U.S. Senate Hearing on National Security Space Launch
Questions on ElonsFAQ asked in this interview (2)
Transcript
0:03Dick DurbinDefense Appropriations Subcommittee we're going to start a minute or two earlier, 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.
0:20Dick DurbinSo 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 to minute or two in advance.
0:29Dick DurbinToday 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 highlights several challenges we face as a nation.
0:47Dick DurbinWhat 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?
1:01Dick DurbinWe'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 cost and risks of launching satellites were out of control.
1:20Dick DurbinEELV mission launches, pardon me, missions launched the most important satellites developed by the Air Force, National Reconnaissance Office and the Navy, not to mention NASA and a fewer number of commercial customers.
1:34Dick DurbinThe program has been extremely successful in launching satellites that cost the US Taxpayers literally billions of dollars. The safety record of the Atlas V and Delta IV rockets made by the United Launch alliance is remarkable, but we do have some concerns about the acquisition, strategy and cost and future of that program.
1:55Dick DurbinFrom 2011 to 2014, the amount the Air Force budgeted for an average of six satellite launches per year grew by 60% in that three 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?
2:14Dick DurbinOver the past three years, the Air Force has tried to control cost by stabilizing ULA production with a block buy of 36 rockets from ULA while fostering competition from new entrants such as SpaceX.
2:27Dick DurbinThe 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.
2:43Dick DurbinThese 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?
2:58Dick DurbinOr should the Department of Defense 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 acquisition programs to the government officials responsible for for the use of taxpayer money.
3:15Dick DurbinToday 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.
3:29Dick DurbinTheir 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 to space in a fiscally constrained environment.
3:45Dick DurbinI'm going to welcome our witnesses. Christina Chaplin, Director of Acquisition, Sourcing and Management at the Government Accountability Office. Michael gass, president and CEO of United Launch Alliance. Elon Musk, CEO and chief designer of Space Exploration Technologies.
4:03Dick DurbinDr. Scott Pace, director of the Space Policy Institute at the Elliott School of International Affairs, George Washington University. I'm going to ask the witnesses to provide their five minute opening statements, but I note the presence of the ranking member of the full Appropriations Committee, Senator Shelby of Alabama.
4:21Dick DurbinAnd I'd like to give you an opportunity, if you wish, for an opening statement.
4:25Richard ShelbyMr. Chairman, 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 most important national security missions.
4:38Richard ShelbyThis 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, has resulted in 68 consecutive successful missions.
5:02Richard Shelby68 success. Consecutive successful missions. I recognize this achievement not just as a center 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% success rate is no small feat.
5:25Richard ShelbyAs 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.
5:47Richard ShelbyBut the launch market is not typical. It is limited demand and is framed by government industrial policies. And 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.
6:12Richard ShelbyI believe that much of the cost 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.
6:30Richard ShelbySimply 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, is estimated 4.4 billion savings so far.
6:48Richard ShelbyThe 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.
7:02Richard ShelbyI'm not convinced yet that a wholesale change in the EELV program is the answer when we have witnessed significant results from a minor modification to purchase and practices in the existing program.
7:16Richard ShelbyBut I do look forward to the testimony of our witnesses on the role of competition in this unique market and in exchange as to why sea change in the program is necessary to achieve savings if it is.
7:29Richard ShelbyThank you, Mr. Chairman.
7:30Dick DurbinThank you very much, Senator Shelby. And now we'll have our witnesses give an opening statement. Their written statement will be made part of the record. If they'll take five or six minutes to summarize it, we can then open it to questions.
7:45Dick DurbinAnd the first person to testify? Christina Chaplin, 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.
8:00Dick DurbinMs. Chaplin, please proceed.
8:01Cristina Chaplain (GAO)Mr. Chairman, thank you for inviting me today. I'm very pleased to be here to discuss the ELV program. The program itself has been through different contract arrangements and acquisition strategies.
8:13Cristina Chaplain (GAO)There was competition at the beginning of the program with the aim of ultimately slowing, 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.
8:27Cristina Chaplain (GAO)Fixed price 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.
8:45Cristina Chaplain (GAO)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.
9:02Cristina Chaplain (GAO)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.
9:13Cristina Chaplain (GAO)And as you mentioned, there has been a good record of success since then. In 2011, the Air Force embarked on the block buy strategy in anticipation of significant price increases.
9:25Cristina Chaplain (GAO)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.
9:35Cristina Chaplain (GAO)At the time, there were also mixed views within DoD about the value and viability of to introduce competition to help lower prices, but DoD ultimately set out to do so.
9:46Cristina Chaplain (GAO)Since our 2011 report, DoD has made strides in gaining knowledge about costs and other issues surrounding the elv, and it has achieved significant savings in negotiating the block buy.
9:58Cristina Chaplain (GAO)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 and that better armed it for negotiations.
