    [Senate Hearing 113-762]
    [From the U.S. Government Publishing Office]

           DEPARTMENT OF DEFENSE APPROPRIATIONS FOR FISCAL YEAR 2015

                                  ----------

                            WEDNESDAY, MARCH 5, 2014

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:58 a.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard Durbin (chairman)
    presiding.
        Present: Senators Durbin, Feinstein, Cochran, and Shelby.

                    National Security Space Launch Programs

    STATEMENT OF CRISTINA CHAPLAIN, DIRECTOR, ACQUISITION
                AND SOURCING MANAGEMENT, GOVERNMENT
                ACCOUNTABILITY OFFICE

                 opening statement of senator richard j. durbin

        Senator Durbin. Good morning, and welcome to this meeting
    of the Defense Appropriations Subcommittee. We're going to
    start a minute or two early, which is unprecedented in the
    Senate because we have votes scheduled, and I want to try to
    get as much testimony in as possible before we might have to
    break for a vote, should that occurrence arise soon. So I'll
    make my opening statement. I want to acknowledge at the
    beginning that Senator Cochran is not late; no one is late at
    this point. I'm starting a minute or two in advance.
        Today, the defense subcommittee will receive testimony on
    national security space launches, with a focus on the Evolved
    Expendable Launch Vehicle, or the EELV, program. Our questions
    expose some of the core tradeoffs in defense policy and
    highlight several challenges we face as a Nation.
        What is the best use of taxpayers' money? How do we promote
    and reward innovation? How do we safeguard the viability of our
    industrial base? How do we protect our competitive edge against
    other nations? We'll return to these questions and many others
    throughout the year as we review the President's fiscal year
    2015 defense budget, which we received just this week.
        Today, we discuss the EELV program, which was created
    almost 20 years ago when the costs and risks of launching
    satellites were out of control. EELV missions launch the most
    important satellites developed by the Air Force, National
    Reconnaissance Office, and the Navy, not to mention NASA
    (National Aeronautics and Space Administration) and a fewer
    number of commercial customers.
        The program has been extremely successful in launching
    satellites that cost the U.S. taxpayers literally billions of
    dollars. The safety record of the Atlas V and Delta IV rockets
    made by the United Launch Alliance (ULA) is remarkable. But we
    do have some concerns about the acquisition strategy and costs
    and future of that program. From 2011 to 2014, the amount the
    Air Force budgeted for an average of six satellite launches per
    year grew by 60 percent in that 3-year period.
        There are many answers as to why the program became more
    expensive, but the important question is: What should we do
    about it? Over the past 3 years, the Air Force has tried to
    control costs by stabilizing ULA production with a block buy of
    36 rockets from ULA, while fostering competition from entrants
    such as SpaceX.
        The subcommittee needs to better understand the cost of the
    current program, how to ensure that competition is fair and
    presents the best value to the Government, and whether we need
    to do more to ensure that we can deliver satellites on orbit in
    the most efficient and affordable manner.
        These decisions on how to purchase access to space could
    have lessons that are applicable to many other defense
    capabilities. Could the Pentagon learn to live with only one
    major supplier of rockets by better managing that industrial
    capability with smarter buying and better negotiating? Or
    should the Department of Defense (DOD) be more forward-leaning
    and embrace companies that challenge the rules on how we
    normally run defense programs?
        It's been the general practice of the Appropriations
    Committee to direct questions about acquisitions programs to
    the Government officials responsible for the use of taxpayer
    money. Today we're taking a different approach by going into
    the details of the EELV program with the two companies most
    involved in the upcoming competition, as well as two
    distinguished experts in space acquisitions.
        Their views and insights on the EELV program will inform
    the subcommittee's deliberations on the fiscal year 2015 budget
    request and also shape our thinking about how the Department of
    Defense can best maintain access to space in a fiscally
    constrained environment.
        I'm going to welcome our witnesses, Cristina Chaplain,
    Director of Acquisition Sourcing and Management at the
    Government Accountability Office (GAO); Michael Gass, President
    and CEO of United Launch Alliance; Elon Musk, CEO and Chief
    Designer of Space Exploration Technologies; Dr. Scott Pace,
    Director of the Space Policy Institute at the Elliott School of
    International Affairs, George Washington University.
        I am going to ask the witnesses to provide their 5-minute
    opening statements, but I note the presence of the ranking
    member of the full Appropriations Committee, Senator Shelby of
    Alabama. I'd like to give you an opportunity, if you wish, for
    an opening statement.
        Senator Shelby. Thank you very much. I will try to be brief
    because we have a distinguished panel here.
        Delivering national security satellites safely to orbit is
    one of our more important national security missions. This
    requirement is precisely why the Department of Defense focuses
    on mission success and reliability in the Evolved Expendable
    Launch Vehicle, or what we call EELV, program.
        This focus and the work of the EELV sole-source contractor,
    the United Launch Alliance, have resulted in 68 consecutive
    successful missions--68 consecutive successful missions. I
    recognize this achievement, not just as a Senator from Alabama,
    where the ULA performs its engine-assembly work, but as someone
    who has watched the defense industry for decades and knows that
    a 100 percent success rate is no small feat.
        As the Department of Defense moves forward with a new
    acquisition strategy for the EELV program, I believe we must
    ensure that the program's record of success is maintained. Much
    of today's discussion will focus on competition, and I agree
    that competition typically results in better quality and lower-
    priced contracts. But the launch market is not typical. It is
    limited demand. In its limited demand, it is framed by
    Government industrial policies.
        While the goal of competition is to lower the cost of
    access to space, which I think is good, combined with the need
    to maintain performance and reliability, such as we have today,
    competition may not actually result in a price reduction for
    the Federal Government.
        I believe that much of the costs associated with the EELV
    program today can be attributed to the Department of Defense
    decisions about the structure of the program, including the
    practice of purchasing one launch vehicle at a time rather than
    a lack of competition. Simply modifying this buying strategy
    alone and moving into a new block-buy approach has already
    resulted in significant savings and will ultimately be saving
    billions of dollars.
        The Air Force, for example, has estimated $4.4 billion
    savings so far. The wise stewardship of taxpayer resources is
    essential in all Government programs, and oftentimes
    competition is key. In this case, the safety and security of
    our national security payloads is paramount.

                               prepared statement

        I'm not convinced yet that a wholesale change in the EELV
    program is the answer when we've witnessed significant results
    from a minor modification to purchasing practices in the
    existing program.
        But I do look forward to the testimony of our witnesses on
    the role of competition in this unique market and an exchange
    as to why a sea change in the program is necessary to achieve
    savings, if it is.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you very much, Senator Shelby.
        Senator Cochran has submitted a statement to be included in
    the record.
        [The statement follows:]
                   Prepared Statement of Senator Thad Cochran
        Mr. Chairman, I am pleased to join you, this morning, in welcoming
    our distinguished panel of witnesses for the Defense Subcommittee's
    first hearing of the year. I am happy to see that our panel today
    includes independent witnesses from GAO and the Space Policy Institute,
    as well as, the CEOs of two companies, ULA and SpaceX, who participate
    in the valuable space work occurring in Mississippi, at the Stennis
    Space Center.
        Today's hearing is quite timely, as recent events in the launch
    industry are bringing about rapid and complex changes to the Evolved
    Expendable Launch (EELV) program, the primary provider of launch
    vehicles and services for U.S. military and intelligence satellites.
    The Air Force is implementing a strategy to reintroduce competition
    into the EELV program, while at the same time ensuring that the
    significant mission success achieved by United Launch Alliance, the
    sole-source launch provider since 2006, is maintained.
        This will not be an easy feat. I have been informed that yesterday
    the GAO finalized a report on the challenges of competition, and I
    anticipate that Ms. Chaplain and all of our witnesses will discuss
    those challenges today. I look forward to the testimony of our
    witnesses.

        Senator Durbin. Now we will have our witnesses give an
    opening statement. Their written statement will be made part of
    the record. If they will take 5 or 6 minutes to summarize it,
    we can then open it to questions.
        The first person to testify, Cristina Chaplain, as I
    mentioned, Director of Acquisition Sourcing and Management at
    the Government Accountability Office, which has done a
    comprehensive review of this issue, which I commend to my
    colleagues and those who are following this debate.
        Ms. Chaplain, please proceed.

                     SUMMARY STATEMENT OF CRISTINA CHAPLAIN

        Ms. Chaplain. Mr. Chairman, thank you for inviting me
    today. I'm very pleased to be here to discuss the EELV program.
        The program itself has been through different contract
    arrangements and acquisition strategies. There was competition
    at the beginning of the program with the aim of ultimately
    selecting one company, though the Government opted to keep two
    companies, based on the assumption that there would be a surge
    in commercial demand that would allow the Government to benefit
    from lower costs.
        Fixed-priced contracts were used also in the early part of
    the program, and the Government was able to benefit from prices
    that were lower because the companies purchased items in bulk,
    key items in bulk, in anticipation of the predicted high demand
    of the commercial market.
        After the commercial market did not materialize as
    expected, however, there were several significant changes. Two
    suppliers merged into one. The Government began using a fixed-
    price contract to acquire launch services and a cost-type
    contract to acquire the capability to launch that hardware.
        In view of launch failures that occurred in the late 1990s
    with the heritage launch program, the Government placed most of
    its focus on mission success and not as much on controlling
    costs. As you mentioned, there has been a good record of
    success since then.
        In 2011, the Air Force embarked on a block-buy strategy in
    anticipation of significant price increases. However, the GAO
    found that the Government did not have the knowledge it needed
    to make such a significant commitment, particularly with
    respect to program costs and the launch industrial base. At the
    time, there were also mixed views within DOD about the value
    and viability to introduce competition to help lower prices,
    but DOD ultimately set out to do so.
        Since our 2011 report, DOD has made strides in gaining
    knowledge about costs and other issues surrounding EELV, and it
    has achieved significant savings in negotiating the block buy.
    There may be a debate as to the validity and extent of the
    savings, but we do know that the DOD performed the analyses and
    the studies that better armed it for negotiations. Further, the
    program now benefits from auditable business systems and
    greater oversight. DOD deserves much credit for these efforts.
        There were also significant positive changes in the new
    contracts, but the basic way of acquiring launch services
    remains the same. There is a fixed-price arrangement for the
    vehicles themselves and a cost arrangement for the capability
    to launch the vehicles, which includes things like systems
    engineering and integration.
        It is important to keep in mind that the capability
    contract maximizes the Government's flexibility, which is
    beneficial when there are delays in satellite deliveries. The
    block-buy contract is for 35 rocket cores, and DOD plans to
    compete up to 14 cores starting as early as 2015.
        There are a number of ways DOD could run this competition.
    We looked at two ways at each end of the spectrum for some
    recent work we did for the Congress. One is to contract similar
    to the way it currently contracts with ULA. The other is to
    follow a commercial approach. My statement details the benefits
    and challenges of both.
        In short, if DOD contracts similar to the way it contracts
    with ULA, DOD could retain insight into contractor cost or
    pricing data, which would lend itself to a better bargaining
    position in future negotiations. But this approach could also
    add costs for the new entrants, including a cost-plus portion
    and bid proposals, for instance, would require them to develop
    and install new business systems to fulfill Government data
    requirements.
        If DOD followed a commercial approach, it could have an
    avenue to decrease launch prices and increase efficiencies.
    However, it would also likely lose access to contractor cost
    and pricing data and some flexibility in rescheduling launches
    of satellites should deliveries slip.
        We did not recommend an approach. It is not GAO's role to
    do so, and there are other possible approaches. The goal of
    introducing competition is being achieved, though the
    competitors may prefer different paths.

                               PREPARED STATEMENT

        The factors that DOD will need to weigh as it makes its
    choice likely include the need to maintain a high degree of
    reliability, as the satellites being launched are expensive and
    are vital to national security; the need for flexibility in
    launches; the importance of retaining costs and pricing data;
    the need to keep costs down; and considerations about the
    future Government's demand for launch services.
        This concludes my statement, and I'm happy to answer any
    questions you have.
        [The statement follows:]
                    Prepared Statement of Cristina Chaplain
                                  introduction
        The Department of Defense's Evolved Expendable Launch Vehicle
    (EELV) program is the primary provider of launch vehicles and services
    for U.S. military and intelligence satellites. The launch vehicles used
    by the EELV program are also used to launch civilian and commercial
    satellites.
        GAO was asked to examine issues related to DOD's effort to
    introduce competition into EELV acquisitions. Doing so is a significant
    challenge given the way contracts are currently structured, the fact
    that new providers are not yet certified to carry sensitive national
    security satellites and sensors--or payloads--into space, and other
    complications. The issues GAO was asked to examine include the way that
    DOD determines costs for launch services with its current contractor
    and how DOD will compare future offers from different launch services
    contractors.
    Program Description and History
        The EELV program started in 1995 when DOD awarded contracts to four
    companies for preliminary launch vehicle system designs; at that time,
    DOD's acquisition strategy was to select the one company with the most
    cost-effective design.
        Given commercial forecasts that predicted sufficient demand to
    support two launch vehicle providers, in 1997 the Secretary of Defense
    approved maintaining competition between the two top companies:
    Lockheed Martin, and what would become Boeing.
        In 2006, following years of projected commercial demand for launch
    vehicles that did not materialize and increasing launch costs, the two
    EELV contractors formed a separate company as a joint venture--the
    United Launch Alliance (ULA).
        From 2006-2013, DOD had two types of contracts with ULA, the sole-
    source provider, to support the EELV program:
      --a cost-plus-incentive-fee EELV launch capability contract (ELC);
            \1\ and
    ---------------------------------------------------------------------------
        \1\ In July 2011, the EELV program awarded a Launch Capability
    contract as a cost-plus incentive fee contract; the prior Launch
    Capability contract was a cost-plus award fee contract. A cost-plus
    incentive fee contract is a type of cost reimbursement contract that
    pays the contractor for allowable costs to the extent prescribed in the
    contract, and allows for the initially negotiated fee to be adjusted
    later, based on a formula in the contract. The fee is based on the
    relationship of total allowable costs to total target cost.
    ---------------------------------------------------------------------------
      --a firm-fixed-price EELV launch services contract (ELS).\2\
    ---------------------------------------------------------------------------
        \2\ A firm-fixed-price contract provides for a price that is not
    subject to any adjustment on the basis of the contractor's cost
    experience in performing the contract.
    ---------------------------------------------------------------------------
        Since 2006, ULA has launched 50 government missions on EELVs, with
    an extremely high rate of success, and DOD values this reliability.
    However, in 2010, program cost estimates indicated launch prices were
    expected to increase at an unsustainable rate, and DOD began an effort
    to develop a new EELV acquisition strategy.
        The November 2011 strategy was designed to maintain mission success
    and incentivize price reductions through steady production rates, long-
    term commitments, opportunities for competition and reductions in
    workforce redundancy.
        In December 2013, DOD and ULA signed a contract modification,
    committing DOD to buy 35 launch vehicle booster cores from ULA over a
    5-year period, and to pay ULA for the associated capability to launch
    them.\3\
    ---------------------------------------------------------------------------
        \3\ The booster core is the main body of a launch vehicle. In the
    EELV program, common booster cores are used to build all of the Atlas V
    and Delta IV launch vehicles. Medium and intermediate launch vehicles
    use one core each, while the Delta IV Heavy launch vehicle requires
    three.
    ---------------------------------------------------------------------------
        According to DOD, two primary goals of this long-term sole-source
    commitment were to increase production stability for ULA and its
    suppliers, and to reduce the price per launch vehicle.
        The most recent independent cost estimate projects the program will
    cost close to $70 billion through 2030.\4\
    ---------------------------------------------------------------------------
        \4\ The Office of the Secretary of Defense, Cost Assessment and
    Program Evaluation conducted an independent cost estimate based on the
    EELV programmatic forecast dated June 2012.
    ---------------------------------------------------------------------------
                        figure 1: eelv program timeline

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: GAO analysis of Air Force data.
    Reimbursement to DOD for Use of ULA Facilities by Other Customers
        DOD has historically paid all fixed costs for ULA. Prior to the
    December 2013 contract modification, when ULA sold a launch to another
    customer, and not through the EELV program office, ULA provided a small
    reimbursement to DOD for the other customer's use of ULA facilities and
    infrastructure. There have been concerns that the reimbursement was too
    small.
    New Entrants to the Launch Market
        In recent years, companies other than ULA have begun developing new
    launch vehicles to compete with ULA for EELV-class payloads, and DOD
    set aside up to 14 launch vehicle booster cores from fiscal years 2015
    to 2017 for competition.\5\ This competition is expected to begin in
    fiscal year 2015.
    ---------------------------------------------------------------------------
        \5\ EELV-class payloads range from 6,000 to 28,000 lbs to
    Geosynchronous Transfer Orbit (GTO). They are divided into intermediate
    (6,000-18,000 lbs to GTO), and heavy (18,000-28,000 lbs to GTO)
    classes.
    ---------------------------------------------------------------------------
        In order to compete for any of the 14 additional launches these
    cores represent, new entrant companies have to follow the process
    outlined by DOD in its Launch Services New Entrant Certification Guide
    to certify a new vehicle to launch national security missions.
        At this point, none of the likely competitors are able to launch
    the full range of EELV-class payloads, though at least one company
    plans to meet the full requirements through further launch vehicle
    development.
        Given the use of different contract types and launch vehicle cost
    allocation practices among contractors, DOD is currently developing a
    methodology for comparing proposals from all competitors. DOD officials
    may include this methodology as part of their first request for
    proposal from launch companies in the competition.
                                   objectives
        This briefing addresses the following questions:
          (1) What insight did DOD have into launch costs under past EELV
            contracts?
          (2) How do recent changes to EELV contracts affect accounting for
            costs?
          (3) How is DOD compensated for costs when ULA sells launches to
            other customers?
          (4) What are the implications if DOD requires competitors to
            submit offers using the same structure it currently uses with
            ULA or a commercial approach?
                              summary of findings
        GAO found:
          (1) The previous two-contract structure paid ULA for continuing
            launch capability to enable the U.S. to readily gain access to
            space, but one consequence of the structure was that DOD had
            difficulty determining the cost of an individual launch, as
            direct launch costs were not separated from other costs.
          (2) In the December 2013 EELV contract modification with ULA, DOD
            leveraged better insight into contractor costs to negotiate
            lower prices, and incentivized ULA to increase efficiencies,
            but DOD may have difficulty identifying the total cost of an
            individual launch.
          (3) The December 2013 contract modification stipulates that when
            ULA sells a launch to customers outside the EELV program
            office, ULA will adjust the value of the EELV contract by a
            pre-negotiated amount for each outside launch it sells.
            Historically the reimbursements have been small compared to the
            overall launch capability paid for, but DOD recently negotiated
            larger reimbursements with some direct costs tied to individual
            launches.
          (4) Even with greater insight into contractor costs, DOD may not
            be immediately poised to take full advantage of competition in
            the launch market, because, in part, it cannot determine an
            accurate price for an individual ULA launch.
                     background: past gao findings on eelv
        In 2008, we reported that the EELV program faced numerous oversight
    challenges, including uncertain launch vehicle reliability, disruption
    from the consolidation of Boeing and Lockheed Martin manufacturing and
    operations under the ULA joint venture, and limited programmatic
    insight due to the elimination of various reporting requirements
    resulting from the designation of the program as in sustainment. We
    also reported that DOD was adjusting the EELV budget using premature
    savings estimates, and made three recommendations to improve DOD
    oversight.
        DOD reinstated reporting requirements and completed a new life-
    cycle cost estimate, but did not assess the EELV program's staffing
    needs to confirm whether shortages exist (GAO-08-1039).
        In 2011, we found that DOD was using insufficient data,
    particularly data on costs and on the launch industrial base, and
    relying on contractor-supplied information to inform the development of
    a new EELV acquisition strategy. We recommended seven actions that
    would help address critical knowledge gaps.
        In response, DOD reassessed the block buy contract, examined
    broader launch issues, incentivized the contractor to implement
    efficiencies without affecting mission success, indicated it does not
    intend to waive future data requirements, is working with the National
    Aeronautics and Space Administration (NASA) on heavy launch decisions
    and conducting an independent assessment of the launch industrial base,
    but has not developed a science and technology plan for evolving launch
    technologies (GAO-11-641).
        In 2012, we reported that DOD had numerous efforts in progress to
    address the knowledge gaps and data deficiencies we identified in our
    2011 report, and that these improvements would allow DOD to make more
    informed decisions on how to proceed with the EELV program (GAO-12-
    822).
        Additionally, in 2013, we reported that DOD's implementation of its
    New Entrant Certification Guide, while generally satisfactory to the
    new entrants, posed some challenges to launch vehicle certification
    (GAO-13-317R).
          objective 1: accounting for costs under past eelv contracts
    Reasons for the Two-Contract Structure
        In 2005, DOD modified the way it contracted for EELV launches.
      --The need for flexibility in launch schedules encouraged DOD to pay
            for launch capability (primarily labor) separately from the
            launch hardware, as DOD wanted to avoid additional costs
            associated with the frequent launch delays they were
            experiencing as new satellites were being developed and
            produced.\6\
    ---------------------------------------------------------------------------
        \6\ We have frequently reported that many of these satellite
    development and production delays could have been reduced or avoided by
    using best practices in space acquisition processes.
    ---------------------------------------------------------------------------
        By paying for a capability to launch, or ``standing army'' of
    personnel (particularly engineers), separately from the launch
    hardware, DOD believed it was ensuring itself access to space in a
    timely manner, regardless of payload delays.
    Basic Contract Structure of Past EELV Contracts
        From 2006-2013, ULA had two types of contracts with DOD through
    which it provided launch services for national security space launches:
      --EELV launch capability (ELC): cost-reimbursement contracts which
            funded items that, according to DOD officials, were not easily
            acquired under a fixed-price contract, such as overhead on
            launch pads and engineering support.\7\
    ---------------------------------------------------------------------------
        \7\ As previously noted, in July 2011 DOD awarded a Launch
    Capability contract as a cost-plus incentive fee contract; prior to
    that award, the contract was a cost-plus award fee contract.
    ---------------------------------------------------------------------------
      --EELV launch services (ELS): firm-fixed-price contracts that paid
            for launch vehicle hardware and labor directly associated with
            building and assembling launch vehicles.

