[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                  AN EXAMINATION OF FUTURE COMMERCIAL
                        LAUNCH MARKETS AND FAA'S
                     LAUNCH INDEMNIFICATION PROGRAM

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON SPACE AND AERONAUTICS

              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                        WEDNESDAY, JUNE 6, 2012

                               __________

                           Serial No. 112-87

                               __________

 Printed for the use of the Committee on Science, Space, and Technology


       Available via the World Wide Web: http://science.house.gov



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              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

                    HON. RALPH M. HALL, Texas, Chair
F. JAMES SENSENBRENNER, JR.,         EDDIE BERNICE JOHNSON, Texas
    Wisconsin                        JERRY F. COSTELLO, Illinois
LAMAR S. SMITH, Texas                LYNN C. WOOLSEY, California
DANA ROHRABACHER, California         ZOE LOFGREN, California
ROSCOE G. BARTLETT, Maryland         BRAD MILLER, North Carolina
FRANK D. LUCAS, Oklahoma             DANIEL LIPINSKI, Illinois
JUDY BIGGERT, Illinois               DONNA F. EDWARDS, Maryland
W. TODD AKIN, Missouri               BEN R. LUJAN, New Mexico
RANDY NEUGEBAUER, Texas              PAUL D. TONKO, New York
MICHAEL T. McCAUL, Texas             JERRY McNERNEY, California
PAUL C. BROUN, Georgia               TERRI A. SEWELL, Alabama
SANDY ADAMS, Florida                 FREDERICA S. WILSON, Florida
BENJAMIN QUAYLE, Arizona             HANSEN CLARKE, Michigan
CHARLES J. ``CHUCK'' FLEISCHMANN,    SUZANNE BONAMICI, Oregon
    Tennessee                        VACANCY
E. SCOTT RIGELL, Virginia            VACANCY
STEVEN M. PALAZZO, Mississippi       VACANCY
MO BROOKS, Alabama
ANDY HARRIS, Maryland
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
LARRY BUCSHON, Indiana
DAN BENISHEK, Michigan
VACANCY
                                 ------                                

                 Subcommittee on Space and Aeronautics

               HON. STEVEN M. PALAZZO, Mississippi, Chair
F. JAMES SENSENBRENNER JR.,          JERRY F. COSTELLO, Illinois
    Wisconsin                        TERRI A. SEWELL, Alabama
LAMAR S. SMITH, Texas                DONNA F. EDWARDS, Maryland
DANA ROHRABACHER, California         FREDERICA S. WILSON, Florida
FRANK D. LUCAS, Oklahoma             HANSEN CLARKE, Michigan
W. TODD AKIN, Missouri               VACANCY
MICHAEL T. McCAUL, Texas             VACANCY
SANDY ADAMS, Florida                 EDDIE BERNICE JOHNSON, Texas
E. SCOTT RIGELL, Virginia
MO BROOKS, Alabama
RALPH M. HALL, Texas


                            C O N T E N T S

                        Wednesday, June 6, 2012

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Steven M. Palazzo, Chair, 
  Subcommittee on Space and Aeronautics, Committee on Science, 
  Space, and Technology, U.S. House of Representatives...........    10
    Written Statement............................................    11

Statement by Representative Jerry F. Costello, Ranking Minority 
  Member, Subcommittee on Space and Aeronautics, Committee on 
  Science, Space, and Technology, U.S. House of Representatives..    12
    Written Statement............................................    13

                               Witnesses:

Dr. George Nield, Associate Administrator for the Office of 
  Commercial Space Transportation, FAA
    Oral Statement...............................................    14
    Written Statement............................................    16

Ms. Alicia Cackley, Director of Financial Markets and Community 
  Investment Team, Government Accountability Office
    Oral Statement...............................................    22
    Written Statement............................................    24

Mr. Frank Slazer, Vice President, Space Systems, Aerospace 
  Industries Association
    Oral Statement...............................................    57
    Written Statement............................................    60

Ms. Alison Alfers, Vice President, Defense and Intellignece, 
  DigitalGlobe Inc.
    Oral Statement...............................................    69
    Written Statement............................................    71

Discussion                                                           74

  ...............................................................      

             Appendix 1: Answers to Post-Hearing Questions

Dr. George Nield, Associate Administrator for the Office of 
  Commercial Space Transportation, FAA...........................    90

Ms. Alicia Cackley, Director of Financial Markets and Community 
  Investment Team, Government Accountability Office..............    99

Mr. Frank Slazer, Vice President, Space Systems, Aerospace 
  Industries Association.........................................   104

Ms. Alison Alfers, Vice President, Defense and Intellignece, 
  DigitalGlobe Inc...............................................   107


                  AN EXAMINATION OF FUTURE COMMERCIAL
                        LAUNCH MARKETS AND FAA'S
                     LAUNCH INDEMNIFICATION PROGRAM

                              ----------                              


                        WEDNESDAY, JUNE 6, 2012

                  House of Representatives,
             Subcommittee on Space and Aeronautics,
               Committee on Science, Space, and Technology,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Steven 
Palazzo [Chairman of the Subcommittee] presiding.

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    Chairman Palazzo. The Subcommittee on Space and Aeronautics 
will come to order. Good morning, and welcome to today's 
hearing entitled, ``An Examination of Future Commercial Launch 
Markets and FAA's Launch Indemnification Program.'' In front of 
you are packets containing the written testimony, biographies, 
and truth in testimony disclosures for today's witness panel.
    I recognize myself for five minutes for an opening 
statement.
    I would like to begin by thanking our witnesses for taking 
time from their busy schedules to appear before us this morning 
and share their wisdom about the role of the Federal Aviation 
Administration's Launch Indemnification Program. I realize you 
and your staff devoted considerable time and effort preparing 
for this hearing, and I want you to know that your expertise 
will help inform this Committee and Congress during the coming 
months and years on this issue.
    The Federal Aviation Administration's Launch 
Indemnification Program was created in the 1980s to provide a 
structured, risk-sharing regime to address third-party 
liability to protect the uninvolved public and property. As 
part of its commercial licensing process, FAA requires launch 
companies to purchase third-party liability coverage from the 
insurance market at a level calculated by the agency to be the 
maximum probable loss.
    As a consequence of these calculations, FAA's decision sets 
the threshold at which federal coverage begins, up to a maximum 
limit of $2.7 billion. Since the program's inception, over 200 
commercial license launches have been flown without one federal 
dollar being paid out in damages.
    Today's hearing will examine whether federal launch 
indemnification is still required and if so, if the program is 
properly structured to serve existing and future markets. FAA's 
launch indemnification authority expires at the end of this 
calendar year, compelling Congress to consider the program's 
merits and the role it plays in the international launch 
marketplace and the necessity to pass legislation extending the 
program's authorization for future years.
    Notwithstanding the high reliability of today's generation 
of launch vehicles, many industry experts advocate extending 
the Indemnification Program in part because of the inherent 
riskiness of launching payloads to orbit. Catastrophic launch 
failures are deemed to be a low probability event but 
understandably one that could result in extremely high damages. 
They also urge competitive, asserting that were the program to 
lapse, launch customers would shift their business to other 
space-faring nations offering some form of government-backed 
indemnification coverage.
    Over the last 10 to 12 years the number of commercial 
launches in the United States has significantly declined to the 
point that last year there was not one licensed commercial 
launch, primarily as a result of pricing competition.
    However, with the advent of NASA's Commercial Cargo 
Program, commercial launches from U.S. spaceports are expected 
to dramatically rise. Through 2016, FAA estimates that SpaceX 
and Orbital will launch 20 cargo resupply missions to the 
International Space Station, with an equal or greater number of 
cargo flights to be completed between 2016, and 2020.
    Commercial crew flights to ISS are also a distinct 
possibility later this decade, adding two additional flights 
per year once service is established. The same forecast 
predicts around 230 additional commercially procured launches 
in the global marketplace by 2020, in support of 
telecommunications, satellite imagery, and science payloads. 
Domestic launch service providers will need to remain 
competitive to win a portion of this market.
    It also bears mentioning that reentry events are also 
covered under indemnification, and while they have not been a 
regular feature of commercial launches to date, SpaceX's Dragon 
capsule is changing the equation, having flown two successful 
reentries with at least a dozen expected through 2016, and 
perhaps many more in the years beyond.
    Commercial crew launches late this decade will also be a 
new form of commercial service, and while I anticipate those 
vehicles will have a very high reliability record, it bears 
asking the question, if launch vehicles carrying capsules with 
abort capabilities and associated failure detection systems 
changes the probability of launch aborts and whether this, in 
turn, will alter FAA's maximum probable loss calculation in any 
appreciable way.
    Before closing, I want to digress for one minute to respond 
to an assertion made last week about SpaceX's commercial 
orbital transportation services demonstration flight to the 
International Space Station. Speaking before an audience in New 
York, John Holdren, Director of the White House Office of 
Science and Technology Policy, said about the SpaceX flight: 
``This represents an entirely new model for the American space 
program, one initiated by this Administration and one that 
despite the handwringing of naysayers who said it would never 
work, now promises to change forever the nature of U.S. space 
exploration and human spaceflight.''
    Mr. Holdren's statement is, at best, misleading. The 
Commercial Orbital Transportation Services Program was proposed 
by the Bush Administration in 2005, and authorized by Congress. 
The COTS contract that funded SpaceX mission was awarded in 
2006. The Commercial Resupply Services contract won by SpaceX 
and Orbital was announced at the end of 2008. Let the record be 
clear.
    I look forward to today's discussion, and I wish to, again, 
thank our witnesses for their presence.
    [The prepared statement of Mr. Palazzo follows:]