10:08Cristina Chaplain (GAO)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 remain the same.
10:23Cristina Chaplain (GAO)There's 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.
10:44Cristina Chaplain (GAO)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.
10:56Cristina Chaplain (GAO)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.
11:07Cristina Chaplain (GAO)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 costs of pricing data, which would lend itself to a better bargaining position in future negotiations.
11:26Cristina Chaplain (GAO)But this approach could also add costs for the new entrants, including a cost plus portion in bid proposals, for instance would require them to develop and install new business systems to fulfill government data requirements.
11:39Cristina Chaplain (GAO)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.
11:54Cristina Chaplain (GAO)Delivery skip we did not recommend an approach. It is not GEO'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.
12:07Cristina Chaplain (GAO)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 cost and pricing data, the need to keep costs down and considerations about the future government's demand for launch services.
12:30Cristina Chaplain (GAO)This concludes my statement and I'm happy to answer any questions you have.
12:34Dick DurbinThank you very much, Ms. Chaplin. We will have some questions, but next we're going to hear from Michael Gass, President and CEO of United Launch Alliance.
12:41Michael GassMr. 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.
12:53Michael GassOn 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.
13:06Michael GassULA 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.
13:18Michael GassOur customers extend beyond the government to 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% mission success over 68 times since the inception of the program, delivering over $60 billion of taxpayer funded satellites.
13:43Michael GassWe are currently at a tempo of a launch of one launch every month. ULA's Atlas V& Delta IV are the most powerful and most reliable rockets in the world.
13:53Michael GassThey are the only rockets that fully meet the unique needs of the national security community. The Air Force EELV program was openly and fairly compete in the late 1990s with a unique acquisition strategy at the time that required significant upfront investment by industry.
14:11Michael GassLockheed 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.
14:23Michael GassThe EELV program is entering a new era. The Air Force new acquisition strategy aims to maintain reliability and stabilize the industrial base while reducing costs and potentially introducing competition.
14:36Michael GassThe 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 strategy is to reintroduce competition.
14:47Michael GassI 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.
15:01Michael GassUltimately, the central question is whether savings from competition will be sufficient to offset the cost of duplicating existing capabilities. ULA was formed to enable a short access to space with two separate launch systems with the recognition the market dam demand was insufficient to sustain two companies.
15:19Michael GassWe went from two competing teams and redundant and underutilized 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.
15:38Michael GassWe are investing in 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, every process to eliminate any unnecessary or inefficient elements.
15:55Michael GassULA 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.
16:08Michael GassULA 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 an existing industrial base infrastructure.
16:21Michael GassThe lower the cost 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 lawn services, from the traditional DoD contracting approaches to the commercial approaches, from buying rockets and blocks to buying them individually.
16:40Michael GassI'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.
16:56Michael GassI 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.
17:11Michael GassI've also experienced some of the launch industry's darkest days, such as in the late 1990s prior to the EELV program, when the US suffered a series of six major launch failures over a ten month period.
17:23Michael GassThose 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 values caused.
17:36Michael GassI 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 open and transparent relationship with our government customers and the acquisition strategies that align with customers priorities.
17:53Michael GassIn 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 to Orbit reliably and on schedule.
18:07Michael GassWe look forward to working with our government customers to further drive down cost without compromising the reliability and readiness. Thank you for the opportunity and I look forward to your questions.
18:17Dick DurbinThanks, Mr. Gass. Elon Musk, CEO and Chief Designer of Space Exploration Technologies. The floor is yours.
18:22Elon MuskThank you, Mr. Chairman.
18:25Dick DurbinTurn on your. There we go.
18:26Elon MuskMr. Chairman. Ranking Member Conrad, 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.
18:41Elon MuskToday 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% success rate including four launches for NASA three which docked with the International Space Station and have launched a sophisticated geostationary satellite for the world's leading satellite companies.
19:10Elon MuskWe are restoring America's competitiveness in the global commercial space launch market as the only US company that is consistently winning head to head competitions for launch opportunities at the world level.
19:22Elon MuskWith respect to the ELV 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.
19:32Elon MuskThe 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.
19:49Elon MuskWhen 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 non mercuri breach for the program exceeding 50% of its cost projections.
20:12Elon MuskAccording to congressional records in FY13, 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 a billion dollars a year, even if they never launch a rocket.
20:27Elon MuskBy contrast, Base X'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.
20:40Elon MuskSo 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.
21:00Elon MuskTo put this into perspective, had SpaceX been awarded the missions ULA received under its recent non competed 36 core block buy. We would have saved the taxpayers $11.6 billion.
21:14Elon MuskCompetition 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 an ELV provider, SpaceX has had to meet a number of requirements that were never demanded of the incumbent provider.