               TABLE 1: DETAILS OF THE EELV TWO-CONTRACT STRUCTURE
    ------------------------------------------------------------------------
                                          EELV Launch         EELV Launch
                                       Capability (ELC)     Services (ELS)
    ------------------------------------------------------------------------
    Contract type...................  Cost-plus           Firm-fixed price.
                                       incentive fee.
    Purpose.........................  To acquire launch   To acquire launch
                                       capability--the     hardware.
                                       ``standing army''
                                       required to
                                       maintain assured
                                       access to space
                                       for 8 launches
                                       per year.
    Items covered by the contract...  Includes items not  Launch vehicle
                                       included in ELS     hardware,
                                       such as: mission    production, and
                                       integration,        directly
                                       systems             associated touch
                                       engineering,        labor.
                                       production
                                       management,
                                       propellants,
                                       transportation,
                                       labor to conduct
                                       launches, etc.
    Number of active contracts......  Only one contract   Multiple contracts
                                       active at any       with ULA active
                                       time.               at any time.
    Length of contract  term........  The contract        Varies; ELS
                                       covers one year     contracts can be
                                       of launch           for one launch or
                                       capability.         multiple
                                                           launches, and
                                                           some can last for
                                                           many years as the
                                                           launches included
                                                           in the contract
                                                           are launched.
    ------------------------------------------------------------------------
    Source: GAO analysis of DOD contracts and related documents, and
      discussions with DOD officials.

    Obscured Costs Under the Two-Contract Structure
        ELC contracts did not require the contractor to break out costs
    associated with each launch; therefore, DOD was unable to calculate
    specific costs for individual EELV launch missions. For example, while
    each of the following costs could have been tied directly to an
    individual launch, DOD contracting officials included these items in
    the scope of the ELC--a cost-type contract--but did not require the
    contractor to separate them by individual launch:
      --Propellants.--Fuel expenses for each launch.
      --Transportation.--The cost of transporting a completed launch
            vehicle from the factory to the launch site.
      --Mission Integration.--The work involved in mating the satellite to
            the launch vehicle could be tied to the overall costs of a
            specific launch.
    Challenges Encountered Under the ELC/ELS Structure
        The EELV program under the ELC/ELS structure had some significant
    outcomes, but presented challenges to the program:
      --Through the ULA joint venture and subsequent consolidation of
            operations, the government realized some significant savings.
            However, given the lack of incentive to identify efficiencies
            in the program's prior cost-reimbursement contract structure,
            and in an environment where no viable competition existed,
            program cost estimates showed launch prices were expected to
            rise.
      --The program earned a record of consistent launch successes but,
            according to DOD, the focus of the program became primarily
            mission success, and not efficiencies or cost savings.
      --According to DOD officials, the ELC contract structure was not
            transparent, and DOD had limited insight into some contractor
            costs, leading to:
        --insufficient knowledge to negotiate fair and reasonable launch
                prices,
        --lack of understanding of the total costs of any given launch, and
        --inadequate ability to account for costs reimbursed to DOD when
                ULA sold launches to non-DOD customers.
           objective 2: recent changes to eelv contracts and impacts
    Better Information to Support Contract Negotiations
        As part of its effort to re-evaluate the EELV acquisition strategy,
    DOD has taken significant steps between 2010 and 2013 to obtain
    information to help it better identify the costs of EELV launches, and
    has made progress in reducing contract prices.
        We reported in 2012 that detailed investigations, or ``deep-
    dives,'' into engine prices and other subcontractor costs have provided
    DOD better information with which to support contract negotiations with
    ULA. This insight was absent in past contract negotiations, in part
    because DOD waived rights to some contractor data in exchange for lower
    prices from large commercial hardware purchases.
        Additionally, DOD has scrutinized launch processes to identify and
    eliminate potentially redundant activities.
        DOD had better information in its recent contract negotiations with
    ULA, affording DOD a stronger bargaining position to lower overall
    contract costs than in recent years. As noted earlier, we recommended
    DOD obtain better data to strengthen DOD's bargaining position.
        Gaining greater insight into contractor costs and reducing
    inefficiencies could have also benefited the program from the start of
    the joint venture in 2006, as program costs continued to rise.
        Additionally, we reported in 2011 that competition could spur ULA
    efficiencies and incentivize ULA pricing. The presence of potential
    competition for launch services--a recent development--likely provided
    the context to help DOD negotiate lower prices.
    Key Tenets of the New Contract
        The December 2013 contract modification with ULA, sometimes
    referred to as a ``block buy'' contract, represents a major change from
    past year-to-year contracting approaches, and buys:
      --Production of 35 launch vehicle booster cores over 5 years, from
            fiscal years 2013 through 2017.
      --Launch capability for 6 years, from fiscal years 2014 through 2019.
        Instead of two separate ELC/ELS contracts, the new single contract
    structure covers the entire EELV program, with contract line items for
    different aspects of the program, such as:
      --launch vehicle hardware;
      --launch capability, including systems engineering and production
            management;
      --mission integration; and
      --propellants.
        According to DOD, some changes to the modified contract include:
      --Better attribution of direct costs to launch vehicles, such as
            propellants and mission integration, into separate contract
            line items.
      --More representative compensation to DOD when ULA sells a launch to
            a non-DOD customer.
        --Compensation to DOD is roughly three times what it was under
                previous contracts with ULA (dollar amount is proprietary).
      --DOD officials estimate about $4.4 billion savings over the fiscal
            year 2012 President's Budget estimate.
      --Stable unit pricing for all launch vehicles.
        However, while DOD can identify the cost of launch capability by
    year, it may be unable to determine the total cost of an individual
    launch because the majority of launch capability costs are not
    allocated to individual launches. Additionally, according to DOD, it is
    to pay for launch capability for 8 launches, even if fewer launches
    actually take place that year.
             objective 3: compensation to dod for non-dod launches
    Historical Reimbursements
        The 2004 U.S. Space Transportation Policy instructed DOD to fully
    fund the fixed costs of the EELV program. However, the 2013 National
    Space Transportation Policy does not instruct DOD to fully fund the
    fixed costs of the EELV program.
        Prior to the December 2013 contract modification:
        --ULA provided a small reimbursement to DOD for the resources used
                to launch missions sold to other customers, such as NASA or
                other government or commercial customers.
        --DOD and ULA annually negotiated the value of the reimbursement.
        --Reimbursements, also known as offsets:
          -- represented the average 30-day cost of launch vehicles
                boosters on the launch pad for a given fiscal year, and not
                actual expenses.
          -- differed based on which launch vehicle is used, and from which
                launch range the vehicle is flown.
          -- were made through price reductions on the invoices ULA
                submitted to DOD.
    Changes Under the December 2013 EELV Contract Modification
        According to DOD officials, the December 2013 contract modification
    changes how launches sold to other customers are handled.
        One significant change is the method by which DOD is to be
    compensated when ULA sells launches to other customers. Specifically,
    ULA and DOD will adjust the EELV contract value at the start of each
    fiscal year, based on the number of non-DOD launches ULA expects to
    sell that year.
        DOD officials told us the EELV program intends to pay only for the
    capability it requires, that is, eight launches per year for the
    duration of the contract.
        The contract also includes provisions for more representative
    compensation for non-DOD launches. For example, compensation to DOD
    will:
      --be based in part on discrete, allocable costs per launch, and
      --amount to roughly three times what was under previous contracts,
            though it still represents a small percentage of total
            capability paid for.
        Although DOD negotiated larger dollar amounts in the current
    contract, DOD may not know if it is receiving fair and representative
    compensation because many ELC costs are not allocated by launch.
       objective 4: implications of requiring competitors to bid launch
          proposals using an elc/els structure or commercial approach
    Best Value Comparison
        Based on our discussions with DOD, DOD plans to conduct a best
    value procurement where price is not the only consideration. DOD will
    likely consider several factors when comparing proposals for up to 14
    additional launches available for competition between ULA and new
    entrants, including the following:
      --Price.--Companies may be required to offer proposals that include
            capability (cost-reimbursement) and launch hardware (fixed-
            price) components, similar to the current ELC/ELS contract
            structure with ULA.
      --Mission risk.--DOD will likely take past launch performance into
            account.
      --Mission Integration.--DOD will likely consider any additional work
            required to integrate satellites onto each company's launch
            vehicles.
        DOD has not yet decided whether to require competitors to submit
    offers using an ELC/ELS structure, a commercial approach, or some other
    type of proposal.

        IMPLICATIONS TO DOD OF REQUIRING AN ELC/ELS STRUCTURE FOR LAUNCH
                                    PROPOSALS
    ------------------------------------------------------------------------
              Benefits to DOD                     Challenges to DOD
    ------------------------------------------------------------------------
    DOD is familiar and experienced
     with the ELC/ELS approach of
     funding launches; this approach
     would not disrupt the current
     contractual arrangement with ULA.

    By requiring all companies to bid
     using an ELC/ELS structure, DOD
     would have a straightforward
     basis on which to compare
     proposals.
                                        DOD has greater insight into current
    Greater insight into contractor      EELV costs than in the past, but
     cost or pricing data could lend     may find itself funding an under-
     itself to a better bargaining       utilized launch capability with ULA
     position in future contract         if they select a new entrant for
     negotiations.                       some or all of the 14 launches.
                                         This is because the current
                                         contract pays for annual ULA launch
                                         capability for eight launches, even
                                         if fewer launches actually take
                                         place in a given year. If DOD buys
                                         a launch from another provider, it
                                         may be paying for duplicate
                                         capabilities.

    ------------------------------------------------------------------------

       IMPLICATIONS TO ULA IF DOD REQUIRES AN ELC/ELS STRUCTURE FOR LAUNCH
                                    PROPOSALS
    ------------------------------------------------------------------------
              Benefits to ULA                     Challenges to ULA
    ------------------------------------------------------------------------
    DOD's recent block buy contract
     with ULA buys launch capability
     for 6 years, and affords ULA the
     opportunity to offer only the
     incremental cost to ULA of
     launching any of the 14 available
     missions. This is because under
     the current EELV contract, DOD
     has already bought ULA launch
     capability for eight launches per
     year, even if fewer launches
     actually take place.

    ULA may get the benefit of an
     excellent launch record of 67
     consecutive successful launches
     of government (defense and civil)
     and commercial missions on Atlas
     V and Delta IV launch vehicles
     since 2002.\8\
                                        New entrants are expected to compete
    Satellite integration requirements   for up to 14 launches before they
     for ULA's Atlas V and Delta IV      have been certified to launch the
     launch vehicles are generally       full range of EELV missions,
     known, given ULA's role as the      meaning they have not paid the
     EELV program's sole launch          developmental costs of standing up
     provider.                           their heavy launch vehicles and
                                         pads. This could give new entrants
                                         a price advantage over ULA, which
                                         is required to provide launch
                                         services for all variants of EELVs,
                                         including heavy launch vehicles,
                                         the most expensive to build and
                                         launch.
    ------------------------------------------------------------------------
    \8\ Lockheed Martin and Boeing launched Atlas V and Delta IV launch
      vehicles, respectively, beginning in 2002, prior to the formation of
      ULA in 2006.

      IMPLICATIONS TO NEW ENTRANTS IF DOD REQUIRES AN ELC/ELS STRUCTURE FOR
                                LAUNCH PROPOSALS
    ------------------------------------------------------------------------
         Benefits to new entrants            Challenges to new entrants
    ------------------------------------------------------------------------
    New entrants are expected to
     compete for up to 14 launches
     before becoming certified to
     conduct the full range of EELV
     missions. This affords them a
     potential price advantage over
     ULA, as new providers have not
     yet had to pay for the
     development, production, and
     demonstration of each type of
     launch vehicle.
                                        DOD does not currently fund launch
    While new entrants cannot            capability for new entrant
     demonstrate a long past             companies, as it does for ULA. If
     performance record for EELV-class   DOD requires a similar structure
     launches as can ULA, the Federal    for new entrants, they may
     Acquisition Regulation (FAR)        ultimately have to stand up their
     prohibits a lack of a performance   own capability to meet DOD
     history from being considered a     requirements, which could be
     negative.\9\                        costly.

    ------------------------------------------------------------------------
    \9\ FAR Section 15.305(a)(2)(iv).

    Using a Commercial Approach for Launch Proposals
        New entrants would prefer to submit proposals on a commercial,
    fixed-price basis in accordance with FAR Part 12, in order to focus the
    EELV competition on price without DOD having to pay separately for ELC
    costs.\10\
    ---------------------------------------------------------------------------
        \10\ FAR Part 12 outlines processes for acquiring commercial items,
    which are defined as items that are customarily used by the general
    public or by nongovernmental entities for purposes other than
    governmental purposes. Some features of FAR Part 12 contracts include
    less insight into cost or pricing data, and fixed-price contract types.
    ---------------------------------------------------------------------------
        DOD is reluctant to use a FAR Part 12 approach because DOD believes
    this approach limits DOD's insight into contractor costs. Officials
    indicate a lack of insight into these costs led to problems in the
    past.
        DOD also points out that a FAR Part 12 approach would have fewer
    cost and data reporting requirements for new entrants than are
    currently placed on ULA, leading to an unfair cost advantage for the
    new entrants who would not have to develop and install business systems
    to manage a cost-reimbursement contract.
        However, if a robust competitive environment exists in the post-
    block buy phase beginning in fiscal year 2018, DOD has noted that it
    may depart from the ELC/ELS construct while requiring all companies to
    submit offers in a full and open competition for launch services.

    ------------------------------------------------------------------------
         Potential benefits to DOD           Potential challenges to DOD
    ------------------------------------------------------------------------
    Use of a fixed-price contract
     identifies the cost of the
     contract at time of award.

    Could facilitate a straightforward
     comparison of launch vehicle
     prices between companies without
     having to account for ULA's ELC
     contract structure.
                                        Under a fixed-price commercial-type
    Full and open competition could      contract, DOD access to cost data
     help to decrease launch prices      would be very limited.
     and increase efficiencies.

    ------------------------------------------------------------------------

                             scope and methodology
        We interviewed or obtained information from:
      --Air Force Space Command, Peterson Air Force Base, Colorado Springs,
            Colorado.
      --Air Force Space and Missile Systems Center, Launch Systems
            Directorate, Los Angeles Air Force Base, El Segundo,
            California.
      --Defense Contract Audit Agency, Littleton, Colorado.
      --Defense Contract Management Agency, Littleton, Colorado.
      --Office of the Secretary of Defense, Cost Assessment and Program
            Evaluation, Washington, District of Columbia.
      --Orbital Sciences Corporation, El Segundo, California.
      --Program Executive Officer for Space Launch, Washington, District of
            Columbia.
      --Space Exploration Technologies, Inc., Hawthorne, California.
      --United Launch Alliance, Centennial, Colorado.

        To determine the insight DOD had into launch costs under past EELV
    contracts:
      --We reviewed the two most recent ELC and ELS contracts and examined
            the contract structure and breakdown of costs included in the
            contract.
      --We received an in-depth verbal and written briefing on the ELC
            contract from DOD, and discussed with senior Air Force
            officials the history, context, and makeup of the EELV
            contracts.
      --We interviewed other DOD and incumbent contractor officials
            regarding direct launch vehicle and other supporting activities
            performed under the contracts.
      --We reviewed Defense Contract Audit Agency audit reports of EELV
            launch contracts, report dates ranging from 2005 to 2012.
      --We reviewed past GAO reports and identified previous
            recommendations and their implementation to determine DOD
            insight into contracts.

        To determine how recent changes to EELV contracts affect accounting
    for costs:
      --We discussed the new EELV contract with DOD contracting officials
            and received an in-depth briefing on the structure of the new
            contract, including changes from previous contracts.
      --We reviewed the modified EELV contract, and compared its contents
            and dollar amounts to previous versions of EELV contracts.
      --We discussed the modified EELV contract, and changes from previous
            contracts, with the incumbent contractor.

        To determine how DOD is reimbursed for costs when the incumbent
    provider sells launches to other customers:
      --We examined ELC contracts from fiscal years 2012-2014 to determine
            reimbursements.
      --We interviewed DOD and incumbent contractor officials to identify
            how any reimbursement amounts were calculated and the extent to
            which ELC costs were included.
      --We analyzed the reimbursement amounts and calculated the
            percentages of total ELC costs that the reimbursements
            represented annually.

        To determine the implications of possible DOD approaches to
    comparing launch proposals between the incumbent and new launch
    providers:
      --We discussed DOD's plans to make the comparison in interviews with
            DOD officials who are developing the plan.
      --We reviewed draft DOD performance work statement related to the
            proposed EELV competition.
      --We discussed the implications of DOD's plan with DOD officials, new
            entrant launch service providers and the incumbent provider.
      --We reviewed FAR requirements for various types of contracts,
            including fixed-price and cost--reimbursement-type contracts.

        We obtained technical comments from DOD to ensure the accuracy of
    the slides, and incorporated changes as appropriate.

        Senator Durbin. Thank you very much, Ms. Chaplain. We will
    have some questions.
        But next, we're going to hear from Michael Gass, President
    and CEO of United Launch Alliance.
        Mr. Gass.
    STATEMENT OF MICHAEL C. GASS, PRESIDENT AND CEO, UNITED
                LAUNCH ALLIANCE
        Mr. Gass. Chairman Durbin, Ranking Member Cochran, members
    of the subcommittee, thank you for the opportunity to appear
    today to talk about the EELV program and the future of space
    launch. On behalf of the men and women of United Launch
    Alliance, and the entire EELV supply team, we are honored to be
    entrusted with the responsibility of safely delivering critical
    national security capabilities to orbit.
        ULA also supports customers outside of national security.
    For NASA, we have launched science missions to the moon,
    Mercury, Jupiter, and Pluto, and even sent the Rovers on to
    Mars. Our customers extend beyond the Government to the
    commercial sector, with nine commercial missions to date and
    several more on the manifest.
        I am also pleased to report that ULA and the Government
    team have consistently delivered 100 percent mission success
    over 68 times since the inception of the program, delivering
    over $60 billion of taxpayer-funded satellites. We are
    currently at a tempo of a launch of one launch every month.
    ULA's Atlas V and Delta IV are the most powerful and most
    reliable rockets in the world. They are the only rockets that
    fully meet the unique needs of the national security community.
        The Air Force EELV program was openly and fairly competed
    in the late 1990s, with a unique acquisition strategy at the
    time that required significant upfront investment by industry.
    Lockheed Martin's Atlas and Boeing's Delta products were the
    winners of that competition. Over the past 17 years, the
    program has continued to deliver, meeting the needs of our
    Nation effectively and efficiently.
        The EELV program is entering a new era. The Air Force's new
    acquisition strategy aims to maintain reliability and stabilize
    the industrial base, while reducing costs and potentially
    reintroducing competition. The new strategy is a welcome
    improvement from the highly inefficient and costly approach of
    buying rockets one at a time.
        The next phase of the Air Force's strategy is to
    reintroduce competition. I believe there are important
    questions about how EELV competitions will be structured to
    ensure they are fair and open, and whether competition will
    actually save the savings that is promised.
        Ultimately, the central question is whether savings from
    competition will be sufficient to offset the cost of
    duplicating existing capabilities. ULA was formed to enable
    assured access to space with two separate launch systems, with
    the recognition that market demand was insufficient to sustain
    two companies. We went from two competing teams and a redundant
    and underutilized infrastructure to one team that has exceeded
    the savings of consolidation expectations.
        Looking to the future, ULA is investing in new technology
    and concepts to make our products better and more affordable.
    We are investing internal funds to develop a capability to
    launch two GPS satellites at once, cutting launch costs almost
    in half. ULA, along with our Government customers, is reviewing
    every requirement and every process to eliminate any
    unnecessary or inefficient elements.
        ULA also is aggressively expanding its customer base, both
    at NASA and the commercial sector, with additional launches,
    because improved utilization of the fixed infrastructure
    improves the cost for all customers. ULA and our industry
    partners are working closely with NASA's space launch system
    and other DOD programs to find opportunities to improve product
    designs and efficiently utilize existing industrial base
    infrastructure to lower the costs for all programs.
        On a personal note, I've been in this business for 35
    years. I've worked with the Government in every imaginable
    approach to buying launch services, from the traditional DOD
    contracting approaches to the commercial approaches, from
    buying rockets in blocks to buying them individually. I've also
    worked extensively in the international and commercial sectors.
    I was there in the 1990s when the commercial demand for launch
    was projected to be dozens of launches per year, only to have
    the projected commercial demand evaporate overnight.
        I believe leveraging the demand of the commercial sector is
    smart. But relying on commercial demand to enable national
    security carries huge risks, both to the rocket supplier and to
    its Government customers.
        I've also experienced some of the launch industry's darkest
    days, such as in the late 1990s, prior to the EELV program,
    when the U.S. suffered a series of six major launch failures
    over a 10-month period. Those losses totaled billions of
    dollars and were a harsh reminder that launch is risky and
    extremely unforgiving. It's difficult to overemphasize the loss
    of national security those failures caused.
        I believe the impressive successes we achieved on EELV stem
    from the difficult lessons learned from those failures. These
    lessons include sustaining a laser focus on technical rigor and
    the importance of an open and transparent relationship with our
    Government customers, and the acquisition strategies that align
    with customers' priorities.

