools. We want to insure the health and safety of the population, so you insure that chlorine continues to the water purification systems. That may sound trivial, but that is the type of thing you would allocate in the market. [Slide.] There's also section 101(c), which provides the authority in the energy area with regard to the maximization of domestic energy supplies. Section 101(a) provides authority for prioritization and allocation of energy for national defense needs. Mr. SHUMWAY. Pardon me, Mr. Krueger, one more question. Does that relate-that first statement there makes no mention at all of defense. How do we tie that kind of authorization into the defense preparedness purpose of this bill? Mr. KRUEGER. The act was changed. The character of the act was changed. Mr. SHUMWAY. With regard to energy mobilization? Mr. KRUEGER. Yes. In 1975 it was changed to maximize domestic energy supplies. Section 101(c) is not a defense program. Page 26 reflects how section 101(c) has been used in the past and is currently being used for hydroelectric facilities in the Pacific Northwest Chairman LAFALCE. To the extent you can, would you let us know what page of the booklet corresponds with what chart you are using? I think that is page 26. Mr. KRUEGER. Yes. it was used for delivery of oil field goods to the Alaskan north slope and the building of some demonstration coal liquefaction plants in Kentucky. [Slide.] We are now moving to title III, which is page 29 of the booklet. Title I says if you're dealing with a resource emergency-that is, you don't have enough-one way is to enforce conservation by saying only certain people can use it or certain people have priority access to material. Title III is a way to expand supply prior to the event of a shortage in an emergency. This encourages exploration, development, and mining of many things. Chairman LAFALCE. Has the President stated what he intends to use that $200 million for in fiscal year 1984 under title III? Mr. KRUEGER. No. I'll talk a little about that. In fiscal year 1980, it was FEMA who was trying to get the money for those four proj ects and not the Department of Defense. In 1982 there was 25 million dollars' worth of loan guarantee authority which was used to fund or guarantee a loan to some Arizona Indians to help bring forward production of domestic natural rubber. As a result of some horse trading at the end of the last session, there is now $50 million in the defense budget for fiscal year 1983, $200 million in the defense budget for fiscal year 1984, $300 million in fiscal year 1985, and $500 million in fiscal years 1986 and 1987. FEMA and DOD will be working together to select particular projects. I have a number of candidates which we will move to in a second here. [Slide.] These are the various types of incentives that the Government, can give under title III. [Slide.] These are some of the projects Chairman LAFALCE. Would those moneys the President has requested be able to be used in any of those ways or are they specifically targeted to be used, for example, exclusively for firm purchase contracts? Mr. KRUEGER. I'm not sure exactly how the appropriation language reads in the budget. I believe it reads in terms of purchases, in which case all of those things except the first two items would be covered. Chairman LAFALCE. Well, you will doublecheck and let us know. [In response to the request of Chairman LaFalce, the following information was submitted for the record by Mr. Krueger:] DEFENSE PRODUCTION ACT PURCHASES On page I-G33 of the Department of Defense-Military budget it reads "For purchases or commitments to purchase metals, minerals, or other materials by the Department of Defense pursuant to section 303 of the Defense Production Act of 1950, as amended (50 U.S.C. app. 2093); $200,000,000 to remain available for obligation until September 30, 1986. (Authorizing legislation to be proposed)." Mr. KRUEGER. Yes. These are some of the things that we could use this. [Slide.] Let me give you a page number on that. Maybe there isn't one. Page 33. These are areas where we have identified potential shortfalls. We will be working with the Department of Defense to see if title III is a cost-effective way of reducing those shortfalls or vulnerabilities. Chairman LAFALCE. Now you say that you have identified potential shortfalls. Who is we? FEMA? The administration? A conglomeration of different agencies and departments? Mr. KRUEGER. FEMA, working with other agencies, but with FEMA being in the leadership role. Chairman LAFALCE. Is there some document, some memorandum, some correspondence which indicates the extent of the shortfall, potential shortfall, in all of these areas that you have disseminated within the administration? Mr. KRUEGER. No. We have done preliminary studies on three or four of them, and a major study on cobalt. Chairman LAFALCE. Well, you have listed a number of items here. Mr. KRUEGER. Yes. Chairman LAFALCE. Foundries, machine tools, vacuum melting capacity, and so on. Clearly, there is some justification for it. |