21:31Elon MuskWe were required to successfully launch three flights of our upgraded Falcon 9 vehicle, which we achieved in January. Under our ELV certification agreement, we're undertaking vigorous engineering reviews with the Air Force.
21:45Elon MuskTo date, we've 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.
22:00Elon MuskPoint number three is we really believe that robust competition must begin this calendar year. We applaud the early steps the Air Force and NRO have taken to reintroduce competition into the ELB program.
22:10Elon MuskIn 2012, the Air Force, under direction from the Secretary of Defense, committed to competing up to 14 missions, with five missions available for competition this year. Of course, we would have 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.
22:34Elon MuskThese five missions will not actually be awarded this year. We recently learned that perhaps only one will be awarded this year.4. 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.
22:58Elon MuskWhen a competitive environment exists, the government should use Firm fixed price FAR part 12 contracts that properly incent contractors to deliver on time and on budget. That means eliminating the billion dollar subsidy annual subsidy to ula, which creates an extremely unequal playing field.
23:16Elon MuskAnd the final point is that our Falcon 9 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.
23:31Elon MuskThis 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 airframe is manufactured overseas.
23:44Elon MuskIn light of Russia's de facto annexation of Ukraine's Crimea region and the formal severing military ties, the Atlas V cannot possibly be described as providing assured access to space for our nation when supply of the main engine depends on President Putin's permission.
24:00Elon MuskGiven this development, it would seem prudent to reconsider whether the 36 core uncompeted sole source award to ULA is truly in the best interest of the people of the United States.
24:10Elon MuskI thank the Committee for this opportunity and look forward to addressing any questions.
24:14Dick DurbinThank 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.
24:24Elon MuskOkay.
24:25Scott PaceThank you, Chairman Durbin and Ranking Member Cochran, members of the Committee, for providing this important opportunity to discuss the topic of national security space launches as called for in US national policy.
24:36Scott PaceThe United States and the DoD in particular need to decide how it best assures the existence of, quote, two U.S. space transportation vehicle families capable of reliably launching national security paper payloads.
24:49Scott PaceA 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.
25:01Scott PaceThe EELV program as 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 in the procurement of EELV class launch services.
25:21Scott PaceThe National Space policy states, quote, that U.S. commercial space transportation capabilities that demonstrate the ability to launch payloads reliably will be allowed to compete for US Government missions on a level playing field consistent with established interagency new entrant certification criteria.
25:39Scott PaceI 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.
25:51Scott PaceDepending on market conditions, competition can result in meeting DoD needs at lower cost or failing to meet those needs and merely shifting government costs to other accounts. The ELV program as managed by ULA today represents a high degree of experience and capability as a potential competitor for national security launches.
26:11Scott PaceSpaceX 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.
26:27Scott PaceWhat 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?
26:40Scott PaceGet the lowest price for all government funded missions? Assure access to space for all needs with a US industrial base at least cost. So the question really is one of scope that this committee wants to take.
26:55Scott PaceThe launch services new entrant certification 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?
27:06Scott PaceWill 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.
27:21Scott PaceCan 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.
27:35Scott PaceWill 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?
27:49Scott PaceIn 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.
28:02Scott PaceDefense 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.
28:15Scott PaceFor example, the government could pay separately for non commercial processes and deliverables rather than having all costs bundled into the launch cost or company overhead. The government may still pay more for its launches than a commercial buyer would, but the cost drivers will be more visible and accountable and we more easily allow cost benefit trades for government decision making.
28:36Scott PaceThe most important consideration for any policy choice 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.
28:51Scott PaceTo do otherwise is to invite failure. Thank you very much for your attention. I'd be happy to answer any questions that you might have.
28:58Dick DurbinDr. Pace. Thank you very much. And I think you can tell from the opening statements that this is a subject that I found challenging to the committee and to Congress.
29:09Dick DurbinThat 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.
29:22Dick DurbinI'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.
29:38Dick DurbinThose 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.
29:50Dick DurbinMr. Gass. Russia is in the news. And the question about sanctions by the United States against Russia for their adventurism in Crimea raise a question about our future relationship with this company or with this country.
30:04Dick DurbinI ask you, when it comes to your use of the RD180 engine on your Atlas V missions, what 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.
30:25Michael GassThank you Senator Durbin. And we all are watching and caring for the people in the Ukraine in this situation. First, let me kind of give a little bit of history on the engine.
30:37Michael GassWe went to the former Soviet Union with 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.
30:48Michael GassAnd what we found was an engine that was more advanced in technology and could be bought in a cost competitive way that we had here in our country. What we have done to protect and for that concern since the day we started with that relationship more than two decades ago, we've protected the nation.
31:09Michael GassAnd what do we do from United Launch Alliance? First and foremost we have two 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.
31:23Michael GassAt United Launch alliance we have another product that is fully compliant and ready to support any of the missions. So from a nation we are not at any risk for supporting our national needs.