                               PREPARED STATEMENT

        In summary, I believe the EELV program has been a major
    success for the Nation. We will continue to provide the assured
    access the Nation needs to deliver critical capabilities to
    orbit reliably and on schedule. We look forward to working with
    our Government customers to further drive down costs without
    compromising the reliability and readiness.
        Thank you for the opportunity, and I look forward to your
    questions.
        [The statement follows:]
                     Prepared Statement of Michael C. Gass
        Chairman Durbin, Ranking Member Cochran, and members of the
    subcommittee, thank you for the opportunity to appear today to discuss
    the Evolved Expendable Launch Vehicle (EELV) program and the future of
    space launch.
        On behalf of the men and women of United Launch Alliance and the
    entire EELV supplier team, we are honored to be entrusted with the
    responsibility of safely delivering critical national security
    satellites to orbit. These satellites provide capabilities vital to
    nearly every aspect of U.S. national security. ULA also supports
    customers outside of national security. For NASA, we have launched
    science missions to the Moon, Mercury, Jupiter, and Pluto, and even
    sent the rovers on their way to Mars. Our customers extend beyond
    government to the commercial sector with nine commercial missions to
    date and several more on the manifest.
        I am pleased to report that ULA and the Government team have
    consistently delivered 100 percent mission success over 68 launches
    since the inception of the program. We are currently at a tempo of
    about one launch every month. ULA's Atlas V and Delta IV rockets are
    the most powerful and most reliable in the world. They are the only
    rockets that fully meet the unique and specialized needs of the
    national security community.
        The Air Force EELV program was competed in the late 1990s with a
    unique acquisition strategy that required significant upfront
    investment by industry. Lockheed Martin's Atlas and Boeing Company's
    Delta products were the winners. Over the past 17 years the program has
    continued to deliver. Meeting the needs of our Nation effectively and
    efficiently--delivering capabilities on time, on budget and while
    delivering on all of the programs original requirements.
        Looking forward, the EELV program is entering a new era. The Air
    Force's new acquisition strategy aims to maintain reliability and
    stabilize the industrial base, while reducing costs and introducing
    competition. We welcome the new strategy, as the previous approach of
    buying rockets one-at-a-time was highly inefficient and costly.
        The Air Force implemented the first phase of the new strategy with
    a block-buy commitment which will save several billions of dollars over
    the next 5 years. The block-buy created efficiency through economies of
    scale, eliminated repetitive administrative contracting actions, and
    provided stability and predictability that enabled informed investment
    decisions on product and process improvements that were incorporated
    into our pricing.
        The next phase of the Air Force strategy is to introduce
    competition. I believe there are substantive questions about how EELV
    competitions will be structured to ensure the competition is fair and
    open and whether it will actually deliver savings to our Nation.
    Ultimately, the central question is whether savings from competition
    will be sufficient to offset the cost of duplicating existing
    capabilities. ULA was formed to enable assured access to space with two
    separate launch systems, with recognition the that market demand was
    insufficient to sustain two competitors. We went from two competing
    teams with redundant and underutilized infrastructure to one team that
    has delivered the expected savings of this consolidation.
        Looking to the future, we are investing in new technology and
    concepts to make our products better and more affordable. We are
    investing internal funds to develop a capability to launch two GPS
    satellites at a time which will cut launch costs almost in half. ULA,
    along with our Government customers, is reviewing every requirement and
    every process to eliminate any unnecessary or inefficient elements.
        ULA is also aggressively expanding its customer base, both at NASA
    and in the commercial sector with additional launches because improved
    utilization of the fixed infrastructure improves the cost for all
    customers. ULA and our industry partners are going to work closely with
    NASA's SLS, and other DOD programs to find opportunities to improve
    product designs and utilize industrial base infrastructure more
    efficiently to lower the cost for all programs.
        On a more personal note, I have been in this business for 35 years.
    I have worked with the Government in every imaginable approach to
    buying launch services, from traditional DOD contracting approaches to
    commercial approaches; from buying rockets in blocks to buying them
    individually. I've also worked extensively in the international and
    commercial sectors. I was there in the 1990s when the commercial demand
    for launch was projected to be dozens of launches per year, only to
    have the projected commercial demand evaporate overnight. I believe
    leveraging the demand from the commercial sector is smart, but relying
    on commercial demand to enable national security carries huge risks,
    both to the rocket supplier and to its government customers.
        I've also experienced some of the launch industry's darkest days,
    such as in the late 1990s when the U.S. suffered a series of six major
    launch failures over a 10-month period. These included three
    consecutive Titan IV failures and the loss of some of the Nation's most
    critical systems. Those losses totaled many billions of dollars and
    were a harsh reminder that launch is risky and extremely unforgiving.
    It's difficult to overemphasize the depth of the loss to national
    security those failures caused.
        I believe the impressive successes we've achieved on EELV stem from
    the difficult lessons-learned from the 1990s. These lessons include
    sustaining a laser focus on technical rigor, the importance of an open
    and transparent relationship with our government customers, and
    acquisition strategies that align with our customers' priorities.
        In summary, I believe the EELV program has been a major success for
    the Nation. We will continue to provide the assured access the Nation
    needs to deliver critical capabilities to orbit reliably and on-
    schedule. We look forward to working with our government customers and
    stakeholders to significantly drive down cost further while maintaining
    reliability and readiness.
        Thank you for the opportunity to appear before you today. I will be
    honored to answer your questions.

                                                   EELV FLIGHT HISTORY
                                                     Updated 2/21/13
    ----------------------------------------------------------------------------------------------------------------
    EELV       Launch Date             Vehicle              Customer              Mission              Outcome
    ----------------------------------------------------------------------------------------------------------------
       108/21/02              Atlas V.............  Commercial..........  Hot Bird 6--         Mission Success
                                                                           Commercial Comm.
       211/20/02              Delta IV............  Commercial..........  Eutelsat W5--        Mission Success
                                                                           Commercial Comm.
       303/11/03              Delta IV............  Air Force...........  DSCS-3 A3--Military  Mission Success
                                                                           Communications.
       405/13/03              Atlas V.............  Commercial..........  Hellas Sat--         Mission Success
                                                                           Commercial Comm.
       507/17/03              Atlas V.............  Commercial..........  Rainbow 1--          Mission Success
                                                                           Commercial Comm.
       608/29/03              Delta IV............  Air Force...........  DSCS-3 B6--Military  Mission Success
                                                                           Communications.
       712/17/04              Atlas V.............  Commercial..........  AMC 16--Commercial   Mission Success
                                                                           Comm.
       812/21/04              Delta IV-Heavy......  Air Force...........  DemoSat--1st flight  Mission Success
                                                                           of Delta IV-Heavy.
       903/11/05              Atlas V.............  Commercial..........  Inmarsat 4-F1......  Mission Success
      1008/12/05              Atlas V.............  NASA................  Mars Reconnaissance  Mission Success
                                                                           Orbiter.
      1101/19/06              Atlas V.............  NASA................  New Horizons--Pluto  Mission Success
      1204/20/06              Atlas V.............  Commercial..........  Astra 1KR..........  Mission Success
      1305/24/06              Delta IV............  NASA/NOAA...........  GOES-N--Weather      Mission Success
                                                                           Satellite.
      1406/28/06              Delta IV............  NRO.................  NROL-22              Mission Success
                                                                           (Classified).
      1511/04/06              Delta IV............  Air Force...........  DMSP-17--Weather     Mission Success
                                                                           Satellite.
      1603/08/07              Atlas V.............  Air Force...........  STP-1--Technology    Mission Success
                                                                           Satellite.
      1706/15/07              Atlas V.............  NRO.................  NROL-30              Mission Success
                                                                           (Classified).
      1810/11/07              Atlas V.............  Air Force...........  WGS-1--Military      Mission Success
                                                                           Communications.
      1911/11/07              Delta IV-Heavy......  Air Force...........  DSP-23--Missile      Mission Success
                                                                           Warning.
      2012/10/07              Atlas V.............  NRO.................  NROL-24              Mission Success
                                                                           (Classified).
      2103/13/08              Atlas V.............  NRO.................  NROL-28              Mission Success
                                                                           (Classified).
      2204/14/08              Atlas V.............  Commercial..........  ICO G1--Commercial   Mission Success
                                                                           Communications.
      2301/18/09              Delta IV-Heavy......  NRO.................  NROL-26              Mission Success
                                                                           (Classified).
      2404/04/09              Atlas V.............  Air Force...........  WGS-2--Military      Mission Success
                                                                           Communications.
      2506/18/09              Atlas V.............  NASA................  LRO--Moon Mission..  Mission Success
      2606/27/09              Delta IV............  NASA/NOAA...........  GOES-O--Weather      Mission Success
                                                                           Satellite.
      2709/08/09              Atlas V.............  DOD.................  PAN--Communications  Mission Success
      2810/18/09              Atlas V.............  Air Force...........  DMSP-18--Weather     Mission Success
                                                                           Satelltie.
      2911/23/09              Atlas V.............  Commercial..........  Intelsat 14--        Mission Success
                                                                           Commercial Comm.
      3012/06/09              Delta IV............  Air Force...........  WGS-3--Military      Mission Success
                                                                           Communications.
      3102/11/10              Atlas V.............  NASA................  Solar Obervatory--   Mission Success
                                                                           Science.
      3203/04/10              Delta IV............  NASA/NOAA...........  GOES-P--Weather      Mission Success
                                                                           Satelltie.
      3304/22/10              Atlas V.............  Air Force...........  X-37B Orbital Test   Mission Success
                                                                           Vehicle-1.
      3405/28/10              Delta IV............  Air Force...........  GPS-IIF-1            Mission Success
                                                                           Navigation
                                                                           Satellite.
      3508/24/10              Atlas V.............  Air Force...........  AEHF-1 Military      Mission Success
                                                                           Communications.
      3609/21/10              Atlas V.............  NRO.................  NROL-41              Mission Success
                                                                           (Classified).
      3711/21/10              Delta IV-Heavy......  NRO.................  NROL-32              Mission Success
                                                                           (Classified).
      3801/20/11              Delta IV-Heavy......  NRO.................  NROL-49              Mission Success
                                                                           (Classified).
      3903/05/11              Atlas-V.............  Air Force...........  X-37B Orbital Test   Mission Success
                                                                           Vehicle-2.
      4003/11/11              Delta IV............  NRO.................  NROL-27              Mission Success
                                                                           (Classified).
      4104/14/11              Atlas V.............  NRO.................  NROL-34              Mission Success
                                                                           (Classified).
      4205/07/11              Atlas V.............  Air Force...........  SBIRS-GEO-1 Missile  Mission Success
                                                                           Warning System.
      4307/16/11              Delta IV............  Air Force...........  GPS IIF-2--          Mission Success
                                                                           Navigation
                                                                           Satellite.
      4408/05/11              Atlas V.............  NASA................  Juno--Mission to     Mission Success
                                                                           Jupiter.
      4511/26/11              Atlas V.............  NASA................  Mars Science Lab/    Mission Success
                                                                           Curiosity Rover.
      4601/20/12              Delta IV............  Air Force...........  WGS-4--Military      Mission Success
                                                                           Communications.
      4702/24/12              Atlas V.............  Navy................  MUOS 1--Military     Mission Success
                                                                           Communications.
      4804/03/12              Delta IV............  NRO.................  NROL-25--(Classifie  Mission Success
                                                                           d).
      4905/04/12              Altas V.............  Air Force...........  AEHF-2 Military      Mission Success
                                                                           Communications.
      5006/20/12              Atlas V.............  NRO.................  NROL-38--(Classifie  Mission Success
                                                                           d).
      5106/29/12              Delta IV-Heavy......  NRO.................  NROL-15              Mission Success
                                                                           (Classified).
      5208/30/12              Atlas V.............  NASA................  RBSP--Heliophysics.  Mission Success
      5309/13/12              Atlas V.............  NRO.................  NROL-36              Mission Success
                                                                           (Classified).
      5410/04/12              Delta IV............  Air Force...........  GPS IIF-3--          Mission Success
                                                                           Navigation
                                                                           Satellite.
      5512/11/12              Atlas V.............  Air Force...........  X-37B Orbital Test   Mission Success
                                                                           Vehicle-3.
      5601/31/13              Atlas V.............  NASA................  TDRS-K--Communicati  Mission Success
                                                                           ons.
      5702/11/13              Atlas V.............  NASA................  LDCM--Landsat......  Mission Success
      5803/19/13              Atlas V.............  Air Force...........  SBIRS-GEO-2 Missile  Mission Success
                                                                           Warning System.
      5905/15/13              Atlas V.............  Air Force...........  GPS IIF-4--          Mission Success
                                                                           Navigation
                                                                           Satellilte.
      6005/24/13              Delta IV............  Air Force...........  WGS-5--Military      Mission Success
                                                                           Communications.
      6107/19/13              Atlas V.............  Navy................  MUOS 2--Military     Mission Success
                                                                           Communications.
      6208/08/13              Delta IV............  Air Force...........  WGS-6--Military      Mission Success
                                                                           Communications.
      6308/28/13              Delta IV-Heavy......  NRO.................  NROL-65              Mission Success
                                                                           (Classified).
      6409/18/13              Atlas V.............  Air Force...........  AEHF-3 Military      Mission Success
                                                                           Communications.
      6511/18/13              Atlas V.............  NASA................  MAVEN--Mission to    Mission Success
                                                                           Mars.
      6612/05/13              Atlas V.............  NRO.................  NROL-39--(Classifie  Mission Success
                                                                           d).
      6701/23/14              Atlas V.............  NASA................  TDRS-L--Communicati  Mission Success
                                                                           ons.
      6802/20/14              Delta IV............  Air Force...........  GPS IIF-5--          Mission Success
                                                                           Navigation
                                                                           Satellite.
    ----------------------------------------------------------------------------------------------------------------

        Senator Durbin. Thanks, Mr. Gass.
        Elon Musk, CEO and Chief Designer of Space Exploration
    Technologies, the floor is yours.
    STATEMENT OF ELON MUSK, CEO AND CHIEF DESIGNER, SPACE
                EXPLORATION TECHNOLOGIES CORPORATION
                (SPACEX)
        Mr. Musk. Thank you. Mr. Chairman, Ranking Member Cochran,
    members of the committee, thank you for having me here today.
        SpaceX was founded to make radical improvements to space
    transport technology, with particular regard to reliability,
    safety, and affordability. Today it is arguably one of the
    leading aerospace companies in the world, with nearly 50
    missions contracted at a value of approximately $5 billion.
        We have launched our Falcon 9 rocket eight times, with 100
    percent success rate, including four launches for NASA, three
    of which docked with the International Space Station, and have
    launched a sophisticated geostationary satellite for the
    world's leading satellite companies.
        We are restoring America's competitive in the global
    commercial space launch market as the only U.S. company that is
    consistently winning head-to-head competitions for launch
    opportunities at the world level.
        With respect to the EELV program, I have five points to
    make.
        The first is that the Air Force and other agencies are
    simply paying too high a price for launch. The impacts of
    relying on a monopoly provider since 2006 were predictable, and
    they have borne out. Space launch innovation has stagnated,
    competition has been stifled, and prices have risen to levels
    that General Shelton has called ``unsustainable.''
        When the merger between Boeing and Lockheed's business
    occurred, the merger promised, in the press release, $150
    million of savings. Instead, there were billions of dollars of
    cost overruns and a Nunn-McCurdy breach for the program
    exceeding 50 percent of its cost projections.
        According to congressional records, in fiscal year 2013,
    the Air Force paid an average of $380 million for each national
    security launch, while subsidizing ULA's fixed costs to the
    tune of more than $1 billion a year, even if they never launch
    a rocket.
        By contrast, SpaceX's price is well under $100 million,
    meaning a savings of almost $300 million per launch, which in
    many cases would pay for the launch and the satellite combined.
    So if you took something like a GPS satellite, which is about
    $140 million, you could actually have a free satellite with the
    launch. So our launch plus the satellite would cost less than
    just their launch, which is an enormous difference. And we seek
    no subsidies to maintain our business.
        To put this into perspective, had SpaceX been awarded the
    missions ULA received under its recent noncompeted 36-core
    block buy, we would have saved the taxpayers $11.6 billion.
        Point number two: Competition is coming to the national
    security market; this has been acknowledged. And we are ready
    to compete for that. In order to be certified as EELV
    providers, SpaceX had to meet a number of requirements that
    were never demanded of the incumbent provider.
        We were required to successfully launch three flights of
    our upgraded Falcon line vehicle, which we achieved in January.
    Under our EELV certification agreement, we are undertaking
    vigorous engineering reviews with the Air Force. To date, we
    have delivered more than 30,000 data items to the Air Force and
    provided total access to our internal systems to more than 300
    Government officials for certification. And we hope to complete
    that certification this year.
        Point number three: We really believe that robust
    competition must begin this calendar year. We applaud the early
    steps the Air Force and National Reconnaissance Office (NRO)
    have taken to reintroduce competition into the EELV program. In
    2012, the Air Force, under direction from the Secretary of
    Defense, committed to competing up to 14 missions, with 5
    missions available for competition this year.
        Of course, we would greatly have preferred that the Air
    Force open all of its missions for competition. And we have
    serious concerns that the five missions that will be competed
    this year will not actually be--that these five missions will
    not actually be awarded this year. We recently learned that
    perhaps only one will be awarded this year.
        Point number four: With the advent of competition, a launch
    should really be viewed as a commodity. And any competition
    between new entrants and ULA should properly acknowledge the
    launch subsidy received by the incumbent. Consistent with
    Federal procurement regulations and DOD acquisition directives,
    when a competitive environment exists, the Government should
    use firm fixed-price Federal Acquisition Regulation (FAR) Part
    12 contracts that properly incent contractors to deliver on
    time and on budget. That means eliminating the $1 billion
    annual subsidy to ULA, which creates an extremely unequal
    playing field.
        And the final point is that our Falcon 9 and Falcon Heavy
    launch vehicles are truly made in America. We design and
    manufacture the rockets in California and Texas, with key
    suppliers throughout the country, and launch them from either
    Vandenberg Air Force Base or Cape Canaveral Air Force Station.
    This stands in stark contrast to the United Launch Alliance's
    most frequently flown vehicle, the Atlas V, which uses a
    Russian main engine, and where approximately half the air frame
    is manufactured overseas. In light of Russia's de facto
    annexation of Ukraine's Crimea region and the formal severing
    of military ties, the Atlas V cannot possibly be described as
    providing assured access to our space for our Nation, when
    supply of the main engine depends on President Putin's
    permission.