       Prepared Statement of Subcommittee Chairman Steven Palazzo

    I would like to begin by thanking our witnesses for taking time 
from their busy schedules to appear before us this morning and sharing 
their wisdom about the role of the Federal Aviation Administration's 
launch imdemnification program. I realize you and your staff devoted 
considerable time and effort preparing for this hearing, and I want you 
to know that your expertise will help inform this Committee and 
Congress during the coming months and years on this issue.
    The Federal Aviation Administration's launch imdemnification 
program was created in the 1980s to provide a structured risk-sharing 
regime to address third-party liability to protect the uninvolved 
public and property. As part of its commercial licensing process, FAA 
requires launch companies to purchase third-party liability coverage 
from the insurance market at a level calculated by the agency to be the 
maximum probable loss. As a consequence of these calculations, FAA's 
decision sets the threshold at which federal coverage begins, up to a 
maximum limit of $2.7 billion. Since the program's inception, over 200 
commercial licensed launches have been flown without one federal dollar 
being paid out in damages.
    Today's hearing will examine whether federal launch indemnification 
is still required, and if so, if the program is properly structured to 
serve existing and future markets. FAA's launch indemnification 
authority expires at the end of this calendar year, compelling Congress 
to consider the program's merits and the role it plays in the 
international launch marketplace, and the necessity to pass legislation 
extending the program's authorization for future years.
    Notwithstanding the high reliability of today's generation of 
launch vehicles, many industry experts advocate extending the 
indemnification program, in part because of the inherent riskiness of 
launching payloads to orbit. Catastrophic launch failures are deemed to 
be a low-probability event, but understandably one that could result in 
extremely high damages. They also argue competitiveness, asserting that 
were the program to lapse, launch customers would shift their business 
to other space-faring nations offering some form of government-backed 
indemnification coverage.
    Over the last 10 to 12 years, the number of commercial launches in 
the United States has significantly declined to the point that last 
year there was not one licensed commercial launch, primarily as a 
result of pricing competition. However, with the advent of NASA's 
commercial cargo program, commercial launches from U.S. spaceports are 
expected to dramatically rise. Through 2016, FAA estimates that SpaceX 
and Orbital will launch 20 cargo flights to be completed between 2016 
and 2020. Commercial crew flights to ISS are also a distinct 
possibility later this decade, adding two additional flights per year 
once service is established. The same forecast predicts around 230 
additional commercially procured launches in the global marketplace by 
2020 in support of telecommunications, satellite imagery, and science 
payloads. Domestic launch services providers will need to remain 
competitive to win a portion of this market.
    It also bears mentioning that reentry events are also covered under 
indemnification, and while they have not been a regular feature of 
commercial launches to date, SpaceX's Dragon capsule is changing the 
equation, having flown two successful reentries, with at least a dozen 
expected through 2016, and perhaps many more in the years beyond.
    Commercial crew launches late this decade will also be a new form 
of commercial serivce, and while I anticipate those vehicles will have 
a very high reliability record, it bears asking the question if launch 
vehicles carrying capsules with abort capabilities and associated 
failure detection systems changes the probability of launch aborts, and 
whether this in turn will alter FAA's maximum probable loss calculation 
in any appreciable way.
    I look forward to today's discussion, and wish to again thank our 
witnesses for their presence.

    Chairman Palazzo. I now recognize Mr. Costello for an 
opening statement.
    Mr. Costello. Mr. Chairman, thank you, and Mr. Chairman, I 
thank you for calling this hearing today. In March we had a 
similar hearing to examine the FAA's Office of Commercial Space 
Transportation Fiscal Year 2013 budget request. Also the 
Aviation Subcommittee of Transportation and Infrastructure, we 
have held a number of hearings concerning the future of NASA's 
human spaceflight programs, which I have chaired and Mr. Petri 
has chaired as well. I agree that it is important to continue 
to continue to focus on this issue in our Subcommittee, given 
the fact that the public needs a clear understanding of the 
risk involved with commercial space transportation, and it will 
need to be convinced that those risks are being effectively 
managed.
    Mr. Chairman, I have additional comments, and I will place 
my statement in the record so that we can go forward and hear 
from the witnesses, so I look forward to hearing their 
testimony.
    I thank you.
    [The prepared statement of Mr. Costello follows:]

         Prepared Statement of Ranking Member Jerry F. Costello

    Good morning and thank you, Mr. Chairman, for calling this 
important hearing on the FAA's commercial space launch indemnification 
program.
    In March, we had a similiar hearing to examine the FAA's Office of 
Commercial Space Transportation Fiscal Year 2013 budget request. Also, 
in 2011, I chaired a hearing in the Aviation Subcommittee of the House 
Transportation and Infrastructure Committee which discussed the future 
of NASA's human spaceflight programs. I agree it is important to 
continue to focus on this issue in our Subcommittee, given the fact 
that the public needs a clear understanding of the risks involved with 
commercial space transportation, and it will need to be convinced those 
risks are being effectively managed.
    Therefore, I want to thank the Chairman for his leadership on this 
issue and I also want to welcome our witnesses. I look forward to your 
testimony.
    In 1988, Congress amended the Commercial Space Launch Act to 
establish a risk-based regime to address third-party losses associated 
with potential U.S. commercial space launch or reentry failures.
    Since then, the U.S. commerical space launch industry has grown and 
changed.
    Just last week, a private U.S. company, Space Exploration 
Technologies--SpaceX--successfully demonstrated the potential for 
commercial cargo resupply of the International Space Station.
    Another company, Orbital Sciences, plans to demonstrate the same 
transportation capability later this year. And in the coming years, 
suborbital spacecraft are anticipated to begin launching space 
tourists, followed potentially by commercial human space flights to 
low-Earth orbit.
    Given that the sunset provision is set to expire at the end of the 
calendar year, Congress must decide whether or not to extend the 
current regime and, if so, whether changes are needed to it.
    The provisions we are examining today were put into place more than 
two decades ago, and I think it is appropriate for us to review the 
impacts.
    To that end, I hope to hear from the witnesses whether the intended 
effects of the provisions are being realized; if the existing 
indemnificaiton regime is still appropriate given the maturity of the 
existing industry; the extent to which government indemnifications are 
needed to achieve optimal transparency and safety while not increasing 
taxpayer exposure to unnecessary risk.

    Chairman Palazzo. Thank you, Mr. Costello, and if there are 
Members who wish to submit additional opening statements, your 
statements will be added to the record at this point.
    At this time I would like to introduce our panel of 
witnesses and then we will proceed to hear from each of them in 
order. Our first witness is Dr. George Nield, Associate 
Administrator for Commercial Space Transportation at the 
Federal Aviation Administration. He has over 30 years of 
aerospace experience with the Air Force, NASA, and in private 
industry. Dr. Nield came to FAA from the Orbital Sciences 
Corporation, where he served as senior scientist for the 
Advanced Programs Group.
    Our second witness is Ms. Alicia Cackley, Director of 
Financial Markets and Community Investment Team with the 
Government Accountability Office. Ms. Cackley has been with GAO 
since 1990, and is a member of their Senior Executive Service 
responsible for directing program evaluations and policy 
analysis studies related to consumer protection, insurance, 
housing, and finance issues.
    Our third witness is Mr. Frank Slazer, Vice President of 
Space Systems at the Aerospace Industries Association. Prior to 
taking his current position, Mr. Slazer worked in the aerospace 
industry for over 30 years with leading launch providers, 
including McDonnell Douglas, Boeing, United Launch Alliance, 
and Northrop Grumman.
    And our final witness is Ms. Alison Alfers, Vice President 
of Defense and Intelligence, DigitalGlobe. Ms. Alfers 
previously served for five years as a General Counsel, and 
prior to joint DigitalGlobe she served in executive positions 
with other private-sector firms, including as Vice President 
and General Counsel for Space Imaging Incorporated.
    Welcome to you. As our witnesses should know, spoken 
testimony is limited to five minutes each. After all witnesses 
have spoken, Members of the Committee will have five minutes 
each to ask questions.
    I now recognize our first witness, Dr. George Nield, to 
present his testimony.