31:36Michael GassWe've always kept our ability to not to be leveraged in case of any kind of supply interruption.
31:42Dick DurbinSo I understand for clarity here you're saying that you have warehoused or stockpiled engines for two years possible launches. What about the capacity to produce that same engine in the United States?
31:56Michael GassThank you Senator Dermot. We have as part of the deal that we signed with a company called rd. Amros was a joint venture of United Technologies and the company in Russia called NPO Energamon.
32:09Michael GassWe 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 demonstrate that we can take the blueprints and specifications that were written in Russian, translated them and that full arm length relationship, demonstrate we can build the most difficult products.
32:29Michael GassAnd 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.
32:39Michael GassI'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.
32:52Michael GassWhen 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 ready to do it.
33:06Michael GassThe people, United launch flights and industry. The work that's being done at Marshall Space Flight center and at the Air Force Research Labs has been pushing our envelope of technology.
33:15Michael GassWe need to stay on that constancy of purpose.
33:18Dick DurbinMr. 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 Senator Shelby noted.
33:31Dick DurbinULA 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 paid dearly for it and could pay a lot less.
33:44Dick DurbinNow, I guess the question I need to ask, the premise of this goes back to the creation of ula. Do you believe it is possible to maintain two companies in competition for future launches?
33:57Dick DurbinAnd 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?
34:12Elon MuskYeah, absolutely. First I should mention that the premise of perfect success is not quite correct for, for ula. It is. 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 reduced life.
34:33Elon MuskSo it's certainly a good. But it's not quite correct to say. It would be a flawed premise 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.
34:50Elon MuskSo currently ULA has both the Atlas and the Delta, but those, those are redundant. You don't need both of those rocket families. And I think it would make sense to, to, you know, for the long term security interest of the country, to probably phase out the Atlas V which depends on the Russian engine, and have ULA operate the, The Delta family, SpaceX operate the Falcon family, giving the Defense Department assured access to space with two completely different rocket families.
35:19Elon MuskI think that's the logical thing to do going forward. And I think it would be the best thing in every respect for the country.
35:29Dick DurbinMr. Gass, before I was chair of this subcommittee, we looked closely at the ELC account, the cost plus account that basically as been described in many different ways to maintain the capability, infrastructure necessary.
35:46Dick DurbinSo we are dealing when we deal with ula, which with the actual fixed price of the product, the launch that we are purchasing, and then an ELC which has been characterized as an infrastructure investment, a subsidy, a cost plus item.
36:04Dick DurbinWhat 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?
36:23Michael GassWell, first, again, thank you for the question. I knew it was coming. And you know, when I was listening to Mr. Musk, an ironic moment came back to me in that it was probably more than a decade and a half that I was sitting in the back of a room like this when there was some generals and some industry leaders sitting here explaining to senators like yourself about why there were some of these failures that caused billions of dollars of lost capability.
36:48Michael GassAnd 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.
37:06Michael GassIn 2004, the two companies competed. We were in a FAR12 fixed price type contract, as Mr. Musk was advocating. All the national security satellites that Congress funded that were being new starts were significantly behind schedules.
37:23Michael GassThe capabilities in orbit were significantly deteriorating. The satellites were not sure when they were going to come out of factories. They were going through final tests. They were having problems.
37:33Michael GassAnd 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.
37:48Michael GassThere was no satellites to be launched. We had people standing around. We would have furloughed our workforce for a while and come back when there was enough demand. When the, when those satellites are ready, pull up the demand.
37:59Michael GassSo we had to come up with a solution that provided the national security capability. So the ELC is just that capability that gives the flexibility to the war fighter to make the critical decisions when they need it.
38:13Michael GassIt's categorically not a subsidy. I wish I had a contract that Mr. Musk has, that he has 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.
38:34Michael GassChaplin articulates. That comes with a lot of restrictions. So ELC is not a subsidy. It's about providing national security capability with the lays a focus on mission success. And I also encourage the committee to think about it as a pendulum.
38:50Michael GassWe 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 a middle. We need to find that right equilibrium that brings that balance of critical missions and it promotes cost competitiveness.
39:08Dick DurbinThank you. I'll have some more questions in the second round. Senator Cochran, Mr. Chairman, thank you very
39:13Elon Muskmuch for convening this hearing. It's obviously very appropriate and timely. I wonder what the reaction of the
39:21Michael Gasspanel is to the Air Force's new
39:23Elon Muskstrategy to reintroduce competition in the ELV program. At the same time, recognizing that we
39:34Dick Durbinhave significant mission success which has been
39:38Elon Muskachieved by United Launch alliance, the sole
39:42Dick Durbinsource launch provider since 2006.
39:47Elon MuskWhat is your reaction to that situation? Should we continue to support this as it is or should we make changes?
