Block buy

In January, 2014, the Air Force and ULA announced a new agreement for 36 national security launches to be flown during the remainder of the decade. ULA’s chief executive at the time, Mike Gass, hailed this “block buy” agreement because it would save the government $4.4 billion. "This contracting approach brings significant value to our customer and helps realize the cost savings ULA continues to achieve in consolidating the Atlas and Delta systems," he said.

SpaceX had not been allowed to compete for any of these missions. Musk was outraged. He felt blindsided. The Air Force responded that SpaceX shouldn’t have been allowed to bid, as the Falcon 9 had not yet been certified for national security missions.

A few months later, in April, this contentious debate spilled into the US Senate Appropriations Committee. Both Musk and Gass were invited to testify during a hearing on national security launch programs. They sat side by side. In response to one question, Musk reiterated that a lack of competition was driving up taxpayer costs for military launches.

“It’s interesting to note that from the time when Lockheed Martin and Boeing’s businesses merged, the point at which they stopped being competitors, the cost has doubled since then,” Musk said.

And then Musk turned to the most contentious issue, the ELC payments, which ULA would continue to receive throughout the block buy contract. Musk repeatedly branded these payments as “subsidies” to his competitor, which SpaceX did not enjoy. Why, effectively, did ULA need government welfare in order to compete with SpaceX?

Gass was asked this during the Senate hearing. “The ELC is just the capability that gives that flexibility to the Warfighter to make the critical decisions when they need it,” he repeated. “It is categorically not a subsidy.”

Two weeks after the hearing, SpaceX filed a lawsuit against the US government to protest the block buy bid process and void the agreement between the Department of Defense and ULA. SpaceX sought the right to compete for those launches—and the gambit worked.

Later, SpaceX and the Air Force entered mediation, and the military agreed to accelerate the certification of the Falcon 9 rocket and open up a number of the block buy launches to competition. SpaceX launched its first national security payload on May 1 of this year. The company has already won the contracts for several more.

A subsidy or not?

Back to that myth business: after the Twitter tiff between Musk and Bruno, Ars reached out to the ULA chief to clarify his comments about the subsidy as a “myth.” After all, ULA still receives annual ELC payments, as the president’s fiscal year 2018 budget request for the Department of Defense makes clear (see page 105).

According to the document, the Air Force pays 75 percent of the ELC costs, and the National Reconnaissance Office covers the remainder. The total payment to ULA in 2016 was $702 million, rising to $983 million in 2017, and it's projected to increase to $1.22 billion in 2018. It is not clear why the ELC costs are slated to rise significantly, especially at a time when the rocket company has reduced its workforce to become more competitive with SpaceX. (There are whispers of concern in the industry that the parent companies are pulling profits out of ULA, rather than investing in its future competitiveness.)

Bruno insisted these payments should not be construed as a subsidy, but rather as a payment to cover the scope of the entire job ULA performs for the government. “The myth is that ELC is a ‘subsidy,’ implying that it is some form of gift or retainer, a payment made without scope or any specific tasks,” he said.

Bruno asserted that instead of cherry picking missions as SpaceX might do, ULA must cover all possible launch requirements for the government. Every rocket is customized for its satellite, and the ELC payments allow ULA to prepare for a flexible manifest that can accommodate delays in satellite construction.

“It is an extremely complex configuration, scheduling, and logistics feat,” Bruno said. “It makes us insensitive to satellite delays and swaps. And it is only possible because of the Air Force’s innovative contracting on the block buy. This turned out to be an essential element that helped to avoid the expected capability gaps. Lives were saved.”

SpaceX stands by Musk’s criticism of the ELC payments as a subsidy. “When the government gives you a sum of money every year, without regard to whether you launch 30 rockets, two rockets, or no rockets, we call that a subsidy,” company spokesman John Taylor told Ars.

Subsidy or not, it seems fair to characterize the payments as a distinct advantage for ULA in the competition for national security launches. During a House Armed Services Committee meeting in 2015, Gen. John Hyten said as much in response to a question: “To be honest, Congressman, I don't think you can have fair competition with that contract in place. There will have to be a change.”

Change comes

By various estimates, ULA has received about $13 to $15 billion in ELC payments since the company’s founding in 2006. But partly because of questions raised by Musk and partly due to concerns in Congress, the ELC payments will soon come to an end. The portion for the Atlas line of rockets stops in September 2019, and the Delta component ends a year later.

What happens after this is difficult to foretell. United Launch Alliance has been lobbying Congress and the US military to stop flying the more costly fleet of Delta rockets and to focus on the Atlas V vehicle with its cheaper Russian engine. But without the Delta IV Heavy, the military would have no way to get some of its heaviest payloads to higher orbits. Also, quietly, Lockheed and Boeing have been exploring the possible sale or breakup of ULA. So far, the price has been too high for potential buyers.

Amid this uncertainty, Bruno and ULA have begun developing a new rocket named Vulcan. This vehicle will meet all of the military’s needs, use American-made engines, and should prove more cost-effective in competition with SpaceX. But one key question is how much federal assistance ULA will receive to develop Vulcan.

ULA received a boost in 2016 when the US Air Force awarded two separate contracts for engines that could be used to power Vulcan. There are two contenders, Blue Origin's BE-4 engine and Aerojet Rocketdyne's AR1. The Air Force provided money for both: $45.8 million to integrate the BE-4 engine into Vulcan and a contract that could be worth as much as $536 million for Aerojet Rocketdyne to develop its AR-1 engine. Both engines, made in America, would meet the US Air Force's longstanding goal to replace the Russian-made RD-180 engine.

Meanwhile, SpaceX got a small slice of Air Force pie, $33.6 million for development of its Raptor engine to power the upper stage of another launch vehicle. Orbital ATK got some money for its own booster system, too.

Thus ended the opening round of what is known as the “Rocket Propulsion System” contract to meet the Air Force’s launch needs in the 2020s and 2030s. There is at least $2 billion in development money at stake, and soon the Rocket Propulsion System contracts will move into phase two. Eventually, the Air Force will down-select to two rockets, and it seems likely that during future competitions one of these two companies will win about 60 percent of the national security launch contracts; the other will be left with 40 percent.

Therefore, both ULA and SpaceX are not only competing for development funding now, but the two are positioning themselves for future military missions. They're not alone, either. Orbital ATK has aspirations, and so does Blue Origin, the company founded by Jeff Bezos. In addition to potentially providing an engine for the ULA rocket, Blue Origin has a large orbital vehicle of its own—New Glenn.

And so the rocket wars will continue. A dozen years ago there was but one US launch competitor. SpaceX made it two. And with a combination of technical skill, hard work, and bravado, Musk has now improbably superseded the incumbent, undercutting ULA’s prices and forcing the US government to end the ELC payments.

Musk should be well pleased. During that 2014 hearing, sitting right next to Gass, the SpaceX founder declared, “As a country I think we’ve generally decided that competition is a good thing and that monopolies are not good.” And if judging by this definition of competition, then good things have come to those of us who have waited.