                 STATEMENT OF DR. GEORGE NIELD,

             ASSOCIATE ADMINISTRATOR FOR THE OFFICE

            OF COMMERCIAL SPACE TRANSPORTATION, FAA

    Mr. Nield. Chairman Palazzo, Ranking Member Costello, and 
distinguished Members of the Subcommittee, good morning, and 
thank you for inviting me to speak with you today.
    I would like to begin by offering the Administration's 
continued support for extending the Commercial Space Launch Act 
indemnification provision for commercial launch and reentry 
operators for five years beyond its current statutory 
expiration date of December 31, 2012. This support is in line 
with the Commercial Space Transportation Advisory Committee 
finding that extension of indemnification past December of this 
year is critical to the viability of the commercial launch 
industry in the U.S.
    The Federal Aviation Administration's Office of Commercial 
Space Transportation licenses and permits commercial launches 
and reentries. As part of its licensing and permitting mission, 
the FAA administers financial responsibility and risk-sharing 
requirements for commercial launch and reentry operators.
    Congress established the current system in 1988. It has 
maintained the regime's functionality and effectiveness over 
the past 24 years by enacting five extensions of the provision 
providing for conditional payment of excess claims subject to 
Congressional appropriation.
    The success of the existing regime is demonstrated by the 
fact that during this period there have been 207 licensed 
launches, all completed without any fatalities, serious 
injuries, or significant property damage to the general public 
and without the need for any liability payments by the 
government or the taxpayer.
    The current liability and risk-sharing regime consists of 
three tiers. Tier one includes the most probable risks which 
are taken on by the operator. The size of the first tier of 
risk is calculated by the FAA as the maximum probable loss, or 
MPL, that a launch or reentry could cause. The FAA's 
regulations define MPL to mean the greatest dollar amount of 
loss for bodily injury or property damage that is reasonably 
expected to result from a licensed or a permitted activity.
    Under the Commercial Space Launch Act and FAA regulations, 
a launch operator must obtain insurance or otherwise 
demonstrate financial responsibility to cover the MPL. An 
operator's responsibility for the risk of maximum probable loss 
is limited by statute to no more than $500 million for a 
potential third-party liability.
    The second tier of risk consists of liability for losses 
exceeding the amount of insurance procured. The statute 
provides that Congress may appropriate up to $1.5 billion 
adjusted for inflation to cover successful third-party claims 
against participants in a launch or reentry. The statute 
specifically states that claims against space flight 
participants are excluded from this authority.
    The third and final tier of financial risk consists of 
liabilities for third-party claims above the $1.5 billion. 
These risks are the least likely and, again, are assumed by the 
launch or reentry operator.
    I believe that the current liability and risk-sharing 
regime is well suited to cover emerging activities such as 
commercial cargo and commercial crew, and both orbital and 
suborbital flights of reusable launch vehicles. Although the 
MPL methodology was specifically developed to accommodate 
unmanned, expendable launch vehicles, the methodology is still 
appropriate for suborbital or orbital flights involving human 
crew or space flight participants because the MPL is not an 
estimate of risk to crew or space flight participants, but 
rather to third parties, including members of the public and 
non-flying United States Government employees. Space flight 
participants and crew are not third parties.
    The benefits of indemnification are many, both to industry 
and the United States government. As Congress itself recognized 
by statute, the development of the commercial space 
transportation industry enables the United States to retain its 
competitive position internationally, contributing to the 
national interest and economic well-being of the United States.
    Extension of the indemnification provision would continue 
to enable industry to attract and maintain a customer base in 
the face of international competitors who offer more certain 
indemnification.
    With the help and leadership of Congress, commercial space 
transportation will continue without the risk of significant 
financial setback, and the private space industry in the United 
States will continue to grow with new jobs, new technologies, 
and new innovations.
    Again, I am grateful for this opportunity to speak before 
you today, and I am happy to answer any questions you may have.
    [The prepared statement of Mr. Nield follows:]

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    Chairman Palazzo. I now recognize Ms. Alicia Cackley for 
five minutes to present her testimony.

                STATEMENT OF MS. ALICIA CACKLEY,

               DIRECTOR OF FINANCIAL MARKETS AND

                   COMMUNITY INVESTMENT TEAM,

                GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Cackley. Chairman Palazzo, Ranking Member Costello, and 
Members of the Subcommittee, I am pleased to be here today to 
talk about the Federal Aviation Administration's Launch 
Indemnification Program.
    As you are aware, a catastrophic commercial launch accident 
could have a significant impact on the uninvolved public or 
third parties in the form of personal injuries or property 
damage. In anticipation of such an event, a launch company must 
purchase a fixed amount of insurance for each launch per 
calculation by the FAA. According to the Commercial Space 
Launch Act amendments of 1988, or CSLA, the Federal Government 
is then potentially liable for claims above that amount, up to 
an additional $2.7 billion as adjusted for inflation and 
subject to Congressional appropriations.
    In my statement today, I will discuss first, the comparison 
of the United States Government's indemnification policy to 
policies of other countries; second, the Federal Government's 
potential costs for indemnification; third, the ability and 
willingness of the insurance market to provide additional 
coverage; and finally, the effects of ending indemnification on 
the competitiveness of U.S. launch companies.
    My statement is based on ongoing work that we are 
conducting at the request of this committee and the Senate 
Committee on Commerce, Science, and Transportation. We expect 
to issue a final report at a later date with recommendations as 
appropriate.
    Turning to the comparison of the U.S. government's 
indemnification policy with those of other countries, our work 
to date indicates that the United States provides less 
indemnification for third-party losses than key competitors 
such as China, France, and Russia because those countries put 
no upper limit on the amount of their coverage, while in the 
U.S., coverage stops at about $2.7 billion per launch.
    In all these countries, however, including the U.S., these 
commitments to pay have never been tested because there has 
never been a third-party claim that exceeded the launch 
company's insurance and thus reach the level of government 
indemnification.
    Looking at the potential cost to the Federal Government of 
indemnification for third-party losses it is currently unclear. 
Estimating probable losses from a rare catastrophic event is 
difficult, and insurance industry officials and risk modeling 
experts told us that FAA's method of calculating maximum 
probable loss is outdated, has not been reviewed by outside 
experts, and may not be sound. An inaccurate calculation that 
understates the amount of insurance a launch provider must 
obtain would increase the likelihood of cost to the Federal 
Government, whereas a calculation that overstates the amount of 
insurance would decrease the likelihood of federal costs.
    In addition, the planned growth in commercial launches, 
including manned launches, could increase the number of 
launches eligible for CSLA coverage and thus, potential costs 
for the Federal Government.
    FAA officials said that their method for calculating 
maximum probable loss was reasonable and conservative, but they 
agreed that a review could be beneficial and that involvement 
of outside experts might be helpful for improving their 
methodology.
    Overall, they said use of more sophisticated methodologies 
would have to be balanced with the additional cost to both FAA 
and the launch companies that would result from requiring and 
analyzing additional data.
    With respect to the ability and willingness of the 
insurance market to provide additional third-party liability 
coverage, industry representatives we contacted told us the 
market is generally willing and able to provide up to $500 
million of coverage per launch. Because the amount of insurance 
FAA requires launch providers to obtain averages about $99 
million per launch and coverage available through CSLA is about 
$2.7 billion above a launch's maximum probable loss, insurers 
could provide some of the coverage currently available through 
CSLA, mainly the difference between the maximum probable loss 
and the $500 million the industry indicated was the most they 
might provide.
    However, industry representatives cautioned that the amount 
and price of insurance that they might provide could change 
quickly if a large loss were to occur.
    Finally, ending indemnification could potentially decrease 
U.S. competitiveness. This depends on many factors, so the 
actual effects are currently unknown. Launch companies and 
customers GAO contacted believed that ending federal 
indemnification could lead to higher costs for U.S. launch 
companies. If those costs are passed onto customers, U.S. 
launch companies could be even more expensive, and therefore, 
less competitive than their foreign counterparts.
    However, it is unclear exactly how much the cost of third-
party liability insurance coverage might increase in the 
absence of federal coverage, and while launch customers said 
that price and vehicle reliability were key factors in their 
choice of a launch company, it is also not clear whether the 
increase in insurance costs alone would be sufficient reason 
for a launch customer to choose a foreign launch company over a 
U.S. company.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to respond to any questions you or Members of the 
Subcommittee may have.
    [The prepared statement of Ms. Cackley follows:]

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    Chairman Palazzo. I now recognize Mr. Frank Slazer for five 
minutes to present his testimony.

