THIRD SIG(SPACE) MEETING ON THE SHUTTLE PRICING ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R000400520007-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 27, 2016
• Document Release Date: July 30, 2010
• Sequence Number: 7
• Publication Date: July 16, 1985
• Content Type: MEMO

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OteRET SYSTEM II
90769
THE WHITE HOUSE
UNCLASSIFIED
SECRET/NOFORN ATTACHMENT
WASHINGTON
July 16, 1985
Executive Registry
85-
2743
MEMORANDUM FOR MEMBERS, SENIOR INTERAGENCY GROUP FOR SPACE
SUBJECT: Third SIG(Space) Meeting on the Shuttle
Pricing Issue
Attached is a new draft of the Shuttle pricing issue paper
which has been prepared in accordance with the direction from
the SIG(Space) meeting on June 17, 1985. This latest draft:
- Substantially modifies the first two options based
upon evolving agency positions.
- Provides a brief description of implied priorities
each option.
by
- Attempts to place primary emphasis on the concept of
each option rather than the price.
- Inserts a section on the conclusions of the CCCT and
OMB studies, along with NASA's rebuttal to each.
The third and last SIG(Space) meeting on this subject will be
held on July 22, 1985, 1:30-2:30 p.m., Room 208, 0E0B. Princi-
pals plus one staff member are invited to attend. Please
inform Gil Rye (395-5022) of the names of your representatives.
Attachments
1. Draft Issue Paper
2. SIG(Space) Membership List
UNCLASSIFIED
SECRET/NOFORN ATTACHMENT
(2
J. M. Poindexter
Deputy Assistant to the President
for National Security Affairs
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SHUTTLE PRICING ISSUE PAPER
ISSUE
90769
Which approach to recover the full cost of Space Transportation
System (STS) services to commercial and foreign users after
1988 best serves the overall national interest?
NASA will charge Shuttle customers a price of $71M (in 1982
dollars) per flight during the FY 1986-1988 period. This issue
paper deals with the FY 1989-1991 period. Three options are
outlined in the latter part of this paper: Additive Costs,
Auction Pricing and Total Costing.
BACKGROUND
National Space Policies: Presidential policies relevant to
this issue are as follows:
The U.S. will maintain space leadership (NSDD 42),
e.g., U.S. competitiveness with other nations.
U.S. private-sector investment in civil space activi-
ties will be encouraged (NSDD 42).
On October 1, 1988, prices for STS services provided
to commercial and foreign users will reflect the full
costs of such services and capabilities (NSDD 144).
The Shuttle will become fully operational and cost-
effective (NSDD 42).
The commercialization of U.S. expendable launch
vehicles (ELVs) will be facilitated (NSDD 94).
At any given Shuttle price level, these five policies cannot
be completely and simultaneously implemented. Therefore,
the challenge presented by this issue is how best to reconcile
these five policies while establishing the Shuttle price.
Prior Studies: NSDD 144 directed that OMB, in consultation
with other agencies, prepare a joint assessment on "Interna-
tional Competitiveness in Launch Services", and that the
Cabinet Council on Commerce and Trade (CCCT) also review the
Shuttle pricing policy. The OMB-led study was completed in
February 1985 and concluded that the option to have a commer-
cial ELV industry in the United States will disappear unless
action is taken now to implement fully a pricing policy for
commercial and foreign users that recovers all of the costs of
the Shuttle, consistent with Government-wide cost recovery
policy. The study states there is a serious risk that by the
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early 1990s, Shuttle availability for commercial and foreign
traffic could be reduced by greater U.S. Government demand or
lower than planned flight rates. Finally, the study concludes
that commercial ELVs provide the best hedge available for
dealing with the uncertainties in the international marketplace
for launch services. NASA did not concur with many of the
study's conclusions, stating that if the U.S. is to maintain
its world leadership position in providing commercial space
transportation, Shuttle prices must remain competitive. If
Shuttle prices are escalated extensively, NASA believes the
French will be in a position to capture as much of the world
market as they desire.