                               PREPARED STATEMENT

        Given this development, it would seem prudent to reconsider
    whether the 36-core uncompeted sole-source award to ULA is
    truly in the best interests of the people of the United States.
        I thank the committee for this opportunity and look forward
    to addressing any questions.
        [The statement follows:]
                        Prepared Statement of Elon Musk
        Chairman Durbin, Ranking Member Cochran, and members of the
    committee: Thank you for the opportunity to participate in this
    important hearing. I also want to thank this committee for its
    continued support for competition in the Evolved Expendable Launch
    Vehicle (EELV) program. This committee's commitment to reliability,
    transparency, and cost-effectiveness coupled with clear and sustained
    support for New Entrant competition will ensure mission success, reduce
    launch costs, spur innovation in the national security launch
    enterprise, and provide true assured access to space for our
    warfighters as they defend our Nation. To be clear at the onset, I
    believe that competition in the EELV program will save the taxpayers in
    excess of $1 billion per year.
        I founded SpaceX in 2002 to radically improve the reliability,
    safety, and affordability of space transportation. Twelve years later,
    SpaceX is the fastest growing launch services company in the world,
    with nearly 50 missions contracted at a total contract value of
    approximately $5 billion. We have now successfully launched our Falcon
    9 rocket eight times, including four successful launches for NASA and
    three successful launches for leading commercial satellite
    companies.\1\ Our Dragon spacecraft has berthed with the International
    Space Station (ISS) three times, and we are scheduled to conduct
    another resupply mission to the ISS for NASA this month.
    ---------------------------------------------------------------------------
        \1\ The first launch of the Falcon 9 was a successful SpaceX-funded
    demonstration flight, which occurred on June 4, 2010.
    ---------------------------------------------------------------------------
        SpaceX has achieved massive, unprecedented reductions in the cost
    of launch and spacecraft development, all while achieving 100 percent
    mission success, scaling our production operations to produce 40 rocket
    cores and nearly 400 rocket engines annually later this year--we are
    today the largest rocket engine manufacturer in the world. Meanwhile,
    we continue to push the envelope on rocket technology as we advance
    toward fully reusable launch vehicles, design the safest crew
    transportation system ever produced, and begin testing on the world's
    next-generation rocket engine at Stennis Space Center. Critically, all
    of this innovation is occurring in the United States and our launch
    vehicles (including engines and fairings) and spacecraft are made in
    America. We do not rely upon Russia for any element of the launch
    vehicle.
        SpaceX today is serving the Nation's space program by routinely
    resupplying cargo to and from the International Space Station with our
    Dragon spacecraft and integrating numerous satellites for government
    launches to occur in the next 2 years. We are restoring America's
    competitive position in the global commercial space launch market,
    recapturing market share that U.S. launch companies long ago
    surrendered to our French, Russians, and Chinese competitors. With
    NASA, we are poised to develop a new human spaceflight system that will
    restore America's domestic capability to launch our astronauts from our
    own soil. And we are dedicated--if given a fair opportunity--to
    successfully executing missions in furtherance of the Nation's defense
    and space priorities, while offering the Air Force and other defense
    agencies the means to achieve mission success at a fraction of the cost
    they are paying for launch today.
        To that end, SpaceX is working aggressively to achieve Air Force
    certification to become a certified provider of national security space
    launches with our Falcon 9 and Falcon Heavy launch vehicles. As a
    threshold matter, we have been required to successfully launch three
    upgraded Falcon 9 launch vehicles, two consecutively. Importantly--in
    just 5 months--we successfully and consecutively launched all three of
    the three required Falcon 9 launches as required by the Cooperative
    Research and Development Agreement (CRADA) with the Air Force and the
    New Entrant Certification Plan. One has already been declared a
    successful certification flight. We continue working with our Air Force
    partner as they conclude the data and engineering reviews from the
    remaining two flights, and we look forward to timely certification of
    the Falcon 9 so that we may compete for EELV missions in 2014 for
    missions to be ordered in fiscal year 2015.
        Although the aggressive reintroduction of competition into the EELV
    Program is now the established policy of the Defense Department, the
    details related to creating a fair, full, and open competitive
    acquisition environment remain unresolved. Fair competition in the EELV
    Program will lower the costs of launch, result in a higher quality of
    customer service, drive contractor-funded innovation, increase
    operational flexibility for the Air Force, and relieve congestion on
    the Air Force launch manifest. Indeed, the EELV Program was initiated
    in 1995 in part to introduce affordability, customer service, and
    flexibility to national security space launch. Unfortunately, as this
    committee well-knows, these goals have not been achieved as launch
    costs have grown dramatically since the EELV Program was established,
    and there is congestion in the ULA manifest.
        By fiscal year 2013, the Government was forced to budget in excess
    of $380 million per launch, while subsidizing ULA's fixed costs to the
    tune of more than $1 billion per year if the company never launches a
    rocket.\2\ Several recent cost analyses have determined the EELV
    Program will double in price over initial estimates to $70 billion.\3\
    This sustained cost growth triggered multiple ``critical'' Nunn-McCurdy
    breaches, most recently in 2012 when the program exceeded 58 percent
    unit cost growth.\4\ These cost increases have been exacerbated by an
    opaque and confusing contracting structure that made it difficult to
    understand the true cost of a launch service to the Government. By
    contrast, SpaceX's Falcon 9 price for an EELV mission is well under
    $100 million--a $280 million per launch difference--and SpaceX seeks no
    subsidies to maintain our business.
    ---------------------------------------------------------------------------
        \2\ Department of Defense, ``Fiscal Year (FY) 2014 President's
    Budget Submission, Missile Procurement, Air Force.'' Apr. 2013. Vol. 1,
    232.
        \3\ Department of Defense OUSD (AT&L) ARA/AM, ``Selected
    Acquisition Report (SAR) Summary Tables,'' December 2012, 6; U.S.
    Government Accountability Office, ``Defense and Civilian Agencies
    Request Significant Funding for Launch-Related Activities,'' September
    2013, 2.
        \4\ U.S. Government Accountability Office, ``Uncertainties in the
    Evolved Expendable Launch Vehicle Program Pose Management and Oversight
    Challenges,'' September 2008, 7; 20-21. U.S. Government Accountability
    Office, ``Assessments of Major Weapon Programs,'' March 2013, 59.
    ---------------------------------------------------------------------------
        Recently, some have claimed that the Air Force's block buy of 36
    booster cores from the incumbent will save the taxpayer ``$4.4 billion
    over the next several years.'' Any ``savings'' resulting from a block
    buy of 36 rocket cores from the incumbent provider are derived directly
    from a 50 percent year-over-year budget projection increase in fiscal
    year 2012, which was purposefully based on worst-case assumptions for a
    single-Launch buy, and acknowledged at the time by the incumbent as
    being inflated.\5\ If SpaceX had contracted for these missions, using
    the same baseline, we would have saved the taxpayer a total of $11.6
    billion. That is a 77 percent reduction from the projected $15 billion
    procurement total from which ULA is claiming its savings. If we all use
    the same baseline, it is accurate to say that the absence of full and
    open competition actually has resulted in a $7.2 billion penalty to the
    taxpayer, and untold consequences for important defense priorities that
    might otherwise have been funded.
    ---------------------------------------------------------------------------
        \5\ Svitak, Amy. ``Rising Engine Costs, Uncertainty Drive Up Atlas
    5 Prices for NASA.'' Space News. Feb. 2, 2011. http://
    www.spacenews.com/article/rising-engine-costs-uncertainty-drive-atlas-
    5-prices-nasa.
    ---------------------------------------------------------------------------
        Despite the continuing promise of lower costs since 2006, the fact
    is that the current situation of sole-source providers has become
    unsustainable, a fact now recognized by most observers and the Defense
    Department. The EELV program is now the largest single item in the
    unclassified Air Force space budget, comprising more than 40 percent of
    all Air Force space funding. General William Shelton, the head of U.S.
    Air Force Space Command, acknowledged that these costs are
    ``unsustainable.'' \6\ These issues stem from the current reliance on a
    single-provider, and a contracting structure that disincentivizes
    affordability, innovation, and adherence to schedule.\7\ Further, the
    Government Accountability Office (GAO) has commented in depth on these
    problematic aspects of the program.\8\
    ---------------------------------------------------------------------------
        \6\ ``Department of Defense fiscal year (FY) 2014 President's
    Budget Submission, Missile Procurement, Air Force.'' Apr. 2013.
        \7\ Wydler, Ginny, Su Chang, and Erin M. Schultz. ``Continuous
    Competition as an Approach to Maximize Performance.'' Proc. of Defense
    Acquisition University Research Symposium. McLean: MITRE Corporation,
    2012, 3.
        \8\ U.S. Government Accountability Office, ``DOD Needs to Ensure
    New Acquisition Strategy is Based on Sufficient Information,''
    September 2011, 10-12.
    ---------------------------------------------------------------------------
        Mr. Chairman, we appreciate this Committee's timely review of the
    EELV Program. We commend the Air Force and NRO efforts to reintroduce
    competition into the EELV Program as a means to counter the rising
    costs of national security space launch and the stagnant innovation in
    this critical sector. In order for true, meaningful competition to
    occur, we respectfully suggest the EELV Program be further reformed to
    adopt contracting practices and other acquisition reforms consistent
    with a competitive procurement environment, as follows:
      --Most importantly, every single mission capable of being launched by
            qualified new entrants should be competed this year and every
            year moving forward. There should be no reason that a mission
            is sole-sourced to ULA, whether as part of the recent 36-core
            deal or any other arrangement. And if competition opportunities
            are being delayed, we should understand why that is so, and we
            should fix it immediately;
      --Introduce a FAR Part 12 commercial contract structure that creates
            rational incentives for both the contractors and the government
            to achieve reliable, cost effective on-time launches;
      --Leverage commercial practices wherever possible--a philosophy and
            acquisition approach that NASA has successfully employed in its
            launch programs. Fundamentally, the Air Force should establish
            clear requirements for launch services and associated
            activities, but it should not dictate how those requirements
            are implemented. Rather, contractors should be empowered to
            meet requirements in a manner best suited to their
            organization's strengths; and
      --Eliminate payments--more properly called subsidies--under the EELV
            Launch Capability (ELC) contract line item that are exclusively
            in support of the incumbent provider. And when conducting
            competitions for launches, properly account for the subsidies
            that the incumbent enjoys so that an even playing field is
            created. The long-term elimination of the ELC is paramount if
            an efficient acquisition approach is to be created. As was
            noted in DOD's recertification of the EELV program after its
            2012 ``critical'' Nunn-McCurdy breach, cost-plus contracting
            and the ELC has funded ``effectively idle personnel'' at
            ULA.\9\
    ---------------------------------------------------------------------------
        \9\ Kendall, Frank. ``Evolved Expendable Launch Vehicle Nunn-
    McCurdy Certification: Basis of Determination and Supporting
    Documentation.'' Memorandum to Congressional leadership. 12 Jul. 2012.
    ---------------------------------------------------------------------------
              spacex commitment to reliability and mission success
        Mission success is paramount to SpaceX, as our eight consecutive
    successful Falcon 9 launches to date have demonstrated. The Falcon 9 is
    designed for the highest reliability starting at the architectural
    level. Because 91 percent of launch vehicle failures in the past two
    decades can be attributed to engine failures, avionics failures or
    stage separation anomalies, the Falcon 9 design incorporates robust,
    fault-tolerant propulsion systems, fault-tolerant avionics and controls
    systems with internal triplication and redundant harnessing, and a
    minimum number of separation events. With its nine-engine
    configuration, Falcon 9 features a unique engine-out capability, and is
    designed to permit the loss of up to two engines in flight without
    compromising the mission. The Falcon 9 is the only American rocket
    since the Saturn V with any engine-out capability; any other launch
    vehicle in the world, including the current EELV fleet, that encounters
    a major engine anomaly on ascent will almost certainly fail its
    mission.
        The Merlin engine--which is designed and manufactured by SpaceX and
    powers the Falcon 9 first and second stages--is a human-rated engine
    with high structural margins and a highly reliable, redundant ignition
    system. A hold-before-release system verifying nominal operations of
    the first-stage engine before liftoff has been successfully
    demonstrated multiple times. Rigorous qualification and acceptance
    testing from the component to the vehicle system level are part of
    SpaceX's ``test what you fly'' approach, and the company uses liquid-
    fueled engines and non-pyrotechnic, resettable separation systems that
    allow testing of actual flight hardware before flight. Notably, SpaceX
    does not rely on any foreign companies for critical components or
    subsystems. There is absolutely zero dependence on Russia with this
    rocket. To state the obvious, the same cannot be said of ULA.
        Demonstrating our long-held commitment to launching national
    security payloads, SpaceX designed the Falcon 9 and its follow-on, the
    Falcon Heavy, from the outset to meet the EELV design specifications,
    including the EELV Standard Interface Specification (SIS) and System
    Performance Requirements Document (SPRD), at no charge to the U.S. Air
    Force. Separately, SpaceX has passed rigorous certification efforts by
    NASA in order allow the Dragon spacecraft to berth with the
    International Space Station, as it has now successfully achieved three
    times, with another mission scheduled later this month. This
    accomplishment demonstrates that SpaceX can be trusted with extremely
    critical national and international assets.
        The Falcon Heavy, which SpaceX will debut in 2015, will leverage
    the same engines, tooling, and launch facilities to enhance
    reliability, while also being the most powerful launch vehicle in the
    world.
                         eelv new entrant certification
        To validate our singular emphasis on mission success and to earn
    the confidence of the Air Force, SpaceX formally submitted Statements
    of Intent to become a certified provider of national security space
    launches with our Falcon 9 and Falcon Heavy launch vehicles. SpaceX
    subsequently entered into a formal CRADA with the Air Force to become
    certified under the EELV Program for the Falcon 9, with plans to
    execute a similar agreement for the Falcon Heavy. The Falcon 9
    certification will enable SpaceX to compete for the 14 EELV missions
    that have been identified for competition, and with the Falcon Heavy
    certification, SpaceX intends to compete in 2018 and beyond for the
    entire spectrum of national security space missions.
        As part of our certification plan for the Falcon 9, SpaceX was
    required to conduct three successful flights, with two consecutive
    successes. I am proud to say that SpaceX successfully completed the
    third flight needed for EELV certification on January 6, 2014, and we
    achieved 100 percent mission success for each flight. Importantly, all
    three missions were for commercial customers, eliminating any risk or
    cost to the Government for these certification flights. In early
    February, the Air Force recognized our CASSIOPE mission, launched on
    Sept. 29, 2013, as having met all mission requirements and qualified
    the flight under the EELV Certification CRADA; we are now awaiting an
    Air Force decision on the subsequent two flights. Here, it bears noting
    that the New Entrant Certification requirements that SpaceX must live
    up to exceed the requirements that the Atlas V and Delta IV launch
    vehicles had to meet in 1998, prior to their ability to compete for and
    be awarded EELV launch service orders.
        At this point, the Air Force must complete independent verification
    activities, audits of our processes, and engineering review boards
    (ERBs) to conclude the certification process. SpaceX has committed
    personnel and resources to support these technical interchanges. The
    Air Force kicked off the first ERB process as of late February of 2014,
    but there are many more to conduct and we hope that the Air Force will
    be able to support the schedule to conclude the certification process
    in 2014. This will allow SpaceX to compete for the fiscal year 2015
    missions. Consistent with DOD and Air Force directives, these risk
    reduction activities can and should occur in parallel with the early
    competition phases for the Phase 1A competed missions.\10\ This method
    is consistent with NASA's Launch Services Program (LSP), which requires
    certification prior to launch rather than contract award.
    ---------------------------------------------------------------------------
        \10\ Kendall, Frank. ``Evolved Expendable Launch Vehicle Program
    Quantity Buy Decision Acquisition Decision Memorandum.'' Memorandum to
    the Secretary of the Air Force and the Director, Cost Assessment and
    Program Evaluation. 27 Nov. 2012. Secretary Kendall directs the
    reintroduction of competition into the EELV Program ``as soon as
    possible.'' 2
    ---------------------------------------------------------------------------
        SpaceX has taken multiple other actions to ensure we meet all EELV
    certification requirements, including:
      --Building and debuting a new launch facility last year at Vandenberg
            Air Force Base (VAFB), CA with a successful September 2013
            Falcon 9 launch. This was self-funded by SpaceX;
      --Agreeing to incorporate the ability to provide vertical integration
            at both launch sites for NSS payloads that require their space
            vehicles to be processed in this manner. SpaceX will self-fund
            this capability;
      --Providing the Air Force with the ability to observe or receive data
            from our contracted commercial launch service activities at no
            cost to the Government; and
      --Being awarded and working on a lease with NASA for the use Launch
            Complex 39A to increase SpaceX's ability to meet a growing
            launch manifest and outfitting the launch pad to serve
            additional customers, including the national security
            community, at our own expense to further reduce EELV manifest
            congestion.
                         challenges to eelv competition
        The Air Force is now taking a major step forward in addressing the
    challenges of reintroducing competition into the EELV Program by
    outlining a plan that takes advantage of the recent significant
    advances that have taken place in the U.S. launch services business.
    SpaceX commends the Air Force for moving to certify New Entrants and
    take advantage of new, commercially developed reliable launch systems.
    As the Air Force moves to restructure the EELV program to on-ramp New
    Entrants for competition in the intermediate term, and contemplates the
    format for full and open competition beginning with the fiscal year
    2018 Phase 2 acquisition, a number of key issues must be addressed to
    ensure a fair and level competition:
      --Number of Competitive Missions.--In his November 27, 2012
            Acquisition Decision Memorandum (ADM), Under Secretary of
            Defense Frank Kendall clearly directed that up to 14 missions
            be made available for competition to certified New Entrants.
            This directive was designed to ``aggressively introduce a
            competitive procurement environment in the EELV program.''
            SpaceX strongly supports the decision to compete these 14
            missions, but remains concerned that, faced with a difficult
            budget environment, the Air Force may push many of the 14
            missions out of the fiscal year 2015-fiscal year 2017
            competition, even while leaving the 36-core block buy for the
            incumbent untouched. Such a decision would materially slow
            progress toward the ADM's goal of aggressively transitioning to
            a competitive environment and further delay real savings that
            can be realized with competition. Undersecretary Kendall's
            acquisition directive is quite specific about the need to
            ``aggressively'' introduce competition. His directive does not
            require buying 36 cores from ULA. Rather, every mission capable
            of being launched by qualified new entrants should be competed
            this year and every year moving forward.
      --EELV Launch Capability Funding.--ULA receives on average $1.2
            billion annually primarily on a cost-plus basis to fund
            ``facility and facility support costs, launch and range
            operations, mission integration, mission unique development and
            integration, subcontract support engineering, factory
            engineering, etc.'' \11\ ULA receives these ``EELV Launch
            Capability'' (ELC) payments whether they launch zero rockets or
            eight; if they launch more than eight times, they are paid
            additional funds. Essentially, the Government supports all of
            ULA's fixed costs. Such funds are not provided to SpaceX, and
            SpaceX has not sought them. Rather, SpaceX has self-funded its
            EELV efforts.
    ---------------------------------------------------------------------------
        \11\ ``Department of Defense fiscal year (FY) 2014 President's
    Budget Submission, Missile Procurement, Air Force.'' Apr. 2013. Vol. 1,
    230.
    ---------------------------------------------------------------------------
        ELC funding provides ULA with a major competitive advantage for
            national security missions, as well as civil and commercial
            missions. ULA can, and most likely will, marginally price
            launch services for commercial and civil customers because ELC
            funding allows ULA to maintain its operations and covers its
            fixed costs. In fact, ULA appears to have marketed a marginal
            launch services price for the MEXSAT mission. Here, it appears
            the Mexican government will be paying substantially less for an
            Atlas launch service than does the Air Force. In these
            challenging economic times--or any economic times for that
            matter--why should American taxpayers subsidize a launch for
            the Mexican government or a commercial purchaser of launch
            services?
      --Sole Source, Non-Compete Block Buy to ULA.--The Air Force's
            decision to provide ULA with a sole-source block buy guarantee
            of 36 rocket booster core from fiscal year 2013-fiscal year
            2017 provides the incumbent with unprecedented business
            stability and presents New Entrants with a substantial
            competitive disadvantage. An early reason for the block buy was
            to save on launch costs, but it is not clear that the Air Force
            has created savings over the last acquisition, known as ``Buy
            3.'' In a head-to-head competition against New Entrants, the
            incumbent is well-positioned to leverage this guaranteed order
            to impact the competition outcome. The 36 core block buy gives
            ULA an extreme and unfair competitive advantage relative to New
            Entrants by allowing ULA to allocate its operating costs to the
            block buy and offer marginally priced launches to other
            customers (e.g. NASA, commercial customers) as well as future
            bids for EELV missions.
      --Cost-Plus Contract Elements.--The EELV Launch Services contract
            line item, which basically represents the cost of the launch
            vehicle hardware and production, is structured as a fixed-
            price, incentive fee (FPIF) line item. The ELC, which funds the
            engineering and infrastructure costs to actually execute the
            launch, is now contained in multiple contract line items, many
            of which are cost-plus types. It should be noted that the EELV
            Program is the only U.S. Government launch program that
            utilizes any cost-plus features. As a New Entrant provider,
            SpaceX does not seek out similar ELC funding. Rather, SpaceX
            believes that the utilization of a FAR Part 12 commercial
            contracting structure, with payments based on achievement of
            results at pre-negotiated prices--rather than costs expended,
            which has no limit--should be the preferred acquisition
            approach for the EELV Program. This contracting mechanism
            rewards organizations that spend more time and more money,
            rather than being efficient and achieving results. A
            contracting mechanism that drives efficiency and innovation
            will improve quality of service at much better value for the
            customer. It bears noting that the current contract structures
            add substantial overhead cost to the taxpayer for oversight of
            a largely mature booster core. Further, New Entrants will be
            forced to adopt these higher overhead cost structures or be at
            a disadvantage to the incumbent. In today's budget environment,
            it would be far better to buy these mature products as
            commercial systems and use lower overhead procedures such as
            FAR-based commercial contract structures.
      --Government-Funded Upgrades to Incumbent Systems.--The Air Force
            continues to provide ULA with development funding for numerous
            items, such as the RL-10C, common upper stage, and has
            discussed potential funding for dual payload adaptors and other
            efforts which give ULA a competitive advantage relative to New
            Entrant competitors. Launch service providers are also affected
            by range modernization and programs such as Automatic Flight
            Termination Systems or GPS metric tracking. ULA is funded by
            the Air Force to upgrade their launch vehicles for these
            programs while New Entrants are expected to bear the burdens of
            these costs. ULA should be required to self-fund these upgrades
            in a competitive procurement environment.
                   recommendations to reform the eelv program
        To achieve real and continuous competition and address the
    challenges outlined above, the EELV Program must transition from its
    current sole-source, non-commercial contracting structure to an
    acquisition approach that employs competition and makes use of
    meaningful aspects of commercial business practices and contract
    structures that reward success, efficiency and innovation.
        The Air Force should begin the transition to a standard,
    commercially oriented procurement process which can be supported by a
    commercial business model, and place its emphasis on achieving mission
    success rather than maintaining legacy contract structures that give
    its incumbent provider a competitive advantage. As it has done with
    other major procurements, such as the Wideband Global Satcom (WGS), the
    Air Force can achieve significant capability at substantially lower
    costs by incorporating competitive, commercial practices into its
    acquisition approach. A commercial approach, however, is hindered by
    the contractual structures that are currently in place and which
    provide a material competitive advantage to the incumbent provider.
    Should the Air Force transition to a new model and fully embrace
    competition, it will be in a position to support U.S. launch companies
    as they win commercial business from foreign competitors, while
    leveraging the broader launch services market to absorb fixed costs and
    reduce the overall costs to the U.S. Government. Congress should
    continue robust oversight of the program to ensure these acquisition
    reforms are implemented.
    (a) Eliminate the ELC
        No competition will be fair, full, and open so long as the Air
    Force continues to utilize contract line items to fund ULA's fixed
    costs to maintain its launch capability. There are reasonable ways to
    address this competitive inequity now. At minimum, the fixed cost
    funding must be accounted for in a meaningful way in competitions for
    EELV launches and must be completely offset in non-EELV competitions.
    This near-term approach should be leveraged as the ELC is ultimately
    phased out. The Air Force must eliminate the funding of ULA's launch
    capability prior to the Phase 2 EELV Acquisition or there can be no
    fair competition, and Congress should conduct continuous oversight to
    ensure the elimination of the ELC.
        The original rationale for incorporating the ELC concept in the
    EELV program was to maintain the capability and assured access to space
    with Atlas and Delta when both Lockheed and Boeing threatened to exit
    the launch business. With the later formation of ULA, the Air Force
    implemented the ELC as a means to secure assured access to space in a
    single-supplier environment, opting to insulate its provider from
    market conditions by fully funding its infrastructure and business
    overhead. In addition, many national security space programs were
    having development challenges that were resulting in significant delays
    in satellite delivery, resulting in a low launch rate and supporting
    arguments in support of a launch capability payment structure.
    Notwithstanding whether or not the ELC was an appropriate mechanism to
    achieve assured access to space when it was instituted, it is clear now
    that the prevailing conditions which were used to justify it no longer
    exist. Critically, the newly revised National Space Transportation
    Policy eliminates a 2005 policy that called for the DOD to fund the
    annual ``fixed costs'' of the EELV provider.
        In 2014, these conditions have materially changed in virtually
    every respect. For example, as the Air Force determined in the course
    of adjusting its Acquisition Strategy to support a transition to
    competition, most national security satellites are out of development
    and into production, with delivery now being somewhat predictable. The
    rate of national security space launch has increased significantly,
    which eliminates the need for continuous launch capability funding
    support and enable a transition to a fully loaded launch services price
    offered by each competitor. Finally, the EELV program is emerging from
    its reliance on a single provider with a limited ability to compete on
    the open market, and transitioning to a model with potentially multiple
    certified providers. With respect to the commercial market, the market
    is robust and forecasts are predicated on rational market assumptions
    and analysis. With the onset of at least two viable new entrants, the
    existence of a robust and durable commercial launch market, and
    stability achieved in major NASA space programs with cargo resupply,
    commercial crew, SLS and numerous science missions, there is no
    remaining rationale for maintaining the ELC.
        SpaceX recognizes that a transition away from the ELC will take
    significant planning and time. In the intervening period, however, as
    the Air Force on-ramps New Entrants and allows those certified to
    compete for 14 identified missions beginning to be ordered in fiscal
    year 2015, the Air Force must require the incumbent provider to account
    for the derived financial and non-financial benefits it is afforded
    through the ELC payments it receives from the Government. The ELC
    contract line items total roughly $1 billion annually in direct
    payments to ULA to fund its annual sustaining engineering,
    manufacturing, operations, and overhead costs. These payments
    constitute a substantial competitive advantage for ULA, and Congress
    should insist that actions to mitigate this structural competitive
    inequity be imposed on ULA.
    (b) Return to Fixed-Price Services for the EELV Program
        Unlike the past 10 years, the commercial space launch market is
    robust, stable, and predictable, and the U.S. is recapturing market
    share previously surrendered to international competitors. The Air
    Force should change its existing contracting structure to leverage the
    commercial market and allow for alternate business models to be
    utilized for the acquisition of launch services. While potentially
    appropriate in a development or sole-source environment, cost-plus
    contracting does not incentivize contractors or the government to
    control and reduce cost, nor does it foster contractor innovation, as
    the EELV Program has plainly demonstrated. The requirements associated
    with launch services and mission assurance for the EELV Program are
    well-understood at this time. Indeed, prior to the execution of the
    ``Buy 3'' contracts, the EELV program fully and successfully
    implemented the enhanced mission assurance requirements that are used
    today based upon the recommendations from the Space Launch Broad Area
    Review (BAR 1). However, given the continued existence of legacy
    contracting structures like the ELC, the EELV Program is currently the
    only U.S. Government program utilizing a cost-plus arrangement for the
    execution of launch services. Consistent with the direction in the FAR
    and pursuant to Public Law 103-355, SpaceX recommends that the EELV
    Program be transitioned back to a FAR Part 12 commercial-item
    acquisition approach, which will then achieve parity in the contracting
    structure among all potential competitors.
        Although the FAR Part 12 acquisition authority was employed in 1998
    in the EELV program, it was not the use of FAR Part 12, or any
    shortcomings resulting from its use, that prompted the restructure of
    the EELV program. The need to restructure the program was driven by the
    original business decisions of the EELV contractors 1998, which
    included an overly optimistic forecast of the commercial market. Today,
    the situation is materially different in two significant ways. First,
    the commercial market is far more predictable, robust and stable than
    it was in the early 2000s.\12\ Second, the commercial market has
    largely moved overseas as foreign competitors have filled the
    commercial space launch services business in light on uncompetitive
    pricing by U.S. launch providers. Bringing competition and continuous
    improvement to the EELV program, along with additional manifest
    availability, will help enable U.S. launch providers win back that
    business from foreign competitors. This is, in fact, what SpaceX is
    doing right now.
    ---------------------------------------------------------------------------
        \12\ The commercial launch market available for U.S. competition is
    stable and averages approximately 30 satellites per year, with a total
    value of nearly $3 billion annually.
    ---------------------------------------------------------------------------
        In 2005, both the launch vehicles used by EELV lacked flight-proven
    maturity in their designs and the number of executed launches on the
    EELV program was low. Eight years later, the EELV Program has now
    demonstrated performance in managing a complex launch and mission
    integration environment, successfully launching all ``first of a kind''
    satellite payloads. Future launches will be for satellites that have
    all been previously integrated, with some (WGS, GPS IIF, DMSP) launched
    on both EELV Systems provided by ULA. Consequently, most requirements
    are well-understood and the need to continue on a cost-plus basis no
    longer exists.
        A separate rationale for maintaining cost-plus elements has been
    the uncertainty in launch schedule. Clearly, the situation existed in
    2005 when the Air Force could not necessarily predict when new
    satellites would be ready for launch, and when they would be, there was
    a sense of urgency for these systems to be launched to replace aging
    national security assets or to provide new capabilities in order to
    support national need. In 2011, the EELV Program began the transition
    to a ``launch slot concept'' that enables the Air Force to have
    improved flexibility to determine as late as 6 months prior to launch
    which satellite has the highest priority for the launch slot. Up until
    that point, the Air Force maintains through the integration process the
    ability to consider alternative missions as ``back-ups'' should the
    primary mission encounter a schedule problem. Further, as the Air Force
    has recently assessed, most satellites today are moving out of
    development and into production, which should have a positive impact
    with respect to on-time satellite delivery and the ability to launch on
    time. As a result, this rationale for a cost-plus contract element is
    no longer valid.
        Consequently, the use of a commercially focused contracting
    approach for the integration, mission assurance, and launch operations
    elements of the EELV Program is appropriate and consistent with the
    guidance contained in FAR Part 16. In addition, as referenced above,
    the FAR plainly instructs (see FAR Part 12.101) the Government to
    acquire commercial items when they are available to meet the needs of
    the agency. Launch services are clearly commercially available and are
    routinely sold on the commercial market. Nearly 60 percent of SpaceX's
    manifest of 50 launches is for commercial customers. Indeed, Lockheed
    Martin Commercial Launch Services (LMCLS) recently sold an Atlas V
    launch vehicle commercially to the Mexican government, subcontracting
    with ULA to execute the launch service. LMCLS has stated publicly its
    intent to market at least two Atlas vehicles annually, leveraging the
    Government's 36-core block buy and the Launch Capability payments to
    reduce its price for commercial customers.\13\
    ---------------------------------------------------------------------------
        \13\ Fester, Warren. ``New ULA-Lockheed Relationship Helps Atlas 5
    Compete for Commercial Launches.'' Space News. September 23, 2013.
    ``Robert Cleave, president of Lockheed Martin Commercial Launch
    Services, said . . . the company expects to be able to capture two
    commercial contracts per year starting in 2015.'' And: ``Cleave
    credited the U.S. Air Force's planned block buy of up to 36 Atlas 5 and
    Delta 4 launch vehicle cores from ULA for Lockheed Martin's ability to
    bring its commercial launch prices to more competitive levels. The
    block buy is intended primarily to generate volume-based price
    discounts for government customers.''
    ---------------------------------------------------------------------------
        As such, the Air Force should execute launch services procurement
    under a FAR Part 12 commercial-item acquisition, as is required under
    the FAR. This approach will allow for the elimination of the non-valued
    items that have no impact to mission success, but add costs to program
    execution.
        SpaceX intends to demonstrate the benefits associated with
    competition--including timely support to the warfighter, contractor-
    funded improvement and excellent value--and provide truly assured
    access to space through two distinct launch providers. By providing
    launch services on a commercially available, proven launch vehicle
    under a FAR-based commercial-item contract, SpaceX can help alleviate
    manifest congestion and reintroduce cost competition and the
    accompanying improvements it provides. As a commercial launch services
    provider with a manifest of almost 50 launches representing over $4
    billion in contracts, SpaceX is able to share its fixed cost among a
    strong customer base in national and international commercial and
    government markets.
    (c) Competitive, Commercial Acquisition Model for Space Launch is
            Proven
        In the mid-2000s, NASA, like the DOD, faced the challenge of
    unacceptably high launch costs. To contain this problem, the agency
    partnered with private industry to produce new launch vehicles that
    were not only highly reliable, but also affordable. This collaboration,
    known as the Commercial Orbital Transportation Services (COTS) program,
    was structured under firm fixed-price, milestone-based development
    agreements that leveraged private sector innovation and capital with
    Government investment and technical expertise. For less than the cost
    of a single Space Shuttle flight, COTS produced two new launch vehicles
    and spacecraft and reestablished American capability to reach the
    International Space Station (ISS). The SpaceX Dragon developed under
    this program is currently the only spacecraft in the world capable of
    bringing substantial cargo both up and back from space.
        NASA further endorsed this approach when it awarded 20 ISS cargo
    missions to multiple providers under the Commercial Resupply Services
    (CRS) program. Using firm fixed-price, FAR Part 12 contracts, NASA is
    able to ensure the safety of the astronauts and equipment onboard the
    $160 billion International Space Station, while also maintaining cost-
    control and benefiting from contractor innovation. This contracting
    approach is an unmitigated success, with SpaceX's cargo delivery prices
    the lowest per pound in the history of the ISS. SpaceX has already
    completed its first two CRS missions and is on track to conduct its
    third in the coming weeks.
        NASA properly approached launch acquisition as a ``commercial
    item,'' consistent with the FAR and the Commercial Space Act of
    1998.\14\ There exists a robust and competitive global launch market
    that grants the Government deep insight into price reasonableness. This
    approach has proven highly successful for the agency. It conducts many
    science missions through the NASA Launch Services (NLS) II program (and
    its predecessor NLS I program), where launch services are competed
    between a stable of providers operating under indefinite delivery,
    indefinite quantity (IDIQ) task order contracts. This structure enables
    NASA to weigh a variety of factors, including risk, technical
    capability, and price prior to issuing any mission award. It further
    encourages launch providers to continually innovate throughout program
    life by permitting them to ``introduce launch vehicles or technologies
    that were not available at the time of the award of the initial
    contract.'' \15\ Consequently, NASA is able to take advantage of a
    continually refreshed portfolio of launch vehicles for its diverse
    missions without resorting to arcane contracting approaches.
    Importantly, NASA does not pay for the ELC, but rather pays for each
    launch service. ULA, Orbital Science, and SpaceX are all part of this
    competitive launch services contract.
    ---------------------------------------------------------------------------
        \14\ ``Special Requirements for the Acquisition of Commercial
    Items,'' FAR Part 12, Subpart 2, Section 207; ``To encourage the
    development of a commercial space industry in the United States, and
    for other purposes (Brief title: Commercial Space Act of 1998).''
    (Public Law 105-303, 28 Oct. 1998). NASA Office of the General Counsel.
        \15\ U.S. Government Accountability Office, ``Medium Launch
    Transition Strategy Leverages Ongoing Investments but Is Not Without
    Risk,'' November 2010, 4.
    ---------------------------------------------------------------------------
        In 2012, the Air Force awarded SpaceX two missions under the
    Orbital/Suborbital Program (OSP-3). These EELV-class missions, which
    were designated as New Entrant missions for EELV, utilized a firm
    fixed-price contracting approach requiring compliance to Air Force
    mission assurance, mission integration, and launch operations
    requirements, with performance-based payment structure. It is important
    to note that for CRS, NLS II, and OSP-3, NASA and the Air Force conduct
    mission assurance (MA) activities on a firm fixed-price basis. This
    demonstrates a strong confidence that safety and reliability can be
    achieved without compromising affordability.
                     benefits of competition for dod launch
        The Air Force has attempted to contain cost-growth through an
    economic order quantity ``block buy,'' sole-sourced to ULA for 36
    rocket booster cores to be ordered through 2017. Although SpaceX is
    pleased that the Air Force made the decision to reinstate competition
    for 20 percent of the DOD launch manifest through 2017 (though would
    far prefer fair and open competition for all missions), the competitive
    advantage created by its sole-source block buy of 36 rocket booster
    cores to ULA must be recognized. It is a factor that challenges a level
    playing field for competition and one which will have limited long-term
    impacts on cost reduction. As has been recognized by numerous
    Government and independent reports, competition is the only true
    mechanism for achieving both performance and affordability. This
    approach is consistent with ``commercial item'' requirements under the
    FAR and the Defense Federal Acquisition Regulation Supplement
    (DFARS).\16\ The Weapon Systems Acquisition Reform Act of 2009 (WSARA)
    further requires competition as ``a means to improve contractor
    performance'' through program lifecycle, and the DOD's Better Buying
    Power 2.0 initiative calls competitive procurement and firm fixed-price
    contracting ``the motivation to control and reduce cost.'' \17\
    ---------------------------------------------------------------------------
        \16\ Ibid. 8-9.
        \17\ ``Weapon Systems Acquisition Reform Act of 2009,'' Public Law
    no. 111-23, 22 May 2009, Sec. 202 (a)(1); Kendall, Frank. ``Better
    Buying Power 2.0: Continuing the Pursuit for Greater Efficiency and
    Productivity in Defense Spending.'' Memorandum to the Defense
    Acquisition Workforce. 13 Nov. 2012. 5.
    ---------------------------------------------------------------------------
        Competition drives notably lower costs than a block buy when
    multiple certified companies exist in a program. If launches were
    awarded today, the DOD would save at least one billion dollars per year
    by selecting SpaceX over the incumbent. Competitive pressures will
    further induce certified providers to continually improve on both cost
    and reliability. These savings would not result in diminished
    Government insight into provider processes and mission assurance, as
    commercial item acquisitions still include substantial insight between
    companies and relevant agencies. There is no connection between cost-
    plus contracting and consistent mission assurance, as has been
    successfully demonstrated in NASA's COTS, CRS, and NLS programs and the
    Air Force's OSP-3 program. However, there is a direct correlation
    between complicated, opaque cost-plus contract structures and higher
    program costs.
        Consistent with the initial goals of the EELV program, competition
    ensures that in the event of a launch vehicle anomaly or national
    emergency, the U.S. still maintains its access to space with another
    independent launch vehicle capability, something which is absent with
    the consolidation of ULA and the increasing commonality between the
    Atlas and Delta launch vehicles. An independent report by the MITRE
    Corporation in September 2012 affirms that multiple providers establish
    an ``insurance for transition in case of performance failure.'' \18\
    Even without any anomalies, multiple providers with separate launch
    sites decrease manifest congestion at a time when DOD's launch needs
    are at their highest in years. The recently issued National Space
    Transportation Policy (NSTP) dictates that ``competition among
    providers'' is critical to ``assure access to space for [the] United
    States Government.'' \19\
    ---------------------------------------------------------------------------
        \18\ Wydler, Chang, and Schultz, 17.
        \19\ The Executive Office of the President, ``National Space
    Transportation Policy,'' November 2013, 3.
    ---------------------------------------------------------------------------
        Critically, competition also reduces national dependence on a
    foreign supply chain. The Atlas V rocket utilizes the first stage
    Russian RD-180 engine and a Swiss 5 meter payload fairing. Further, the
    Delta IV is dependent on Japanese suppliers for its upper stage liquid
    hydrogen tanks. This foreign reliance introduces obvious risk into the
    national security launch enterprise. Indeed, it was reported late last
    year that Russia's Security Council was considering discontinuing the
    supply of the RD-180 engine for the Atlas V over unrelated foreign
    policy issues with the United States.\20\ As mentioned previously,
    Falcon 9 and Falcon Heavy are manufactured entirely in the United
    States and do not rely on foreign companies for major subsystems and
    components.
    ---------------------------------------------------------------------------
        \20\ ``Russian Rocket Engine Export Ban Could Halt US Space
    Program.'' RT, 27 Aug. 2013. Web.
    ---------------------------------------------------------------------------
        Much is made of the shrinking defense industrial base, specifically
    with respect to space industrial base. Competition is one remedy to
    this challenge. Excluding SpaceX, the U.S. industrial base averages
    only five liquid rocket engines per year capable of lifting a medium-
    or heavy-lift payload. In contrast, SpaceX produces 120 such rocket
    engines per year, with annual manufacturing capacity growing to 420
    engines by the end of this year, far exceeding all other liquid rocket
    engine producers in the United States and Russia combined. This all-
    American production maintains critical skills in the U.S. and sustains
    important suppliers around the country.
        In the monopoly cost-plus environment that has existed in the EELV
    program since just prior to the 2006 formation of ULA, there is little
    incentive for contractor innovation, and little has been seen. Any
    launch vehicle upgrades, most recently with the RL-10C, were initiated
    and paid for by the Government with little return to the taxpayer.
    Reestablishing competition in the program will return the spirit of
    self-funded innovation by forcing providers to consistently invest in
    launch vehicle improvements to win contracts, else they be awarded to
    their competitors. NASA has certainly benefited from this approach,
    with both companies in the COTS program putting their own capital into
    the program; as a result, Falcon 9 emerged as the lowest cost medium-
    to-intermediate lift launch vehicle in NASA's portfolio.
        Mr. Chairman, I appreciate your invitation to testify before the
    committee today. Leveraging SpaceX's current Air Force, NASA, and
    commercial contracts, SpaceX plans to demonstrate heritage,
    reliability, and safety over a relatively short period of time. SpaceX
    has demonstrated its commitment to support national security space
    launches with significant internal investments in launch vehicle
    improvements and launch infrastructure to support the full spectrum of
    EELV program requirements, as well as the commitment and allocation of
    resources to the Air Force New Entrant Certification process.
        With fully American-made launch vehicles and launch sites on both
    East and West coasts, SpaceX's objective is to establish an enduring
    U.S. launch industry, consistent with the National Space Transportation
    Policy and the Commercial Space Launch Act. As a result, SpaceX seeks
    to provide the U.S. Government with true assured access to space with a
    new launch vehicle family and launch infrastructure and without
    reliance on foreign suppliers for rocket engines, fairings or other
    major launch vehicle components.
        With a mature commercial launch market ready to support national
    security launch needs, the time has come for the EELV program to live
    up to its name and evolve. Conducting competition in a fair and level
    playing field will significantly and immediately reduce costs for the
    Government, while enhancing vehicle reliability and national assured
    access to space capability.

