February 24, 2010 / 2:34 PM / 9 years ago

UPDATE 3-Pentagon sets new tanker rules with slight changes

* Some adjustments for inflation

* Requirements broadly unchanged from draft

* Northrop supporters disappointed

(Adds analyst comment, Shelby quote)

By Andrea Shalal-Esa

WASHINGTON, Feb 24 (Reuters) - The Pentagon unveiled on Wednesday revised final terms for a $35 billion refueling plane competition, but lawmakers said changes from a draft version were minor and may not suffice to keep Northrop Grumman Corp (NOC.N) in the bidding against Boeing Co (BA.N).

Northrop and its European partner EADS EAD.PA won the last competition, but then lost the deal after government auditors upheld a Boeing protest. Northrop told the Pentagon last year that the draft rules favored Boeing and it would not bid unless significant changes were made.

Neither company had any immediate comment, but industry officials said they were studying the Pentagon’s briefing.

Deputy Defense Secretary William Lynn, Pentagon acquisition chief Ashton Carter and Air Force Secretary Michael Donley, accompanied by dozens of senior officers and staffers, briefed lawmakers on the final request for proposals (RFP) for the contest, beginning early on Wednesday.

“We are confident that our acquisition strategy favors no one except the warfighter and taxpayer,” Lynn said in a briefing chart provided to lawmakers and obtained by Reuters.

“The requirements are clear, achievable and we believe that both companies have the ability to not only make a competitive offering, but the opportunity to win the solicitation,” he said in the document.

The final rules included 230 changes, many made based on comments submitted by the companies, but lawmakers said the changes were minor and did not alter the fundamental approach.

The biggest changes included measures that would allow adjustment for inflation after the first two batches of production aircraft were built and a slight modification of the Pentagon’s fixed-price approach to development that calls for a 60/40 burden-sharing split with the government.

But the government is still sticking to a long list of mandatory requirements for the planes — 372 instead of 373 in the draft — and would only consider 93 additional capabilities if the bids were just 1 percent apart.

“It appears that the fundamental RFP has not been changed. I think this is a disappointment,” said Senator Jeff Sessions, a Republican from Alabama, where Northrop and EADS had planned to assemble the planes.

Sessions said there was no doubt the Northrop plane, based on the Airbus A330, would carry more fuel, more passengers and more cargo, but the competition rules still appeared to be skewed to favor the smaller Boeing 767.

Senator Richard Shelby, a fellow Republican from Alabama, said the final RFP conjured “an illusion of a fair competition in which the warfighter and the taxpayer lose.”

Shelby and Sessions are holding up votes on some key officials nominated by President Barack Obama for top Pentagon jobs over the tanker dispute.

Sessions said he would still urge Northrop to submit a bid, given the large number of jobs at stake, but said that could prove difficult if Northrop did not feel it had a fair chance to win, especially given the expected $50 million to $80 million cost of submitting a second bid. Analysts estimate Northrop spent about $100 million to prepare its first bid.

Defense consultant Jim McAleese said the Pentagon had made minimal changes to accommodate Northrop’s complaints, but the rules were still geared to reward “whoever proposes the cheapest tanker.”

Lynn insisted the Pentagon’s approach would weigh both price and non-price factors, including the plane’s war-fighting effectiveness and the cost of ownership over 40 years, and said even a bidder with a higher price could potentially win.

The three officials are due to answer questions at a 4 p.m. EST (2100 GMT) news conference at the Pentagon.

Senator John McCain, whose investigation of an earlier $23.5 billion sole-source tanker deal with Boeing ultimately killed that deal, said he was still reviewing the data.

Asked if he were confident the final terms for the competition would guarantee a level playing field for both parties, he said: “Put me down as cautious.”

Representative Norm Dicks — a Democrat from Washington, where Boeing has aircraft assembly operations and a strong supporter of the Boeing bid — said he sees only minimal changes in the final request for proposals.

“They’re trying to make it transparent. They hope both companies will bid. We’ll just have to wait and see,” Dicks told reporters after the briefing. “I think the changes here have been rather minimal,” he said.

This is the Air Force’s third attempt since 2001 to begin replacing its current fleet of nearly 50-year-old KC-135 tankers, which were built by Boeing. The first two attempts failed amid ethics violations and technical problems.

A Pentagon briefing document included following items:

* It said it found no conflict of interest due to Northrop’s work in developing a computer refueling model that is being used to help assess the bids and said the company had implemented adequate firewalls.

* The tanker contract would be a fixed-price incentive for development, with a 60/40 ratio of shared risk between the government and the winning bidder.

* The first two production lots of tankers would be on a firm fixed price contract, while lots 3-13 would include provisions to adjust for inflation.

* The RFP exempts ongoing World Trade Organization disputes over aircraft subsidies, but the Air Force would include a clause to prevent any effect of future rulings on pricing. (Reporting by Andrea Shalal-Esa; editing by Dave Zimmerman, Gerald E. McCormick and Andre Grenon)

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