Senate hearing on National Security Space Launch Programs with Elon Musk

foreign foreign oh foreign foreign foreign foreign foreign foreign defense 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 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 highlights 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 discussed the eelv program which was created almost 20 years ago when the cost and risks of launching satellites were out of control eelv mission launches apartment missions launched the most important satellites developed by the air force national reconnaissance office and the navy not to mention nasa and a few fewer number of commercial customers the program's 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 is remarkable but we do have some concerns about the acquisition strategy and cost 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 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 over 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 the subcommittee needs to better understand the cost of the current program how to ensure that competition is fair and presents the best 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 supply of rockets by better managing that industrial capability with smarter buying and better negotiating or should the department of defense be moved 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 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 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 dr 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 and i'd like to give you an opportunity if you wish for an opening statement mr 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 this requirement is precisely why the department of defense focuses on mission success and reliability in the evolved examinable 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 68 success consecutive successful missions i recognize this achievement not just as a senator from alabama where the ula pro ula performs its engine assembly work but is someone who has watched the defense fence industry for decades and knows that a 100 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 it 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 i believe that much of the cost of 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 by approach has already resulted in significant savings and will ultimately say or be saving billions of dollars the air force for example is estimated 4.4 billion savings so far the wise stewardship of taxpayer resources is essential to in all government programs and oftentimes competition is key in this case the safety and security of our national security payloads is paramount i'm not convinced yet that a wholesale change in the eelv program is the answer when we witness significant results from a minor modification to purchase and practice 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 in exchange as to why sea change in the program is necessary to achieve savings if it is thank you mr chairman thank 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 and 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 ms chaplin please proceed 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 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 price contracts were used also in the early 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 lunch program the government placed most of its focus on mission success and not as much on controlling costs and as you mentioned there has been a good record of success since then in 2011 the air force embark barked on the block by 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 are 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 the elb and it has achieved significant savings in negotiating the block by 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 remain the same 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 the block by 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 the 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 of 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 to also likely lose access to contractor cost and pricing data and some flexibility in rescheduling launches of satellites delivery skip we did not recommend an approach it is not ja'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 the fact is 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 this concludes my statement and i'm happy to answer any questions you have thank 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 mr gas 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 our 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 a 100 percent mission success over 68 times since the inception of the program delivering over 60 billion dollars of taxpayer-funded satellites we are currently at a tempo of a launch of one launch every month ula's atlas 5 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 elv program was openly and fairly compete in the late 1990s with a unique active 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 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 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 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 the market damn demand was insufficient to sustain two companies we went from two competing teams and redundant and underutilized underutilized infrastructure to one team that has exceeded the savings uh 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 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 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 an existing industrial base infrastructure the 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 imaginal approach to buying launch services from the traditional dod contracting approaches to the commercial approaches from buying rockets and 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 that 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 values over a 10-month period those losses totaled billions of dollars and were harsh reminded that launch is risky and extremely unforgiving it's difficult to overemphasize the loss of national security those values 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 open and transparent relationship with our government customers and the acquisition strategies that align with customers priorities in summary i believe the elv 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 cost without compromising the reliability and readiness thank you for the opportunity and i look forward to your questions thanks mr cass elon musk ceo and chief designer of space exploration technologies the floor is yours thank you mr chairman turn on your mr chairman ranking member members of the committee thank you for having me here today uh spacex was was founded to make radical improvements to space transport technology uh 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 five billion dollars we have launched our falcon 9 rocket eight times with 100 success rate including four launches for nasa uh three which docked with the international space station uh and and and have launched a sophisticated geostationary satellite for the world's leading satellite companies um we are restoring america's competitiveness in the global commercial space launch market as the the only us company that is consistently winning head-to-head competitions for launch opportunities at the world level with respect to the elv program i have five points to make the first is that the air force and other agencies are simply playing too high a price for launch the impacts of relying on monopoly providers 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 when the merger between boeing and lockheed's business occurred the the merger promised in the press release 150 million dollars of savings instead there were billions of dollars of cost overruns and and a non-mccoy breach for the program exceeding 50 percent of its cost projections according to congressional records in fy 13 the air force paid an average of 380 million dollars for each national security launch while subsidizing ula's fixed costs the tune of more than a billion dollars a year even if they never launch a rocket by contrast spacex's price is well under 100 million dollars meaning a savings of almost 300 million dollars 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 dollars 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 uh to put this into perspective had spacex been awarded the missions ula received under its recent uh non-competed 36 core block by we would have saved the taxpayers 11.6 billion dollars competition it's a point number two competition is coming to the national security market this has been acknowledged uh and and we're already compete we are ready to compete for that in order to be certified as an elb provider 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 9 vehicle which we achieved in in january under our elv certification agreement we're undertaking vigorous engineering reviews with the air force today 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 point number three is we really believe that robust competition must begin this this town of the year we applaud the early steps the air force and nro have taken to reintroduce