        Senator Durbin. Thank you very much.
        Our last witness: Dr. Scott Pace, Director of Space Policy
    Institute, Elliott School of International Affairs at George
    Washington University.
        Dr. Pace.
    STATEMENT OF DR. SCOTT PACE, DIRECTOR, SPACE POLICY
                INSTITUTE, ELLIOTT SCHOOL OF INTERNATIONAL
                AFFAIRS, GEORGE WASHINGTON UNIVERSITY
        Dr. Pace. Thank you, Chairman Durbin and Ranking Member
    Cochran, and members of the committee, for providing this
    important opportunity to discuss the topic of national security
    space launches.
        As called for in the U.S. national policy, the United
    States and the DOD in particular need to decide how it best
    assures the existence of ``two U.S. space transportation
    vehicle families capable of reliably launching national
    security payloads.'' A space industrial base meeting all
    Government needs cannot presently be sustained by private
    market demand alone. Thus, a significant degree of Government
    support will be necessary for the foreseeable future.
        The EELV program as it exists today is the result of
    technical, economic, and policy decisions made over several
    decades. Today, fiscal constraints, rising launch costs,
    limited demand, and strict Government requirements have
    combined to create a complex, ongoing debate about the role of
    competition and the procurement of EELV-class launch services.
        The national space policy states, ``U.S. commercial space
    transportation capabilities that demonstrate the ability to
    launch payloads reliably will be allowed to compete for U.S.
    Government missions on a level playing field, consistent with
    established interagency new entrant certification criteria.''
        I emphasize the phrase ``level playing field,'' as the
    determination of just what this means is central to the
    question of competition going forward. Industry competition is
    a tool, not an end in itself. Depending on market conditions,
    competition can result in meeting DOD needs that lower costs,
    or failing to meet those needs and merely shifting Government
    costs to other accounts.
        The EELV program as managed by ULA today represents a high
    degree of experience and capability. As a potential competitor
    for national security launches, SpaceX brings, in my view, an
    intense focus on cost control, while meeting customer launch
    needs.
        The policy issue is not one of SpaceX and other potential
    new entrants versus ULA as much as it is one of deciding what
    the role of DOD should be. What are the Government's policy
    priorities? Should we be trying to, for example, get the lowest
    price for reliable transportation to orbit for a particular
    mission? Get the lowest price for all national security
    missions? Get the lowest price for all Government-funded
    missions? Assure access to space for all needs with the U.S.
    industrial base at least-cost? So the question really is one of
    scope that this committee wants to take.
        The Launch Services New Entrant Certificate Guide is a
    thoughtful and prudent approach to assessing potential
    entrants. The more difficult question comes with what happens
    after a new entrant is certified. Will incumbents and new
    entrants with very different histories compete under the same
    rules? And whether they do or do not, what may be said about
    the rules themselves? Reliability and readiness have been the
    top priority for national security launches. Can the critical
    need for mission assurance be achieved at lower cost than the
    way we do it today?
        This certainly seems desirable, even plausible. But careful
    thought needs to be given as to what responsibilities and
    capabilities ought to remain within the Government. Will the
    Government have the authority to order a stand-down of a
    vehicle family in the event of failure? Are agencies willing to
    relax or modify their use of cost-accounting rules and other
    FAR-based requirements for all launch service providers?
        In short, how much is the Government willing to pay for
    process, and how much is it willing to pay for performance? I
    would note here the GAO's report, I thought, was very germane
    on this point in terms of pointing out some of the issues.
        Defense acquisition reform is a much larger topic than the
    present hearing, but it's nonetheless relevant. Deciding how to
    best acquire space launch services may provide opportunities
    for pilot testing, some forms of regulatory relief. For
    example, the Government could pay separately for noncommercial
    processes and deliverables rather than having all costs bundled
    into the launch costs or company overhead. The Government may
    still pay more for its launches than a commercial buyer would,
    but the cost drivers would be more visible and accountable and
    would more easily allow cost-benefit trades for Government
    decisionmaking.

