[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

AN EXAMINATION OF FUTURE COMMERCIAL
LAUNCH MARKETS AND FAA'S
LAUNCH INDEMNIFICATION PROGRAM

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON SPACE AND AERONAUTICS

COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

WEDNESDAY, JUNE 6, 2012

__________

Serial No. 112-87

__________

Printed for the use of the Committee on Science, Space, and Technology

Available via the World Wide Web: http://science.house.gov

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COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

HON. RALPH M. HALL, Texas, Chair
F. JAMES SENSENBRENNER, JR., EDDIE BERNICE JOHNSON, Texas
Wisconsin JERRY F. COSTELLO, Illinois
LAMAR S. SMITH, Texas LYNN C. WOOLSEY, California
DANA ROHRABACHER, California ZOE LOFGREN, California
ROSCOE G. BARTLETT, Maryland BRAD MILLER, North Carolina
FRANK D. LUCAS, Oklahoma DANIEL LIPINSKI, Illinois
JUDY BIGGERT, Illinois DONNA F. EDWARDS, Maryland
W. TODD AKIN, Missouri BEN R. LUJAN, New Mexico
RANDY NEUGEBAUER, Texas PAUL D. TONKO, New York
MICHAEL T. McCAUL, Texas JERRY McNERNEY, California
PAUL C. BROUN, Georgia TERRI A. SEWELL, Alabama
SANDY ADAMS, Florida FREDERICA S. WILSON, Florida
BENJAMIN QUAYLE, Arizona HANSEN CLARKE, Michigan
CHARLES J. ``CHUCK'' FLEISCHMANN, SUZANNE BONAMICI, Oregon
Tennessee VACANCY
E. SCOTT RIGELL, Virginia VACANCY
STEVEN M. PALAZZO, Mississippi VACANCY
MO BROOKS, Alabama
ANDY HARRIS, Maryland
RANDY HULTGREN, Illinois
CHIP CRAVAACK, Minnesota
LARRY BUCSHON, Indiana
DAN BENISHEK, Michigan
VACANCY
------

Subcommittee on Space and Aeronautics

HON. STEVEN M. PALAZZO, Mississippi, Chair
F. JAMES SENSENBRENNER JR., JERRY F. COSTELLO, Illinois
Wisconsin TERRI A. SEWELL, Alabama
LAMAR S. SMITH, Texas DONNA F. EDWARDS, Maryland
DANA ROHRABACHER, California FREDERICA S. WILSON, Florida
FRANK D. LUCAS, Oklahoma HANSEN CLARKE, Michigan
W. TODD AKIN, Missouri VACANCY
MICHAEL T. McCAUL, Texas VACANCY
SANDY ADAMS, Florida EDDIE BERNICE JOHNSON, Texas
E. SCOTT RIGELL, Virginia
MO BROOKS, Alabama
RALPH M. HALL, Texas

C O N T E N T S

Wednesday, June 6, 2012

Page
Witness List..................................................... 2

Hearing Charter.................................................. 3

Opening Statements

Statement by Representative Steven M. Palazzo, Chair,
Subcommittee on Space and Aeronautics, Committee on Science,
Space, and Technology, U.S. House of Representatives........... 10
Written Statement............................................ 11

Statement by Representative Jerry F. Costello, Ranking Minority
Member, Subcommittee on Space and Aeronautics, Committee on
Science, Space, and Technology, U.S. House of Representatives.. 12
Written Statement............................................ 13

Witnesses:

Dr. George Nield, Associate Administrator for the Office of
Commercial Space Transportation, FAA
Oral Statement............................................... 14
Written Statement............................................ 16

Ms. Alicia Cackley, Director of Financial Markets and Community
Investment Team, Government Accountability Office
Oral Statement............................................... 22
Written Statement............................................ 24

Mr. Frank Slazer, Vice President, Space Systems, Aerospace
Industries Association
Oral Statement............................................... 57
Written Statement............................................ 60

Ms. Alison Alfers, Vice President, Defense and Intellignece,
DigitalGlobe Inc.
Oral Statement............................................... 69
Written Statement............................................ 71

Discussion 74

...............................................................

Appendix 1: Answers to Post-Hearing Questions

Dr. George Nield, Associate Administrator for the Office of
Commercial Space Transportation, FAA........................... 90

Ms. Alicia Cackley, Director of Financial Markets and Community
Investment Team, Government Accountability Office.............. 99

Mr. Frank Slazer, Vice President, Space Systems, Aerospace
Industries Association......................................... 104

Ms. Alison Alfers, Vice President, Defense and Intellignece,
DigitalGlobe Inc............................................... 107

AN EXAMINATION OF FUTURE COMMERCIAL
LAUNCH MARKETS AND FAA'S
LAUNCH INDEMNIFICATION PROGRAM

----------

WEDNESDAY, JUNE 6, 2012

House of Representatives,
Subcommittee on Space and Aeronautics,
Committee on Science, Space, and Technology,
Washington, DC.

The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2318 of the Rayburn House Office Building, Hon. Steven
Palazzo [Chairman of the Subcommittee] presiding.

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Chairman Palazzo. The Subcommittee on Space and Aeronautics
will come to order. Good morning, and welcome to today's
hearing entitled, ``An Examination of Future Commercial Launch
Markets and FAA's Launch Indemnification Program.'' In front of
you are packets containing the written testimony, biographies,
and truth in testimony disclosures for today's witness panel.
I recognize myself for five minutes for an opening
statement.
I would like to begin by thanking our witnesses for taking
time from their busy schedules to appear before us this morning
and share their wisdom about the role of the Federal Aviation
Administration's Launch Indemnification Program. I realize you
and your staff devoted considerable time and effort preparing
for this hearing, and I want you to know that your expertise
will help inform this Committee and Congress during the coming
months and years on this issue.
The Federal Aviation Administration's Launch
Indemnification Program was created in the 1980s to provide a
structured, risk-sharing regime to address third-party
liability to protect the uninvolved public and property. As
part of its commercial licensing process, FAA requires launch
companies to purchase third-party liability coverage from the
insurance market at a level calculated by the agency to be the
maximum probable loss.
As a consequence of these calculations, FAA's decision sets
the threshold at which federal coverage begins, up to a maximum
limit of $2.7 billion. Since the program's inception, over 200
commercial license launches have been flown without one federal
dollar being paid out in damages.
Today's hearing will examine whether federal launch
indemnification is still required and if so, if the program is
properly structured to serve existing and future markets. FAA's
launch indemnification authority expires at the end of this
calendar year, compelling Congress to consider the program's
merits and the role it plays in the international launch
marketplace and the necessity to pass legislation extending the
program's authorization for future years.
Notwithstanding the high reliability of today's generation
of launch vehicles, many industry experts advocate extending
the Indemnification Program in part because of the inherent
riskiness of launching payloads to orbit. Catastrophic launch
failures are deemed to be a low probability event but
understandably one that could result in extremely high damages.
They also urge competitive, asserting that were the program to
lapse, launch customers would shift their business to other
space-faring nations offering some form of government-backed
indemnification coverage.
Over the last 10 to 12 years the number of commercial
launches in the United States has significantly declined to the
point that last year there was not one licensed commercial
launch, primarily as a result of pricing competition.
However, with the advent of NASA's Commercial Cargo
Program, commercial launches from U.S. spaceports are expected
to dramatically rise. Through 2016, FAA estimates that SpaceX
and Orbital will launch 20 cargo resupply missions to the
International Space Station, with an equal or greater number of
cargo flights to be completed between 2016, and 2020.
Commercial crew flights to ISS are also a distinct
possibility later this decade, adding two additional flights
per year once service is established. The same forecast
predicts around 230 additional commercially procured launches
in the global marketplace by 2020, in support of
telecommunications, satellite imagery, and science payloads.
Domestic launch service providers will need to remain
competitive to win a portion of this market.
It also bears mentioning that reentry events are also
covered under indemnification, and while they have not been a
regular feature of commercial launches to date, SpaceX's Dragon
capsule is changing the equation, having flown two successful
reentries with at least a dozen expected through 2016, and
perhaps many more in the years beyond.
Commercial crew launches late this decade will also be a
new form of commercial service, and while I anticipate those
vehicles will have a very high reliability record, it bears
asking the question, if launch vehicles carrying capsules with
abort capabilities and associated failure detection systems
changes the probability of launch aborts and whether this, in
turn, will alter FAA's maximum probable loss calculation in any
appreciable way.
Before closing, I want to digress for one minute to respond
to an assertion made last week about SpaceX's commercial
orbital transportation services demonstration flight to the
International Space Station. Speaking before an audience in New
York, John Holdren, Director of the White House Office of
Science and Technology Policy, said about the SpaceX flight:
``This represents an entirely new model for the American space
program, one initiated by this Administration and one that
despite the handwringing of naysayers who said it would never
work, now promises to change forever the nature of U.S. space
exploration and human spaceflight.''
Mr. Holdren's statement is, at best, misleading. The
Commercial Orbital Transportation Services Program was proposed
by the Bush Administration in 2005, and authorized by Congress.
The COTS contract that funded SpaceX mission was awarded in
2006. The Commercial Resupply Services contract won by SpaceX
and Orbital was announced at the end of 2008. Let the record be
clear.
I look forward to today's discussion, and I wish to, again,
thank our witnesses for their presence.
[The prepared statement of Mr. Palazzo follows:]

