SpaceX gets a boost from House Armed Services Committee 2020 NDAA markup

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There had been speculation that Smith’s mark would direct the Air Force to put the procurement on hold until his concerns were addressed. But the bill does not disrupt the program schedule and only directs some changes to the rules of the competition.

WASHINGTON — House Armed Services Committee Chairman Adam Smith (D-Wash.) is proposing legislation for the 2020 defense authorization bill that would put SpaceX and to a lesser extent Blue Origin on a stronger footing to compete in the National Security Space Launch program.

The chairman’s mark will be debated and voted on June 12 when the committee reviews its version of the 2020 National Defense Authorization Act.

The bill helps to create “fair and open competition in launch,” Smith said on Monday during a breakfast meeting with reporters.

Rep. Adam Smith (D-Wash.) Credit: HASC.

Smith’s mark includes provisions that specifically target the Air Force’s space launch competition, the National Security Space Launch Phase 2 Launch Service Procurement. The Air Force issued a request for bids on May 3 and proposals are due Aug. 1.

Smith for years has been critical of the Air Force’s space launch program. Most recently he challenged the Air Force’s decision to select two providers in 2020 to split all national security launches from 2022 to 2026. He criticized that strategy as one that favors incumbents and shuts out emerging commercial players that would have to wait five years to get another chance if they don’t win a Phase 2 contract.

The field of competitors includes United Launch Alliance, SpaceX, Blue Origin and Northrop Grumman.

There had been speculation that Smith’s mark would direct the Air Force to put the procurement on hold until his concerns were addressed. But the bill does not disrupt the program schedule and only directs some changes to the rules of the competition.

In a provision that one industry source characterized as a “SpaceX earmark,” the bill creates a $500 million fund for “certification and infrastructure” that would be available to companies that win a Phase 2 procurement contract but were not awarded funds by the Air Force under the Launch Service Agreement (LSA) program.

Last October the Air Force awarded $3.2 billion in LSA contracts to ULA, Blue Origin and Northrop Grumman. These are six-year agreements to help pay for the development of rockets and launch facilities required to fly national security missions.

SpaceX was left out presumably because its proposal didn’t satisfy the Air Force’s requirements. The company protested the decision on May 17, filing a complaint in the Court of Federal Claims that argues the Air Force is tilting the scale in favor of SpaceX’s competitors and harming the company by expecting it to finance costly development and infrastructure upgrades required for the Phase 2 competition.

Smith’s provision would give SpaceX access to government funds that it did not win competitively. But in his mind this is the right thing to do in recognition that the government is imposing unique costs on launch providers.

“I think it’s only fair” to give SpaceX $500 million if it wins a Phase 2 contract, said Smith. “I was told the reason ULA got more money is that they had greater needs to meet national security requirements for their new vehicles,” he said. SpaceX has needs as well and “if they win they ought to get the help.”

Smith said the Air Force pushed back on that provision, claiming said they don’t have the money. He doesn’t buy that excuse, said Smith. The Air Force already budgeted the LSA funds it awarded the three companies over six years. If any of them win they will get the full amount, said Smith. “If SpaceX wins, they will get $500 million.” If any of the LSA winner companies are not selected in Phase 2, their funding would be terminated.

In an effort to inject more competition into the program, one of the provisions in Smith’s proposal would limit the Phase 2 contracts to 29 missions, allowing the losers of Phase 2 to get another chance at competing for launches after the 29th mission. The Air Force in the request for proposals projected about 34 launches for the five-year contract period so Smith’s bill would open up the competition at the tail end of Phase 2. If the new competitors don’t win, the launch contract defaults back to the two selected providers.

This provision could help Blue Origin, a commercial player from Smith’s home state that is a newcomer to the military market and has argued that the Air Force’s strategy creates a duopoly and favors entrenched contractors. The company unsuccessfully sought to persuade the Air Force to select three providers in Phase 2 and to shorten the contract period to three years. The Air Force has insisted that its strategy is best met by a team of two companies. Front-runner ULA has sided with the Air Force and warned against the addition of a third supplier, arguing that the workload projected by the Air Force cannot support more than two companies.

Opening up a handful of launches to competitors that didn’t win Phase 2 would be a small consolation prize for Blue Origin, an industry executive said. These competitive launches wouldn’t happen until 2024 and the companies that didn’t win Phase 2 would have had their LSA development dollars cut off in 2020, creating a four year gap in funding.

What Blue Origin wanted was for the committee to reverse that rule and direct the Air Force to continue to provide LSA funds to all the winners irrespective of whether they win Phase 2 contracts. Blue Origin, for example, would use LSA funds to build a West Coast launch pad and a payload integration facility on the East Coast that are needed for military launches. Industry executives said it takes five to seven years to build these facilities.

Smith’s bill would give SpaceX access to the $500 million fund right away if it wins a Phase 2 procurement contract. Other companies that won LSA funds but didn’t win a Phase 2 contract would only get access to the $500 million fund if they win one of the competitive launches beyond the first 29.

One way to look at the $500 million fund provision is that it would ensure the government is not imposing more costs on one provider compared to the other. Another way to look at it is as a backdoor way to give SpaceX access to funds it failed to win competitively.

An industry source called Smith’s language an “elegant compromise” that lets the Air Force stick to its plan for the most part but gives SpaceX the funding the Air Force denied, and gives new entrants a ramp into the program before the end of Phase 2.