                               PREPARED STATEMENT

        The most important consideration for any policy choice in
    implementing approach is that it be clearly stated and
    adequately funded, with clear priorities as to which
    requirements, schedules, and goals will be relaxed if resources
    or regulatory relief is not forthcoming. To do otherwise is to
    invite failure.
        Thank you very much for your attention, and I'd be happy to
    answer any questions that you might have.
        [The statement follows:]
                      Prepared Statement of Dr. Scott Pace
        Thank you, Chairman Durbin, Ranking Member Cochran, members of the
    committee, for providing an opportunity to discuss the important topic
    of national security space launch programs, and in particular, the
    Evolved Expendable Launch Vehicle Program which is central to
    maintaining assured access to space for the Department of Defense.
        The Evolved Expendable Launch Vehicle (EELV) program as it exists
    today is the result of technical, economic, and policy decisions made
    over several decades. After the loss of the Space Shuttle Challenger in
    1986, the Reagan Administration limited the Shuttle to flying only
    those payloads that required its unique capabilities. Additional launch
    failures and subsequent decisions in the 1990s led to the creation of
    the EELV program and the Atlas V and Delta IV launch vehicles to meet
    U.S. national security needs for expendable vehicles. Boeing and
    Lockheed Martin formed United Launch Alliance (ULA) in 2006 at the
    behest of the Government in an effort to reduce duplicative costs in
    separate launch vehicle programs.
        In late 2012, the Department of Defense (DOD) announced that it
    would invite competition for its EELV-class payloads beginning in 2015.
    The Air Force would proceed with a ``block buy'' of up to 36 ``launch
    cores'' from United Launch Alliance while competing up to 14 cores from
    potential new U.S. entrants such as SpaceX. The Air Force separately
    signed a contract with SpaceX for two launches in 2014 and 2015 to
    support the certification process for Space X's Falcon 9 v1.1 vehicle.
    The criteria for certification are set forward in a Launch Services New
    Entrant Certification Guide. There are several potential ways to
    achieve certification, through combinations of successful flights and/
    or detailed analyses showing compliance with Air Force requirements.
                          current issues and policies
        Fiscal constraints, rising launch costs, limited demand, and strict
    Government requirements have combined to create a complex, on-going
    debate about the role of competition in the procurement of EELV-class
    launch services by the DOD. Private companies, whether Boeing,
    Lockheed, or potentially SpaceX, Orbital, and other companies yet to
    emerge must provide these services as the Air Force does not own and
    operate its own launch vehicles in contrast to its ownership and
    operation of air cargo transports. The Government clearly has an
    interest in getting the most value for the taxpayer dollar while at the
    same time requiring a high degree of mission assurance given the
    criticality of national security payloads. The Government also has an
    interest in understanding the implications of its purchasing decisions
    on the U.S. aerospace industrial base.
        Due to the size and scope of DOD launch purchases and the
    requirement to use U.S. suppliers, DOD decisions have a major impact on
    the U.S. space launch industrial base. National space policy calls for
    maintaining assured access to space, with the DOD having the largest
    share of this responsibility. NASA and commercial providers also
    require assured access to space and they too are concerned about the
    U.S. launch industrial base. However, they purchase the best available
    launch services meeting individual mission needs, with NASA limited to
    U.S. suppliers unless specifically exempted, and commercial satellite
    firms purchasing the best globally available launch services, unless
    limited by export controls or other regulations.
        DOD, NASA, and commercial satellite firms all rely on the same
    industrial base such that decisions made in one U.S. sector nearly
    always affect others, often in unanticipated ways. The DOD decision to
    end the use of the Delta II launch vehicle meant that fixed costs that
    had been shared by DOD and NASA now fell completely on NASA. This
    increased the cost to NASA and made the Delta II uneconomic for a large
    class of science missions that had relied upon it for many years.
    Similarly, the retirement of the Space Shuttle together with the
    cancellation of the follow-on Constellation program by NASA ended the
    sharing of certain fixed costs with DOD and drove up the cost of solid
    and liquid rocket propulsion systems, including those used by EELVs.
        The 2013 National Space Transportation Policy does not specifically
    address the EELV program. Rather, it directs the Secretary of Defense
    to: ``Ensure, to the maximum extent practicable, the availability of at
    least two U.S. space transportation vehicle families capable of
    reliably launching national security payloads''. This condition is met
    today by the existence of the Atlas V and Delta IV, and in the future
    may (or may not) include SpaceX, Orbital, or even NASA's Space Launch
    System. There is no requirement that these vehicle families be
    privately owned, although that is at present the most plausible
    assumption.

        U.S. national policy addresses the space launch industry base by
    stating that the health the industrial base, broadly defined, is a
    consideration that goes beyond the needs of any specific mission in
    awarding contracts or setting the parameters of competition.
    Specifically, the policy states that:

        ``To promote a healthy and efficient United States Government and
    private sector space transportation industrial base, departments and
    agencies shall:
      --Make space transportation policy and programmatic decisions in a
            manner that considers the health of the U.S. space
            transportation industrial base; and
      --Pursue measures such as public-private partnerships and other
            innovative acquisition approaches that promote affordability,
            industry planning, and competitive capabilities,
            infrastructure, and workforce.''

        It should be noted that the policy includes both Government and
    private sector industrial bases, although in practice is it difficult
    to clearly separate the two. The only Government-led launch system
    development at present is the Space Launch System, and even in that
    case private contractors are doing the work in commercial as well as
    Government facilities. With regard to private sector competition for
    Government contracts, the policy states that:

        ``U.S. commercial space transportation capabilities that
    demonstrate the ability to launch payloads reliably will be allowed to
    compete for United States Government missions on a level playing field,
    consistent with established interagency new entrant certification
    criteria. Any changes to these new entrant criteria shall be
    coordinated with the Assistant to the President and National Security
    Advisor and Assistant to the President for Science and Technology and
    Director of the Office of Science and Technology Policy before they may
    take effect.'' [Emphasis added]

        I have emphasized to the phrase ``level playing field'' as the
    determination of just what this means is central to the question of
    competition going forward. Policy alone cannot answer the dilemma of
    how industrial base and competition objectives should be traded so as
    to assure the existence of at least two ``U.S. space transportation
    vehicle families capable of reliably launching national security
    payloads.'' The judgment as to what constitutes acceptable reliability
    is left to the DOD and the Air Force. I will briefly address three
    primary factors that are driving possible trade-offs and the
    uncertainties around them: market structure, mission assurance needs,
    and options for reducing launch costs.
                         structure of the launch market
        Given that private firms provide U.S. launch services, how many
    launch providers can the market sustain? It should be recalled that ULA
    was formed because launch demand, U.S. and foreign, was inadequate to
    sustain two independent competing launch providers with separate
    infrastructures. The structure and size of the market has not changed
    in the last decade; U.S. Government demand has remained flat at best.
    There has not been growth on the commercial side for EELV- class
    payloads, although there has been an increase in small ``nanosats'' and
    ``cubesats.''
        Historically, the demand for space transportation has often been
    overestimated, whether from projections in the early 1980s of the need
    for 24 Shuttle flights per year, or the 1990s expectations of hundreds
    of small satellites for mobile satellite services. Virtually all of
    those ``big LEO'' and ``little LEO'' systems disappeared or went
    bankrupt in the face of the rapid expansion of ground-based cellular
    communications. In 2013, the FAA's commercial space transportation
    advisory committee (COMSTAC) predicted a small increase in commercial
    launches in 2014 and 2015, followed by a decline to a relatively steady
    state for the rest of the decade.
        Mass tourism to orbit, not just suborbital flights, would be a
    ``game changer'' in terms of bringing significant new commercial demand
    to the space transportation market. In the Government civil sector, the
    market for transportation of cargo and crew to the International Space
    Station is quite modest however, a U.S. commitment to human lunar
    exploration, with procurement of private launchers to deliver cargo to
    the Moon, could greatly strengthen demand for U.S. launchers. Both
    tourism and lunar logistics would occur outside of the DOD budget, and
    thus would have the potential to benefit DOD, but it is unknown when,
    if ever, either new source of demand might occur.
        The recently successful SpaceX launches of communication satellites
    are a case in point, taking back market share from European and Russian
    providers that had largely driven the United States out of
    international competitions. A shift in demand toward the United States
    would, of course, drive up costs for competitors in Europe and Russia,
    who would have less demand for their services. This would also create
    partial disincentives for new countries seeking to develop launch
    capabilities and offset some of their costs through export of launch
    services. In this way, U.S. pricing power can be a barrier to entry for
    developing space launchers.
        While the success of the SpaceX Falcon and, more recently,
    Orbital's Antares launcher is welcome, it should be kept in mind that
    governments, not private industry, drive much of global launch demand.
    Most foreign government launch opportunities are inaccessible to U.S.
    launch providers, just as U.S. Government launch opportunities are
    inaccessible to foreign launch providers. In general, competition is a
    good thing. However, the launch market is not a classic one of ``many
    buyers and many sellers,'' but is instead characterized by very thin
    demand, few suppliers, and multiple government-driven industrial
    polices (U.S., European, Russian, Chinese, Indian, and Japanese). Major
    spacefaring countries have shown a willingness to retain their launch
    autonomy, even if it makes no commercial sense.
        In space transportation, price is among several factors, such as
    schedule, reliability, and risk that affect demand. In conventional
    markets, falling prices create increased demand. Space launch demand
    has, however, proven to be remarkably flat over a very wide range of
    prices. Past studies have estimated that launch prices would have to
    fall to a few hundred dollars per pound, from the thousands of dollars
    per pound levels of today, to induce new demand, notably in space
    tourism. A consequence of flat demand is that a lower cost supplier,
    able and willing to offer a lower price, can displace a higher priced
    incumbent. However, once accomplished, the new supplier has every
    incentive to raise prices to gain revenue and profit margin. The buyer
    does not necessarily benefit from lower prices once a new set of
    suppliers is established. Said another way, the prices experienced by
    buyers in a thin market, with flat demand and high barriers to entry,
    generally do not drop after the exit of the former incumbent.
        The attainment of lower launch costs and hence lower prices with
    present-day expendable launchers can create disincentives to the
    private development of new reusable launchers. As expendable prices
    drop, the economic break-even point for investing in reusable launch
    systems increases; that is, more flights of the reusable system are
    required to ``pay back'' the investment in its development. This is an
    especially difficult barrier given current and foreseeable launch
    markets, where demand is essentially flat. Thus, new reusable launch
    vehicle technology resulting in dramatically lower operational costs
    would seem to be out the reach of private development. It is not the
    availability of capital but rather the lack of an attractive business
    case that is the problem.
        High prices and low volumes characterize today's launch market such
    that industry revenue is maximized when demand is (nearly) linear with
    prices. If prices were to be cut by half and volume only doubles, total
    revenue would be constant. This creates a classic market failure in
    that there is no market incentive to invest. The space launch market
    thus has some similarity to other historical transportation
    technologies, from canals and railroads to automobiles and airplanes.
    Faced with these issues in the past, the Government has taken action to
    overcome ``market failure,'' with incentives that move the market to
    prices at which demand is capable of driving prices lower rather than
    higher. Thus, the early transcontinental railroads profited from the
    sale of former Federal land, not the operation of the railroads
    themselves. The air transportation system enabled by Government support
    for airports and the air traffic control system benefits the economy as
    a whole far more than it does the airline owners and operators.
        The point of these examples is that space launch is a strategic
    national capability that serves public as well as private objectives.
    Despite its criticality, however, the economic structure of today's
    space launch market results in a classic ``market failure'' that
    justifies Government intervention. However the purpose, degree, and
    scope of that intervention is a subject of debate, as we will discuss.
                   mission assurance and the cost of failure
        Launch vehicles are a means to an end, the reliable placement of
    payload into space. The loss of a national security payload is unlike a
    commercial loss in which an insurance payout can compensate for the
    loss. The cost of failure in the national security arena is tremendous,
    in terms of direct hardware losses, failure investigations and
    corrective measures, replanning and rebuilding, delayed mission
    capabilities, and indirect loss of national and international
    confidence. The stakes are even higher, of course, where human life is
    concerned.
        The EELV program has an excellent reliability record, with 68
    successful launches since 2002. Launch vehicle reliability records,
    whether for Atlas, Delta, Titan, Soyuz, Proton, Long March, Zenit or
    Ariane, develop over time. A launch vehicle may be designed to be
    reliable, and the tools of probabilistic risk assessments can help
    predict relative reliabilities among different designs. But it is only
    with accumulated flight experience over time that one can actually know
    what the reliability of a vehicle is. This is a challenge for
    developing vehicles in which the configuration of the vehicle may be
    changing from flight to flight. The actual flight heritage and
    confidence of individual subsystems, such as engines, electrical,
    guidance, and separation devices, can vary substantially in a vehicle
    that appears outwardly unchanged.
        If mission assurance is critical and the costs of failure are high,
    it makes sense to be willing to incur additional costs to assure launch
    vehicle reliability--and to want to have actual flights to prove that
    reliability. The current Air Force approach of requiring combinations
    of either demonstrated performance or documentation is a reasonable one
    for giving new entrants an opportunity while protecting national
    security interests. That said, the United States incurs considerable
    cost to ensure that it can place national security payloads reliably
    into space, with extensive documentation requirements, audits, and
    inspections, not only of technical matters but of financial and
    business processes as well. Do all of these additional costs add value
    for the Government? What are the cost/risk/benefit trade-offs of doing
    something different?
        Government oversight is costly, but reliance on the private sector
    when commercial demand is very thin is also risky. During the defense
    reforms of the 1990s, the Government stopped requiring its standards
    for radiation-hardened electronics, assuming an experienced industry
    could and would apply more cost efficient commercial standards.
    Government needs proved to be both unique and limited, such that there
    was little economic incentive to meet Government standards in the much
    larger commercial markets. The result was a series of costly failures
    in Government programs that necessitated rebuilding, at public expense,
    an industrial capability that had withered.
        I am not saying that we should accept less reliability for lower
    launch prices; or that some level of failure in space is acceptable. It
    is difficult to identify a viable product or service that thrives with
    low reliability. However, there is suggestive evidence that the cost of
    Government-driven mission assurance and current Federal Acquisition
    Regulations (FAR) increase costs by factors of 3-5 times, not just 20-
    30 percent.\1\ Thus debate should be about the cost of assuring
    reliability and whether than can be accomplished in a more cost-
    effective way.
    ---------------------------------------------------------------------------
        \1\ Comparison of actual private costs to development costs
    predicted by Government cost models have indicated wide gaps in some
    cases of small launch vehicles, communications satellites, and cargo
    aircraft. The data are sparse however as few direct public-private
    product analogues exist.
    ---------------------------------------------------------------------------
        The traditional FAR process is not inherently dysfunctional--
    nothing in the FAR requires Government program managers to act
    inefficiently. Unfortunately, the penalties imposed on Government
    managers who try to expedite development by tailoring the application
    of FAR processes can be so severe that, in practice, most persons in
    authority will not take the risk. The typical Government acquisition
    cycle is structured with far more emphasis on eliminating any possible
    cause of failure, than achieving success in a timely and cost-effective
    manner. In reality, the cost of broken hardware and the required rework
    can easily be less onerous in the long run than the cost and schedule
    overruns that so typically plague Government procurement. But cost and
    schedule overruns, as long as they are in some sense ``moderate,''
    e.g., factors of two or less, are not considered to be ``failures,''
    whereas broken hardware emphatically is.
        As a result, Government procurement can become so dysfunctional
    that innovative approaches such as NASA Space Act Agreements are sought
    out for use in situations well beyond their originally intended sphere
    of applicability. The DOD and intelligence communities have their own
    ``other transactional authorities'' which can be used in place of FAR-
    based procurements, and have at times sought their own approaches to
    operating more efficiently in performing critical missions, such as
    classification and the establishment of special programs under DARPA or
    the Strategic Defense Initiative Organization.
        Expedited approaches to Federal acquisition are structured so as to
    sacrifice a certain amount of formal, documented accountability for the
    expenditure of public funds in exchange for significantly expedited
    results obtained at substantially lower cost. While this has worked
    extremely well in particular cases, it remains broadly true that public
    funds must be carefully accounted for, and the Government must be a
    ``smart buyer'' on behalf of the taxpayer. Experiences with programs
    such as the Future Imagery Architecture demonstrate the consequences of
    agencies having inadequate internal skills and capacities to oversee
    major program acquisitions.
        This raises a key but widely misunderstood point: much of what has
    been labeled ``commercial space transportation'' at NASA in recent
    years is really just innovative contracting with new contractors. It
    is, largely, not private capital being put at risk to compete in
    private markets; the arrangements involved might far more accurately be
    described as ``private-public partnerships.'' There is nothing
    inherently wrong with such arrangements, but we should use accurate
    terminology in describing them, and we should require that in exchange
    for the public funds that are advanced, the Government benefits
    accordingly. For example, the development of two new cargo suppliers
    for the International Space Station--Falcon 9 and Antares--has been a
    success. The DOD may thus be in a position to benefit from the
    capabilities of SpaceX and Orbital that NASA has helped to develop with
    its innovative combination of public money and private talent.
        By all observations, the new private entities are intensely focused
    on reducing costs, and this includes the cost of compliance with
    Government regulations that are now imposed on United Launch Alliance.
    If a private entity can demonstrate reliability without traditional
    levels of Government oversight, it could have a sizable cost advantage.
    This then raises the question of whether the Government will allow one
    set of rules for so-called ``new entrants'' and a different set for
    incumbents. Looking forward to the potential 14-core competition, the
    question for the Government will be what costs it wishes to impose on
    suppliers of national security space launch services, and whether those
    rules are applied on a ``level playing field'' as called for in U.S.
    policy.
                             reducing launch costs
        How does one actually reduce launch costs? Clearly, anyone with
    deep pockets can reduce launch prices--e.g., sovereign nations, wealthy
    entrepreneurs or philanthropists--but how can the actual cost of
    launches be cut? The rocket equation and propulsion mass fractions are
    as unforgiving as private capital markets. Process improvements, in
    design, production, and operations can help, such as vertical component
    integration, horizontal payload processing, and streamlined launch
    checkout and operations. However the amount of ``touch labor'' required
    per pound of launch vehicle is stable across a wide range of masses, so
    improvements tend to be of marginal, not break-through, benefit.
        Increasing production volume through large buys can achieve
    economies of scale. However, without new demand, large buys are not
    sustainable without Government support. As mentioned earlier, demand is
    relatively flat, so there are limits to the size of buys that could be
    justified. Launch costs might be made cheaper if some lower level of
    reliability could be traded for cost, but no payload owner would want
    to use them. Large-scale space tourism is only possible at levels of
    reliability and safety even greater than what we have today.
        Various teams are exploring how existing engines such as the RS-68,
    RS-25, and even the old Saturn V F-1, could be manufactured more
    efficiently. The production line for Merlin engines at SpaceX is very
    large, with 10 engines being used on each Falcon 9 flight. This helps
    build operational experience more rapidly than if using a fewer number
    of more powerful engines. Whether this multi-engine approach is
    reliable and executable as flight rates increase remains to be seen.
        New concepts such as reusable ``flyback'' boosters that return
    expensive elements (propulsion, avionics) for re-use are promising.
    Electric propulsion for in-space movement of satellites is developing
    rapidly. During the Government shutdown last year, a space electric
    propulsion conference was held at my university. It attracted about 400
    participants, U.S. and foreign, industry and academia. Commercial
    satellite companies are moving to take advantage of electric
    propulsion. This could have great impact on the commercial launch
    markets, as a dedicated upper stage would no longer be needed to place
    a satellite in its final orbit. I am speculating, but a two-stage
    vehicle with a reusable first stage could be a serious competitor in
    that future world.
        New technology seems to be the long-term answer, in particular,
    advanced propulsion with much higher specific impulse, than current
    chemical propulsion. DARPA has pioneered work in high energy density
    materials that may the potential to dramatically increase the
    performance of chemical rockets. DARPA also does not seem to think that
    re-engineering existing engine designs will enable major cost
    reductions. Instead, they are looking at reusable systems such as two-
    stage to orbit concepts. Single-stage to orbit vehicles using air-
    breathing engines still look to be beyond the state-of-the-art. As
    mentioned earlier, the economic break-even point for reusable launch
    vehicles is greater than for expendable launchers. Assuming expendable
    launch prices do decline, this will make the economic case for reusable
    more challenging without dramatic technology advancements. Thus
    investments in new space launch R&D are likely going to have to come
    from the Government, not private industry.
                            concluding observations
        The United States and the DOD in particular need to decide how it
    best assures the existence of at least two ``U.S. space transportation
    vehicle families capable of reliably launching national security
    payloads.'' In doing so, the DOD has to be mindful of the overriding
    need for mission assurance, fiscal constraints, and the need for a U.S.
    industrial base that can assure access to space for all payloads.
        In this context, industry competition is a tool, not an end in
    itself. Depending on its terms and conditions, competition can result
    in meeting DOD needs at lower cost or failing to meet those needs and
    merely shifting costs to other accounts. The EELV program as managed by
    ULA today represents high degree of experience and capability that are
    vital to assuring access to space for all national security needs. As a
    potential competitor for national security launches, SpaceX is
    innovative, real, and brings an intense focus on cost control while
    meeting customer launch needs.
        How will any new entrant, do in the future? Only repeatable,
    configuration-controlled flight experience will tell. The Launch
    Services New Entrant Certification Guide is a thoughtful and prudent
    approach that is being applied to SpaceX and should be to any candidate
    new entrant. The more difficult question is what comes after a new
    entrant is certified. Will current FAR-based procurements be used, or
    will the DOD procure future services in a more commercial-like manner,
    perhaps paying for additional specific services not required by private
    sector customers?
        Will incumbents and new entrants, with very different histories,
    compete under the same rules? And, whether they do or do not, what may
    be said about the rules themselves? Do today's rules appropriately
    reflect the nearly 60 years of lessons learned in space transportation?
    I do not know the answers to these questions, and I suspect no one else
    does either at this time. In this connection, I am reminded of the
    comment made some years ago by Wayne Hale, former Space Shuttle Flight
    Director and, later, Program Manager--``I am not sure I know how to
    make space transportation more reliable, but I do know how to make it
    more expensive.''
        In the end, the policy issue is not one of SpaceX and other
    potential new entrants versus ULA as much as it is one of deciding what
    the role of the DOD should be, and what are the Government's policy
    requirements. Should we be trying to:
      --Get the lowest price for reliable transportation to orbit for a
            particular mission?
      --Get the lowest price for all national security missions?
      --Get the lowest price for all Government-funded missions?
      --Assure access to space for all needs with a U.S. industrial base at
            least cost?
        The last question is a consequence of the fact that a space launch
    industrial base meeting all Government needs, civil as well as national
    security, cannot presently be sustained by private market demand. Thus,
    a significant degree of Government support will be necessary for the
    foreseeable future.
        Reliability and readiness have been the top priorities for national
    security launches. Given the importance of national security missions,
    what is the most cost-effective way for the DOD to assure mission
    success? Can mission assurance be achieved at lower cost than the way
    we do it today? This certainly seems plausible, but careful thought
    needs to be given as to what responsibilities and capabilities ought to
    remain within the Government. Will the Government have the authority to
    order a stand-down of a vehicle family in the event of a failure? Are
    agencies willing to relax or modify their use of cost-accounting rules
    and other FAR-based requirements for all launch service providers? In
    short, how much is the Government willing to pay for ``process'' in
    addition to ``performance''?
        Defense acquisition reform is a much larger topic than the present
    hearing, but nonetheless bears directly upon the present case. Thus,
    the question of how best to acquire space launch services may provide
    an opportunity for pilot-testing some forms of regulatory relief, as
    opposed to direct subsidies. The Government could pay separately for
    non-commercial processes and deliverables, rather than having all such
    costs bundled into the launch cost or company overhead as is done at
    present. The Government may still pay more for its launches than a
    commercial buyer would, but the costs drivers would be more visible and
    accountable and would more easily allow cost-benefit trades to be
    performed.
        Most critically, the United States needs to ensure that its space
    policies, programs, and budgets are in alignment, since to do otherwise
    is to invite failure. The first consideration for any policy choice and
    implementing approach is that it be clearly stated and adequately
    funded--with clear priorities on which requirements, schedules, and
    goals will be relaxed if resources or regulatory relief are not
    forthcoming.
        Thank you for your attention. I would be happy to answer any
    questions you might have.