Prepared Statement of Subcommittee Chairman Steven Palazzo

I would like to begin by thanking our witnesses for taking time
from their busy schedules to appear before us this morning and sharing
their wisdom about the role of the Federal Aviation Administration's
launch imdemnification program. I realize you and your staff devoted
considerable time and effort preparing for this hearing, and I want you
to know that your expertise will help inform this Committee and
Congress during the coming months and years on this issue.
The Federal Aviation Administration's launch imdemnification
program was created in the 1980s to provide a structured risk-sharing
regime to address third-party liability to protect the uninvolved
public and property. As part of its commercial licensing process, FAA
requires launch companies to purchase third-party liability coverage
from the insurance market at a level calculated by the agency to be the
maximum probable loss. As a consequence of these calculations, FAA's
decision sets the threshold at which federal coverage begins, up to a
maximum limit of $2.7 billion. Since the program's inception, over 200
commercial licensed launches have been flown without one federal dollar
being paid out in damages.
Today's hearing will examine whether federal launch indemnification
is still required, and if so, if the program is properly structured to
serve existing and future markets. FAA's launch indemnification
authority expires at the end of this calendar year, compelling Congress
to consider the program's merits and the role it plays in the
international launch marketplace, and the necessity to pass legislation
extending the program's authorization for future years.
Notwithstanding the high reliability of today's generation of
launch vehicles, many industry experts advocate extending the
indemnification program, in part because of the inherent riskiness of
launching payloads to orbit. Catastrophic launch failures are deemed to
be a low-probability event, but understandably one that could result in
extremely high damages. They also argue competitiveness, asserting that
were the program to lapse, launch customers would shift their business
to other space-faring nations offering some form of government-backed
indemnification coverage.
Over the last 10 to 12 years, the number of commercial launches in
the United States has significantly declined to the point that last
year there was not one licensed commercial launch, primarily as a
result of pricing competition. However, with the advent of NASA's
commercial cargo program, commercial launches from U.S. spaceports are
expected to dramatically rise. Through 2016, FAA estimates that SpaceX
and Orbital will launch 20 cargo flights to be completed between 2016
and 2020. Commercial crew flights to ISS are also a distinct
possibility later this decade, adding two additional flights per year
once service is established. The same forecast predicts around 230
additional commercially procured launches in the global marketplace by
2020 in support of telecommunications, satellite imagery, and science
payloads. Domestic launch services providers will need to remain
competitive to win a portion of this market.
It also bears mentioning that reentry events are also covered under
indemnification, and while they have not been a regular feature of
commercial launches to date, SpaceX's Dragon capsule is changing the
equation, having flown two successful reentries, with at least a dozen
expected through 2016, and perhaps many more in the years beyond.
Commercial crew launches late this decade will also be a new form
of commercial serivce, and while I anticipate those vehicles will have
a very high reliability record, it bears asking the question if launch
vehicles carrying capsules with abort capabilities and associated
failure detection systems changes the probability of launch aborts, and
whether this in turn will alter FAA's maximum probable loss calculation
in any appreciable way.
I look forward to today's discussion, and wish to again thank our
witnesses for their presence.

Chairman Palazzo. I now recognize Mr. Costello for an
opening statement.
Mr. Costello. Mr. Chairman, thank you, and Mr. Chairman, I
thank you for calling this hearing today. In March we had a
similar hearing to examine the FAA's Office of Commercial Space
Transportation Fiscal Year 2013 budget request. Also the
Aviation Subcommittee of Transportation and Infrastructure, we
have held a number of hearings concerning the future of NASA's
human spaceflight programs, which I have chaired and Mr. Petri
has chaired as well. I agree that it is important to continue
to continue to focus on this issue in our Subcommittee, given
the fact that the public needs a clear understanding of the
risk involved with commercial space transportation, and it will
need to be convinced that those risks are being effectively
managed.
Mr. Chairman, I have additional comments, and I will place
my statement in the record so that we can go forward and hear
from the witnesses, so I look forward to hearing their
testimony.
I thank you.
[The prepared statement of Mr. Costello follows:]

Prepared Statement of Ranking Member Jerry F. Costello

Good morning and thank you, Mr. Chairman, for calling this
important hearing on the FAA's commercial space launch indemnification
program.
In March, we had a similiar hearing to examine the FAA's Office of
Commercial Space Transportation Fiscal Year 2013 budget request. Also,
in 2011, I chaired a hearing in the Aviation Subcommittee of the House
Transportation and Infrastructure Committee which discussed the future
of NASA's human spaceflight programs. I agree it is important to
continue to focus on this issue in our Subcommittee, given the fact
that the public needs a clear understanding of the risks involved with
commercial space transportation, and it will need to be convinced those
risks are being effectively managed.
Therefore, I want to thank the Chairman for his leadership on this
issue and I also want to welcome our witnesses. I look forward to your
testimony.
In 1988, Congress amended the Commercial Space Launch Act to
establish a risk-based regime to address third-party losses associated
with potential U.S. commercial space launch or reentry failures.
Since then, the U.S. commerical space launch industry has grown and
changed.
Just last week, a private U.S. company, Space Exploration
Technologies--SpaceX--successfully demonstrated the potential for
commercial cargo resupply of the International Space Station.
Another company, Orbital Sciences, plans to demonstrate the same
transportation capability later this year. And in the coming years,
suborbital spacecraft are anticipated to begin launching space
tourists, followed potentially by commercial human space flights to
low-Earth orbit.
Given that the sunset provision is set to expire at the end of the
calendar year, Congress must decide whether or not to extend the
current regime and, if so, whether changes are needed to it.
The provisions we are examining today were put into place more than
two decades ago, and I think it is appropriate for us to review the
impacts.
To that end, I hope to hear from the witnesses whether the intended
effects of the provisions are being realized; if the existing
indemnificaiton regime is still appropriate given the maturity of the
existing industry; the extent to which government indemnifications are
needed to achieve optimal transparency and safety while not increasing
taxpayer exposure to unnecessary risk.

Chairman Palazzo. Thank you, Mr. Costello, and if there are
Members who wish to submit additional opening statements, your
statements will be added to the record at this point.
At this time I would like to introduce our panel of
witnesses and then we will proceed to hear from each of them in
order. Our first witness is Dr. George Nield, Associate
Administrator for Commercial Space Transportation at the
Federal Aviation Administration. He has over 30 years of
aerospace experience with the Air Force, NASA, and in private
industry. Dr. Nield came to FAA from the Orbital Sciences
Corporation, where he served as senior scientist for the
Advanced Programs Group.
Our second witness is Ms. Alicia Cackley, Director of
Financial Markets and Community Investment Team with the
Government Accountability Office. Ms. Cackley has been with GAO
since 1990, and is a member of their Senior Executive Service
responsible for directing program evaluations and policy
analysis studies related to consumer protection, insurance,
housing, and finance issues.
Our third witness is Mr. Frank Slazer, Vice President of
Space Systems at the Aerospace Industries Association. Prior to
taking his current position, Mr. Slazer worked in the aerospace
industry for over 30 years with leading launch providers,
including McDonnell Douglas, Boeing, United Launch Alliance,
and Northrop Grumman.
And our final witness is Ms. Alison Alfers, Vice President
of Defense and Intelligence, DigitalGlobe. Ms. Alfers
previously served for five years as a General Counsel, and
prior to joint DigitalGlobe she served in executive positions
with other private-sector firms, including as Vice President
and General Counsel for Space Imaging Incorporated.
Welcome to you. As our witnesses should know, spoken
testimony is limited to five minutes each. After all witnesses
have spoken, Members of the Committee will have five minutes
each to ask questions.
I now recognize our first witness, Dr. George Nield, to
present his testimony.

