[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.]