39:58Elon MuskWho would you like to answer this? Whoever wants to answer it.
40:06Cristina Chaplain (GAO)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.
40:17Cristina Chaplain (GAO)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 ELV and the prime contractor are in a poor negotiating position and pay the price demanded.
40:36Cristina Chaplain (GAO)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 cost and pricing and to take actions to gain more efficiencies within the program.
40:49Cristina Chaplain (GAO)You have the Air Force is doing both. They've also, you know, 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.
41:04Cristina Chaplain (GAO)It's worked well for another government agency.
41:09Elon MuskMr. Gass, do you have an impression
41:12Michael Gassto share with us? Absolutely. The measures of success should not be how widely competition is employed, but how wisely competition is employed. And when we started this program, we had two competing companies, the Lockheed Martin Corporation, the Boeing Company, and it wasn't working.
41:30Michael GassSo can we formulate competition that could work? That's actually going to save the taxpayer money. And when you deal with the limited demand of the nation and some of the unique requirements that nation is, how are we going to have that competition to be on a fair and level playing field?
41:48Michael GassSome 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?
41:59Michael GassWhen 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.
42:12Michael GassI was running a program called the Atlas 2. It was supporting DoD programs on a far competitive basis. When we were launching basically the military satellite Constellation, we had a block by of Diskus and uhf which had been replaced by the WGS and muos in today's Constellation.
42:31Michael GassWe had a block by 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.
42:58Michael GassThose capabilities are so unique that it just would not work and would 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.
43:15Michael GassMany 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.
43:27Michael GassAnd 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.
43:44Michael GassMs. Chaplin 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 more efficient activity.
43:56Elon MuskThank you.
43:57Dick DurbinMr. Musk, what is your reaction to that?
44:01Elon MuskWell, 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, from the point which they stopped being competitors, the costs doubled since then.
44:25Elon MuskAnd I think the reality is when competition is introduced, reliability is a key factor in competition.
44:34SenatorSo.
44:35Elon MuskSo that would be a deciding factor in who wins what launches. It doesn't become less important, it becomes more important. But the cost to the US Taxpayer will drop substantially.
44:46Elon MuskI think they will drop at least to the level that they were before Boeing, Lockheed became a monopoly in the launch business, and perhaps even better than that. And frankly, if power rockets are good enough for NASA, why are they not good enough for the Air Force?
45:00Elon MuskIt doesn't. Doesn't make sense. Dr. Pace,
45:06Scott PaceI 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.
45:19Scott PaceThere isn't really a DoD space launch industrial base, there's a US launch industrial base. And so what actions other agencies pursue has an impact here. As is mentioned, NASA has been successful in using more streamlined processes for buying its launches.
45:36Scott PaceI 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.
45:50Scott PaceThey 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.
46:02Scott PaceSo 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?
46:19Scott PaceAnd 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.
46:29Elon MuskYeah. Thank you.
46:31Dick DurbinThanks, Mr. Chairman. Senator Feinstein,
46:35Senatorthank 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.
46:44SenatorAnd 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.
47:02SenatorThe 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 the cost of the EELV program since its inception.
47:19SenatorThe 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 1.6 billion in FY14.
47:48SenatorThat's a 166% 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% against both the original 2004 and 2007 modified baseline.
48:14SenatorMost startling, the most recent independent cost estimate 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.
48:44SenatorChairman. 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.
49:13SenatorAnd 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 undersecretary.
49:30SenatorAccording 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 FY17. And I think that's really a shame.
49:47SenatorI have three quick questions, 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.
50:08SenatorSo what challenges, if any, do you expect from the Air Force certification process?
50:16Elon MuskThe 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.
50:31Elon MuskWe are concerned about any delays in the contracting and 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 five year buy, as was mentioned earlier by Mr.
50:55Elon MuskGass, they only have a two year supply of engines and yet this contract is, this is a 5 year contract for the 36 cores. So if there are any sanctions or if there's any issue with supply of those engines, there will not be assured access to space for the Atlas V.
51:10SenatorNow, according to the Kendall memo that I just mentioned, new entrants should be able to begin competing for up to 414 EELV launches by FY15. Do you expect the Air Force to live up to the requirement imposed upon it by Under Secretary Kendall.
51:30Elon MuskI'm very hopeful that the Air Force will adhere to that requirement.
51:37SenatorSo you believe that you will be able to compete for 14 EELV launches by FY15?
51:46Elon MuskI'm highly confident that we will be able to do so, yes.
51:48SenatorGood. Thank you very much, Mr. Chairman.
51:51Dick DurbinThank you, Senator Feinstein. Senator Shelby.
51:53Richard ShelbyThank you, Mr. Chairman. Mr. Musk, you recognize. Excuse me. In your statement for the record, that the Air Force's acquisition approach, requiring detailed cost data, accounting, auditing and other mission assurance requirements adds.