STATEMENT OF DR. GEORGE NIELD,

ASSOCIATE ADMINISTRATOR FOR THE OFFICE

OF COMMERCIAL SPACE TRANSPORTATION, FAA

Mr. Nield. Chairman Palazzo, Ranking Member Costello, and
distinguished Members of the Subcommittee, good morning, and
thank you for inviting me to speak with you today.
I would like to begin by offering the Administration's
continued support for extending the Commercial Space Launch Act
indemnification provision for commercial launch and reentry
operators for five years beyond its current statutory
expiration date of December 31, 2012. This support is in line
with the Commercial Space Transportation Advisory Committee
finding that extension of indemnification past December of this
year is critical to the viability of the commercial launch
industry in the U.S.
The Federal Aviation Administration's Office of Commercial
Space Transportation licenses and permits commercial launches
and reentries. As part of its licensing and permitting mission,
the FAA administers financial responsibility and risk-sharing
requirements for commercial launch and reentry operators.
Congress established the current system in 1988. It has
maintained the regime's functionality and effectiveness over
the past 24 years by enacting five extensions of the provision
providing for conditional payment of excess claims subject to
Congressional appropriation.
The success of the existing regime is demonstrated by the
fact that during this period there have been 207 licensed
launches, all completed without any fatalities, serious
injuries, or significant property damage to the general public
and without the need for any liability payments by the
government or the taxpayer.
The current liability and risk-sharing regime consists of
three tiers. Tier one includes the most probable risks which
are taken on by the operator. The size of the first tier of
risk is calculated by the FAA as the maximum probable loss, or
MPL, that a launch or reentry could cause. The FAA's
regulations define MPL to mean the greatest dollar amount of
loss for bodily injury or property damage that is reasonably
expected to result from a licensed or a permitted activity.
Under the Commercial Space Launch Act and FAA regulations,
a launch operator must obtain insurance or otherwise
demonstrate financial responsibility to cover the MPL. An
operator's responsibility for the risk of maximum probable loss
is limited by statute to no more than $500 million for a
potential third-party liability.
The second tier of risk consists of liability for losses
exceeding the amount of insurance procured. The statute
provides that Congress may appropriate up to $1.5 billion
adjusted for inflation to cover successful third-party claims
against participants in a launch or reentry. The statute
specifically states that claims against space flight
participants are excluded from this authority.
The third and final tier of financial risk consists of
liabilities for third-party claims above the $1.5 billion.
These risks are the least likely and, again, are assumed by the
launch or reentry operator.
I believe that the current liability and risk-sharing
regime is well suited to cover emerging activities such as
commercial cargo and commercial crew, and both orbital and
suborbital flights of reusable launch vehicles. Although the
MPL methodology was specifically developed to accommodate
unmanned, expendable launch vehicles, the methodology is still
appropriate for suborbital or orbital flights involving human
crew or space flight participants because the MPL is not an
estimate of risk to crew or space flight participants, but
rather to third parties, including members of the public and
non-flying United States Government employees. Space flight
participants and crew are not third parties.
The benefits of indemnification are many, both to industry
and the United States government. As Congress itself recognized
by statute, the development of the commercial space
transportation industry enables the United States to retain its
competitive position internationally, contributing to the
national interest and economic well-being of the United States.
Extension of the indemnification provision would continue
to enable industry to attract and maintain a customer base in
the face of international competitors who offer more certain
indemnification.
With the help and leadership of Congress, commercial space
transportation will continue without the risk of significant
financial setback, and the private space industry in the United
States will continue to grow with new jobs, new technologies,
and new innovations.
Again, I am grateful for this opportunity to speak before
you today, and I am happy to answer any questions you may have.
[The prepared statement of Mr. Nield follows:]

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Chairman Palazzo. I now recognize Ms. Alicia Cackley for
five minutes to present her testimony.

STATEMENT OF MS. ALICIA CACKLEY,

DIRECTOR OF FINANCIAL MARKETS AND

COMMUNITY INVESTMENT TEAM,

GOVERNMENT ACCOUNTABILITY OFFICE

Ms. Cackley. Chairman Palazzo, Ranking Member Costello, and
Members of the Subcommittee, I am pleased to be here today to
talk about the Federal Aviation Administration's Launch
Indemnification Program.
As you are aware, a catastrophic commercial launch accident
could have a significant impact on the uninvolved public or
third parties in the form of personal injuries or property
damage. In anticipation of such an event, a launch company must
purchase a fixed amount of insurance for each launch per
calculation by the FAA. According to the Commercial Space
Launch Act amendments of 1988, or CSLA, the Federal Government
is then potentially liable for claims above that amount, up to
an additional $2.7 billion as adjusted for inflation and
subject to Congressional appropriations.
In my statement today, I will discuss first, the comparison
of the United States Government's indemnification policy to
policies of other countries; second, the Federal Government's
potential costs for indemnification; third, the ability and
willingness of the insurance market to provide additional
coverage; and finally, the effects of ending indemnification on
the competitiveness of U.S. launch companies.
My statement is based on ongoing work that we are
conducting at the request of this committee and the Senate
Committee on Commerce, Science, and Transportation. We expect
to issue a final report at a later date with recommendations as
appropriate.
Turning to the comparison of the U.S. government's
indemnification policy with those of other countries, our work
to date indicates that the United States provides less
indemnification for third-party losses than key competitors
such as China, France, and Russia because those countries put
no upper limit on the amount of their coverage, while in the
U.S., coverage stops at about $2.7 billion per launch.
In all these countries, however, including the U.S., these
commitments to pay have never been tested because there has
never been a third-party claim that exceeded the launch
company's insurance and thus reach the level of government
indemnification.
Looking at the potential cost to the Federal Government of
indemnification for third-party losses it is currently unclear.
Estimating probable losses from a rare catastrophic event is
difficult, and insurance industry officials and risk modeling
experts told us that FAA's method of calculating maximum
probable loss is outdated, has not been reviewed by outside
experts, and may not be sound. An inaccurate calculation that
understates the amount of insurance a launch provider must
obtain would increase the likelihood of cost to the Federal
Government, whereas a calculation that overstates the amount of
insurance would decrease the likelihood of federal costs.
In addition, the planned growth in commercial launches,
including manned launches, could increase the number of
launches eligible for CSLA coverage and thus, potential costs
for the Federal Government.
FAA officials said that their method for calculating
maximum probable loss was reasonable and conservative, but they
agreed that a review could be beneficial and that involvement
of outside experts might be helpful for improving their
methodology.
Overall, they said use of more sophisticated methodologies
would have to be balanced with the additional cost to both FAA
and the launch companies that would result from requiring and
analyzing additional data.
With respect to the ability and willingness of the
insurance market to provide additional third-party liability
coverage, industry representatives we contacted told us the
market is generally willing and able to provide up to $500
million of coverage per launch. Because the amount of insurance
FAA requires launch providers to obtain averages about $99
million per launch and coverage available through CSLA is about
$2.7 billion above a launch's maximum probable loss, insurers
could provide some of the coverage currently available through
CSLA, mainly the difference between the maximum probable loss
and the $500 million the industry indicated was the most they
might provide.
However, industry representatives cautioned that the amount
and price of insurance that they might provide could change
quickly if a large loss were to occur.
Finally, ending indemnification could potentially decrease
U.S. competitiveness. This depends on many factors, so the
actual effects are currently unknown. Launch companies and
customers GAO contacted believed that ending federal
indemnification could lead to higher costs for U.S. launch
companies. If those costs are passed onto customers, U.S.
launch companies could be even more expensive, and therefore,
less competitive than their foreign counterparts.
However, it is unclear exactly how much the cost of third-
party liability insurance coverage might increase in the
absence of federal coverage, and while launch customers said
that price and vehicle reliability were key factors in their
choice of a launch company, it is also not clear whether the
increase in insurance costs alone would be sufficient reason
for a launch customer to choose a foreign launch company over a
U.S. company.
Mr. Chairman, this concludes my prepared statement. I would
be happy to respond to any questions you or Members of the
Subcommittee may have.
[The prepared statement of Ms. Cackley follows:]

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Chairman Palazzo. I now recognize Mr. Frank Slazer for five
minutes to present his testimony.