The CCCT Working Group Study was completed in April 1985 and
concluded that it is in our national interest to maintain an
environment where our domestic ELV industry has the potential
to compete in the launch services market. That environment as
viewed by the study can be maintained without sacrificing any
legitimate objective of U.S. space policy, significantly
reducing revenue to the Treasury or jeopardizing U.S. trade
interests. The study concluded that the spectrum of justifi-
able full cost recovery prices runs from $116M per flight to -
$135M per flight (depending on the assumed flight rate) which
reflects the allocated pro rate share of the direct and indi-
rect costs associated with the Space Transportation System.
NASA nonconcurred with most of the CCCT study's conclusions as
well. NASA states that an increase in Shuttle prices aimed at
commercializing ELVs will stifle other space commercialization
goals. NASA states that over five times as many companies are
investing ten times as much money in Shuttle-dependent and
other new space commercialization activities as there are
companies investing in private ELVs.
Relevant Factors: Four important factors in determining
whether a high or low Shuttle price proves to be in the
national interest are: the projected Shuttle flight rate,
future supply and demand for foreign and domestic flights, the
prospects for Ariane to capture a larger segment of the market
and the impact on space commercialization. These factors are
explained below.
Shuttle Flight Rate. The first factor is the ability of
NASA to generate 24 flights at a reasonable level of funding as
targeted in NSDD 164. Options #1 and #2 are calculated using
this projected rate. Some other agencies question NASA's
ability to generate 24 flights per year pointing to the agency's
inability to date to generate the number previously or currently
planned. These agencies believe 20 Shuttle flights is a more
realistic rate and have used this estimate in calculating
Option #3.
Supply & Demand. In the area of free world commercial
and foreign payloads, recent assessments call for 17-20 such
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payloads (6-8 Shuttle-equivalents) to be launched each year
between FY 1989-1991. With respect to supply, as little as 2
or as many as 7 Shuttle flights could be made available to
compete with the projected 7 Ariane flights (approximately 3
Shuttle-equivalents) to service commercial and foreign payload
demand. While no U.S. ELVs are currently launching, they have
a theoretical launch capacity larger than projected demand.
Under these conditions, there would be an excess of worldwide
launch capacity relative to demand. The Shuttle may have the
capacity to launch almost the entire market. Ariane could
service 52-82% of the market, depending on load factor; and
U.S. ELVs could service the entire market. However, if signi-
ficant increases in demand result from such programs as space
station and the Strategic Defense Initiative, the environment
would change from a "buyer's market" to a "seller's market."
Ariane. The Ariane program is seen by Western Europeans
as vital toimproving their leadership position and as a source
of employment and technology development in aerospace. Ariane-
space has demonstrated a willingness to bid approximately 5%
below U.S. prices to capture market share during the beginning
of its operational phase and is expected to continue this
practice. CIA estimates Ariane's costs to be in the range of
$84M to $127M per Shuttle-equivalent flight. Ariane's planned
production and launch capacity is estimated to be eight launches
per year through the late 1980s increasing to ten per year by
1993. CIA has no evidence to indicate that either ESA or the
French plan an expansion of production facilities for the
1989-1991 time frame. U.S. industry has filed an unfair
practices complaint against Ariane. USTR has recommended to
the President that he make a negative finding under Section 301
with respect to allegations of unfair trade practices by the
European Space Agency and its Member States in the field of
satellite launching services (more specifically, the French-built
Ariane ELV).
Space Commercialization. Expanding the private sector's
investment in space is a high priority of this Administration.
The Shuttle price is the most important factor in determining
whether commercial ELVs can become competitive with the Shuttle
in attracting commercial and foreign flights. Also, the
Shuttle price will have an impact on U.S. industry's willing-
ness to remain or become involved in other areas of space
commercialization such as space communications, upper stages
and space manufacturing.
DISCUSSION
Advocates of a lower Shuttle price argue that:
Any Shuttle price above the mid-$80M would be non-
competitive against Ariane. Higher Shuttle prices would
immediately concede to Ariane roughly 80% of the market and
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possibly encourage Ariane to expand capacity to capture the
entire market and encourage other foreign competitors to enter
the market.
- Higher space transportation costs would inhibit
private sector investment and research in space. As much as
90% of commercial space revenues may come from new areas such
as space manufacturing, while only 2% will come from commercial
ELVs.