competition into the elb program in 2012 the air force under direction from the secretary of defense committed competing up to 14 missions with five available with five missions available for competition this year of course we would greatly have preferred that the air force opened all of its missions for competition and uh 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 four with the advent of competition a launch should really be viewed as a commodity and any competition between new entrants and ula should probably 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 a firm fixed price for par 12 contracts that appropriate properly incent contractors to live on time and on budget that means eliminating the billion dollar subsidy at annual subsidy to to ula which creates an extremely unequal playing field and the final point is that our falcon 9 falcon heavy launch vehicles are truly made in america we design and manufacture 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 stone stark contrast to the united launch alliance's most frequently flown vehicle the atlas 5 which uses a russian main engine and where approximately half the airframe is manufactured overseas in in light of rushes the factor 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 given this development it was important to reconsider whether the 36 core uncompleted sole source award to ula is truly in the best interest of the people united states i thank the committee for this opportunity and look forward to addressing any questions 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 okay thank 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 u.s national policy the united states and the dod in particular need to decide how it best assures the existence of quote to u.s space transportation vehicle families capable of reliably launching national security payloads unquote 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 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 want services the 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 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 essential 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 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 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 a u.s industrial base at least cost so the question is really is one of scope that this committee wants to take the 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 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 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 and a commercial buyer would but the cost drivers would be more visible and accountable and we more easily allow cost benefit trades for government decision making the 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 to do otherwise is to invite failure thank you very much for your attention and be happy to answer any questions that you might have dr pace thank you very much and um i think you can tell from the opening statements that uh this is a subject that i 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'm i've done something that's a little unorthodox here i've invited each of the companies represented ula through mr gas 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 uh each of them to respond appropriately and in a timely fashion let's get get down to some specifics if we can mr gas rush 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 his country i ask you when it comes to your use of the rd-180 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 interests of its own defense should take that into consideration when it awards these contracts thank you senator durbin and uh we all are watching uh and caring for the people in the ukraine in this situation first uh let me kind of give a little bit of history on the engine we went to the former soviet union with with encouragement from two presidential administrations more than two decades ago to look at capabilities that were in russia that were in in the form of soviet union and what we found was a 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 and uh to protect and for that concern since the day we started with that relationship uh more than two decades ago we protected the nation and what do we do from united launch lines 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 at the 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 uh our our national needs we've always kept our ability to not to be leveraged in case of any kind of supply interruption so i understand uh 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 uh thank you senator but we have as part of the deal that we uh signed with the company called artie amoros was the joint venture of united technologies and the company in russia called npo and nurgamash 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 demonstrate that we can take the blueprints and specifications that were written in russian translated them and that 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 to build that exact engine i've always encouraged the nation and uh 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 textbook 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 the people at the united launch lights 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 we need to stay on that constancy of purpose 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 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 for example commercial business to sustain you when government budgets cannot um yeah absolutely at first i i i should mention that the the premise of of perfect success is not not quite correct for for ula it is um there's something have a very good track record but the the first delta iv heavy uh failed and there was a partial failure of the one of the atlas missions uh which resulted in a satellite having reduced life so it's certainly a good but but it's not not quite correct it's a it would be a flawed premise to say that it's perfect um 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 those are redundant um you don't need both of those rocket families um 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 um and have ula operate the the delta family uh spacex operate the the falcon family giving the defense department uh assured access to space with two completely different rocket families i think that's that's the logical thing to do uh going forward and i think it would be um the best thing on on in every respect for the for the country mr gas before i uh was chair of this subcommittee uh we looked closely at the elc account the cost plus account that basically has been described in many different ways to maintain the capability infrastructure necessary so we're 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 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 well first uh again thank you for the question i knew knew it was coming and you know when i was listening to mr musk an ironic moment came back to me and that uh 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 was 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 uh and we changed the acquisition strategy the elc was a it was an outgrowth of that event what 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 was advocating all the national security satellites that congress funded that were being new new starts was significantly behind schedules the 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 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 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 were ready pull up the demand so we had to create come up with a solution that provided the national security capability so the elc is just that capability that gives the flexibility to the warfighter to make the 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 he has from the nasa uh commercial cargo activity much better for making us competitive in in in the true commercial market because it doesn't come with any of the constraints and burdens of accounting that i think miss chaplin articulate articulates that comes with a lot of restrictions so elc is not a subsidy it's about providing national security capability with the focus laser focus on mission success and i 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 uh 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 thank you i'll have some more questions in the second round senator cochran mr chairman thank you very much for convening this hearing it's obviously very appropriate and timely i wonder what the reaction of the panel is to the air force's new strategy to reintroduce competition in the elv program at the same time um 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 uh would would who would you like to answer sir whoever wants to answer it um i think when we did our report in 2011 the idea of having competition in this program arose and over time the ud 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 elv and the prime contractor are an important 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 cost and pricing and to take actions to gain more efficiencies within the program 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 i ula and spacex are both used to working under those