52:10Richard ShelbyThese are your words, adds substantial overhead cost to the taxpayer for oversight of a largely mature booster corps. 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?
52:35Richard ShelbyIt seems like your price estimates compare apples and oranges. And why should. Mr. Musk, why should SpaceX be exempt from the same auditing, oversight and accounting rules that DoD requires of the United launch?
52:52Richard ShelbyIf SpaceX is required to comply with those specific requirements, how will that impact the cost of your launch vehicle? You understand?
53:02Elon MuskCertainly. So we provide full and detailed insight into all of our costs. We've been doing so for a long time to NASA, and we're also providing that to the Air Force.
53:14Elon MuskSo the. The government has complete insight into our cost structure. There is additional cost for US Government missions due to the mission assurance process because the US Government does not buy launch insurance.
53:28Elon MuskSo 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% higher for air Force flights than for commercial flights.
53:46Elon MuskSo 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.
53:59Elon MuskIn fact, all of the numbers I was referring to are including the Air Force overhead.
54:04Richard ShelbyShould you have the same rules to apply to your company that the United Launch has applied to them? I guess is the question.
54:12Elon MuskAbsolutely.
54:12Richard ShelbyOkay.
54:13Elon MuskYeah.
54:14Richard ShelbyMs. Chaplin, I 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 contractor costs, which has caused problems in the past.
54:31Richard ShelbyCould 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?
54:44Richard ShelbyWhoever's doing it.
54:46Cristina Chaplain (GAO)Okay. I would like to say when there was commercial contracts used at the beginning of the EELV program, the suppliers did not have to follow those requirements. When the ELV program transferred into using a cost type arrangement for one of its contracts, then they were required to have those systems.
55:08Cristina Chaplain (GAO)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.
55:20Cristina Chaplain (GAO)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.
55:35Cristina Chaplain (GAO)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.
55:49Cristina Chaplain (GAO)The systems do provide good data, they give you insight into cost, they give 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.
56:05Cristina Chaplain (GAO)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.
56:15Cristina Chaplain (GAO)So it's reasonable why they 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.
56:30Richard ShelbyMr. Musk, would you concede that 68 consecutive launches is a great record?
56:38Elon MuskI would. Although I'd like to point out that there were two highly publicized failure investigations. One for Delta 4 heavy, one for Atlas. The Air Force conducted failure investigations.
56:53Elon MuskULA has a very good track record. It is just not quite as perfect as 68 perfect launches.
56:58Richard ShelbyMr. Gash, you have any response?
57:02Michael GassWe measure the mission success by our customers declaration. And so if they declare that the satellite and the mission is success, we use the same record. The and why it's important because our profit is tied to emission success.
57:16Michael GassIf we don't deliver it, it's not only we lose forfeit our profit, but potentially get a penalty. So the declaration is about the on orbit capability and that's how we measure success.
57:28Richard ShelbyMr. 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.
57:42Richard ShelbyWhat recourse did the owner of the secondary payload have in that situation to recover damages in Other words, what's next? What was next?
57:57Elon MuskRight. Well, by ULA's definition of success, that mission was perfect.
58:02Richard ShelbyThat was perfect, although you went into the wrong orbit and so forth.
58:09Elon MuskSo the primary mission, which was to deliver the Cassiopeia satellite was 100% successful. There was a secondary satellite that was an optional objective that was not part of the primary mission.
58:25Elon MuskBut as I said, if, if you accept ULA's definition of perfect success, then that mission was perfectly successful.
58:32Michael GassMr. Gas, it would not be declared successful if that was a contracted requirement. We would.
58:39Richard ShelbyHe would say it was successful by his criteria, but you'd say it was not success.
58:44Michael GassYou know, we could have a debate about success, success, but if, if it's considered an experiment and the rocket was supposed to perform all the capabilities and it didn't, that's, you know, that's a different kind of business arrangement.
58:56Michael GassBut in our measure of success, we put margins in. The anomalies that Mr. Musk referred to that we had on United launch lines was design margins. The margins came into play and we were able to successfully deliver the satellite.
59:10Michael GassIt is an incredibly risky business and everything needs to work perfectly.
59:17Richard ShelbyDr. Pace, you have any comment on that?
59:21Scott PaceI would add more from, as a former analyst, you know, with, with NASA, that getting detailed understanding of the prices and costs, prices we understood, I think, with SpaceX, understanding all the costs, I think, was somewhat more difficult.
59:37Scott PaceSpaceX did not have, when I was at NASA, the detailed level of business accounting systems that we were used to on, on other projects. So we had a very robust dialogue with SpaceX people and we got a lot of information, there's a lot of cooperation.
