The Opposite of Competition

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When the chief executive for the monopoly provider of national security launches praises the virtues of a proposed long-term, sole-sourced block buy, and likewise applauds the government’s approach to considering new entrants, the buyer of those launches should be wary.

In reading United Launch Alliance (ULA) Chief Executive Michael Gass’ recent commentary in Space News [“EELV Competition vs. Block Buy: It’s Not One or the Other,” April 16, page 34], it bears highlighting that, as he puts it, there has been “significant growth in the EELV budget line.” This Evolved Expendable Launch Vehicle cost growth is, in fact, an astonishing 58.4 percent increase over the original projected per unit cost, an escalation so severe that U.S. Department of Defense has been forced to declare a critical Nunn-McCurdy unit cost breach, an oversight tool typically reserved for the worst offending programs. Simply put, no monopoly in history has ever reduced prices.

ULA’s cost growth prompted the Congress to pass bipartisan legislation last year effectively requiring EELV to be redesignated as a Major Defense Acquisition Program, or MDAP, from which it had been exempted since 2007. The renewed scrutiny associated with MDAP requirements — in other words, a closer look at the books — resulted in the Nunn-McCurdy breach notification.

According to this year’s budget documents, the gross unit cost for an Atlas or Delta booster core is $420 million. This exceeds the price of every other rocket available in the world by at least a factor of four. Many causes are attributed to ULA’s massive cost escalation. Mr. Gass, at least in part, attributes the increase to the U.S. Air Force, blaming his prices on “inefficient government buying practices.”

ULA has also attributed the “crash” of the commercial launch market for its habitual price increases. This argument, however, rings hollow given that Space Exploration Technologies (SpaceX), a hopeful new entrant in the Department of Defense launch market, has over 40 missions manifested on the all-American Falcon 9 rocket — including those for the U.S. government, commercial entities and international governments.

What is left unstated about EELV’s cost growth is the recent conclusion by the Government Accountability Office (GAO) that there is little transparency into ULA’s cost structure. According to GAO, every audit report of EELV pricing issued by the Defense Contract Audit Agency has contained an adverse opinion, with “unsupported or questioned costs ranging from 20-60 percent.” The Air Force’s “should cost” review identified a key structural problem with the EELV program, expressly stating that “[a]lthough ULA is motivated to successfully deliver satellites on orbit, the company is not motivated to do so in a cost efficient manner.”

Much has been made about the needs of the industrial base in the absence of the space shuttle program, but whatever temporary lack of certainty there was has now been resolved. Congress has set a clear path forward, with funding for the Space Launch System and Multi-Purpose Crew Vehicle on the NASA side. Indeed, ULA is contracted to launch a test flight of that capsule in 2014 on a Delta 4 Heavy through an award by one of its parent companies, Lockheed Martin.

Meanwhile, ULA is also seeking to expand substantially its non-national security space market by providing launch vehicles to Boeing, Sierra Nevada and Blue Origin for NASA Commercial Crew Program flights, even setting up a new Human Launch Services Organization. Given that ULA has a current backlog of orders going back to 1998 that will take three and a half years to move through at a rate of 10 launches per year, and given that it currently has a guaranteed customer in the U.S. government, one might ask: Where is the uncertainty?

As for SpaceX — a critical member of the industrial base and currently the largest liquid propulsion engine manufacturer in America — there is no market uncertainty. A vibrant commercial market exists for U.S. launch services companies that offer competitive pricing. With our robust manifest on the Falcon 9, SpaceX has significantly increased American market share in the launch business, bringing jobs and economic activity long surrendered to foreign launch companies back to the United States. Other American launch companies plan to compete for national security and commercial launch opportunities as well.

The taxpayer, meanwhile, funds ULA for infrastructure and all operational overhead in excess of $1 billion annually, and then pays separately for launch vehicle hardware. No other launch company in America benefits from such taxpayer magnanimity. This federal financing simply “maintains” the capability to launch — maintains a standing army of employees — whether ULA launches zero times or 10 times in a given year.

No such subsidy is contemplated for any new entrant. Under the newly proposed block buy arrangements, it would appear that ULA will continue to benefit from this subsidy until at least 2019. Consequently, even if the Air Force certifies new entrants to compete for launches, this launch capability subsidy allows ULA to bid its marginal costs for any launch services against a new entrant competitor’s full costs. If the country is to be serious about reducing launch prices and making our programs more competitive, it is time to end this approach.

The Congress, the Air Force and the Department of Defense have rightly recognized that the lack of competition is a critical factor in the government’s inability to negotiate fair and reasonable prices from its current monopoly supplier. Moving forward expeditiously with new entrant certification is vital to reduce launch costs, ensure true assured access to space for the warfighter, and provide the government with maximum negotiating leverage as it attempts to elicit fair and reasonable pricing, from ULA or any contractor.

In order for competition to mean something, however, real opportunities for competition must exist. That means competition without billion-dollar “capabilities” payments to an incumbent supplier. That means competition annually, rather than multiyear, noncompeted block buys.

The Air Force is currently undertaking an independent National Security Space Enterprise Review, which will examine operational requirements, satellite production status and program funding, in order to fully understand its launch manifest requirements. In addition, an independent team is assessing the readiness of new entrants to meet the certification timetables they have outlined. Meanwhile, new entrants are working diligently through the certification process. And to achieve enhanced program management, the Department of Defense is processing a recertification for the EELV program as a result of its Nunn-McCurdy breach, a process that generally takes many months and should result in significant restructuring of the program.

At a minimum, until these and other reviews are finalized, it is neither timely nor appropriate to proceed with a five-year, sole-source launch procurement. Too much work remains to be done to ensure a fair deal for the taxpayer, and a fair shot for new entrant competitors.

The facts are clear. The warfighter and the country deserve full and open competition in space launch as soon as possible. The government is on the cusp of benefitting from that competition. Rather than locking in unreasonable pricing today to prevent further unreasonable pricing in the future, the government should maximize its leverage by truly promoting competition.

New entrants understand that the Air Force will need time to certify these new systems. It is critical, however, that there is sufficient flexibility in any near-term contracts to enable true competition. Only then will the government eliminate its dependence on a single supplier. No monopoly in history has ever reduced prices.

 

Tim Hughes is senior vice president and general counsel of SpaceX.