arrangements it's worked well for another government agency mr gas you have an impression to 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 a two competing companies the lockheed martin corporation the boeing company and it wasn't working so can we formulate competition that could work that's actually going to save the taxpayer to money and when you deal with the limited uh 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 some of the most unique missions clearly don't need multiple capabilities in this country and if we talk about fair level competition is 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 of the product i shared the story of when i was here in about a decade and a half ago i was running a program called the atlas ii it was supporting dod programs on a far competitive basis when we were launching basically the military satellite constellation we had a block buy of discus and uhf which had been replaced by the wgs and muos in today's constellation we had a block by fixed price commercial contract with that contract we were able to compete for nasa for uh commercial missions fairly successfully after that 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 doesn't which would not work it would cost the government excess funds to 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 won the dual source and have competition well the demand wasn't there they told the companies you're going to stay in business and 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 doesn't it also doesn't work miss chaplin talks about the lessons learned in the balance i'm all for that pendulum moving to to to the right spot for our nation and delivers taxpayers uh a better and more efficient active thank you uh mr musk what is your reaction to that well i i think as a country we've we've generally decided that competition and the free market is a good thing and that monopolies are are not good and it's interesting to note that from the point of which uh boeing and lockheed's launch business merged from the point which they stopped being competitors the costs doubled since then um and i think the reality is when competition is introduced uh you also reliability is a key factor in competition so that that would be a deciding factor in who wins what launches it it doesn't become less important it becomes more important but the cost to the us taxpayer will drop substantially i think they will drop at least to the level that uh they were before boeing lockheed became a monopoly in the launch business and perhaps even better than that and and frankly if our rockets are good enough for for nasa why they're not good enough for for the air force it doesn't doesn't make sense dr pace well i think the previous two comments have highlighted uh 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 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 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 uh at least cost but they did not have the same policy imperatives for assured access 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 yeah thank you thank you mr chairman 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 promise savings of eliminating competition have materialized uh the cost of 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 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 starting startling since 2006 when ula was formed spatial space launch costs have increased from 613 million to 1.63 billion in fy 14. that's a 166 percent increase for the program overall mr musk mentioned and he's correct that in 2012 this program triggered a non-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 estimate from the cost assessment and program evaluation of dod projects the program will cost close to 70 billion dollars 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 memo states and let me read it i direct the air force to aggressively introduce a competitive procurement environment in the ee lv 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 and 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 fy17 and i think that's really a shame i have three quick questions mr musk spacex has achieved as you just pointed out three consecutive successful launches of its falcon 9 rocket the major that's the major requirement for being certified for competition for ee lv contracts by the air force so what challenges if any do you expect from the air force certification process uh the 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 in completing that certification this year we are concerned about any delays in in the contracting and hopefully the hopefully those delays don't materialize and as i mentioned in my earlier testimony i think in light of the of recent uh events on the international stage it may be uh wise to consider whether uh procuring the the atlas for as part of the 36 core block by which which is a five-year buy as was mentioned earlier by mr gas they only have a two-year supply of engines and yet this contract is this is a five-year contract for the 36 cores so if there are any sanctions or if there's any issue with supply of those engines they will not be assured access to space for the atlas v now according to the kindle memo that i i just mentioned new entrants should be able to begin competing for up to 14 ee lv launches by fy15 do you expect the air force to live up to the requirement imposed upon it by under secretary kendall i'm very hopeful that the air force will adhere to to that uh requirement so you believe that you will be able to compete for 14 eelv launches by fy15 i'm highly confident that we will be able to do so yes good thank you very much mr chairman thank you senator feinstein senator shelby thank you mr chairman mr musk you recognize excuse me in your statement for the record that the air force air force's acquisition approach requiring detailed cost data accounting auditing and other mission assurance requirements ads these are your words add 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 and why should mr musk why should spacex be exempt from the same auditing oversight and accounting rules that do dod requires of the united launch condition if spacex is required to comply with those specific requirements how will that impact the cost of your launch vehicle said you understand certainly um so we provide uh 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 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 so in order to improve the probability of success there is quite a substantial mission assurance overhead that's applied which is why that 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 should you have the same rules to apply to your company that the united launch has applied to them i guess is the question absolutely okay miss chaplin i gotta 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 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's doing it okay i would like to say when there was commercial contracts used at the beginning of the elv 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 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 just 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 d d 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 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 it was not easy it's not an easy accomplishment to do after a time period where you weren't required to do that that was also tied to these lot buys early on in the program 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 mr musk would you uh concede that 68 consecutive launches is a great record um i i i would although i'd like to point out that there were two uh highly publicized uh failure investigations one for delta iv heavy one for atlas the air force conducted failure investigations they have a ula has a very good track record it is just not quite as perfect as 68 perfect launches yes you have any response we measure the mission success by by our customers declaration and so if they declare that the satellite and emission is a success we use the same record the uh and why it's important because our profit is tied to a mission success if 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 uh 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 what's what's next what was next um right well um by ulaa's definition of success that that mission was perfect now that was perfect although you went into the wrong orbit and so forth so that the primary mission which which was to deliver the casio satellite was 100 successful uh there was a secondary satellite that was an optional objective that that which was not part of the primary mission um but as i said if if you accept ula's definition of perfect success then that mission was perfectly successful mr yes uh it would not be uh declared successful if that was a contracted requirement we would he would say it was successful about his criteria but you would say it was not successful you 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 but 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 was able to successfully deliver the the satellite it is a uh incredibly risky business and everything needs to work perfectly dr pace you have any comment on that uh i would add um more