                 STATEMENT OF MR. FRANK SLAZER,

                 VICE PRESIDENT, SPACE SYSTEMS,

                AEROSPACE INDUSTRIES ASSOCIATION

    Mr. Slazer. Thank you, Mr. Chairman. I am here on behalf of 
the Aerospace Industries Association, an organization of 
approximately 350 companies. The 350 companies represent about 
90 percent of the U.S. aerospace business in this country, 
creating about 3.5 million jobs nationwide. I appreciate this 
opportunity to testify in support of the FAA's Launch 
Indemnification Program.
    AIA wishes to stress to the Committee the importance of 
reauthorizing the Commercial Space Launch Act first mitigation 
provisions, substantially extending or eliminating the Sunset 
Provisions of the act, and removing the upper indemnification 
cap for space launch activities.
    U.S. space launch capabilities are essential to our 
Nation's security and its ability to lead in space exploration. 
To sustain this capability a healthy launch industrial base is 
needed and to mitigate cyclical impacts. This would ideally 
include military, civil, government, as well as commercial 
businesses as customers.
    As Chart A shows, the U.S. once had a very robust 
commercial launch industry position. This is a chart that shows 
the GEO-synchronous launches that were previously made by the 
United States from 1990, to 2001. That bluish part of the bar 
towards the bottom represents the number of U.S. launches. 
There were comparable numbers of non-GEO-stationary launches 
for systems such as Iridium and Globalstar at that time.
    Unfortunately, as shown in Chart B, our launch industrial 
base has lost commercial market share and is struggling to 
adapt to declining demand by government, especially since the 
end of the Space Shuttle Program. International launch services 
providers have been aggressively winning commercial 
opportunities, often with the help of their governments and 
through financial assistance or low-cost financing.
    The sad reality is that U.S. launch services now have a 
negligible share of the world commercial market, and as you 
noted, Mr. Chairman, in 2011, there were no commercial orbital 
launches from a U.S. spaceport.
    Despite the dismal record trend for American launchers, new 
investments by U.S. industry, including several AIA member 
companies, are enabling the emergence of new domestic space 
launch systems. The willingness of our private sector to commit 
resources to develop new U.S. launch capabilities is a uniquely 
American development that should be supported. No other nation 
in the world has a similar effort underway. These new systems 
have the potential to increase the U.S. share of the commercial 
launch market, open up new markets, and create jobs.
    Chart number C shows a conservative estimate, again, by the 
FAA, through their Commercial Space Transportation Advisory 
Committee, of the potential future market, and this is not blue 
sky, wild-eyed opportunities. These are fairly baseline 
capabilities already in place, not really even counting the 
potential new markets enabled by these new systems.
    Companies, our companies are making their investment 
decisions within the current launch policy business framework, 
and, again, strong international competition. Mr. Chairman, the 
U.S. space launch industry is not seeking subsidies, but it 
does require a stable and predictable business environment, one 
that will be enabled by maintaining the existing launch risk 
mitigation framework. It is worth noting that foreign launch 
competitors already benefit from more general indemnification 
rules and other advantages.
    FAA's Launch Indemnification Program has been in place for 
over 20 years, providing critical risk management and 
supporting the emergence of this new domestic commercial launch 
market, benefiting our broader space industry, technology 
leadership, and ultimately our Nation's security without 
costing U.S. taxpayers a dime.
    Our industry needs the more level playing field provided by 
the FAA's program. For the U.S. to take a purely laissez-faire 
approach to commercial launch business when competing against 
Russian, European, and other nations, who operate under more 
favorable risk-management frameworks, would amount to 
unilateral disarmament, and we are already at a pricing 
disadvantage. Even if U.S. firms could insure for the initial 
risk commercially, it would add costs that their competitors do 
not have to bear, making U.S. commercial launch sales even more 
difficult. Given that our current risk approach has been in 
place for so long, it is not clear if sufficient additional 
underwriting capability is available in the space insurance 
market.
    In the end, adding new uncertainty will harm U.S. industry 
without saving the government any money. In fact, the CBO has 
previously estimated the FAA's indemnification authority has 
had no budgetary impact on the government. A rationale for 
continued indemnification support is not narrowly focused on 
its benefits just for industry.
    It also provides benefits for the Federal Government and 
America. In recent years the U.S. government launch costs have 
increased substantially, partly due to the shift of commercial 
satellite launches to foreign systems, adversely impacting 
domestic space industrial base. The success of new-launch 
ventures will help the Federal Government since they have the 
potential to reverse this trend. Without a renewal of the 
regime, our Nation's space industrial base may forego business 
that could help spread the fixed cost of space launch 
capabilities between government and commercial customers. 
Again, savings that could be passed onto taxpayers.
    CSLA enables U.S. launch providers like their foreign 
competitors to operate without betting the company with every 
single launch. This launch indemnification backstop has been 
renewed four times since 1988, creating a reasonable 
expectation it will be renewed again in the future, without 
entirely eliminating the business uncertainty. Given the long 
lead times for space launch, the development and the need for 
stable policies to promote investment and maximize our 
industry's competitiveness, Congress should eliminate the 
Sunset Provisions of the act or at least extend them for a much 
longer time than prior renewals.
    To be consistent with our international competitors, AIA 
recommends Congress remove the indemnification caps beyond tier 
one for space launch activities.
    In conclusion, AIA sees continuing FAA's Launch 
Indemnification as a very low-risk way to support our Nation's 
vital space launch industrial base with substantial upside 
potential to enable new markets, create jobs, and ensure U.S. 
space leadership. American industry is investing capital and 
innovative ideas to create this new future. It would be a shame 
if these efforts were to flounder due to a lack of even a 
partially leveled playing field with foreign competitors.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Slazer follows:]

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    Chairman Palazzo. I now recognize our final witness, Ms. 
Alison Alfers, for five minutes to present her testimony.

                STATEMENT OF MS. ALISON ALFERS,

           VICE PRESIDENT, DEFENSE AND INTELLIGENCE,

                       DIGITALGLOBE INC.

    Ms. Alfers. Thank you, Chairman. Chairman Palazzo and 
Ranking Member Costello and Members of the Subcommittee, thank 
you for this opportunity to testify before the Committee on the 
issue of extension of the Federal Aviation Administration's 
Launch Indemnification Program. As noted in the introductory 
remarks, I currently serve as Vice President of the Defense and 
Intelligence Business Unit for DigitalGlobe Inc.
    DigitalGlobe is a leading global provider of high-
resolution satellite imagery and related products and services. 
We operate a constellation of high-resolution, electro-optical 
imaging satellites, and our business is highly dependent on the 
availability of reliable and cost-effective launch services. 
Our detailed written statement is on file with the Committee, 
and so I would like to use the time provided here to highlight 
certain points that as a consumer of launch services we view as 
significant.
    First, the reduced demand for launch services by the U.S. 
government and the corresponding increase in launch prices and 
reduction in launch vehicle options has, in our view, resulted 
in the U.S. launch services industry losing the global 
leadership position it once had. We see this as detrimental to 
U.S. national security interests and as certainly detrimental 
to the health of the broader U.S. industrial base.
    With regard to our specific business, the increase in 
launch costs has necessarily required us to seriously consider 
foreign launch providers. For our WorldView-3 launch scheduled 
for launch in mid-2014, we went so far as to get necessary 
export approvals in place to allow us to select the foreign 
provider that bid for the launch. The single driving factor for 
considering a foreign launch at all was cost. In our 
experience, foreign launches are now on average 40 percent less 
than the current prices for U.S. launches.
    We ultimately selected a U.S. provider for WorldView-3 
because we did not feel that foreign provider's success record 
was well-enough developed, but this is rapidly changing with 
each successful launch by a foreign provider.
    With regard to the specific issue before the Committee, the 
extension of the Launch Indemnification Program, as a consumer 
of commercial launch services, we believe extension of the 
program is critical to encourage U.S. providers, current 
providers to stay in the market and to incentivize new 
providers to enter the market. In our view, the Indemnification 
Program provides a degree of certainty around risk management 
for launch providers. That is essential if U.S. launch 
capabilities are to remain or some may say return to a position 
of global leadership.
    Without the indemnification program launch, providers are 
operating in an environment of totally uncapped risk, which we 
believe will absolutely be reflected in prices that are passed 
onto launch consumers like DigitalGlobe. The U.S. launch 
services industry is already, in our view, not competitive with 
foreign providers on price, and it is rapidly losing its edge 
on technological superiority.
    As noted in our written statement, we believe we are at a 
tipping point, in that any changes in the Indemnification 
Program that may lead to higher launch prices will result in 
foreign providers being the first choice for consumers for 
DigitalGlobe because the cost differential would be so 
significant and the technological differences will be so 
minimal. We see this as a very negative development, both from 
a national security standpoint and from our position as a U.S. 
company that consumes commercial launch services. We would much 
prefer to use a U.S. provider, but it is rapidly becoming an 
impractical option due to price and related considerations.
    That said, we are very encouraged by increasing private 
sector investments in U.S. launch capabilities. We believe that 
the private investment has potential to reverse the current 
downward trend and to once again return the U.S. to 
unquestioned superiority in launch capabilities.
    To succeed, however, will require that these companies have 
the ability to manage risks with some degree of certainty, and 
that is the very important role that is played by the 
Indemnification Program. It provides a vital degree of 
certainty that allows providers to manage risks, and that is 
reflected in prices.
    In the time remaining, I would like to also encourage the 
Subcommittee and Congress to consider elimination of the 
current three-year Sunset Provision or, at a minimum, to 
consider significant extension. We typically contract for 
launches three to four years ahead of the scheduled launch, and 
we believe that continued uncertainty around the status of the 
Indemnification Program will eventually translate into higher 
costs as providers hedge against potential shifts in the 
Indemnification Program.
    So, in summary, as a consumer of commercial launch 
services, we encourage Congress to, at a minimum, extend the 
current program to continue to incentivize investment, private 
investment in launch services industry and to consider 
significant extension or, ideally, elimination of the current 
Sunset Provision.
    Thank you, and I would be glad to answer any questions.
    [The prepared statement of Ms. Alfers follows:]