- Noncompetitive Shuttle prices would encourage cus-
tomers to use other means of space transportation, thereby
reducing revenues to the government. All NASA reimbursements
above the marginal cost of a flight ($33M) are net revenues
acting to defray the fixed costs of operating the Shuttle for
government needs. Without commercial and foreign customers to
help in defraying fixed costs, the price charged U.S. Govern-
ment users, including DOD, would increase.
- Large increases in government or foreign and commer-
cial demand for launch services are unlikely. However, if
demand should unexpectedly increase, future private ELV capacity
could be provided by extending production runs of Titan (now
being produced for the Air Force) or by restarting production
of other ELV's (which would require no more than two years lead
time).
Advocates of a higher Shuttle price argue that:
- Continuation of the current low Shuttle price will
place the government in direct competition with the private
sector and ultimately eliminate the private U.S. ELV industry.
If launch demand increases (due to such Presidential initia-
tives as Space Station or SDI) or the Shuttle continues to
experience flight delays, U.S. ELVs provide a no-cost-to-
taxpayer means of satisfying this demand.
- The low price does not conform to government policies
for full cost recovery and continues to subsidize profitable
commercial satellite businesses and foreign governments by tens
of millions of dollars per launch. Lower Shuttle prices will
not recover the full range of long-term Shuttle costs, result-
ing in net costs to the government even if the Shuttle is fully
utilized. The unique benefits of the Shuttle should be suffi-
ciently attractive to new space applications at higher prices
to assure that the Shuttle will be fully utilized and recover
its costs.
- The reliability of the Shuttle is suspect. Today,
STS is losing 50-70% of the commercial and foreign market to
Ariane, its only competitor. This is primarily the result of
Shuttle delays and operational problems, customer demands for
launch alternatives, and preferences for simpler, unmanned
system. Continued low prices will not remedy this situation.
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It supports the Administration's policy of free
trade. Fair and full competition for launch services inter-
nationally can be achieved and enforced by USTR only if a price
is adopted which is publicly recognized as reflecting full
costs.
OPTIONS AND IMPLICATIONS
All of the following options purport to meet the policy objec-
tive of "full cost recovery."
Option #1. Additive Costs (Sponsored by Commerce)
This option would establish a price based on the additive costs
associated with adding Shuttle flights for commercial/foreign
payloads plus depreciation for an Orbiter. Additive costs are
those above the fixed operational base costs required to
maintain and refurbish the Space Transportation System to meet
government mission requirements. The price charged commercial/
foreign customers should also include a capital recovery fee
for depreciation to capture the production costs of a new
Orbiter. The total of all these costs is $65M per flight.
In the opinion of the sponsor, this option supports the
policies shown on the first page in the order shown. The
sponsor believes maintaining U.S. competitiveness in world
markets is the primary national interest. U.S. competitiveness
in launch services will maintain U.S. space leadership consis-
tent with NSDD 42. Because competitiveness tends to drive
prices to their lowest possible level, the low cost Space
Transportation System will encourage the private sector to
invest in space-related research and development -- the second
most significant policy goal. Beyond the funding needed for
government missions, it is entirely consistent with full cost
recovery to require commercial users to bear only the additional
costs associated with their particular additional needs. Such
a pricing rationale is consistent with a fully operational and
cost effective Shuttle system as called for in NSDD 42. The
commercialization of ELVs should not be subsidized through
inappropriate pricing of Shuttle operations.
Option #2: Auction Pricing (Sponsored by OMB, CEA and NASA)
This option permits market forces, not the government, to
determine the price for Shuttle commercial services. For each
year of flight beginning with 1989, Shuttle flight capacity
available for foreign and domestic commercial users would be
sold at auction. A minimum acceptable bid (auction floor)
would be established at $82.5M (82$). However, the NASA
Administrator may price up to two Shuttle-equivalent flights
per year below the auction floor if necessary to match bona
fide offers from foreign competitors. The NASA Administrator
will also be able to price the Shuttle below $82.5M (82$) for
other reasons subject to authorization from the Assistant to
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the President for National Security Affairs and the Office of
Management and Budget. Auction bids will be accepted at any
time and available capacity will be sold until it is no longer
available, up to three Shuttle-equivalents worth. Starting two
years before the launch year, NASA will be able to offer any
remaining unused capacity to the commercial market. All sales
will be subject to the pricing conditions stated above. NASA
will review annually the commercial Shuttle activities and
submit a report of such activities, together with any recommen-
dations for changes in this pricing policy, to the Assistant to
the President for National Security Affairs. Any policy issues
raised as a result of this annual report will be promptly
considered by the SIG(Space).
