[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.]