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    Chairman Palazzo. I thank the panel for their testimony. 
Reminding Members that Committee rules limit questioning to 
five minutes.
    The Chair will at this point open the round of questions. 
The Chair recognizes himself for five minutes.
    Dr. Nield, in your written testimony, you state that 
foreign launch providers are made competitive through 
government subsidies and preferential foreign national laws. 
How will extending the U.S. liability risk-sharing regime make 
domestic launch providers more competitive or level the playing 
field in the face of overt foreign subsidies to their launch 
providers?
    Mr. Nield. Mr. Chairman, as was mentioned by several of the 
other witnesses, there are a number of factors that go into the 
selection of a launch provider for a particular mission. One 
important factor is cost. The indemnification regime provides a 
piece of the cost because the provider must purchase insurance 
or otherwise look at the risks that it is facing financially in 
terms of its investments and its willingness to be in the 
market.
    We believe that the indemnification regime at least levels 
the playing field with foreign providers. As the GAO has 
mentioned, in general, the foreign providers have more 
favorable indemnification systems under most circumstances.
    Chairman Palazzo. You recommended a five-year extension of 
the U.S. liability risk-sharing regime. How did you calculate 
that timeline and, for example, do you think the U.S. launch 
industry will sufficiently mature in five years to eliminate or 
phase out the regime, and is there a rationale for extending it 
indefinitely?
    Mr. Nield. That is an excellent question. I think there are 
two factors in play here. One perspective that we have heard is 
industry very much likes certainty in terms of its planning for 
investment, future operations, and hiring. So, from the 
industry's perspective, it would be ideal to know in advance 
what the indemnification regime is. This seems to support an 
argument for making the regime permanent.
    On the other hand, we certainly understand Congress's 
interest and desire to be able to periodically examine the 
program and see what works and whether any particular changes 
are necessary. As we mentioned, Congress has approved an 
extension for just a few years at a time a number of times in 
the past.
    As a result, the Administration believes that extending 
indemnification for five years would be a reasonable 
compromise. This would allow at least some near-term certainty 
for industry in terms of its planning and allow Congress to 
take another look when things have matured. After five years, 
we should see a lot more activity in terms of the sub-orbital 
market that is starting to develop. That may offer the Congress 
an opportunity to see if any additional changes are required.
    Chairman Palazzo. Ms. Cackley, under the current risk-
sharing regime, FAA sets a maximum probable loss value which 
also serves as a threshold for the second tier, which is the 
liability assumed by the Federal Government. The first tier of 
coverage is capped and fixed at $500 million, but the second 
tier the government's assumed risk is adjusted for inflation, 
which began at $1.5 billion in 1989, and today is almost double 
that number.
    Is it prudent that the government should continue to assume 
greater and greater exposure under this shared-risk regime 
while the first tier private insurance remains fixed, and 
shouldn't the first tier cap be adjusted for inflation as well?
    Ms. Cackley. We looked at what industry could provide in 
terms of first-tier coverage and what we have been told through 
talking to insurance brokers and insurance providers is that 
that first, where the first tier cap is right now is the 
maximum of what industry is capable of providing, is willing to 
provide. So using an inflation adjustment would take the first-
tier cap beyond what we have been told industry is willing to 
go. Now, that is where things stand right now. The question is 
in the future, how quickly industry's capacity might increase 
enough to allow that to increase as well. We didn't look at 
that directly, and so I don't have an estimate of how soon that 
cap would be able to be increased.
    Chairman Palazzo. Thank you. I now recognize Mr. Costello.
    Mr. Costello. Thank you, Mr. Chairman.
    Dr. Nield and the other witnesses, I suspect I know the 
answer to this question, but I want to get it on the record. 
Given that there are other high-risk, hazardous industries such 
as the nuclear power industry, that do not have similar shared 
risks, why is it necessary for for the Federal Government to 
continue this structure for the commercial space launch 
industry?
    Dr. Nield. As you know, Congress originally structured this 
system based upon the nuclear power system.
    Mr. Costello. Right.
    Dr. Nield. There were a number of examples that could be 
drawn on to form this system. It appears that the current 
system represents a reasonable sharing of risks between all key 
stakeholders with the important point being that the most 
probable losses are covered by the operators themselves, and 
the less probable ones could potentially be covered by 
Congressional appropriation. It seems to be a reasonable 
approach.
    Even though there have been space launches for 50 years, 
the industry itself, of course, is relatively new. The 
commercial sector is really only now starting to come into its 
own in terms of its future potential. As we look at the 
insurance capacity that is available and the risks of potential 
catastrophic accidents going forward, we would like to see the 
industry grow and insurance capacity increase and the vehicles 
continue to be made increasingly safe. But right now, we think 
this is a reasonable approach to sharing risk.
    Mr. Costello. Ms. Cackley, would you or other witnesses, 
would you like to comment?
    Ms. Cackley. I think I agree with the statement of Mr. 
Nield that at this point in time the industry is not at a place 
where they are capable of taking on what is a small probability 
but a very high-value possibility and which could basically 
wipe out a company or even several companies if more than one 
company is insuring a given launch where a catastrophic 
accident were to happen.
    Mr. Slazer. I guess I would like to point out two 
differences in this industry. First is that it is something the 
United States needs for national security. Our military is 
completely dependent upon space capabilities to do the superb 
job they do of operating in modern combat, and we cannot allow 
that capability to be dependent on foreign suppliers.
    So as long as we are going to need a launch business, how 
can we spread some of that cost out, and then how big is the 
base we can spread that cost out amongst? In the nuclear power 
industry, nuclear power provides about one-fifth of American 
generating capability. That is about 60 million customers can 
help share the cost of insuring those plants. In this case you 
are talking, even in the wildest hope of U.S. recapturing 
market share the next five or seven years, maybe 40 launches a 
year, 50 launches a year. Tremendously increased from our seven 
or eight now, but nothing near to the point where each launch 
could only take a very small part of the risk if you were to 
eliminate the risk mitigation capability that is there right 
now.
    Mr. Costello. Thank you.
    Ms. Alfers. We would echo that. I would describe the launch 
industry from the standpoint of a consumer as reemerging. It 
has been on years of decline, and it is now trying to recover, 
and the success, the factor that will determine whether or not 
it does succeed in recovering will be companies like SpaceX and 
smaller companies that are willing to invest in this industry.
    I don't think some of the smaller companies right now are 
prepared even just on the strength of balance sheet basis to 
self-insure, to take on these risks right now to self-insure, 
and any incremental costs for even the larger providers I can 
tell you as a consumer will drive us, not out of desire but out 
of necessity, to foreign providers because when we are forced 
in a position to pay, you know, 40 percent premium or more on 
launches, we either have to reflect that in our pricing to our 
customers, and our largest customer is the U.S. government, or 
we have to absorb that and take it out of our margins. And at 
some point that just has such a negative effect on our bottom 
line that we have no choice but to go to foreign providers.
    So the Indemnification Program I really see as a backstop 
that will help turn this industry around and return it to a 
thriving industry, we hope, because we would very much prefer 
to be launching on U.S. providers.
    Mr. Costello. Thank you. Dr. Nield, under the existing 
regime, would the FAA calculate the risk of potential third-
party losses for unmanned versus manned or orbital versus 
suborbital flights differently? And if not, should they?
    Dr. Nield. We would use the same methodology. We think it 
is appropriate because, again, the purpose of the 
indemnification regime is to provide for the payments of third-
party claims. Indemnification does not apply to either the 
flight crew or the spaceflight participants. What is on the 
rocket basically does not matter. What matters is the potential 
damage is done to the members of the public or to property on 
the ground.
    Theoretically, the numbers could come out differently, 
depending on how reliable the system is, where the launch takes 
place, and so forth. The general methodology, however, would be 
the same.
    Mr. Costello. Ms. Cackley, did the GAO look at how the FAA 
approached calculating the MPL as compared to other methods of 
assessing risk, and if so, what did you find?
    Ms. Cackley. We did look at the maximum probable loss 
calculation that FAA does, and we found that it is quite 
different from the way the industry in general does that 
calculation. In some instances it is almost in a reverse order 
where FAA starts with calculating the loss of casualties and 
then calculates property damages as just 50 percent of what the 
total casualty loss is.
    The industry, on the other hand, told us that they start 
from doing a much more sophisticated model-based simulation of 
property damage and then do their calculation of casualties 
based on the area that their estimates calculate would be 
covered by such an accident.
    Mr. Costello. And you have recommended that the FAA change 
their methodology?
    Ms. Cackley. We are definitely looking at the methodology 
and have some questions and suggestions for them about ways to 
improve it.
    Mr. Costello. Very good. Thank you, Mr. Chairman.