        Senator Durbin. Dr. Pace, thank you very much. I think you
    can tell from the opening statements that this is a subject
    that I've found challenging to the committee and to Congress
    that really called for a much different approach in hearing, to
    bring together two companies from the private sector to express
    their points-of-view.
        I've done something that's a little unorthodox here. I've
    invited each of the companies represented, ULA through Mr.
    Gass, and SpaceX through Mr. Musk, to submit 10 questions to
    the other side so that we can hear what they consider to be the
    strengths and weaknesses of their position. And those will be
    submitted for the record, and I encourage each of them to
    respond appropriately and in a timely fashion.
        Let's get down to some specifics if we can.

                                 RD-180 ENGINE

        Mr. Gass, Russia's in the news. And the question about
    sanctions by the United States against Russia for their
    adventurism in Crimea raises a question about our future
    relationship with this country. I ask you, when it comes to
    your use of the RD-180 engine on your Atlas V missions, what do
    you think is the reliability of that engine being available
    from Russia for the immediate future and whether the United
    States, in the interest of its own defense, should take that
    into consideration when it awards these contracts?
        Mr. Gass. Thank you, Senator Durbin, and we all are
    watching and caring for the people in Ukraine in this
    situation.
        First, let me kind of give a little bit of history on the
    engine. We went to the former Soviet Union with the
    encouragement from two presidential administrations more than
    two decades ago to look at capabilities that were in Russia,
    that were in the former Soviet Union. And what we found was an
    engine that was more advanced in technology and could be bought
    in a cost-competitive way than we had here in our country.
        What we have done to protect, for that concern, since the
    day we started with that relationship more than two decades
    ago, we protected the Nation. And what do we do from United
    Launch Alliance? First and foremost, we have 2 years of safety
    stock inventory. Actually, today we have greater than that in-
    country, and our ability to launch any of the near-term
    satellites that we need to do for national security.
        At United Launch Alliance, we have another product that is
    fully compliant and ready to support any of the missions. So
    from the Nation, we are not at any risk for supporting our
    national needs. We've always kept our ability not to be
    leveraged in the case of any kind of supply interruption.
        Senator Durbin. So I understand, for clarity here, you're
    saying that you have warehoused or stockpiled engines for 2
    years' possible launches? What about the capacity to produce
    that same engine in the United States?
        Mr. Gass. Thank you, Senator Durbin. We have, as part of
    the deal that we signed with a company called RD-Amross, was
    the joint venture of United Technologies and the company in
    Russia called NPO Energomash.
        We had a business deal where we could buy--co-produce that
    engine. We bought all the blueprints and specifications,
    brought them into the country, and demonstrated that we can
    take the blueprints and specifications that were written in
    Russian, translated them, and at full arms-length relationship,
    demonstrate we can build the most difficult products.
        And we've done that over several years. We invested
    hundreds of millions of dollars to prove that we have the
    capability to demonstrate our ability to build that exact
    engine.
        I've always encouraged the Nation to kind of follow what we
    saw in Russia; that they as a country invested consistently in
    propulsion technology. We have kind of fallen behind in
    advanced technology. When we went to Russia, there were things
    that they were doing that we found in our textbooks said was
    impossible. So, you know, it just shows that you can break the
    bounds of technology, and we have the ability, now that we know
    how to do it and are ready to do it.
        The people at United Launch Alliance industry, the work
    that's being done at Marshall Space Flight Center and at the
    Air Force research labs have been pushing our envelope of
    technology. We need to stay on that constancy of purpose.

                                SPACEX LAUNCHES

        Senator Durbin. Mr. Musk, one cannot help but be impressed
    by the numbers that you've given us in terms of the cost of
    your product, measured against ULA.
        We start with the premise that Senator Shelby noted. ULA
    has a flawless record. It's been able to achieve the goals that
    we've set for them time and time and time again. Your
    suggestion is we've paid dearly for it and could pay a lot less
    now.
        I guess the question I need to ask, the premise of this is,
    goes back to the creation of ULA. Do you believe it is possible
    to maintain two companies in competition for future launches?
    And could your company, with a record of success, but more
    limited because of the time that you've been around, be able to
    compete without, for example, commercial business to sustain
    you when Government budgets cannot?
        Mr. Musk. Yes, absolutely. At first I should mention that
    the premise of perfect success is not quite correct for ULA.
    They certainly have a very good track record. But the first
    Delta IV Heavy failed, and there was a partial failure of one
    of the Atlas missions, which resulted in a satellite having a
    reduced life. So it's certainly a good, but it's not quite
    correct to say that it's perfect.
        What I think is a logical sort of thing going forward is
    that there would be two families of rockets, but not three
    families of rockets. So, currently, ULA has both the Atlas and
    the Delta, but those are redundant. You don't need both of
    those rocket families. And I think it would make sense, you
    know, for the long-term security interests of the country, to
    probably phase out the Atlas V, which depends on the Russian
    engine, and have ULA operate the Delta family, SpaceX operate
    the Falcon family, giving the Defense Department a shared
    access to space with two completely different rocket families.
        And I think that's the logical thing to do moving forward.
    And I think it would be the best thing in every respect for the
    country.

                      EELV LAUNCH CAPABILITY ACCOUNT (ELC)

        Senator Durbin. Mr. Gass, before I was chair of this
    subcommittee, we looked closely at the EELV Launch Capability
    (ELC) account, the cost-plus account that basically has been
    described in many different ways, to maintain the capability,
    infrastructure necessary. So we are dealing, when we deal with
    ULA, with the actual fixed price of the product, the launch,
    that we are purchasing, and then at ELC, which has been
    characterized as an infrastructure investment, a subsidy, a
    cost-plus item.
        What I hear from Mr. Musk is that he doesn't need that
    cost-plus item. He doesn't need that subsidy in order to
    compete with you. So the question for the taxpayers: Why should
    we give your company a special break when it comes to these
    launches if you can't meet competition head-on?
        Mr. Gass. Well, first, again, thank you for that question,
    and I knew it was coming. And, you know, I was listening to Mr.
    Musk and an ironic moment came back to me. It was probably more
    than a decade-and-a-half that I was sitting in the back of a
    room like this when there were some generals and some industry
    leaders sitting here explaining to Senators like yourself about
    why there were some of these failures that cost billions of
    dollars of lost capability, and they were held accountable. And
    most of them, their careers ended, and we changed the
    acquisition strategy.
        The ELC was an outgrowth of that event. And I want to put
    you in the shoes of the director of the National Reconnaissance
    Office and the Air Force in 2004. The two companies competed.
    We were in a FAR-12 fixed-price type contract, as Mr. Musk is
    advocating. All the national security satellites that Congress
    funded that were being new stocks were significantly behind
    schedules. The capabilities in orbit were significantly
    deteriorating.
        We were not sure when the satellites were going to come out
    of the factories. They were going through final tests. They
    were having problems. And the Nation needed the launch vehicle
    company to stand ready. Whenever that satellite came, the
    Nation needed that satellite to be launched successfully
    whenever it was ready.
        In a fixed-price business, we were losing money. There were
    no satellites to be launched. We had people standing around. We
    would have furloughed our workforce for awhile and come back
    when there was enough demand when those satellites were ready,
    pool up the demand. So we had to come up with a solution that
    provided the national security capability.
        So the ELS is just that capability that gives the
    flexibility to the war fighter to make critical decisions when
    they need it. It's not; it's categorically not a subsidy. I
    wish I had a contract that Mr. Musk has, that from the NASA
    commercial cargo activity, much better for making us
    competitive in the true commercial market, because it doesn't
    come with any of the constraints and burdens of accounting that
    I think Ms. Chaplain articulates that comes with a lot of
    restrictions.
        So ELC is not a subsidy. It's about providing national
    security capability with a laser focus on mission success.
        I would also encourage the committee to think about it as a
    pendulum. We swung at one point in time to a very commercial
    model. We swung to a very classical DOD contract. And the
    pendulum is moving back to the middle. We need to find that
    right equilibrium that brings that balance of critical
    missions, and it promotes cost competitiveness.
        Senator Durbin. Thank you. I'll have some more questions in
    the second round.
        Senator Cochran.
        Senator Cochran. Mr. Chairman, thank you very much for
    convening this hearing. It's obviously very appropriate and
    timely.

                                EELV COMPETITION

        I wonder what the reaction of the panel is to the Air
    Force's new strategy to reintroduce competition in the EELV
    program, at the same time recognizing that we have significant
    mission success which has been achieved by United Launch
    Alliance, the sole-source launch provider since 2006. What is
    your reaction to that situation? Should we continue to support
    this as it is? Or should we make changes?
        Mr. Musk. Who would you like to answer that, sir?
        Senator Cochran. Whoever wants to answer it.
        Ms. Chaplain. I think when we did our report in 2011, the
    idea of having competition in this program arose. And over
    time, DOD did recognize that this was a way to lower costs. The
    costs were a real issue back in 2011.
        Just to quote Frank Kendall, who is the acquisition leader
    at DOD, ``With no threat of competition, DOD, the EELV, and the
    prime contractor are in a poor negotiating position and pay the
    price demanded.'' So, competition is one avenue to put pressure
    to lower prices. It's not the only avenue.
        The other avenue is to gain insight into costs and pricing
    and to take actions to gain more efficiencies within the
    program you have. The Air Force is doing both. The NASA side
    uses competition to do its launches. It works pretty
    effectively. And ULA and SpaceX are both used to working under
    those arrangements. It's worked well for other Government
    agencies.
        Senator Cochran. Mr. Gass, do you have an impression to
    share with us?
        Mr. Gass. Absolutely. The measures of success should not be
    how widely competition is employed, but how wisely competition
    is employed. When we started this program; we had two competing
    companies Lockheed Martin and, the Boeing Company, and it
    wasn't working. So can we formulate competition that could work
    that's actually going to save the taxpayer money?
        When you deal with a limited demand of the Nation and some
    of the unique requirements that the Nation has, how are we
    going to have that competition to be on a fair and level
    playing field?
        Some of the most unique missions clearly don't need
    multiple capabilities in this country. And if we talk about
    fair, level competition, is it two companies? Is it three
    companies? Is it four companies? When does it stop, and how do
    you limit other companies from wanting to participate and
    taking a niche of the product?
        I shared the story of when I was here about a decade-and-a-
    half ago. I was running the program called the Atlas II. It was
    supporting DOD programs on a FAR competitive basis. And we were
    launching, basically, the military satellite constellation. We
    had a block buy of discus and UHF, which have been replaced by
    the WGS and MUOS in today's constellation.
        We have a block-buy fixed-price commercial contract. With
    that contract, we were able to compete for NASA, for commercial
    missions fairly successfully. After those disasters, I was
    promoted and I now had all of--many launch capabilities. And I
    was cleared for some classified missions and recognized those
    missions can't work in a competitive, commercial environment.
    Those capabilities are so unique that it just would not work.
    It would have cost the Government excess funds to stand up
    multiple companies to have that redundant capability.
        I always go back, when I share with acquisition officers
    the story, many years ago I worked on the Tomahawk cruise
    missile program. And the country wanted to dual-source and have
    competition. Well, the demand wasn't there. They told the
    companies, ``You're going to stay in business.'' It quickly
    became a competition to win the losing share. There was no
    incentive to win the majority share because if you don't have a
    winner-take-all survival-of-the-fittest kind of competition,
    and you know that you're going to be kept around, it also
    doesn't work.
        Ms. Chaplain talks about the lessons learned in the
    balance. I'm all for that pendulum moving to the right spot for
    our Nation and delivers taxpayers a better and a more efficient
    activity.
        Senator Cochran. Thank you.
        Mr. Musk, what is your reaction to that?
        Mr. Musk. Well, I think as a country we've generally
    decided that competition and the free market is a good thing
    and that monopolies are not good. And it's interesting to note
    that from the point at which Boeing and Lockheed's launch
    business merged, the point at which they stopped being
    competitors, the costs doubled since then.
        And I think the reality is: When competition is introduced,
    reliability is a key factor in competition. So that would be a
    deciding factor in who wins what launches. It doesn't become
    less important; it becomes more important. But the costs to the
    U.S. taxpayer will drop substantially. I think they will drop
    at least to the level that they were before Boeing and Lockheed
    became a monopoly in the launch business, and perhaps even
    better than that.
        And frankly, if our rockets are good enough for NASA, why
    are they not good enough for the Air Force? It does not make
    sense.
        Senator Cochran. Dr. Pace.
        Dr. Pace. Well, I think the previous two comments have
    highlighted the importance of looking at this as more than just
    DOD. That is, what actions occur in the commercial market? What
    actions occur with NASA? All affect the same industrial base.
    There isn't really a DOD space-launch industrial base. There's
    a U.S. launch industrial base. So what actions other agencies
    pursue have an impact here.
        As is mentioned, NASA has been successful in using more
    streamlined processes for buying its launches. I think it's
    also fair to say that NASA doesn't have the same policy
    requirements for assured access to space that DOD does. I
    dealt, when I was at NASA, with a lot of the science mission
    community. And they were plainly opportunistic. They would buy
    the best, most reliable vehicle they could at least cost. But
    they did not have the same policy imperatives for assured
    access to space for all their payloads that DOD does.
        So the question is: What does the Government want? How much
    is it willing to give regulatory relief to move that pendulum
    back? And how much does it still want to have the kind of cost
    and data and pricing insights that it's traditionally asked
    for? And whatever it does, it needs to be done beyond just DOD,
    but needs to be looking at other Government purchases, you
    know, such as NASA practices.
        That would be my response.
        Senator Cochran. Yes. Thank you.
        Thanks, Mr. Chairman.
        Senator Durbin. Senator Feinstein.
        Senator Feinstein. Thank you very much for holding this
    hearing. I'm not a newcomer to this issue. I think it was
    several years ago that ULA came in and talked to me. And all of
    these companies are in California in one way or another. And
    so, I've had a great interest in trying to follow this, Mr.
    Chairman. And I don't believe that the promised savings of
    eliminating competition have materialized. The cost to the
    Government, to the taxpayer really has skyrocketed.
        Behind me is a chart from the GAO's written testimony for
    this morning's hearing. It depicts of the EELV program since
    its inception. The red line shows when ULA was formed. So the
    cost of this program before and after competition for space
    launch, depicted by the red line, is startling. Since 2006,
    when ULA was formed, space-launch costs have increased from
    $613 million to $1.63 billion in fiscal year 2014. That's a
    166-percent increase for the program overall.
        Mr. Musk mentioned, and he's correct, that in 2012, this
    program triggered a Nunn-McCurdy breach when average
    procurement unit costs grew 58.4 percent against both the
    original 2004 and 2007 modified baseline. Most startling, the
    most recent independent cost estimates from the Cost Assessment
    and Program Evaluation of DOD projects the program will cost
    close to $70 billion through 2030.
        I welcomed Secretary Kendall's acquisition decision
    memorandum dated November 27, 2012. And I'd like to submit this
    for the record, if I may, Mr. Chairman.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator Feinstein. The memo states, and let me read it. ``I
    direct the Air Force to aggressively introduce a competitive
    procurement environment in the EELV program by competing up to
    14 cores with initial contract awards as early as 2015 for
    missions that can be flown as early as 2017.''
        Then it gave specific directions to the Secretary of the
    Air Force, which I think will be interesting to read.
    Unfortunately, it appears the Air Force is not living up to the
    direction provided by the Under Secretary. According to
    information provided to my office, it appears the Air Force is
    going to delay and reduce the number of cores that will be
    competitively procured before fiscal year 2017. And I think
    that's really a shame.
        I have three quick questions.

                            AIR FORCE CERTIFICATION

        Mr. Musk, SpaceX has achieved, as you just pointed out,
    three consecutive successful launches of its Falcon 9 rocket.
    That's the major requirement for being certified for
    competition for EELV contracts by the Air Force. So, what
    challenges, if any, do you expect from the Air Force
    certification process?
        Mr. Musk. The Air Force certification process appears to be
    going quite well. And we're not aware of any issues that would
    prevent us from being certified to fly missions, completing
    that certification this year. We aren't concerned about any
    delays in the contracting. Hopefully, those delays don't
    materialize. And as I mentioned in my earlier testimony, I
    think in light of recent events on the international stage, it
    may be wise to consider whether procuring the Atlas as part of
    the 36-core block buy, which is a 5-year buy, as mentioned
    earlier by Mr. Gass, they only have a 2-year supply of engines.
    Yet, this contract is a 5-year contract for the 36 cores.
        So, if there were any sanctions or if there is any issue
    with supply of those engines, they will not be assured access
    to space for the Atlas V.
        Senator Feinstein. Now, according to the Kendall memo that
    I just mentioned, new entrants should be able to begin
    competing for up to 14 EELV launches by fiscal year 2015. Do
    you expect the Air Force to live up to the requirement imposed
    upon it by Under Secretary Kendall?
        Mr. Musk. I'm very hopeful that the Air Force will adhere
    to that requirement.
        Senator Feinstein. So you believe that you will be able to
    compete for 14 EELV launches by fiscal year 2015?
        Mr. Musk. I'm highly confident that we will be able to do
    so, yes.
        Senator Feinstein. Good.
        Thank you very much, Mr. Chairman.
        Senator Durbin. Thank you, Senator Feinstein.
        Senator Shelby.
        Senator Shelby. Thank you, Mr. Chairman.