from as a as a former uh analyst uh you know with with nasa um 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 the spacex 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 uh dialogue with spacex people and we had got a lot of information there's a lot of cooperation but i would have to say that uh 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 again how much is the government willing to pay and impose on spacex on this 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 thank you thank you mr chairman thank 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 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 head 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 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 and 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 gas explain the eelc 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 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 sure well the reality is that today there's a steady cadence of air force and nro emissions every year so this you don't really have the the wide difference that from one year to the next that you had in the past so i think the just the prior justification of needing that for stability is no longer there because there is a stable launch demand from from the uh the air force and intelligence community um 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 up upon a russian main engine which can be cut off at any time a 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 greatest reliability and the cost savings that the government is is looking for mr gas 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 are seeing uh 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 that 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 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 and uh i'll be glad to share with the committee the the right calculation i saw this chart last night in the ga report when it was released and i i i noted it as as well and 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 ears we're now buying rockets and launching in about a 10 or 11 years so if you just do division all of a sudden be different the other thing that's interesting to note that when we converted the contract in 2006 the stewards of 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 and about over a bill 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 so you talk about the good stewards of taxpayers and i want to you know give a compliment to the incredibly hard hard-working acquisition professionals that go through the data and provide and make sure that the nation is getting a good value but take me down to the basic question here price competition is going to give the taxpayers a lower cost is it not they can if 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 only you don't need to be excess capacity because it's just not a work for two and if everybody has to have it it could create excess cost the other example that i gave before when they talked about the tomo cruise missile if you know you're not going to lose that's not a winner take all you may not have the right kind of incentives at the same time that ms feinstein shows the ex 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 with an award fee if we said no and push back in the requirements we get negatively rewarded on on your 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 haven't cost incentive contract on the elc we have to year-over-year improve we signed up to a greater than a five percent year-over-year improvement it's already in the contract and we're incentivized to improve upon that and uh 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 as a different time frame than where we are today i came into this into the building and talked to the dod 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 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 complement the efforts that the contractors are making to produce products which will protect the security interests of our country at a reasonable price to mr gas 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 there are rest that 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 thank you absolutely not the ula is ready and willing and able to compete on any field i i would think that would be your answer and i think would think that that would be satisfactory because after all competition is the american basic demand uh for the accordance of a contract so what keeps us from doing this basically uh spacex doesn't have all the capabilities nor the requirements so if if if you think about if spacex's requirements have to come down and some of our requirements have to uh have to be eliminated do we get that level playing field okay mr musk respond to that if this is the heart of the matter respond to it yeah i i believe spacex has can can manage all of the air force requirements um 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 we can manage all of the air force's satellites and then some how much of this is in the fixed price competition versus cost plus uh well i i think i think fixed price competition is is the the better way to go when when there is competition the the logical thing to do is to go for a fixed price because otherwise if you competed and it's cost plus then it gives the uh companies the opportunity to raise their that their prices effectively as their costs grow subsequent to the competition do you have a problem with that mr gas uh 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 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 the operational needs the changes in schedules the the care and feeding that some of the satellites need the unique facilities we talk about the rockets but uh we're required to have special handling equipment uh nitrogen purges for some of the uh to protect some of the most sensitive sensors that are on 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 and when we use the term elc we're applying those costs to all missions and it goes back to the roots of what how the eelv program was established and it was come from a mormon general mormon report in the 1990s and the goal was to lower costs for the nation across all of our national launch national launch 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 is is improving but the key about if you 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 errors miss chaplin'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 that how the government and leaders make choices of how to deliver that so 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 is that correct or not it would be fine for the competition but just yesterday uh in the 14th air force out in california had to make some mission switches between nasa the air force they just gave direction nasa mission was late an air force mission moved in another air force mission took priority another nasa mission was moved out if we want to fix 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 warfighter but it works for competition may mr musk respond to that would you respond to that certainly so i think um 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 um that that there's a there's a that which is a fairly small part of the the mission uh that that would be cost plus so so if if know 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 um or it's going to require priority then then that just that incremental piece would it would be logical to make that cost plus but the vast majority of the contract would be fixed price thank you thank you very much thank you mr 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 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 calls for dod a lot of us are concerned that recreating the wheel could actually increase overall cost compared to what dod is currently paying do you have a comment on that that's certainly certainly possible i think what we could see happening is that the introduction of competition could lower uh the cost by as a virtue of lower prices for a wide category of services there'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 four 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 if you charge extra for non-commercial 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 uh where falcon takes over for most of that we're still retaining the delta fours 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 would remain to be seen how important is quality in other words the 68 straight launches successful launch is important to dod for example well i think 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 every one of those uh falcons that goes off that's that's ten 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 two things that are quite different from each other thank you thank you mr chairman mr chairman i do have a number of other questions i'd like to submit for the record certainly and um if there are no further questions in today's panel i want to thank uh all of you for being with us dr pace mr musk mr gas and miss chaplin thank you for your contribution today there will be written questions coming your way and we hope that you'll 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 foreign you