    Chairman Palazzo. I now recognize the gentleman from 
California, Mr. Rohrabacher.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. I 
remember when we were trying to get this through the very first 
time, and it was, it almost did not pass, and if, in fact, I 
was told to pull the bill right before it went for a vote 
because we didn't have the votes. And let me just note it was a 
bipartisan effort that saved it, and I remember quite well the 
Democrats who came over and helped us on this very much.
    What if this wouldn't have passed? Would there be a SpaceX 
and Orbital and some of these private companies today? What if 
we would not have passed the Commercial Space Act of 2004?
    Mr. Slazer. It is difficult to say. I think part of the 
answer would be there would still be a market out there. There 
would still be a market for the U.S. government. In my 
experience and, as you are aware, because of the experience 
with Huntington Beach with the Delta Launch Vehicle, there was 
a government customer out there, which ULA still supports. 
There are occasional commercial launches which they still 
support, but they could be so much hurt by that. The commercial 
launches could go away, and then the government would be left 
with picking up the full cost of these launch providers. At the 
end of the day you still need GPS, you still need Milsatcom or 
AEHF and similar systems, and so that is really the risk out 
there. Launch services can be provided. The question is how can 
we make that grow, how can we broaden this space economy and 
make that bigger.
    Mr. Rohrabacher. Well, that was the big question. We either 
had to go this route that we are talking about, or there was 
another route that was lawyers in space, the Lawyers in Space 
Program, where we would shoot them into space, and that might 
take care of the problem. But, of course, we chose the more 
focused approach and went with indemnification.
    Today we are talking about a company having basically $2.7 
billion worth of protection. Is that it?
    Dr. Nield. Again, the amount of insurance that the company 
must procure is based on the maximum probable loss up to a 
level of $500 million or the amount of insurance available at 
reasonable market prices. Above that, then Congress would have 
the opportunity to appropriate up to $1.5 billion, adjusted for 
inflation, which is $2.7 billion.
    If the claims exceed even that total, then the 
responsibility, again, reverts to the launch operator.
    Mr. Rohrabacher. But up until $500 million the company 
would have to pay itself, so the company is not off the hook. 
We are actually not taking responsibility off their shoulders. 
We are just sort of making sure that it is not such a great 
treat that nobody wants to participate.
    Dr. Nield. That is correct.
    Mr. Rohrabacher. And we have competition with Russia and 
France and China. Now, of course, we know people who stick 
their head up and sue people, but at least in Russia and China, 
that doesn't happen unless the government really wants them to. 
What about in France, and what about our European competition? 
Do they have this indemnification, and what does that look 
like?
    Dr. Nield. Based on the studies that have been previously 
done, all of the other space faring states, such as the ones 
that you have mentioned, have similar indemnification regimes. 
Although, in general, these regimes are more favorable because 
instead of a three-tiered system, they only have two tiers, 
where, again, the company would typically purchase insurance up 
to some amount, but then the government would step in, without 
limit, to pick up any claims above that level.
    Mr. Rohrabacher. Okay. Well, do you believe is it--I will 
go down the line. Do you want this? Should we just take the 
provision out in terms of having to revote on this every, is it 
four years or five years. How many years do we have before we 
have to do it again?
    Ms. Cackley. Three.
    Mr. Rohrabacher. What is the Sunset Provision on this?
    Mr. Slazer. It ends this year, and it has varied over the 
last four years, last four times it has been reauthorized. I 
would just note that if you look at the development time, five 
years for a launch vehicle, launch system is not an 
uncharacteristic time from the time you first get the idea and 
you want to build a product to the time you actually do your 
first launch.
    Mr. Rohrabacher. So if we keep the Sunset Provisions, we 
should not have to do it for another five years?
    Mr. Slazer. Well, I would hope at a minimum, but I would 
also point out that launch contracts typically happen two or 
more years in advance, and so if you really want to look at the 
cycle time of the industry, it is more, it is longer than three 
to five years from the time you first start thinking you are 
going to do something until you start providing regular 
services to customers. And the closer we can get to that cycle 
time in the industry, the better it will be for investment 
decisions and the more likely we are to attract capital to 
develop new capabilities.
    Mr. Rohrabacher. Okay. Thank you very much.
    Chairman Palazzo. I now recognize the gentlelady from 
Maryland, Ms. Edwards.
    Ms. Edwards. Thank you, Mr. Chairman, and for Mr. 
Rohrabacher, just for the record, I am a lawyer, and I actually 
do want to go to space, and I want to make sure there is an 
appropriate MPL calculation for that trip.
    Mr. Rohrabacher. But our program didn't have any provisions 
for the lawyers coming back down.
    Ms. Edwards. Right. I do want to come back. So thank you. I 
have been looking at this question for indemnification, and 
really my concern has been if there is some predictability in 
terms of what the obligation of the taxpayer would be and how 
we can establish more predictability with a model that has some 
way to more reasonably calculate what that liability would be.
    And so I wonder, Dr. Nield, I want to talk to you about the 
modeling that is used for airline carriers and other examples 
and perhaps we can get a comment also from GAO about this, that 
would give us a little bit more predictability in terms of 
taxpayer obligation beyond the cap.
    Dr. Nield. We are eager to look at all kinds of 
improvements on how we do what we do, and we would solicit 
recommendations from GAO, from Congress, and from industry 
experts about the best way to do that.
    In fact, we have already begun an internal effort to look 
at alternate methodologies. We discussed some of these with the 
GAO as they prepared their report and we shared some of our 
thoughts on that. We certainly benefited from that discussion, 
and we think it would be an excellent idea to review the 
methodologies that could be used.
    I would point out that the GAO had noted that in its 
discussions it found that sometimes a sophisticated model could 
require, for example, the purchase of a database costing many 
hundreds of thousands of dollars and experts in order to 
operate it. So, we need to make sure that we balance the costs 
and the benefits and ask: does it really change the MPL? Then 
we can decide whether that would be an appropriate change to 
make.
    Ms. Edwards. Ms. Cackley, before you comment, I wonder if 
you could give us some idea. I am trying to figure out how it 
is that we recognize that the industry, the commercial industry 
is not mature yet. That is understandable, and I guess that 
that is some justification for some amount of indemnification.
    And so my question, though, goes to how we can move the 
industry along so that it becomes mature enough to indemnify 
itself rather than to have over a course of time taxpayers foot 
that. And do you have some ideas of that? If we were, for 
example, to extend for a temporary period, is there some way in 
which we can, markers that we can identify that could move the 
industry along to getting some more predictability for a better 
model so that there is some rationale to why we would have a 
cap or why we would eliminate a cap. What are the things that 
we could ask for in an interim period that could help move the 
industry along so that indemnification catches up with 
maturity?
    Ms. Cackley. I think one of the key things that has to 
happen is just enough launches have to take place so that 
industry has a better track record for different vehicles, for 
different companies so that risk assessments can be done that 
take advantage of more sophisticated methodologies, that take 
advantage of things like simulation, modeling, and that allow 
for better understanding of probabilities, a richer set of 
probabilities that can be modeled using computer-based 
technology.
    And that will require certainly data, it requires some 
expenditure of funds for the modeling, but it also requires 
time for enough launches to happen that you have a better 
understanding of what the risks are based on a track record.
    Ms. Edwards. So rather than a five-year extension, for 
example, we could so something shorter and then use this time 
to begin deliberately gathering the kind of data that we need. 
Right?
    Ms. Cackley. It is definitely important to be gathering the 
data. I don't have a specific time period that I think is the 
ideal time period, but certainly we don't think that it would 
be a good idea to continue with the calculations that we are 
using and continue that indefinitely.
    Ms. Edwards. Thank you. Thank you, Mr. Chairman.
    Chairman Palazzo. I now recognize the gentlelady, Mrs. 
Adams, from Florida.
    Mrs. Adams. Thank you, Mr. Chairman.
    Ms. Cackley, I have been listening, and I have listened to 
your discussion about the lack of data, you are going to need 
more data, and I want to kind of start off where my colleague 
over there left off.
    She was asking and you said, well, we need time for enough 
launches to take place with the different vehicles and the 
different categories, and then you need to use the technology 
from computerizing to do some kind of simulation.
    The question I have is aren't these vehicles changing 
rapidly as we are moving forward? Or are they staying the same?
    Ms. Cackley. Different vehicles are definitely being 
developed so that it depends which vehicle, you use different 
vehicles for different purposes.
    Mrs. Adams. Correct.
    Ms. Cackley. Some will have better track records than 
others, and you are right. That is definitely something that 
will always be true that----
    Mrs. Adams. Technology keeps----
    Ms. Cackley [continuing]. Technology will change, and so 
that is another reason why insurance is provided.
    Mrs. Adams. Well, then my question is how long do you need 
with these different vehicles to have the capability of 
determining the time enough to make that determination, I guess 