                          AUDITING AND OVERHEAD COSTS

        Mr. Musk, you recognized in your statement for the record
    that the Air Force's acquisition approach requiring detailed
    cost data, accounting, auditing, and other mission assurance
    requirements and, these are your words, ``adds substantial
    overhead costs to the taxpayer for oversight of a largely
    mature booster core.''
        Yet, when you compare SpaceX and the ULA launch prices, do
    you ignore the fact that the ULA currently complies with the
    mandates that you acknowledge add substantial overhead costs?
    It seems like your price estimates compare apples and oranges.
    Mr. Musk, why should SpaceX be exempt from the same auditing,
    oversight, and accounting rules that DOD requires of the United
    Launch Alliance? If SpaceX is required to comply with those
    specific requirements, how will that impact the cost of your
    launch vehicle? Do you understand?
        Mr. Musk. Certainly. We provide full and detailed insight
    into all of our costs. And we've been doing so for a long time,
    to NASA. And we're also providing that to the Air Force. So the
    Government has complete insight into our cost structure.
        There are additional costs for U.S. Government missions due
    to the mission assurance process, because the U.S. Government
    does not buy launch insurance. So in order to improve the
    probability of success, there is quite a substantial mission
    assurance overhead that's applied, which is why our launch
    costs are estimated to be 50 percent higher for Air Force
    flights than for commercial flights. So instead of $60 million
    for a commercial mission, it's $90 million. But that compares
    to more like $380 million for United Launch Alliance.
        So even when you add the Air Force overhead, there is still
    a huge difference. In fact, all of the numbers I was referring
    to are including the Air Force overhead.
        Senator Shelby. Should you have the same rules to apply to
    your company that the United Launch has applied to them? I
    guess is the question.
        Mr. Musk. Absolutely.
        Senator Shelby. Okay.
        Mr. Musk. Yes.

                                 CONTRACT COST

        Senator Shelby. Ms. Chaplain, I've got to direct this to
    you and GAO. You've explained to the committee that a fixed-
    price commercial contract, in accordance with FAR Part 12,
    limits the DOD's insight into contract costs, which has caused
    problems in the past.
        Could you describe for the committee the problems that have
    occurred in the past and your view of the utility in ensuring
    that DOD continues to acquire detailed cost data going forward,
    whoever is doing it?
        Ms. Chaplain. Okay. I would like to say when there were
    commercial contracts used at the beginning of the EELV program,
    the suppliers did not have to follow those requirements.
        When the EELV program transferred into using a cost-type
    arrangement for one of its contracts, then they were required
    to have those systems. And the reason those systems are there
    is when you have a cost-type contract, the Government needs to
    validate those costs. They're not just paying some price. They
    are paying the costs incurred. So you need standard, certified
    systems to ensure those costs incurred are valid.
        They include things, overhead, pensions, everything that's
    allowable that the company incurs while it's making that
    product or producing that service.
        If going into this competition, DOD chooses the commercial
    approach, those requirements will not be required of either
    party. If they choose the approach they're using now, the
    requirements will be imposed on both parties. The systems do
    provide good data. They give you insight into costs. They give
    you a uniform way of measuring. They help impose discipline on
    a program. There's a lot of value. And it was a long, hard
    fight to get those in the current program. It was not easy.
    It's not an easy accomplishment to do after a time period where
    you aren't required to do that.
        That was also tied to these lot buys early on in the
    program. So it's reasonable why that wasn't required in the
    very beginning.
        So there's value to these requirements. But under a
    commercial approach, the bottom line is price. And those
    requirements wouldn't be required of either party.

                              SUCCESSFUL LAUNCHES

        Senator Shelby. Mr. Musk, would you concede that 68
    consecutive launches is a great record?
        Mr. Musk. I would, although I'd like to point out that
    there were two highly publicized failure investigations, one
    for Delta IV Heavy and one for Atlas. The Air Force conducted
    failure investigations. But ULA has a very good track record.
    It is just not quite as perfect as 68 perfect launches.
        Senator Shelby. Mr. Gass, do you have any response to that?
        Mr. Gass. We measure the mission success by our customer's
    declaration. And so if they declare that the satellite and the
    mission is success, we use the same record. And why it is that
    important, because our profit is tied to our mission success.
    If we don't deliver it, it's not only a loss, we forfeit our
    profit, but potentially also get penalized. So the declaration
    is about the on-orbit capability. And that's how we measure
    success.
        Senator Shelby. Mr. Musk, in October 2012, I believe this
    is right, a secondary payload aboard a SpaceX Falcon 9 rocket
    was sent into the wrong orbit because one of the nine Merlin
    engines powering the rocket failed.
        What recourse did the owner of the secondary payload have
    in that situation to recover damages? In other words, what's
    next? What was next?
        Mr. Musk. Right. Well, by ULA's definition of success, that
    mission was perfect.
        Senator Shelby. That was perfect, although you went into
    the wrong orbit and so forth?
        Mr. Musk. Right.
        Senator Shelby. You're saying that's perfect?
        Mr. Musk. So, the primary mission, which I was to deliver
    the CASSIOPE satellite, was 100 percent successful. There was a
    secondary satellite that was an optional objective that was not
    part of the primary mission.
        But, as I said, if you accept ULA's definition of perfect
    success, then that mission was perfectly successful.
        Senator Shelby. Mr. Gass.
        Mr. Gass. It would not be declared successful. If that was
    a contracted requirement, we would----
        Senator Shelby. He would say it was successful by his
    criteria, but you would say it was not successful by yours?
        Mr. Gass. Right. You know, we can have a debate about
    ``success.'' But if it was considered an experiment and the
    rocket was supposed to perform all the capabilities and it
    didn't, you know, that's a different kind of business
    arrangement.
        But in our measure of success, we put margins in. The
    anomalies that Mr. Musk referred to that we had on United
    Launch Alliance were designed margins. The margins came into
    play, and we were able to successfully deliver the satellite.
        It is an incredibly risky business. And everything needs to
    work perfectly.
        Senator Shelby. Dr. Pace, do you have any comment on that?
        Dr. Pace. I would add, more from as a former analyst, you
    know, with NASA, that getting detailed understanding of the
    prices and costs, we understood, I think with SpaceX.
    Understanding all the costs, I think, was somewhat more
    difficult, that SpaceX should not have, when I was at NASA, the
    detailed level of business accounting systems that we were used
    to on other projects. So we had a very robust dialog with
    SpaceX people, and we got a lot of information. There was a lot
    of cooperation.
        But I would have to say that really understanding all those
    costs to the same level of detail was hard to come by. And so,
    eventually, in some areas, we said, you know, ``There's some
    magic going on in SpaceX. We don't fully understand. But we
    appreciate the results.''
        Again, how much is the Government willing to pay and impose
    on SpaceX on its contracts? If it's not willing to impose those
    kind of detailed reporting requirements, are they willing to
    relax them, you know, on other players?
        Senator Shelby. Thank you.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Shelby.
        In this round, I'm going to take what I've considered,
    after listening to the testimony and reading the background
    here, the best arguments on both sides and ask you each to
    address them.

                       BUDGET CONSTRAINTS AND COMPETITION

        I'll preface my question to Mr. Musk as follows: In this
    new job, I'm traveling around the United States, seeing some
    amazing capacity that we have developed: Newport News, the very
    best when it comes to building submarines, aircraft carriers;
    Connecticut, in their production of helicopters. Wherever you
    go in this country, California, as well, Boeing in the Midwest,
    you see some exceptional companies doing exceptional work
    keeping us as safe as possible.
        And they all say to me, ``Mr. Chairman, if you keep cutting
    these budgets, we're going to be laying off the best workers in
    the world. When you need us, if you ever need us, we won't be
    there. So you've got to find a way to maintain our capacity to
    build, even if we're not at war, even if our budgets are going
    down.''
        When I heard Mr. Gass explain the ELC, I think that's what
    I heard. He suggested there was a time when the workers were
    idle. They weren't being called to have as many launches as
    they were in the past. And so the ELC, some call it a subsidy,
    some call it something else, is basically there to maintain
    capacity even if the demand is not there.
        So let me ask you this: What kind of risk do we run as a
    country to jeopardize the capacity of ULA by eliminating the
    subsidy or not factoring it into the bid so that, ultimately,
    war, no war, good budget, bad budget, when we need them,
    they'll be there?
        Mr. Musk. Sure. Well, the reality is that today there's a
    steady cadence of Air Force and NRO missions every year. So you
    don't really have the wide difference from 1 year to the next
    that you had in the past. So I think the prior justification of
    needing that for stability is no longer there, because there is
    the stable launch demand from the Air Force and the
    intelligence community.
        Secondly, I go back to the point that there's really not a
    need for ULA to maintain two families of rockets, both the
    Delta and the Atlas. And given that the Atlas is dependent upon
    a Russian-made engine which can be cut off at any time, the
    logical thing to do is to eliminate the Atlas family, have the
    Delta and Falcon family. And that will provide the greatest
    amount of assured access and the great reliability and the cost
    savings that the Government is looking for.
        Senator Durbin. Mr. Gass, you saw the chart that Senator
    Feinstein produced. When it comes to competition, it usually
    means lower cost. When there's no competition, a monopoly
    situation or anything close to it, buyer beware. Consumer,
    consider the possibilities here that your costs are going to go
    up unbridled.
        So, what we hear from Mr. Musk is that if we went into
    price competition, we could save a lot of money in a hurry,
    that in fact, ULA, based on his estimates, is overcharging the
    taxpayers. Now, here we're facing a budget situation which is
    awful. We're seeing limited increases in defense spending and,
    slightly over the horizon, another sequestration coming our
    way.
        So, why shouldn't we, as good stewards of taxpayers'
    dollars, say, ``Well, let's put some competition at this.
    That's the American way. That's the free market. Let's make
    sure that ULA is not overcharging us''?
        When we look at the mountains on Senator Feinstein's chart,
    it suggests that, without competition, your costs have gone up
    dramatically. So why wouldn't the taxpayer be better served
    with competition?
        Mr. Gass. Thank you for that question. It's important. And
    may I ask you to put the chart back up? First, for the record,
    I heard Mr. Musk use all kinds of numbers that were
    categorically wrong. And I'll be glad to share with the
    committee the right calculation.
        I saw this chart last night in the GAO report when it was
    released, and I noted it as well. And that's an accurate
    representation of appropriation. It's not an accurate
    representation of cost or cost performance.
        Let me just point your attention to the red line. In a
    period of time we're launching one or two a year, satellites
    were late, and as you described, we were being paid for a
    capability to stand ready. As we go out to the outer years,
    we're now buying rockets and launching at about 10 or 11 a
    year. So if you just do division, all of a sudden it would be
    different.
        The other thing that's interesting to note, that when we
    converted the contract in 2006, the stewards for this country,
    the acquisition professionals, required Lockheed and Boeing,
    and then into ULA, that when we signed up the contracts prior
    to that red line, there was losses. We actually had to give
    credits about almost $1 billion that we took off the contract
    price so you didn't have to appropriate during that time, and
    the company took that as losses because they were overly
    aggressive in the pre-red line activities, but with that
    expectation of commercial.
        So you talk about the good stewards of taxpayers, you know,
    give a compliment to the incredibly hardworking acquisition
    professionals that go through the data and provide and make
    sure that the Nation is getting a good value.
        Senator Durbin. But take me down to the basic question
    here. Price competition is going to give the taxpayers a lower
    cost, is it not?
        Mr. Gass. It can if it's on a fair and open playing field.
    And everybody has to have the same requirements. The problem
    with that statement is: If everybody has to have the same
    requirements, and the certain requirements that you do not
    need--there will be excess capacity because there is just not
    enough work for two. And if everybody has to have it, it could
    create excess costs.
        The other example that I gave before when we talked about
    the Tomahawk cruise missile, if you know you're not going to
    lose, it's not a winner-take-all, you may not have the right
    kind of incentives.
        At the same time that Ms. Feinstein shows the increase in
    the appropriation, there was a period of time where we had a
    contract that was not incentivizing cost performance. We had
    what we call an award-fee contract, where requirements could
    creep up. And as a company, an award-fee, if we said no and
    pushed back in the requirements, we'd get negatively rewarded
    on your profit rate.
        Today, the Air Force fixed that. We have a very clear
    contract that's aligned on the priorities. That's one, mission
    success is a major portion of our profit, and we have a cost
    incentive contract on ELC. We have to year-over-year improve.
    We signed up to a greater than 5 percent year-over-year
    improvement. It's already in the contract. And we're
    incentivized to improve upon that. So it's the right kind of
    contract for the time frame.
        The period of time where the satellites were not coming at
    a regular basis has a different time frame than where we are
    today. I came into the building and talked to the officials as
    early as 2008, seeing that things were going to get more
    stable, that we needed to change the acquisition strategy. And
    it took us to 2012 for us to do that. But it's on the right
    path.
        Senator Durbin. Senator Cochran.
        Senator Cochran. Mr. Chairman, thank you for convening this
    hearing. I think it's been a very helpful exercise. I have no
    further questions. But I want to compliment the efforts that
    the contractors are making to produce products which protect
    the security interests of our country at a reasonable price.
        Senator Feinstein. To Mr. Gass, I'm trying to remember how
    many years ago we met. But it was quite a few. And when we met,
    you know, I was surprised that this was essentially a monopoly.
    And I think we talked about it. And you assured me that these
    costs would go down.
        Now, if I understand you correctly today, what you're
    saying is, ``Well, we have to follow one set of restrictions,
    and they follow another set of restrictions.'' And I don't
    quite understand this.
        Would you oppose an open competition if all the rules
    across the board were the same? Would ULA actually say, ``We
    don't want to compete with SpaceX''?
        Mr. Gass. Absolutely not. The ULA is ready and willing and
    able to compete on any field of open competition.
        Senator Feinstein. See, I would think that would be your
    answer. And I would think that that would be satisfactory,
    because, after all, competition is the American basic demand
    for the accordance of a contract.
        So, what keeps us from doing this?
        Mr. Gass. Basically, SpaceX doesn't have all the
    capabilities nor the requirements. So if you think about it, if
    SpaceX's requirements have to come down and some of our
    requirements have to be eliminated till we get that level
    playing field.
        Senator Feinstein. Okay.
        Mr. Musk, respond to that. If this is the heart of the
    matter, respond to it.
        Mr. Musk. Yes. I believe SpaceX has--can manage all of the
    Air Force requirements. We might argue that maybe some of those
    requirements shouldn't be there. But we will meet whatever
    requirements the Air Force asks of us. And we believe we can
    manage all of the Air Force's satellites, and then some.
        Senator Feinstein. How much of this is in the fixed-price
    competition versus cost-plus?
        Mr. Musk. Well, I think fixed-price competition is the
    better way to go. When there is competition, then the logical
    thing to do is to go for a fixed price, because otherwise if
    you compete it and it's cost-plus, then it gives the companies
    the opportunity to raise their prices effectively, as their
    costs grow, subsequent to the competition.
        Senator Feinstein. Do you have a problem with that, Mr.
    Gass?
        Mr. Gass. I think it's important that the Government
    understands what it's buying. I shared the story about the
    times when we had failures and I was working on a fully fixed-
    price contract. And then when I was cleared for some missions
    that I know that you're well aware of, those kinds of missions
    are very difficult to support on a fixed-price basis, the
    operational needs, the changes in schedules, the care and
    feeding that some of the satellites need.
        The unique facilities--we talk about the rockets, but we're
    required to have special handling equipment, nitrogen purges
    for some of the--to protect some of the most sensitive sensors
    that are in some of these satellites, very unique capabilities
    that only the national security needs. They're not commercial
    commodities.
        And right now, the way we're doing the contracting today,
    when we use the term ``ELC,'' we're applying those costs to all
    missions. And it goes back to the roots of how the EELV program
    was established. And it comes from a general report in the
    1990s. And the goal was to lower costs for the Nation across
    all of our national launch security needs, not one mission area
    or not.
        So on average, our costs have come down. The program is
    greatly successful, and we're continuing to drive the costs
    down, and the productivity is improving. But the key about--
    your question was about fixed price--is can you really apply it
    to everything? And it's about choices the Nation needs to make.
    We can use it. I talked about the pendulum swinging. We can go
    back that way, and we'll see some of the areas. Ms. Chaplain's
    team has done a great job on the report of laying out the
    balances, the trades that the Nation has to make.
        It's not about what companies want. It's about what the
    country needs and how the Government and leaders make choices
    of how to deliver that.
        Senator Feinstein. So I'm trying to understand what you're
    saying. What you're saying is if the requirements for bid were
    all the same across the board, we would have no problem. Is
    that correct or not?
        Mr. Gass. It would be fine for the competition. But just
    yesterday, the 14th Air Force out in California had to make
    some mission switches between NASA and the Air Force. They just
    gave direction. A NASA mission was late. An Air Force mission
    moved in. Another Air Force mission took priority. Another NASA
    mission was moved out.
        If we were on a fixed-price world, that would be a series
    of contractual actions, potentially not having the capability
    to accommodate that because it took some money to create that
    flexibility. In a fixed-price world, that operational
    flexibility is not there for the war fighter. But it works for
    competition.
        Senator Feinstein. May Mr. Musk respond to that?
        Would you respond to that?
        Mr. Musk. Certainly. So, I think the logical thing to do is
    to do a fixed-price competition for the basic vehicle. And then
    to the degree that there are mission-unique requirements, there
    is a fairly small part of the mission, that that would be cost-
    plus.
        So if the Air Force says, ``Well, there's a unique national
    security satellite. It's going to require these additional
    changes to the rocket or to the mission, or it's going to
    require priority,'' then just that incremental piece would be--
    it would be logical to make that cost-plus.
        But the vast majority of the contract would be fixed-price.
        Senator Feinstein. Thank you. Thank you very much.
        Senator Durbin. Senator Shelby.
        Senator Shelby. Thank you, Mr. Chairman.
        We're talking about competition, real competition. And if
    you can get it, it's the best thing in the market. We all know
    that.
        Dr. Pace, in a classic market of multiple buyers and
    sellers, competition generally produces quality products and
    lower prices. The launch market is characterized by limited
    demand, few suppliers, and multiple Government industrial
    policies.
        Therefore, lowering the cost of access to space while
    retaining performance and reliability may not result in price
    decrease for buyers; we don't know. If DOD has to pay, for
    example, new entrants for the infrastructure and labor costs
    now included in the EELV launch capability contract, how would
    duplication of existing infrastructure result in lower launch
    costs for DOD?
        A lot of us are concerned that recreating the wheel could
    actually increase overall costs compared to what DOD is
    currently paying. Would you have a comment on that?
        Dr. Pace. Sure. That's certainly possible. I think what we
    could see happening is that the introduction of competition
    could lower the costs, as a virtue of lower prices, for a wide
    category of services. There are a number of missions that I
    think SpaceX, for example, could certainly compete for. There
    are a number of missions that it may take awhile before SpaceX
    can compete, as mentioned, the Delta IV class systems, although
    eventually, may compete for those as well.
        So, the question is, what do you want the industrial base
    to actually look like? If you break these costs out, and if you
    charge extra for noncommercial processes, is the Government
    willing to pay for that? Or do they prefer the convenience of
    bundling all that up?
        I could imagine a situation where Atlas exits the market,
    as described, where Falcon takes over for most of that. We're
    still retaining the Delta IV's. And that is a much more
    segmented market. But as a result of that segmentation, you'll
    simply have a new set of monopolies. You'll have areas where
    only the Delta is going to be meeting that until SpaceX
    develops new products. You may have situations where only the
    Falcon is meeting other needs. So you'll be swapping the number
    of players around. You'll be breaking costs out in a more clean
    way.
        But whether total costs go down for the Government, I
    think, is still something that may remain to be seen.
        Senator Shelby. How important is quality? In other words,
    the 68 straight launches, successful launches--important to
    DOD, for example?
        Dr. Pace. Well, I think it's absolutely, absolutely crucial
    because what's happened so far is that we've paid the--we as
    the Government have paid for reliability and readiness. I would
    also say that SpaceX is accumulating launch experience at a
    very, very rapid rate. Every one of those Falcons that goes
    off, that's 10 engines, as I understand, that are being
    qualified. So their rate of experience is building up quickly.
        But ULA has a longer range of experience with a wider range
    of payloads. So it's really two things that are quite different
    from each other.

                         ADDITIONAL COMMITTEE QUESTION

        Senator Shelby. Thank you.
        Thank you, Mr. Chairman.
        Mr. Chairman, I do have a number of other questions I'd
    like to submit for the record.
        Senator Durbin. Certainly.
        [The following question was not asked at the hearing, but
    was submitted to the Department for response subsequent to the
    hearing:]
                   Question Submitted to Cristina T. Chaplain
                    Question Submitted by Senator Roy Blunt
        Question. Does SpaceX's Falcon 9 rocket meet all of the
    requirements of the EELV program?
        Answer. The SpaceX Falcon 9 v1.1 launch vehicle currently under Air
    Force review for new entrant certification does not, and is not
    intended to, meet all EELV program requirements. For example, to meet
    EELV program key system requirements, launch providers must demonstrate
    a mass-to-orbit lift capability of 26,100 lbs. to the geosynchronous
    transfer orbit. The Falcon 9 v1.1 configuration is designed to launch
    missions requiring lift capability of up to 12,789 lbs to the same
    orbit. Each of the up-to 14 national security space launches originally
    set aside for competition in the Air Force's upcoming launch vehicle
    competition were, at the time they were identified, within the Falcon 9
    v1.1 launch vehicle's predicted lift capability. Some missions in the
    national security space launch manifest require greater lift capability
    than this, however, so the Falcon 9 v1.1 launch vehicle will not be
    able to compete for the entire EELV launch manifest. SpaceX is
    currently developing a Falcon Heavy launch vehicle that is intended to
    meet higher-weight EELV program lift requirements. The Falcon Heavy
    launch vehicle is expected to achieve certification in 2016, according
    to SpaceX. We did not assess whether the Falcon 9 v1.1 is able to meet
    all other EELV program requirements.

                              SUBCOMMITTEE RECESS

        Senator Durbin. And if there are no further questions in
    today's panel, I want to thank all of you for being with us,
    Dr. Pace, Mr. Musk, Mr. Gass, and Ms. Chaplain. Thank you for
    your contribution today. There will be written questions coming
    your way, and we hope that you will respond to them in a timely
    fashion so we can make this report available to the public.
        And this meeting of the subcommittee will stand adjourned.
        [Whereupon, at 11:15 a.m., Wednesday, March 5, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]