In the opinion of the sponsors, this option best reconciles and
supports the first four policies shown on the first page. It
places less emphasis on encouraging the commercialization of
ELVs. In particular, this market pricing approach will permit
continued U.S. competitiveness for launch services, encourage
space commercialization, and maximize the return to the U.S.
Government for selling commercial launches. This option does
not represent a subsidy to foreign and domestic commercial '
users. DOD and other U.S. Government users will negotiate an
appropriate price for Shuttle services in accordance with NSDD
164. Under this approach, U.S. commercial ELVs will be encour-
aged to develop without subsidy in response to rising market
prices as market conditions allow.
Option #3. Total Cost (Sponsored by Transportation)
This option recovers direct and indirect operating costs,
depreciation and interest. These elements and the resulting
price are based on a definition of "full cost recovery" consis-
tent with standards and policies prescribed by OMB, GAO and the
Generally Accepted Accounting Principles (GAAP) used by the
private sector. This approach and price are supported in the
CCCT Working Group study on "Commercial Impacts of Shuttle
Pricing Policy," which identified a range of full cost Shuttle
pricing of $116M to $135M per flight depending on assumptions.
The price recommended by this option is $129M.
In the opinion of the sponsor, this option supports the Presi-
dent's initiatives to recover full costs for Shuttle services
and capabilities as well as encourage and facilitate develop-
ment of a U.S. commercial ELV industry. A U.S. ELV industry is
viewed as a much needed element in the U.S. space transporta-
tion to maintain leadership since the Shuttle at current $71M
prices is losing 50-70% of the commercial and foreign market to
the French ELV, Ariane. Options #1, and #2, which are based on
either operating costs only, short run marginal cost do not
support the President's policies for full cost recovery or a
U.S. commercial ELV industry, as directed in NSDDs 94 and 144.
Shuttle pricing based on any of these options represents a
contrived effort to keep the Shuttle competitive with Ariane
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even though current low prices have not proved productive in
improving Shuttle competitiveness. This option reduces sub-
stantial Shuttle subsidies and unfair government competition
with the private sector which must recover all costs. In
addition, it ensures U.S. capability to meet increases in
demand for space transportation. NASA would continue its
policy for providing below-cost transportation for high-risk
research and development ventures with commercial potential.
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? ' SYSTEM II Atch #.
SENIOR INTERAGENCY GROUP FOR SPACE 90769
CHAIRMAN: ROBERT C. McFARLANE
ELIZABETH H. DOLE
Secretary of Transportation
JAMES M. BEGGS
Administrator
National Aeronautics and Space Administration
WILLIAM SCHNEIDER
Under Secretary of State for Security Assistance,
and Technology
WILLIAM H. TAFT, IV
Deputy Secretary of Defense
CLARENCE J. BROWN
Deputy Secretary of Commerce
JOSEPH R. WRIGHT
Deputy Director
Office of Management and Budget
JOHN N. McMAHON
Deputy Director
Central Intelligence Agency
VICE ADMIRAL ARTHUR S. MOREAU, JR.
Assistant to the Chairman
Joint Chiefs of Staff
DAVID F. EMERY
Deputy Director
Arms Control and Disarmament Agency
JOHN McTAGUE
Deputy Director
Office of Science and Technology Policy
JOHN SVAHN
Assistant to the President for Policy Development
Executive Secretary:
COLONEL GILBERT D. RYE
Director of Space Programs
NSC Staff
Additional invitees to July 22, 1985 SIG(Space) Meeting:
Dr. Beryl Sprinkle
Chairman, Council of Economic Advisors
Mr. Alfred Kingon
Special Assistant to the President for Cabinet Affairs
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