is the best way to ask that.
    Ms. Cackley. And I don't have an answer specifically, but I 
think what we would suggest is that there are risk-assessment 
experts who could tell you and who should be consulted and be 
part of the discussion.
    Mrs. Adams. Right and I know, Dr. Nield, we have talked a 
lot about the modeling for the calculating the maximum probable 
loss, and we all understand the model hasn't been updated since 
'88, and GAO has some concerns of that, and we have heard a lot 
about that today. Do you believe that you will be trying to do 
some kind of update to it?
    Dr. Nield. Yes, definitely. We benefited from our 
discussion with the GAO, and we would welcome additional ideas.
    Mrs. Adams. Ms. Cackley, in the absence of a current 
indemnification system in the United States, would it be 
possible for the Commercial Launch System industry to survive?
    Ms. Cackley. In the absence of indemnification completely, 
I think that it is not that the market would go away, but there 
would be probably a large contraction of capacity of insurance, 
and there would be a great increase in cost potentially at some 
point. I think other witnesses have talked about whether that 
is sustainable in the long term, but we didn't really look at 
what that length of time might be.
    Mrs. Adams. Has there ever been an estimate of the increase 
in the insurance cost if the launch indemnification were to 
lapse?
    Ms. Cackley. No, we have not done that estimate.
    Mrs. Adams. Mr. Slazer, if launch indemnification was 
allowed to sunset, is it your opinion that the launch 
industrial base would begin to deteriorate rapidly?
    Mr. Slazer. Given our low number of launches historically 
the last several years, I don't know if it would deteriorate 
much more, but it certainly wouldn't improve. It is more the 
upside that we are risking.
    And I just want to take one quick second to point out a 
distinction here. Launch vehicles have launched for many years, 
and some of them haven't changed very much. Delta II has been 
pretty much the same since about 1997, 1998. Soyuz has been 
around since about the 1960s. Those launch vehicles, the 
maturity helps refine your understanding of the probability of 
loss and the potential consequences of the loss.
    At the same time, two vehicles that are both mature, if one 
provider has a subsidized indemnification capability as with 
Soyuz and the other as with Delta II does not, you may wind up 
having the U.S. provider being at a competitive disadvantage 
and going out of business anyway, even if they are equal and 
mature.
    So maturity has to be looked at. It is not going to be the 
answer to this. It just helps you make a better determination 
of the risk. It is not going to solve the issue.
    Mrs. Adams. So, again, I will go back to Ms. Cackley then. 
With what Mr. Slazer has just said, we do have enough launches 
under our belts on some of these, and so we could be using that 
to identify possibly. Is that not correct?
    Ms. Cackley. Identify?
    Mrs. Adams. We are talking about how do we decide how to 
indemnify. Earlier when I said something about they are 
changing, and they are changing, but we do have, as Mr. Slazer 
just said, we have vehicles that have been operating, although 
they have changed slightly throughout the years, they are 
mature enough.
    Ms. Cackley. Absolutely, and there is a market of space 
insurance providers who told us that they would be willing to 
indemnify at a higher level than the current maximum probable 
loss of the average current maximum probable loss of flight 
launches now. Part of what we discovered was that there is a 
difference between what the insurance companies provide now and 
what they said that they would be willing to provide in the 
future that is currently covered by government indemnification. 
That is not to say that there is no need for any government 
indemnification, but it might be able to start at a higher 
level than it currently does.
    Mrs. Adams. Okay. Earlier, because I am getting confused, 
and I just want to make sure. Earlier you said they are not 
capable or willing to provide, and now you are saying that 
there have been some that have said they could.
    Ms. Cackley. They are not willing to provide beyond $500 
million, but right now they are not asked to provide beyond the 
maximum probable loss, which is much lower. Ninety-nine million 
dollars is the average. So what we are suggesting is that there 
is some room for the market to provide some indemnification at 
a higher level than they currently do, but it is still not 
completely indemnified up to whatever maximum there is.
    Chairman Palazzo. I want to welcome Chairman Hall to our 
hearing and recognize him for five minutes.
    Mr. Hall. Mr. Chairman, thank you, and I am hesitant to ask 
anything because of not being here, don't know what questions 
they have been asked, but I listened to the gentleman from 
California and his debate with Ms. Edwards. I can't figure out 
who won that, but I am always on her side, usually.
    And the gentleman from California mentioned France. That 
doesn't do anything to me. There is not a nation in the world 
they won't surrender to. They will fight to the last American 
the way they have been. So I wouldn't even consider them, but I 
do consider this.
    Some might be tempted to argue that such a small share of 
no practical consequence. I don't agree with that. I think, I 
am convinced without it what small share we now have would all 
but disappear if we don't take some action, and I think we are 
going to, and FAA's Launch Indemnification Program is critical 
to the launch industry and its aspirations to compete for 
future business.
    I actually look forward to working with you, Mr. Chairman, 
on moving the extension through the House this year. It can be 
done. It probably ought to be done, and I yield back my time, 
and I thank you, Mr. Chairman, for the good work you are doing.
    Chairman Palazzo. Thank you, Mr. Chairman.
    I now recognize the gentleman from Alabama, Mr. Brooks.
    Mr. Brooks. Thank you, Mr. Chairman.
    I am a stronger believer in the free enterprise system 
which typically means less government, not more government 
intervention in the marketplace. Typically government 
intervention results in distortions in the marketplace, less 
efficiency, and more cost to taxpayers.
    At the same time, as you are very well familiar, America 
faces probably its greatest financial challenge since the War 
of 1812, when we last went into bankruptcy, not long after that 
war. We have got deficits probably going to be our fourth 
trillion dollar deficit in a row. We have got a debt where we 
blew through $15 trillion last year. We are going to blow 
through $16 trillion just this year. Just the increase in one 
year from fiscal year 2010, to fiscal year 2011, and the cost 
of servicing that debt is larger than the cost, this is one-
year increase now, is larger than the entire cost of the NASA 
Program, all of our space activities.
    So with that as a backdrop, I want you all to help me out 
as best you can. Taxpayers are being asked to be on the 
potential hook for roughly $2.7 billion should we have a 
private sector space catastrophe of some kind, and I understand 
your argument about competition and how this help is needed 
with respect to that foreign competition, but we have got other 
industries in America who also would love to have their 
insurance costs subsidized by the Federal Government and 
America's taxpayers. You can talk about steel manufacturing, 
ship construction, bridge construction for our highways, auto 
industry, just every industry would love to have the similar 
kind of subsidy of its operational costs that the commercial 
space is asking of this United States Congress.
    And so what I would like for you to help me with is why 
should commercial space receive insurance subsidies but not 
these other industries that are also facing stiff foreign 
competition that threatens to put them out of business, and how 
do you distinguish commercial space from these other American 
industries that are similarly facing stiff foreign competition 
such that you all should receive an insurance subsidy but they 
should not.
    And I would ask for each of you to respond.
    Dr. Nield. I will start by reminding you that there 
actually has been no costs to the Treasury or to the general 
public in the 24 years that this system has been in place. 
Should there be a low probability, but high-cost, catastrophe 
at some point in the future, Congress would have the ability to 
make a decision whether or not to appropriate the funds above 
the cost of the insurance.
    The other key point is to recognize that although we are 
continuing to look at alternate methodologies and the best way 
to calculate things, we are very confident at the FAA that we 
have a conservative calculation system today. The probability 
that the losses would exceed the maximum probable loss value 
that would be covered by insurance is very, very small, on the 
order of one in 10 million. So, there would need to be 10 
million launches before one would expect to see the 
indemnification kick in.
    Mr. Brooks. All right. Thank you, and I am looking at my 
Committee notes that are similar to what you just said, and I 
will read it into the record. ``In what is commonly referred to 
as indemnification, should any successful third-party claim be 
in excess of the MPL-based insurance requirement, then the U.S. 
government is authorized to pay up to an additional $1.5 
billion, adjusted for post-1988, inflation, approximately $2.7 
billion today. The payment is not automatic and subject to 
Congressional appropriations.''
    But I am hearing you here today because you are expecting 
the Congress will, in fact, provide that indemnification should 
we have some catastrophic accident.
    And so, Ms. Cackley, what do you suggest, or what are your 
thoughts on this? How do we distinguish?
    Ms. Cackley. I think that it is true that the industry does 
expect that Congress will appropriate the funds if there were, 
if indemnification came into play, even though it is subject to 
appropriation. It is part of what the industry told us is what 
makes them willing to invest and be part of the market is that 
they believe that there is that backstop.
    To your further question about why this industry and not 
others, that is not something that GAO is taking a position on. 
We learn as much as we could about how the program works, but 
we are not--we don't have a position on why space and not any 
other particular market.
    Mr. Brooks. Mr. Slazer.
    Mr. Slazer. Yeah. I think the answer is that you are going 
to need this whether or not there is a commercial market or 