STATEMENT OF MR. FRANK SLAZER,

VICE PRESIDENT, SPACE SYSTEMS,

AEROSPACE INDUSTRIES ASSOCIATION

Mr. Slazer. Thank you, Mr. Chairman. I am here on behalf of
the Aerospace Industries Association, an organization of
approximately 350 companies. The 350 companies represent about
90 percent of the U.S. aerospace business in this country,
creating about 3.5 million jobs nationwide. I appreciate this
opportunity to testify in support of the FAA's Launch
Indemnification Program.
AIA wishes to stress to the Committee the importance of
reauthorizing the Commercial Space Launch Act first mitigation
provisions, substantially extending or eliminating the Sunset
Provisions of the act, and removing the upper indemnification
cap for space launch activities.
U.S. space launch capabilities are essential to our
Nation's security and its ability to lead in space exploration.
To sustain this capability a healthy launch industrial base is
needed and to mitigate cyclical impacts. This would ideally
include military, civil, government, as well as commercial
businesses as customers.
As Chart A shows, the U.S. once had a very robust
commercial launch industry position. This is a chart that shows
the GEO-synchronous launches that were previously made by the
United States from 1990, to 2001. That bluish part of the bar
towards the bottom represents the number of U.S. launches.
There were comparable numbers of non-GEO-stationary launches
for systems such as Iridium and Globalstar at that time.
Unfortunately, as shown in Chart B, our launch industrial
base has lost commercial market share and is struggling to
adapt to declining demand by government, especially since the
end of the Space Shuttle Program. International launch services
providers have been aggressively winning commercial
opportunities, often with the help of their governments and
through financial assistance or low-cost financing.
The sad reality is that U.S. launch services now have a
negligible share of the world commercial market, and as you
noted, Mr. Chairman, in 2011, there were no commercial orbital
launches from a U.S. spaceport.
Despite the dismal record trend for American launchers, new
investments by U.S. industry, including several AIA member
companies, are enabling the emergence of new domestic space
launch systems. The willingness of our private sector to commit
resources to develop new U.S. launch capabilities is a uniquely
American development that should be supported. No other nation
in the world has a similar effort underway. These new systems
have the potential to increase the U.S. share of the commercial
launch market, open up new markets, and create jobs.
Chart number C shows a conservative estimate, again, by the
FAA, through their Commercial Space Transportation Advisory
Committee, of the potential future market, and this is not blue
sky, wild-eyed opportunities. These are fairly baseline
capabilities already in place, not really even counting the
potential new markets enabled by these new systems.
Companies, our companies are making their investment
decisions within the current launch policy business framework,
and, again, strong international competition. Mr. Chairman, the
U.S. space launch industry is not seeking subsidies, but it
does require a stable and predictable business environment, one
that will be enabled by maintaining the existing launch risk
mitigation framework. It is worth noting that foreign launch
competitors already benefit from more general indemnification
rules and other advantages.
FAA's Launch Indemnification Program has been in place for
over 20 years, providing critical risk management and
supporting the emergence of this new domestic commercial launch
market, benefiting our broader space industry, technology
leadership, and ultimately our Nation's security without
costing U.S. taxpayers a dime.
Our industry needs the more level playing field provided by
the FAA's program. For the U.S. to take a purely laissez-faire
approach to commercial launch business when competing against
Russian, European, and other nations, who operate under more
favorable risk-management frameworks, would amount to
unilateral disarmament, and we are already at a pricing
disadvantage. Even if U.S. firms could insure for the initial
risk commercially, it would add costs that their competitors do
not have to bear, making U.S. commercial launch sales even more
difficult. Given that our current risk approach has been in
place for so long, it is not clear if sufficient additional
underwriting capability is available in the space insurance
market.
In the end, adding new uncertainty will harm U.S. industry
without saving the government any money. In fact, the CBO has
previously estimated the FAA's indemnification authority has
had no budgetary impact on the government. A rationale for
continued indemnification support is not narrowly focused on
its benefits just for industry.
It also provides benefits for the Federal Government and
America. In recent years the U.S. government launch costs have
increased substantially, partly due to the shift of commercial
satellite launches to foreign systems, adversely impacting
domestic space industrial base. The success of new-launch
ventures will help the Federal Government since they have the
potential to reverse this trend. Without a renewal of the
regime, our Nation's space industrial base may forego business
that could help spread the fixed cost of space launch
capabilities between government and commercial customers.
Again, savings that could be passed onto taxpayers.
CSLA enables U.S. launch providers like their foreign
competitors to operate without betting the company with every
single launch. This launch indemnification backstop has been
renewed four times since 1988, creating a reasonable
expectation it will be renewed again in the future, without
entirely eliminating the business uncertainty. Given the long
lead times for space launch, the development and the need for
stable policies to promote investment and maximize our
industry's competitiveness, Congress should eliminate the
Sunset Provisions of the act or at least extend them for a much
longer time than prior renewals.
To be consistent with our international competitors, AIA
recommends Congress remove the indemnification caps beyond tier
one for space launch activities.
In conclusion, AIA sees continuing FAA's Launch
Indemnification as a very low-risk way to support our Nation's
vital space launch industrial base with substantial upside
potential to enable new markets, create jobs, and ensure U.S.
space leadership. American industry is investing capital and
innovative ideas to create this new future. It would be a shame
if these efforts were to flounder due to a lack of even a
partially leveled playing field with foreign competitors.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Slazer follows:]

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Chairman Palazzo. I now recognize our final witness, Ms.
Alison Alfers, for five minutes to present her testimony.

STATEMENT OF MS. ALISON ALFERS,

VICE PRESIDENT, DEFENSE AND INTELLIGENCE,

DIGITALGLOBE INC.

Ms. Alfers. Thank you, Chairman. Chairman Palazzo and
Ranking Member Costello and Members of the Subcommittee, thank
you for this opportunity to testify before the Committee on the
issue of extension of the Federal Aviation Administration's
Launch Indemnification Program. As noted in the introductory
remarks, I currently serve as Vice President of the Defense and
Intelligence Business Unit for DigitalGlobe Inc.
DigitalGlobe is a leading global provider of high-
resolution satellite imagery and related products and services.
We operate a constellation of high-resolution, electro-optical
imaging satellites, and our business is highly dependent on the
availability of reliable and cost-effective launch services.
Our detailed written statement is on file with the Committee,
and so I would like to use the time provided here to highlight
certain points that as a consumer of launch services we view as
significant.
First, the reduced demand for launch services by the U.S.
government and the corresponding increase in launch prices and
reduction in launch vehicle options has, in our view, resulted
in the U.S. launch services industry losing the global
leadership position it once had. We see this as detrimental to
U.S. national security interests and as certainly detrimental
to the health of the broader U.S. industrial base.
With regard to our specific business, the increase in
launch costs has necessarily required us to seriously consider
foreign launch providers. For our WorldView-3 launch scheduled
for launch in mid-2014, we went so far as to get necessary
export approvals in place to allow us to select the foreign
provider that bid for the launch. The single driving factor for
considering a foreign launch at all was cost. In our
experience, foreign launches are now on average 40 percent less
than the current prices for U.S. launches.
We ultimately selected a U.S. provider for WorldView-3
because we did not feel that foreign provider's success record
was well-enough developed, but this is rapidly changing with
each successful launch by a foreign provider.
With regard to the specific issue before the Committee, the
extension of the Launch Indemnification Program, as a consumer
of commercial launch services, we believe extension of the
program is critical to encourage U.S. providers, current
providers to stay in the market and to incentivize new
providers to enter the market. In our view, the Indemnification
Program provides a degree of certainty around risk management
for launch providers. That is essential if U.S. launch
capabilities are to remain or some may say return to a position
of global leadership.
Without the indemnification program launch, providers are
operating in an environment of totally uncapped risk, which we
believe will absolutely be reflected in prices that are passed
onto launch consumers like DigitalGlobe. The U.S. launch
services industry is already, in our view, not competitive with
foreign providers on price, and it is rapidly losing its edge
on technological superiority.
As noted in our written statement, we believe we are at a
tipping point, in that any changes in the Indemnification
Program that may lead to higher launch prices will result in
foreign providers being the first choice for consumers for
DigitalGlobe because the cost differential would be so
significant and the technological differences will be so
minimal. We see this as a very negative development, both from
a national security standpoint and from our position as a U.S.
company that consumes commercial launch services. We would much
prefer to use a U.S. provider, but it is rapidly becoming an
impractical option due to price and related considerations.
That said, we are very encouraged by increasing private
sector investments in U.S. launch capabilities. We believe that
the private investment has potential to reverse the current
downward trend and to once again return the U.S. to
unquestioned superiority in launch capabilities.
To succeed, however, will require that these companies have
the ability to manage risks with some degree of certainty, and
that is the very important role that is played by the
Indemnification Program. It provides a vital degree of
certainty that allows providers to manage risks, and that is
reflected in prices.
In the time remaining, I would like to also encourage the
Subcommittee and Congress to consider elimination of the
current three-year Sunset Provision or, at a minimum, to
consider significant extension. We typically contract for
launches three to four years ahead of the scheduled launch, and
we believe that continued uncertainty around the status of the
Indemnification Program will eventually translate into higher
costs as providers hedge against potential shifts in the
Indemnification Program.
So, in summary, as a consumer of commercial launch
services, we encourage Congress to, at a minimum, extend the
current program to continue to incentivize investment, private
investment in launch services industry and to consider
significant extension or, ideally, elimination of the current
Sunset Provision.
Thank you, and I would be glad to answer any questions.
[The prepared statement of Ms. Alfers follows:]