Channel: canadarm2

Views: 131,432

Rating: 4.9172578 out of 5

Keywords: elon musk, spacex, senate, ula, lockheed, boeing, screw ula, spacex ftw, National Security (Organization Sector), United States Senate (Governmental Body), Space Launch

Id: he0-SP-BnCQ

Length: 90min 53sec (5453 seconds)

Published: Wed Mar 05 2014

Reddit Comments

[u/Drogans]

That the hearing occurred right in the middle of this Russia business was terrible timing for ULA. Elon destroyed their standing as a reliable launch provider.

Reliability doesn't matter if the engines are made in Russia and ULA can't source them. It's an ugly truth that could go a long way towards opening DoD lauanches to SpaceX.

One also hopes they're lobbying hard for accelerated funding of commercial crew.

[u/NeilFraser]

A key theme that kept coming up was the limited demand for launches. With so few launches, one had to pay subsidies to ensure the workforce didn't wander off.

What nobody said was that there is actually enormous demand for launches. But the demand is inversely proportional to the price. ULA is correct in that there is limited demand for its rockets (its only real customer is the one that can't buy overseas). But SpaceX does not have this problem. SpaceX's costs are low, which ensures plenty of demand, which ensures their costs are low.

[u/canadaarm2]

If that's the real Steve Jurvetson who just posted a comment on the video, I'll eat my hat.

Anyways, here's a version with the 10 minutes of still image cut out for people who are on a mobile device or can't click the annotation for some other reason:

http://www.youtube.com/watch?v=O_azyt1JhI0

[u/Mummele]

In retrospective I think Elon Musk could have brought so many counter arguments. He is not the most eloquent guy but he is talking with what he does rather than what he says.

Michael Gass used many rhetorical methods to avoid answering or reshaped the question in order to bring a different point instead. As others mentioned here, many things stayed unsaid e.g. the reason why ULA charges such high prices, the fact that they showcase their "new" launch prices as saving potential although being more expensive than ever.

I am not a US citizen so it is not that important to me how the US taxpayer's money is spent, but I would rather trust it to those who try not to avoid the real answers with rhetoric tactics.

One counter argument to SpaceX I found interesting though; After some point SpaceX would just become their own monopole, which is probably partly true. The point is that I don't think SpaceX would abuse that in order to charge more than necessary, as it is the main point of the company's existence to bring prices down (which again stayed unmentioned).

I wonder how many of people started imaginary discussions after watching that...

[u/[deleted]]

Thanks! (And I think that actually is Steve who commented.)

[u/whtml]

First time i saw a senate hearing (i'm not from the US) and i have to say that it really seems like they need some fresh blood in those chairs. Some of these people seem a bit on the slow side (very old).