not. Other industries aren't in that same position. We can 
import those products, we can do without them we can make other 
substitutions, but we need to have a space launch capability 
for our national security.
    As a result, we can choose to spread those fixed costs of 
development and operations over a broader base by bringing in 
commercial businesses and potentially expand that base to the 
point where it actually becomes a job and revenue generator 
kicking back into the Treasury, or we can go down to a 
minimalistic set of launches and have very high costs.
    I would contend that is kind of the inflection point we 
have been at these last couple of years. And that is why we 
have seen costs for DOD launches, costs for NASA launches, NASA 
has been having a great deal of difficulty getting their 
science program launched because costs have risen so much. We 
have got the prospect in the near future as new companies come 
online, as new capabilities by existing companies are expanded, 
start bringing those costs down and spreading that fixed cost 
out, but we have to keep this regime in place to make that 
business case work.
    Mr. Brooks. Mr. Chairman, my time has expired, but is there 
any chance you would allow sufficient time for Ms. Alfers to 
also respond?
    Chairman Palazzo. Yes.
    Ms. Alfers. Okay. Thank you. We would echo the national 
security concern. The U.S. Government needs to have domestic 
launch capabilities available, and in addition to spreading the 
fixed costs, there is also an issue of maintaining the skill 
set. The launch business is a highly technical business. I 
mean, it is very complicated, and there are a handful of people 
that do this and do this well, and when you take a factory and 
you shut it down to the point where you are running one car off 
about every four years, you lose that skill set. That is a very 
high-risk situation for the U.S. government for when they need 
to call on those resources.
    Right now the payloads that we launch are heavily relied 
upon by the U.S. government. Our largest customer is NGA, the 
National Geospatial-Intelligence Agency, and I will tell you 
that the U.S. launch market right now is not appealing to 
launch on, and we are looking at foreign launches for our Next 
Generation satellite, and unless there are new vehicles that 
come into the market.
    And I want to make this point. There was discussion about 
the Delta II. One of the things that has happened as a result 
of the reduction in demand is that some of the launch vehicles 
that have been highly reliable and are more appropriately sized 
for commercial payloads are not available. We are being forced 
to launch on an Atlas V. I shouldn't say forced, but we are 
launching on an Atlas V, which is a much more expensive and 
much larger vehicle than we would prefer to launch on, and that 
is simply a product of, or byproduct of, the declining U.S. 
launch industry.
    So, in the interest of national security, we think it is 
very important that the U.S. industry fosters innovation, and 
we see the Indemnification Program supporting that because it 
does fix risks to some degree for the launch providers, and 
without that to answer an earlier question, I actually do think 
the U.S. launch industry will gradually fade away to a point 
that will be very detrimental to national security.
    Mr. Brooks. Thank you for your insight, and Mr. Chairman, 
thank you for the additional time.
    Chairman Palazzo. At this time, we are going to enter into 
a second round of questions where each Member will be allowed 
the opportunity to ask one question, and we will begin with the 
gentlelady from Maryland, Ms. Edwards.
    Ms. Edwards. Thank you, Mr. Chairman. I just have a couple 
of questions here.
    Ms. Cackley, there has been a lot of discussion about the 
impact on international competitiveness. Did GAO find any 
documented evidence regarding the impact of shared risk, third-
party liability on international competitiveness or analysis 
that if we didn't have that protection, it would result in the 
loss of business to foreign launch providers?
    Ms. Cackley. We did not find documented evidence. We 
certainly talked to launch customers who told us that because 
their two main factors that they look at are price and 
reliability and the indemnification has an impact on price, you 
can make the connection that it has some impact, but we could 
not quantify that.
    Ms. Edwards. Are there other factors that impact 
competitiveness of the domestic launch provider?
    Ms. Cackley. Besides----
    Ms. Edwards. Besides the shared-risk regime?
    Ms. Cackley. No. There are certainly many factors that 
affect competitiveness besides this regime.
    Ms. Edwards. And even though we have had the shared risk, 
we have still lost market share. Right?
    Ms. Cackley. That is right.
    Ms. Edwards. And then I just have a question regarding the 
analysis about behavior. Has GAO made any determination or Dr. 
Nield, perhaps you could answer this, as to whether risk 
management practices among the providers, among the companies 
would be affected by eliminating the cap?
    Dr. Nield. In our discussions, it certainly has been made 
very clear that industry considers the current indemnification 
regime to be vital. The big concern I would have is that in the 
worst case, a straightforward business decision would be made 
that says, we can't afford to bet the company, and so we are 
just going to withdraw from the industry. It is hard to predict 
the likelihood of that, but that is certainly a very real 
possibility.
    Ms. Edwards. Well, I am wondering, Mr. Slazer, if you could 
comment because my question is whether--what the risk 
management practices of a company would be if they knew that 
they wouldn't be on the hook for anything? Because I would 
think that that would actually result in a greater probability 
of liability for taxpayers.
    Mr. Slazer. Yeah. I guess it is important to remember we 
are talking here about third-party indemnification, and so any 
of these companies that are getting into this business are 
putting hundreds, more likely billions of dollars of their own 
shareholders' capital at stake in developing these systems, and 
it is not in their interest to do something that is not going 
to work well. They are going to do everything they can to 
succeed in that business, and with so many providers in the 
very competitive international market with very good 
reliability rates, if you show any indication that you aren't 
able to deliver reliably, whether or not you have third-party 
liability issues or not, you are going to lose business.
    And so it is the company's own self-motivation to make 
their businesses succeed are going to make them highly 
motivated to succeed. Regardless if they are completely 
indemnified for third-party issues, which they are not in the 
current regime.
    Ms. Edwards. Well, so then that would also be an argument 
for keeping the cap, too. Right? The cap, too. Right? Why not?
    Mr. Slazer. The only reason there would be the competitive 
relative impact on pricing. So the number I----
    Ms. Edwards. And so what is the documented evidence that 
you have that there would be an impact on competitiveness?
    Mr. Slazer. The one number I have seen out there, which 
goes--that I recall, that goes back to an aerospace corporation 
study in about 2006, that I believe is still accurate, is that 
European launcher Ariane has a requirement for indemnification 
insurance for maximum probable loss of about $75 million by our 
$500 million.
    Ms. Edwards. I have a note from that same Aerospace 
Corporation study in 2006, that says, ``Measuring the 
contribution of indemnification itself, which is critical to 
considering amendments to eliminate it or at the other extreme 
altering it to reallocate more risk to the government, is 
impossible.'' Do you agree with that?
    Mr. Slazer. It is extremely difficult, and I would throw in 
another factor that is extremely difficult is where companies 
are operating. If you are operating on the plains of Kazakhstan 
where no one is in the range of possibly being hit by any 
debris, I suspect your indemnification costs are going to have 
another natural advantage of being lower, but it is very 
difficult to make that determination.
    Mr. Edwards. And just lastly, Mr. Slazer, to what extent do 
commercial launcher providers purchase third-party liability 
insurance above the level required by the MPL before you would 
reach the cap?
    Mr. Slazer. I am afraid I am not able to answer that 
question.
    Ms. Edwards. It would be helpful for the industry to be 
able to answer the question as to how much they, I mean, 
because otherwise in-between $99, whatever it is, $99 million 
and $500 million. That is a really big number. Who is on the 
hook for that?
    Mr. Slazer. I will take the action to try to get you some 
answers.
    Ms. Edwards. Thank you. Thank you, Mr. Chairman.
    Chairman Palazzo. The gentlelady's time has expired.
    I will ask my one question but of two people.
    Would the FAA need additional, this is for Dr. Nield, will 
the FAA need additional regulatory authorities to extend the 
liability risk-sharing regime to on-orbit activity?
    Dr. Nield. Yes, we would. As you know, we currently have 
regulatory authority only over launch and reentry. As the GAO 
reported, at this point, there is a gap in terms of 
indemnification and in terms of regulatory authority. We have 
been in discussion with some other government agencies about 
the potential benefits of FAA asking for on-orbit authority, 
and that certainly is an item for further discussion.
    Chairman Palazzo. Ms. Cackley, would you like to add to 
that?
    Ms. Cackley. We certainly recognize that if the FAA is 
regulating on-orbit activities and licensing for on-orbit 
activities, it is going to increase the number of possible 
activities that could be eligible for coverage under CSLA, and 
to the extent that there are more of these activities, there 
will be increased risk to the government in the case of an 
accident of this type.
    Chairman Palazzo. I want to thank the witnesses for their 
valuable testimony and the Members for their questions. The 
Members of the Subcommittee may have additional questions for 
the witnesses, and we will ask you to respond to those in 
writing. The record will remain open for two weeks for 
additional comments and statements from Members. The witnesses 
are excused, and this hearing is adjourned.
    [Whereupon, at 11:22 a.m., the Subcommittee was adjourned.]

                   Answers to Post-Hearing Questions


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                    Responses from Mr. Frank Slazer

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