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Chairman Palazzo. I thank the panel for their testimony.
Reminding Members that Committee rules limit questioning to
five minutes.
The Chair will at this point open the round of questions.
The Chair recognizes himself for five minutes.
Dr. Nield, in your written testimony, you state that
foreign launch providers are made competitive through
government subsidies and preferential foreign national laws.
How will extending the U.S. liability risk-sharing regime make
domestic launch providers more competitive or level the playing
field in the face of overt foreign subsidies to their launch
providers?
Mr. Nield. Mr. Chairman, as was mentioned by several of the
other witnesses, there are a number of factors that go into the
selection of a launch provider for a particular mission. One
important factor is cost. The indemnification regime provides a
piece of the cost because the provider must purchase insurance
or otherwise look at the risks that it is facing financially in
terms of its investments and its willingness to be in the
market.
We believe that the indemnification regime at least levels
the playing field with foreign providers. As the GAO has
mentioned, in general, the foreign providers have more
favorable indemnification systems under most circumstances.
Chairman Palazzo. You recommended a five-year extension of
the U.S. liability risk-sharing regime. How did you calculate
that timeline and, for example, do you think the U.S. launch
industry will sufficiently mature in five years to eliminate or
phase out the regime, and is there a rationale for extending it
indefinitely?
Mr. Nield. That is an excellent question. I think there are
two factors in play here. One perspective that we have heard is
industry very much likes certainty in terms of its planning for
investment, future operations, and hiring. So, from the
industry's perspective, it would be ideal to know in advance
what the indemnification regime is. This seems to support an
argument for making the regime permanent.
On the other hand, we certainly understand Congress's
interest and desire to be able to periodically examine the
program and see what works and whether any particular changes
are necessary. As we mentioned, Congress has approved an
extension for just a few years at a time a number of times in
the past.
As a result, the Administration believes that extending
indemnification for five years would be a reasonable
compromise. This would allow at least some near-term certainty
for industry in terms of its planning and allow Congress to
take another look when things have matured. After five years,
we should see a lot more activity in terms of the sub-orbital
market that is starting to develop. That may offer the Congress
an opportunity to see if any additional changes are required.
Chairman Palazzo. Ms. Cackley, under the current risk-
sharing regime, FAA sets a maximum probable loss value which
also serves as a threshold for the second tier, which is the
liability assumed by the Federal Government. The first tier of
coverage is capped and fixed at $500 million, but the second
tier the government's assumed risk is adjusted for inflation,
which began at $1.5 billion in 1989, and today is almost double
that number.
Is it prudent that the government should continue to assume
greater and greater exposure under this shared-risk regime
while the first tier private insurance remains fixed, and
shouldn't the first tier cap be adjusted for inflation as well?
Ms. Cackley. We looked at what industry could provide in
terms of first-tier coverage and what we have been told through
talking to insurance brokers and insurance providers is that
that first, where the first tier cap is right now is the
maximum of what industry is capable of providing, is willing to
provide. So using an inflation adjustment would take the first-
tier cap beyond what we have been told industry is willing to
go. Now, that is where things stand right now. The question is
in the future, how quickly industry's capacity might increase
enough to allow that to increase as well. We didn't look at
that directly, and so I don't have an estimate of how soon that
cap would be able to be increased.
Chairman Palazzo. Thank you. I now recognize Mr. Costello.
Mr. Costello. Thank you, Mr. Chairman.
Dr. Nield and the other witnesses, I suspect I know the
answer to this question, but I want to get it on the record.
Given that there are other high-risk, hazardous industries such
as the nuclear power industry, that do not have similar shared
risks, why is it necessary for for the Federal Government to
continue this structure for the commercial space launch
industry?
Dr. Nield. As you know, Congress originally structured this
system based upon the nuclear power system.
Mr. Costello. Right.
Dr. Nield. There were a number of examples that could be
drawn on to form this system. It appears that the current
system represents a reasonable sharing of risks between all key
stakeholders with the important point being that the most
probable losses are covered by the operators themselves, and
the less probable ones could potentially be covered by
Congressional appropriation. It seems to be a reasonable
approach.
Even though there have been space launches for 50 years,
the industry itself, of course, is relatively new. The
commercial sector is really only now starting to come into its
own in terms of its future potential. As we look at the
insurance capacity that is available and the risks of potential
catastrophic accidents going forward, we would like to see the
industry grow and insurance capacity increase and the vehicles
continue to be made increasingly safe. But right now, we think
this is a reasonable approach to sharing risk.
Mr. Costello. Ms. Cackley, would you or other witnesses,
would you like to comment?
Ms. Cackley. I think I agree with the statement of Mr.
Nield that at this point in time the industry is not at a place
where they are capable of taking on what is a small probability
but a very high-value possibility and which could basically
wipe out a company or even several companies if more than one
company is insuring a given launch where a catastrophic
accident were to happen.
Mr. Slazer. I guess I would like to point out two
differences in this industry. First is that it is something the
United States needs for national security. Our military is
completely dependent upon space capabilities to do the superb
job they do of operating in modern combat, and we cannot allow
that capability to be dependent on foreign suppliers.
So as long as we are going to need a launch business, how
can we spread some of that cost out, and then how big is the
base we can spread that cost out amongst? In the nuclear power
industry, nuclear power provides about one-fifth of American
generating capability. That is about 60 million customers can
help share the cost of insuring those plants. In this case you
are talking, even in the wildest hope of U.S. recapturing
market share the next five or seven years, maybe 40 launches a
year, 50 launches a year. Tremendously increased from our seven
or eight now, but nothing near to the point where each launch
could only take a very small part of the risk if you were to
eliminate the risk mitigation capability that is there right
now.
Mr. Costello. Thank you.
Ms. Alfers. We would echo that. I would describe the launch
industry from the standpoint of a consumer as reemerging. It
has been on years of decline, and it is now trying to recover,
and the success, the factor that will determine whether or not
it does succeed in recovering will be companies like SpaceX and
smaller companies that are willing to invest in this industry.
I don't think some of the smaller companies right now are
prepared even just on the strength of balance sheet basis to
self-insure, to take on these risks right now to self-insure,
and any incremental costs for even the larger providers I can
tell you as a consumer will drive us, not out of desire but out
of necessity, to foreign providers because when we are forced
in a position to pay, you know, 40 percent premium or more on
launches, we either have to reflect that in our pricing to our
customers, and our largest customer is the U.S. government, or
we have to absorb that and take it out of our margins. And at
some point that just has such a negative effect on our bottom
line that we have no choice but to go to foreign providers.
So the Indemnification Program I really see as a backstop
that will help turn this industry around and return it to a
thriving industry, we hope, because we would very much prefer
to be launching on U.S. providers.
Mr. Costello. Thank you. Dr. Nield, under the existing
regime, would the FAA calculate the risk of potential third-
party losses for unmanned versus manned or orbital versus
suborbital flights differently? And if not, should they?
Dr. Nield. We would use the same methodology. We think it
is appropriate because, again, the purpose of the
indemnification regime is to provide for the payments of third-
party claims. Indemnification does not apply to either the
flight crew or the spaceflight participants. What is on the
rocket basically does not matter. What matters is the potential
damage is done to the members of the public or to property on
the ground.
Theoretically, the numbers could come out differently,
depending on how reliable the system is, where the launch takes
place, and so forth. The general methodology, however, would be
the same.
Mr. Costello. Ms. Cackley, did the GAO look at how the FAA
approached calculating the MPL as compared to other methods of
assessing risk, and if so, what did you find?
Ms. Cackley. We did look at the maximum probable loss
calculation that FAA does, and we found that it is quite
different from the way the industry in general does that
calculation. In some instances it is almost in a reverse order
where FAA starts with calculating the loss of casualties and
then calculates property damages as just 50 percent of what the
total casualty loss is.
The industry, on the other hand, told us that they start
from doing a much more sophisticated model-based simulation of
property damage and then do their calculation of casualties
based on the area that their estimates calculate would be
covered by such an accident.
Mr. Costello. And you have recommended that the FAA change
their methodology?
Ms. Cackley. We are definitely looking at the methodology
and have some questions and suggestions for them about ways to
improve it.