59:52Scott PaceBut I would have to say that really understanding all those costs, the same level of detail was, was hard to come by. And so eventually in some areas, we said, you know, there's some, there's some magic going on on SpaceX we don't fully understand, but we appreciate the results.
1:00:08Scott PaceAgain, how much is the government willing to pay and impose on SpaceX on this contract if it's not willing to impose those kind of detailed reporting requirements? Are they willing to relax them, you know, on other players?
1:00:21Richard ShelbyThank you. Thank you, Mr. Chairman.
1:00:23Dick DurbinThank you, Senator Shelby. In this round, I'm going to take what I consider, after listening to the testimony and reading the background here, the best arguments on both sides, and ask you each to address them.
1:00:36Dick DurbinI'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.
1:00:51Dick DurbinHead up to Connecticut, 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.
1:01:04Dick DurbinAnd 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. And when you need us, if you ever need us, we won't be there.
1:01:15Dick DurbinSo 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.
1:01:25Dick DurbinGass explain the E L C. 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.
1:01:37Dick DurbinAnd so the elc, some call it 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.
1:01:48Dick DurbinWhat 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.
1:02:01Dick DurbinGood budget, bad budget. When we need them, they'll be there.
1:02:05Elon MuskSure. Well, the reality is that today there's a steady cadence of Air Force and NRO emissions every year. So you don't really have the wide difference from one year to the next.
1:02:16Elon MuskThat you had in the past. So I think the prior justification of needing that for stability. Is no longer there. Because there is a stable launch demand from the Air Force and intelligence community.
1:02:28Elon MuskSecondly, 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 main engine.
1:02:41Elon MuskWhich can be cut off at any time. Logical thing to do is to eliminate the Atlas family. Have the Delta and Falcon family. That will provide the greatest amount of assured access.
1:02:52Elon MuskAnd the greatest reliability. And the cost savings that the government is looking for.
1:02:57Dick DurbinMr. 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.
1:03:09Dick DurbinBuyer 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.
1:03:21Dick DurbinWe 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.
1:03:34Dick DurbinWe are 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.
1:03:48Dick DurbinThat'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.
1:04:02Dick DurbinSo why wouldn't the taxpayer be better served with competition?
1:04:05Michael GassThank 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.
1:04:20Michael GassI saw this chart last night in the GA 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.
1:04:34Michael GassLet 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.
1:04:45Michael GassAs we go out to the outer years, we're now buying rockets and launching at about a 10 or 11 year. So if you just do division, all of a sudden it'll be different.
1:04:53Michael GassThe 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.
1:05:09Michael GassWe actually had to give credits about almost a billion dollars that we took off the contract price. So you didn't have to appropriate during that time. And the company took those losses because they were overly aggressive in the pre red line activities with that expectation of commercial.
1:05:26Michael GassSo you talk about the good stewards of taxpayers and I want to 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.
1:05:41Dick DurbinBut take me down to the basic question here. Price competition is going to give the taxpayers a lower cost, is it not?
1:05:49Michael GassIt 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 don't need, there'll be excess capacity because there's just not enough work.
1:06:08Michael GassAnd if everybody has to have it, it could create excess cost. The other example that I gave before when we talked about the Tomato Cruise Missile, if you know you're not going to lose, that's not a winner take all.
1:06:20Michael GassYou 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.
1:06:32Michael GassWe had what we call an award fee contract where requirements could creep up. And as a company in award fee, if we said no and pushed back on the requirements, you get negatively rewarded on your profit rate.
1:06:46Michael GassToday 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 in cost incentive contract on elc we have to year over year improve.
1:07:01Michael GassWe signed up to a greater than a 5% year over year improvement. It's already in the contract and we're incentivized to improve upon that. And so it's the right kind of contract for the time frame.
1:07:13Michael GassThe period of time where the satellites were not coming at a regular basis is a different time frame than where we are today. I came into this, into the building and talked to the Air DoD officials as early as 2008, seeing that things were going to get more stable, that we needed to change the acquisition strategy.
1:07:31Michael GassAnd it took us to 2012 for us to do that. But it's on the right path.
1:07:36Elon MuskSenator 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 will compliment the efforts that the contractors
1:07:50Michael Gassare making to produce products which protect
1:07:54Elon Muskthe security interests of our country at a reasonable price.
1:08:01SenatorTo 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.
1:08:14SenatorAnd 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, there are.
1:08:30SenatorWe 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?
1:08:46SenatorWould ULA actually say we don't want to compete with SpaceX?
1:08:51Michael GassAbsolutely not. Thank you. Absolutely not. ULA is ready and willing and able to compete on any field full of
1:08:59SenatorOkay, 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.
1:09:15SenatorSo what keeps us from doing this?
1:09:19Michael GassBasically SpaceX doesn't have all the capabilities nor the requirements. So if, if, if you think about it, if SpaceX's requirements have to come down and some of our requirements have to have to be eliminated till we get that level playing field.
