The U.S. Air Force is to determine when to shut off Launch Services Agreement (LSA) funding for Northrop Grumman [NOC] and Blue Origin, the two companies that lost out in the Phase 2 launch service procurement (LSP) National Security Space Launch (NSSL) awards on Aug. 7.

“We will work with those two companies to determine the right point to tie off their work under the LSA agreements,” Air Force acquisition chief Will Roper told reporters on Aug 10. “The goal is not to carry them indefinitely. The point of an LSA was to create a more competitive environment leading into Phase 2, which was full and open. Every competition hereafter will be full and open. We will tie off the LSA contracts just as soon as we can at a point that makes sense.”

Under the Phase 1 LSA awards in October, 2018, Northrop Grumman,  Blue Origin, and United Launch Alliance, composed of Lockheed Martin [LMT] and Boeing [BA] received up-front contracts of $109 million. Northrop Grumman was eligible for $792 million under LSA, while Blue Origin was eligible for $500 million.

“We want to make sure that work that’s in flux, that we’re able to document what the vendors have done,” Roper said on Aug. 7 regarding the LSA agreements with Northrop Grumman and Blue Origin. “Where the government has rights to the data, the work, we want to make sure we retain those, and then if Congress decides to consider Phase 3 activities earlier, we want to also know the timing of their potential activities.”

On Aug. 7, the U.S. Air Force Space and Missile Systems Center (SMC), in partnership with the National Reconnaissance Office (NRO), on Aug. 7 awarded ULA a $337 million contract for two classified mission launches and Space X a $316 million contract for one classified mission launch under Phase 2 of LSP.

Such high dollar amounts are sure to raise eyebrows in Congress, as the Evolved Expendable Launch Vehicle (EELV) program, the predecessor to NSSL, had as its paramount goal a dramatic reduction in launch costs through lower cost commercial launch providers. Space X’s Falcon 9 and Falcon Heavy launches start around $60 million but will cost no more than $150 million, Space X founder Elon Musk has said.

The Phase 2 contracts are for launch service orders this fiscal year through FY ’24, with the first missions launching in FY ’22. SMC is to order launch services annually from ULA and Space X. ULA is to receive 60 percent of the launch orders, and SpaceX will receive the remaining 40 percent.

While the Air Force was expected to award up to 25 launches to the two Phase 2 winners under the indefinite delivery/indefinite quantity contract vehicle for NSSL, Roper said on Aug. 7 that the service believes a reasonable number of launches could be between 30 and 34.

The NSSL effort is to allow the Air Force to end reliance on the Russian-made RD-180 engine by leveraging U.S. commercial launch capabilities. The service has 12 RD-180 engines it can use, if a catastrophic failure arises in the NSSL program, but the service is prohibited by law from buying new RD-180s after 2022.

Roper has said that the Air Force could only afford to award contracts to two launch providers for future national security space launches, after a government-sponsored study largely agreed with that assessment.

The RAND Corp. released a report in April, “Assessing the Impact of U.S. Air Force National Security Space Launch Acquisition Decisions: An Independent Analysis of the Global Heavy Lift Launch Market, which mostly concurred with the service’s assessment that support exists for two, not three, launch providers. But the report also recommended that the Air Force “provide tailored support through 2023 to enable three U.S. launch service providers to continue in or enter the heavy lift launch market” in the event that newly designed vehicles may take longer to field than anticipated.

“Should no more than two launch providers be chosen for LSP contracts in Phase 2, the companies not selected would lose the LSA funds received from the Air Force and could potentially be faced with the choice of abandoning NSSL development to focus on competing in the commercial launch sector, or investing vast company reserves to continue development on its own,” Stephen McCall, a Congressional Research Service (CRS) analyst of military space, missile defense and defense innovation, wrote in a May 1 report. “Furthermore, DoD investment in only two
launch providers could mean fewer options for an increasingly diverse range of NSS mission demands and possibly limit competition in the launch market once again.”

Roper said that Phase 3 is an open competition so Northrop Grumman and Blue Origin could compete for contracts in that phase.

Northrop Grumman said on Aug. 7 that it is “disappointed” that the Air Force did not select the company for Phase 2. “We are confident we submitted a strong proposal that reflected our extensive space launch expertise and provided value to the customer, and we are looking forward to our debriefing from the customer,” the company said in a statement.

Bob Smith, the CEO of Blue Origin, said in a statement that the company was also disappointed that it did not receive a Phase 2 award.

“We submitted an incredibly compelling offer for the national security community and the U.S. taxpayer,” Smith said. “Blue Origin’s offer was based on New Glenn’s heavy-lift performance, unprecedented private investment of more than $2.5 billion, and a very competitive single basic launch service price for any mission across the entire ordering period. We are proceeding with New Glenn development to fulfill our current commercial contracts, pursue a large and growing commercial market, and enter into new civil space launch contracts. We remain confident New Glenn will play a critical role for the national security community in the future due to the increasing realization that space is a contested domain and a robust, responsive, and resilient launch capability is ever more vital to U.S security.”

Blue Origin said that its BE-4 engine will power ULA’s Vulcan launch vehicle in Phase 2.  “The BE-4 is the most powerful liquefied natural gas-fueled rocket engine ever developed and the first oxygen-rich staged combustion engine made in the U.S.,” Smith said. “We look forward to supporting ULA’s long-standing role in launching national security payloads.”

Blue Origin is owned by Amazon [AMZN] founder Jeff Bezos, who also owns The Washington Post.