Mr. Costello. Very good. Thank you, Mr. Chairman.
Chairman Palazzo. I now recognize the gentleman from
California, Mr. Rohrabacher.
Mr. Rohrabacher. Thank you very much, Mr. Chairman. I
remember when we were trying to get this through the very first
time, and it was, it almost did not pass, and if, in fact, I
was told to pull the bill right before it went for a vote
because we didn't have the votes. And let me just note it was a
bipartisan effort that saved it, and I remember quite well the
Democrats who came over and helped us on this very much.
What if this wouldn't have passed? Would there be a SpaceX
and Orbital and some of these private companies today? What if
we would not have passed the Commercial Space Act of 2004?
Mr. Slazer. It is difficult to say. I think part of the
answer would be there would still be a market out there. There
would still be a market for the U.S. government. In my
experience and, as you are aware, because of the experience
with Huntington Beach with the Delta Launch Vehicle, there was
a government customer out there, which ULA still supports.
There are occasional commercial launches which they still
support, but they could be so much hurt by that. The commercial
launches could go away, and then the government would be left
with picking up the full cost of these launch providers. At the
end of the day you still need GPS, you still need Milsatcom or
AEHF and similar systems, and so that is really the risk out
there. Launch services can be provided. The question is how can
we make that grow, how can we broaden this space economy and
make that bigger.
Mr. Rohrabacher. Well, that was the big question. We either
had to go this route that we are talking about, or there was
another route that was lawyers in space, the Lawyers in Space
Program, where we would shoot them into space, and that might
take care of the problem. But, of course, we chose the more
focused approach and went with indemnification.
Today we are talking about a company having basically $2.7
billion worth of protection. Is that it?
Dr. Nield. Again, the amount of insurance that the company
must procure is based on the maximum probable loss up to a
level of $500 million or the amount of insurance available at
reasonable market prices. Above that, then Congress would have
the opportunity to appropriate up to $1.5 billion, adjusted for
inflation, which is $2.7 billion.
If the claims exceed even that total, then the
responsibility, again, reverts to the launch operator.
Mr. Rohrabacher. But up until $500 million the company
would have to pay itself, so the company is not off the hook.
We are actually not taking responsibility off their shoulders.
We are just sort of making sure that it is not such a great
treat that nobody wants to participate.
Dr. Nield. That is correct.
Mr. Rohrabacher. And we have competition with Russia and
France and China. Now, of course, we know people who stick
their head up and sue people, but at least in Russia and China,
that doesn't happen unless the government really wants them to.
What about in France, and what about our European competition?
Do they have this indemnification, and what does that look
like?
Dr. Nield. Based on the studies that have been previously
done, all of the other space faring states, such as the ones
that you have mentioned, have similar indemnification regimes.
Although, in general, these regimes are more favorable because
instead of a three-tiered system, they only have two tiers,
where, again, the company would typically purchase insurance up
to some amount, but then the government would step in, without
limit, to pick up any claims above that level.
Mr. Rohrabacher. Okay. Well, do you believe is it--I will
go down the line. Do you want this? Should we just take the
provision out in terms of having to revote on this every, is it
four years or five years. How many years do we have before we
have to do it again?
Ms. Cackley. Three.
Mr. Rohrabacher. What is the Sunset Provision on this?
Mr. Slazer. It ends this year, and it has varied over the
last four years, last four times it has been reauthorized. I
would just note that if you look at the development time, five
years for a launch vehicle, launch system is not an
uncharacteristic time from the time you first get the idea and
you want to build a product to the time you actually do your
first launch.
Mr. Rohrabacher. So if we keep the Sunset Provisions, we
should not have to do it for another five years?
Mr. Slazer. Well, I would hope at a minimum, but I would
also point out that launch contracts typically happen two or
more years in advance, and so if you really want to look at the
cycle time of the industry, it is more, it is longer than three
to five years from the time you first start thinking you are
going to do something until you start providing regular
services to customers. And the closer we can get to that cycle
time in the industry, the better it will be for investment
decisions and the more likely we are to attract capital to
develop new capabilities.
Mr. Rohrabacher. Okay. Thank you very much.
Chairman Palazzo. I now recognize the gentlelady from
Maryland, Ms. Edwards.
Ms. Edwards. Thank you, Mr. Chairman, and for Mr.
Rohrabacher, just for the record, I am a lawyer, and I actually
do want to go to space, and I want to make sure there is an
appropriate MPL calculation for that trip.
Mr. Rohrabacher. But our program didn't have any provisions
for the lawyers coming back down.
Ms. Edwards. Right. I do want to come back. So thank you. I
have been looking at this question for indemnification, and
really my concern has been if there is some predictability in
terms of what the obligation of the taxpayer would be and how
we can establish more predictability with a model that has some
way to more reasonably calculate what that liability would be.
And so I wonder, Dr. Nield, I want to talk to you about the
modeling that is used for airline carriers and other examples
and perhaps we can get a comment also from GAO about this, that
would give us a little bit more predictability in terms of
taxpayer obligation beyond the cap.
Dr. Nield. We are eager to look at all kinds of
improvements on how we do what we do, and we would solicit
recommendations from GAO, from Congress, and from industry
experts about the best way to do that.
In fact, we have already begun an internal effort to look
at alternate methodologies. We discussed some of these with the
GAO as they prepared their report and we shared some of our
thoughts on that. We certainly benefited from that discussion,
and we think it would be an excellent idea to review the
methodologies that could be used.
I would point out that the GAO had noted that in its
discussions it found that sometimes a sophisticated model could
require, for example, the purchase of a database costing many
hundreds of thousands of dollars and experts in order to
operate it. So, we need to make sure that we balance the costs
and the benefits and ask: does it really change the MPL? Then
we can decide whether that would be an appropriate change to
make.
Ms. Edwards. Ms. Cackley, before you comment, I wonder if
you could give us some idea. I am trying to figure out how it
is that we recognize that the industry, the commercial industry
is not mature yet. That is understandable, and I guess that
that is some justification for some amount of indemnification.
And so my question, though, goes to how we can move the
industry along so that it becomes mature enough to indemnify
itself rather than to have over a course of time taxpayers foot
that. And do you have some ideas of that? If we were, for
example, to extend for a temporary period, is there some way in
which we can, markers that we can identify that could move the
industry along to getting some more predictability for a better
model so that there is some rationale to why we would have a
cap or why we would eliminate a cap. What are the things that
we could ask for in an interim period that could help move the
industry along so that indemnification catches up with
maturity?
Ms. Cackley. I think one of the key things that has to
happen is just enough launches have to take place so that
industry has a better track record for different vehicles, for
different companies so that risk assessments can be done that
take advantage of more sophisticated methodologies, that take
advantage of things like simulation, modeling, and that allow
for better understanding of probabilities, a richer set of
probabilities that can be modeled using computer-based
technology.
And that will require certainly data, it requires some
expenditure of funds for the modeling, but it also requires
time for enough launches to happen that you have a better
understanding of what the risks are based on a track record.
Ms. Edwards. So rather than a five-year extension, for
example, we could so something shorter and then use this time
to begin deliberately gathering the kind of data that we need.
Right?
Ms. Cackley. It is definitely important to be gathering the
data. I don't have a specific time period that I think is the
ideal time period, but certainly we don't think that it would
be a good idea to continue with the calculations that we are
using and continue that indefinitely.
Ms. Edwards. Thank you. Thank you, Mr. Chairman.
Chairman Palazzo. I now recognize the gentlelady, Mrs.
Adams, from Florida.
Mrs. Adams. Thank you, Mr. Chairman.
Ms. Cackley, I have been listening, and I have listened to
your discussion about the lack of data, you are going to need
more data, and I want to kind of start off where my colleague
over there left off.
She was asking and you said, well, we need time for enough
launches to take place with the different vehicles and the
different categories, and then you need to use the technology
from computerizing to do some kind of simulation.
The question I have is aren't these vehicles changing
rapidly as we are moving forward? Or are they staying the same?
Ms. Cackley. Different vehicles are definitely being
developed so that it depends which vehicle, you use different
vehicles for different purposes.
Mrs. Adams. Correct.
Ms. Cackley. Some will have better track records than
others, and you are right. That is definitely something that
will always be true that----
Mrs. Adams. Technology keeps----
Ms. Cackley [continuing]. Technology will change, and so
that is another reason why insurance is provided.
Mrs. Adams. Well, then my question is how long do you need
with these different vehicles to have the capability of
determining the time enough to make that determination, I guess