1:09:32SenatorOkay, Mr. Musk, respond to that. If this is the heart of the matter, respond to it.
1:09:38Elon MuskYeah, I believe SpaceX has, can, 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.
1:09:59SenatorHow much of this is in the fixed price competition versus cost plus?
1:10:07Elon MuskWell, I think fixed price competition is the, the better way to go when, when there is competition that the logical thing to do is to go for a fixed price.
1:10:16Elon MuskBecause otherwise if you competed 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.
1:10:26SenatorDo you have a problem with that, Mr. Gas?
1:10:32Michael GassI 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 is very difficult to support on a, on a fixed price basis.
1:10:50Michael GassThe 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 on some of these satellites.
1:11:07Michael GassVery 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 come from a Mormon what General Mormon report in the 1990s and the goal was to lower cost for the nation across all of our national launch certic security needs not one missionary or not so on average our costs have come down, the program is greatly successful and we're continuing to drive the cost down and the productivity is improving.
1:11:49Michael GassBut 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.
1:11:59Michael GassI talked about the pendulum swinging. We can go back that way and we'll see some of the errors. Ms. Chaplin's team has done a great job on the report of laying out the balances, the trades that the nation has to make.
1:12:10Michael GassIt'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.
1:12:17SenatorSo I'm trying to understand what you're saying. What you're saying is if the requirements for a bid were all the same across the board, we would have no problem.
1:12:27SenatorIs that correct or not?
1:12:29Michael GassIt would be fine for the competition, but just Yesterday in the 14th, Air Force out in California had to make some mission switches between NASA, the Air Force. They just gave direction.
1:12:42Michael GassA NASA mission was late. An Air Force mission moved in. Another NAS Air Force mission took priority. Another NASA mission was moved out. If we were in 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.
1:13:00Michael GassIn a fixed price world, that operational flexibility is not there for the war fighter, but it works for competition.
1:13:06SenatorMay Mr. Musk respond to that? Would you respond to that?
1:13:10Elon MuskCertainly. So I think the logical thing to do is to do a fixed price competition for, for the basic vehicle. And then to the degree that there are mission unique requirements, which is a fairly small part of the mission, that that would be cost plus.
1:13:27Elon MuskSo 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.
1:13:41Elon MuskIt would be logical to make that cost plus, but the vast majority of the contract would be fixed price.
1:13:46SenatorThank you. Thank you very much.
1:13:48Richard ShelbyThank 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.
1:14:09Richard ShelbyThe 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.
1:14:27Richard ShelbyWe don't know. If DoD has to pay, for example, new entrants for the infrastructure and labor costs of now included in the EELV launch capability contract, how would duplication of existing infrastructure result in lower launch costs for DoD.
1:14:48Richard ShelbyA lot of us are concerned that recreating the wheel could actually increase overall cost compared to what DOD is currently paying. Would you have a comment on that?
1:15:00Scott PaceThat's certainly, that's certainly possible. I think what we could see happening is that the introduction of competition could lower the cost as a virtue of lower prices for a wide category of services.
1:15:12Scott PaceThere's a number of missions that I think SpaceX, for example, could certainly compete for. There are a number of missions that it may take A while before SpaceX can compete, as mentioned, the Delta, Delta 4 class systems, although eventually it may compete for those as well.
1:15:26Scott PaceSo the question is, what do you want the industrial base to actually look like if you break these costs out? If you charge extra for non commercial processes, is the government willing to pay for that?
1:15:37Scott PaceOr 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 4S, and that is a much more segmented market.
1:15:54Scott PaceBut 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.
1:16:03Scott PaceYou 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.
1:16:13Scott PaceBut whether total costs go down for the government, I think is still something to remain to be seen.
1:16:19Richard ShelbyHow important is quality, in other words, the 68 straight launches, successful launches, important to DoD, for example?
1:16:27Scott PaceWell, I think it's, it's absolutely, absolutely crucial because what's happened so far is that we've paid the. We as a government have paid for reliability and readiness. I would also say that SpaceX is accumulating launch experience at a very, very rapid rate.
1:16:42Scott PaceEvery one of those Falcons that goes off, that's, that's 10 engines, as I understand that are that are being qualified. So their rate of experience is building up quickly.
1:16:52Scott PaceBut, but ULA has a longer range of experience with a wider range of payloads. So it's really two, two things that are quite different from each other.
1:17:01Richard ShelbyThank you. Thank you, Mr. Chairman. Mr. Chairman, I do have a number of other questions I'd like to submit for the record.
1:17:08Dick DurbinCertainly. 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.
1:17:16Dick DurbinChaplin. 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.
1:17:26Dick DurbinAnd this meeting of the subcommittee will stand adjourned.