“This is probably the best Blue Origin could have hoped for,” the source said. There was no desire by the committee to compel the Air Force to take three providers upfront or to cause major disruptions, the source said. The HASC puts the onus on the companies that don’t win Phase 2 to get ready to compete if he manifest exceeds 29 missions. If they’re not ready, they will have to wait for Phase 3.

None of the companies would comment on-the-record for this story due to the sensitivity of the program.

Smith said the provision capping Phase 2 contracts at 29 launches and opening up the remainder to other companies is “perfectly in keeping with what the Air Force was trying to accomplish” which was to increase competition. “Why the Air Force has been trying to kill this and is upset about it, I still don’t have a clear answer,” he said. “What we’re doing is perfectly consistent with the rules of the Phase 2 competition.”

Smith said he discussed the launch provisions on Sunday with Acting Air Force Secretary Matt Donovan and planned to meet on Monday with Assistant Secretary of the Air Force for Acquisition Will Roper.

Equal access to materials

Potentially one of the most controversial provisions in Smith’s mark is one mandating that Phase 2 competitors have equal access to supplies and materials. The mark does not mention any specific companies. Industry sources said this provision resulted from complaints by SpaceX that ULA was preventing its supplier RUAG from selling a 5.4 meter composite fairing to SpaceX. The fairing is needed to be able to launch large national security payloads, and not having it would prevent a company from competing in Phase 2.

SpaceX makes a 5.2 meter fairing and reportedly sought to purchase the 5.4 meter composite fairing made by RUAG. These sources said the company declined to sell the fairing to SpaceX because its design was partially funded by ULA and is technically ULA’s intellectual property. ULA can’t prohibit RUAG from selling components to SpaceX but can block the sale of the fairing to protect its intellectual property. “That is the way business is done in any industry,” one source said. “You can’t be forced to sell your IP to a competitor.”

According to the language, the secretary of defense has to “ensure that the supplier of an item to be procured for use in the performance of a phase 2 contract shall provide material information about the item to a National Security Space Launch provider for use in preparing an offer for such phase 2 contract.”

ULA’s congressional backers on the HASC might move to strike this provision as congressional overreach, the source said. A compromise is expected to be reached in the full committee mark.

Another provision deals with the scoring of launch companies’ pricing bids. It directs the Air Force to factor government investments in companies’ launch vehicles in the total evaluated price of their bids. The Air Force would need to take into account how much government funding companies received from LSA contracts in 2018 and Rocket Propulsion System development contracts in 2016. In the evaluation, the Air Force would give lower scores to those companies that received the most funding. This provision presumably would benefit SpaceX and Blue Origin which got less Air Force money than the others.

The final provision in Smith’s national security launch mark requires the Air Force to inform the committee on its Phase 2 selection 10 days before making any public announcements. One industry source said it is reasonable for the committee to want to have a heads-up on a major contract decision but this language “doesn’t suggest a whole lot of confidence in the Air Force.” Military procurements are subject to congressional oversight but this implies “Congress comes in and says they don’t like the winners you picked.”

Air Force response to HASC mark

An Air Force memo obtained by SpaceNews lays out the service’s response to the HASC chairman’s mark. The one-page memo is not signed by any official but several sources confirmed it was submitted to the committee in advance of the markup.

The Air Force disagrees with the provision that caps at 29 the number of launches to be awarded to the two winners of Phase 2 and requires a new competition for any launches beyond that. It argues that this approach dis-incentivizes companies from investing in heavy rockets that would be critical to fly National Reconnaissance Office satellites after the Air Force retires ULA’s Delta 4 Heavy in 2024 to make way for new vehicles.

The Air Force says this provision “dramatically increases cost for all missions due to Phase 2 covering a smaller quantity of launch services” and “damages multiple providers’ business cases and return on investment calculations.”

The provision requiring DoD to ensure materials are equally provided to launch providers also is problematic, the Air Force memo says. The Air Force procures launch services but the technical baseline is owned by the launch provider. “Executing this mandate would require the government to obtain permission to share all launch vehicle components with all launch service providers,” says the memo.

The Air Force also challenged the provision requiring source selection information be given to Congress 10 days prior to contract award. The memo says this “creates a perception that Congress influenced the Phase 2 award decision.”

In response to Smith’s concerns about fair and open competition, the Air Force argues that these issues will be addressed comprehensively in the Phase 3 procurement.

“The HASC-proposed investment in LSA/Phase 2 non-winners negates hard earned competition and does not address national security needs,” says the memo. “Applying these funds to focus on future national security launch needs in Phase 3 provides more value for national security space.”

The memo says the Air Force will initiate a “National Security Launch Architecture” study to inform the Phase 3 acquisition strategy. “Investing in Phase 3 will maintain the integrity of past, current and future source selections,” says the Air Force memo.

Set-aside launches such as demonstration missions from the Space Test Program or the NRO would create opportunities for non-Phase 2 commercially viable providers to work alongside the Air Force, the memo says. “This strategy would also prepare the launch service providers for the Phase 3 competition.”

Experts have challenged the suggestion that an STP mission would qualify as a legitimate opportunity to prepare to compete in the national security launch market. An STP launch does not require national security launch certification or the launch infrastructure that would be needed to be competitive for national security missions.

An industry executive said the Air Force’s assertion that it wants more competition in the NSSL program is contradicted by its own decision to cut off LSA funding at the beginning of Phase 2. A National Security Space Architecture study aimed at helping providers prepare for Phase 3 would be like starting another LSA program all over again. “Why do that when they already have an LSA program now?” he said. “The goal of long term competition is undermined by cutting off development funding.”