is the best way to ask that.
Ms. Cackley. And I don't have an answer specifically, but I
think what we would suggest is that there are risk-assessment
experts who could tell you and who should be consulted and be
part of the discussion.
Mrs. Adams. Right and I know, Dr. Nield, we have talked a
lot about the modeling for the calculating the maximum probable
loss, and we all understand the model hasn't been updated since
'88, and GAO has some concerns of that, and we have heard a lot
about that today. Do you believe that you will be trying to do
some kind of update to it?
Dr. Nield. Yes, definitely. We benefited from our
discussion with the GAO, and we would welcome additional ideas.
Mrs. Adams. Ms. Cackley, in the absence of a current
indemnification system in the United States, would it be
possible for the Commercial Launch System industry to survive?
Ms. Cackley. In the absence of indemnification completely,
I think that it is not that the market would go away, but there
would be probably a large contraction of capacity of insurance,
and there would be a great increase in cost potentially at some
point. I think other witnesses have talked about whether that
is sustainable in the long term, but we didn't really look at
what that length of time might be.
Mrs. Adams. Has there ever been an estimate of the increase
in the insurance cost if the launch indemnification were to
lapse?
Ms. Cackley. No, we have not done that estimate.
Mrs. Adams. Mr. Slazer, if launch indemnification was
allowed to sunset, is it your opinion that the launch
industrial base would begin to deteriorate rapidly?
Mr. Slazer. Given our low number of launches historically
the last several years, I don't know if it would deteriorate
much more, but it certainly wouldn't improve. It is more the
upside that we are risking.
And I just want to take one quick second to point out a
distinction here. Launch vehicles have launched for many years,
and some of them haven't changed very much. Delta II has been
pretty much the same since about 1997, 1998. Soyuz has been
around since about the 1960s. Those launch vehicles, the
maturity helps refine your understanding of the probability of
loss and the potential consequences of the loss.
At the same time, two vehicles that are both mature, if one
provider has a subsidized indemnification capability as with
Soyuz and the other as with Delta II does not, you may wind up
having the U.S. provider being at a competitive disadvantage
and going out of business anyway, even if they are equal and
mature.
So maturity has to be looked at. It is not going to be the
answer to this. It just helps you make a better determination
of the risk. It is not going to solve the issue.
Mrs. Adams. So, again, I will go back to Ms. Cackley then.
With what Mr. Slazer has just said, we do have enough launches
under our belts on some of these, and so we could be using that
to identify possibly. Is that not correct?
Ms. Cackley. Identify?
Mrs. Adams. We are talking about how do we decide how to
indemnify. Earlier when I said something about they are
changing, and they are changing, but we do have, as Mr. Slazer
just said, we have vehicles that have been operating, although
they have changed slightly throughout the years, they are
mature enough.
Ms. Cackley. Absolutely, and there is a market of space
insurance providers who told us that they would be willing to
indemnify at a higher level than the current maximum probable
loss of the average current maximum probable loss of flight
launches now. Part of what we discovered was that there is a
difference between what the insurance companies provide now and
what they said that they would be willing to provide in the
future that is currently covered by government indemnification.
That is not to say that there is no need for any government
indemnification, but it might be able to start at a higher
level than it currently does.
Mrs. Adams. Okay. Earlier, because I am getting confused,
and I just want to make sure. Earlier you said they are not
capable or willing to provide, and now you are saying that
there have been some that have said they could.
Ms. Cackley. They are not willing to provide beyond $500
million, but right now they are not asked to provide beyond the
maximum probable loss, which is much lower. Ninety-nine million
dollars is the average. So what we are suggesting is that there
is some room for the market to provide some indemnification at
a higher level than they currently do, but it is still not
completely indemnified up to whatever maximum there is.
Chairman Palazzo. I want to welcome Chairman Hall to our
hearing and recognize him for five minutes.
Mr. Hall. Mr. Chairman, thank you, and I am hesitant to ask
anything because of not being here, don't know what questions
they have been asked, but I listened to the gentleman from
California and his debate with Ms. Edwards. I can't figure out
who won that, but I am always on her side, usually.
And the gentleman from California mentioned France. That
doesn't do anything to me. There is not a nation in the world
they won't surrender to. They will fight to the last American
the way they have been. So I wouldn't even consider them, but I
do consider this.
Some might be tempted to argue that such a small share of
no practical consequence. I don't agree with that. I think, I
am convinced without it what small share we now have would all
but disappear if we don't take some action, and I think we are
going to, and FAA's Launch Indemnification Program is critical
to the launch industry and its aspirations to compete for
future business.
I actually look forward to working with you, Mr. Chairman,
on moving the extension through the House this year. It can be
done. It probably ought to be done, and I yield back my time,
and I thank you, Mr. Chairman, for the good work you are doing.
Chairman Palazzo. Thank you, Mr. Chairman.
I now recognize the gentleman from Alabama, Mr. Brooks.
Mr. Brooks. Thank you, Mr. Chairman.
I am a stronger believer in the free enterprise system
which typically means less government, not more government
intervention in the marketplace. Typically government
intervention results in distortions in the marketplace, less
efficiency, and more cost to taxpayers.
At the same time, as you are very well familiar, America
faces probably its greatest financial challenge since the War
of 1812, when we last went into bankruptcy, not long after that
war. We have got deficits probably going to be our fourth
trillion dollar deficit in a row. We have got a debt where we
blew through $15 trillion last year. We are going to blow
through $16 trillion just this year. Just the increase in one
year from fiscal year 2010, to fiscal year 2011, and the cost
of servicing that debt is larger than the cost, this is one-
year increase now, is larger than the entire cost of the NASA
Program, all of our space activities.
So with that as a backdrop, I want you all to help me out
as best you can. Taxpayers are being asked to be on the
potential hook for roughly $2.7 billion should we have a
private sector space catastrophe of some kind, and I understand
your argument about competition and how this help is needed
with respect to that foreign competition, but we have got other
industries in America who also would love to have their
insurance costs subsidized by the Federal Government and
America's taxpayers. You can talk about steel manufacturing,
ship construction, bridge construction for our highways, auto
industry, just every industry would love to have the similar
kind of subsidy of its operational costs that the commercial
space is asking of this United States Congress.
And so what I would like for you to help me with is why
should commercial space receive insurance subsidies but not
these other industries that are also facing stiff foreign
competition that threatens to put them out of business, and how
do you distinguish commercial space from these other American
industries that are similarly facing stiff foreign competition
such that you all should receive an insurance subsidy but they
should not.
And I would ask for each of you to respond.
Dr. Nield. I will start by reminding you that there
actually has been no costs to the Treasury or to the general
public in the 24 years that this system has been in place.
Should there be a low probability, but high-cost, catastrophe
at some point in the future, Congress would have the ability to
make a decision whether or not to appropriate the funds above
the cost of the insurance.
The other key point is to recognize that although we are
continuing to look at alternate methodologies and the best way
to calculate things, we are very confident at the FAA that we
have a conservative calculation system today. The probability
that the losses would exceed the maximum probable loss value
that would be covered by insurance is very, very small, on the
order of one in 10 million. So, there would need to be 10
million launches before one would expect to see the
indemnification kick in.
Mr. Brooks. All right. Thank you, and I am looking at my
Committee notes that are similar to what you just said, and I
will read it into the record. ``In what is commonly referred to
as indemnification, should any successful third-party claim be
in excess of the MPL-based insurance requirement, then the U.S.
government is authorized to pay up to an additional $1.5
billion, adjusted for post-1988, inflation, approximately $2.7
billion today. The payment is not automatic and subject to
Congressional appropriations.''
But I am hearing you here today because you are expecting
the Congress will, in fact, provide that indemnification should
we have some catastrophic accident.
And so, Ms. Cackley, what do you suggest, or what are your
thoughts on this? How do we distinguish?
Ms. Cackley. I think that it is true that the industry does
expect that Congress will appropriate the funds if there were,
if indemnification came into play, even though it is subject to
appropriation. It is part of what the industry told us is what
makes them willing to invest and be part of the market is that
they believe that there is that backstop.
To your further question about why this industry and not
others, that is not something that GAO is taking a position on.
We learn as much as we could about how the program works, but
we are not--we don't have a position on why space and not any
other particular market.
Mr. Brooks. Mr. Slazer.
Mr. Slazer. Yeah. I think the answer is that you are going
to need this whether or not there is a commercial market or
not. Other industries aren't in that same position. We can
import those products, we can do without them we can make other
substitutions, but we need to have a space launch capability
for our national security.
As a result, we can choose to spread those fixed costs of
development and operations over a broader base by bringing in
commercial businesses and potentially expand that base to the
point where it actually becomes a job and revenue generator
kicking back into the Treasury, or we can go down to a
minimalistic set of launches and have very high costs.
I would contend that is kind of the inflection point we
have been at these last couple of years. And that is why we
have seen costs for DOD launches, costs for NASA launches, NASA
has been having a great deal of difficulty getting their
science program launched because costs have risen so much. We
have got the prospect in the near future as new companies come
online, as new capabilities by existing companies are expanded,
start bringing those costs down and spreading that fixed cost
out, but we have to keep this regime in place to make that
business case work.
Mr. Brooks. Mr. Chairman, my time has expired, but is there
any chance you would allow sufficient time for Ms. Alfers to
also respond?
Chairman Palazzo. Yes.
Ms. Alfers. Okay. Thank you. We would echo the national
security concern. The U.S. Government needs to have domestic
launch capabilities available, and in addition to spreading the
fixed costs, there is also an issue of maintaining the skill
set. The launch business is a highly technical business. I
mean, it is very complicated, and there are a handful of people
that do this and do this well, and when you take a factory and
you shut it down to the point where you are running one car off
about every four years, you lose that skill set. That is a very
high-risk situation for the U.S. government for when they need
to call on those resources.
Right now the payloads that we launch are heavily relied
upon by the U.S. government. Our largest customer is NGA, the
National Geospatial-Intelligence Agency, and I will tell you
that the U.S. launch market right now is not appealing to
launch on, and we are looking at foreign launches for our Next
Generation satellite, and unless there are new vehicles that
come into the market.
And I want to make this point. There was discussion about
the Delta II. One of the things that has happened as a result
of the reduction in demand is that some of the launch vehicles
that have been highly reliable and are more appropriately sized
for commercial payloads are not available. We are being forced
to launch on an Atlas V. I shouldn't say forced, but we are
launching on an Atlas V, which is a much more expensive and
much larger vehicle than we would prefer to launch on, and that
is simply a product of, or byproduct of, the declining U.S.
launch industry.
So, in the interest of national security, we think it is
very important that the U.S. industry fosters innovation, and
we see the Indemnification Program supporting that because it
does fix risks to some degree for the launch providers, and
without that to answer an earlier question, I actually do think
the U.S. launch industry will gradually fade away to a point
that will be very detrimental to national security.
Mr. Brooks. Thank you for your insight, and Mr. Chairman,
thank you for the additional time.
Chairman Palazzo. At this time, we are going to enter into
a second round of questions where each Member will be allowed
the opportunity to ask one question, and we will begin with the
gentlelady from Maryland, Ms. Edwards.
Ms. Edwards. Thank you, Mr. Chairman. I just have a couple
of questions here.
Ms. Cackley, there has been a lot of discussion about the
impact on international competitiveness. Did GAO find any
documented evidence regarding the impact of shared risk, third-
party liability on international competitiveness or analysis
that if we didn't have that protection, it would result in the
loss of business to foreign launch providers?
Ms. Cackley. We did not find documented evidence. We
certainly talked to launch customers who told us that because
their two main factors that they look at are price and
reliability and the indemnification has an impact on price, you
can make the connection that it has some impact, but we could
not quantify that.
Ms. Edwards. Are there other factors that impact
competitiveness of the domestic launch provider?
Ms. Cackley. Besides----
Ms. Edwards. Besides the shared-risk regime?
Ms. Cackley. No. There are certainly many factors that
affect competitiveness besides this regime.
Ms. Edwards. And even though we have had the shared risk,
we have still lost market share. Right?
Ms. Cackley. That is right.
Ms. Edwards. And then I just have a question regarding the
analysis about behavior. Has GAO made any determination or Dr.
Nield, perhaps you could answer this, as to whether risk
management practices among the providers, among the companies
would be affected by eliminating the cap?
Dr. Nield. In our discussions, it certainly has been made
very clear that industry considers the current indemnification
regime to be vital. The big concern I would have is that in the
worst case, a straightforward business decision would be made
that says, we can't afford to bet the company, and so we are
just going to withdraw from the industry. It is hard to predict
the likelihood of that, but that is certainly a very real
possibility.
Ms. Edwards. Well, I am wondering, Mr. Slazer, if you could
comment because my question is whether--what the risk
management practices of a company would be if they knew that
they wouldn't be on the hook for anything? Because I would
think that that would actually result in a greater probability
of liability for taxpayers.
Mr. Slazer. Yeah. I guess it is important to remember we
are talking here about third-party indemnification, and so any
of these companies that are getting into this business are
putting hundreds, more likely billions of dollars of their own
shareholders' capital at stake in developing these systems, and
it is not in their interest to do something that is not going
to work well. They are going to do everything they can to
succeed in that business, and with so many providers in the
very competitive international market with very good
reliability rates, if you show any indication that you aren't
able to deliver reliably, whether or not you have third-party
liability issues or not, you are going to lose business.
And so it is the company's own self-motivation to make
their businesses succeed are going to make them highly
motivated to succeed. Regardless if they are completely
indemnified for third-party issues, which they are not in the
current regime.
Ms. Edwards. Well, so then that would also be an argument
for keeping the cap, too. Right? The cap, too. Right? Why not?
Mr. Slazer. The only reason there would be the competitive
relative impact on pricing. So the number I----
Ms. Edwards. And so what is the documented evidence that
you have that there would be an impact on competitiveness?
Mr. Slazer. The one number I have seen out there, which
goes--that I recall, that goes back to an aerospace corporation
study in about 2006, that I believe is still accurate, is that
European launcher Ariane has a requirement for indemnification
insurance for maximum probable loss of about $75 million by our
$500 million.
Ms. Edwards. I have a note from that same Aerospace
Corporation study in 2006, that says, ``Measuring the
contribution of indemnification itself, which is critical to
considering amendments to eliminate it or at the other extreme
altering it to reallocate more risk to the government, is
impossible.'' Do you agree with that?
Mr. Slazer. It is extremely difficult, and I would throw in
another factor that is extremely difficult is where companies
are operating. If you are operating on the plains of Kazakhstan
where no one is in the range of possibly being hit by any
debris, I suspect your indemnification costs are going to have
another natural advantage of being lower, but it is very
difficult to make that determination.
Mr. Edwards. And just lastly, Mr. Slazer, to what extent do
commercial launcher providers purchase third-party liability
insurance above the level required by the MPL before you would
reach the cap?
Mr. Slazer. I am afraid I am not able to answer that
question.
Ms. Edwards. It would be helpful for the industry to be
able to answer the question as to how much they, I mean,
because otherwise in-between $99, whatever it is, $99 million
and $500 million. That is a really big number. Who is on the
hook for that?
Mr. Slazer. I will take the action to try to get you some
answers.
Ms. Edwards. Thank you. Thank you, Mr. Chairman.
Chairman Palazzo. The gentlelady's time has expired.
I will ask my one question but of two people.
Would the FAA need additional, this is for Dr. Nield, will
the FAA need additional regulatory authorities to extend the
liability risk-sharing regime to on-orbit activity?
Dr. Nield. Yes, we would. As you know, we currently have
regulatory authority only over launch and reentry. As the GAO
reported, at this point, there is a gap in terms of
indemnification and in terms of regulatory authority. We have
been in discussion with some other government agencies about
the potential benefits of FAA asking for on-orbit authority,
and that certainly is an item for further discussion.
Chairman Palazzo. Ms. Cackley, would you like to add to
that?
Ms. Cackley. We certainly recognize that if the FAA is
regulating on-orbit activities and licensing for on-orbit
activities, it is going to increase the number of possible
activities that could be eligible for coverage under CSLA, and
to the extent that there are more of these activities, there
will be increased risk to the government in the case of an
accident of this type.
Chairman Palazzo. I want to thank the witnesses for their
valuable testimony and the Members for their questions. The
Members of the Subcommittee may have additional questions for
the witnesses, and we will ask you to respond to those in
writing. The record will remain open for two weeks for
additional comments and statements from Members. The witnesses
are excused, and this hearing is adjourned.
[Whereupon, at 11:22 a.m., the Subcommittee was adjourned.]

Answers to Post-Hearing Questions

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Responses from Mr. Frank Slazer

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