INTERVIEWER: Okay, why don't we take it from the top, starting with the Los Angeles class submarines, you know, what was their purpose and where were they built?

MR. DONNELLY: The Los Angeles class submarines, called 688s, were built between the years 1970 and 1990. About half of them were built by Electric Boat, in Groton, Connecticut, which is now a unit of General Dynamics, and about half were built by Newport News Shipbuilding in Virginia. This is a classic Cold War submarine, "Hunt for Red October." Sixty-two of them were built in that time period. And that's -- that is the submarine that has been in existence -- it constitutes the bulk of our submarine force right now. We have 73 nuclear-powered Attack submarines in the fleet right now. The L.A. class subs will be retired pretty rapidly, some before their time, so that we can whittle down the force to -- the goal now is 50 Attack subs, 2003 and beyond.

INTERVIEWER: Okay, and the program -- submarine program that came after the L.A. class was the Sea Wolf. When was that started and what exactly is the Sea Wolf submarine?

MR. DONNELLY: The Sea Wolf submarine was the follow-on to the Los Angeles class 688 submarine. It was also very much of a Cold War-style submarine, designed to fight the Soviet Navy in the deep blue sea. It was -- it ran silent and it ran deep. We have built -- one of them was just commissioned a few weeks ago, in July, and two more are on the way.

The -- how does it compare to the predecessor, the Los Angeles class? Well, the Sea Wolf submarine has quite a bit more fire power. It can fire 50 cruise missiles or torpedoes, whereas the L.A. class could fire 26. I want to check that.

INTERVIEWER: I need to -- I mean, electronics or it's, you know, capable of higher speeds, those sort of things. You know, keep it simple.

MR. DONNELLY: Okay, all right.

INTERVIEWER: And short, and that'll work.

MR. DONNELLY: Okay, let me try that one again, then. All right. The Los Angeles class submarine was the follow-on to the Sea Wolf -- excuse me.

CAMERAMAN:Take 3.

MR. DONNELLY: The Sea Wolf submarine was the follow-on to the Los Angeles class submarine. It was about 2,000 pounds heavier and packed a lot more firepower. It was an extremely stealthy submarine. Three of them have been funded, in '89, '91 and '95, respectively.

INTERVIEWER: Now, there was some -- there was some hesitation on the part of the administration back then, the Bush administration at the end of the Cold War, on whether or not to proceed with the Sea Wolf. What exactly precipitated there and how did we end up with three Sea Wolfs that we have today?

MR. DONNELLY: Okay.

INTERVIEWER: And you can break this up in chunks and we can go through it.

MR. DONNELLY: Okay. Okay. Okay. The Sea Wolf submarine was developed in the early '80s. The original objective was to buy 30 of them. In 1992, the Bush administration decided that we would not buy any more than the first Sea Wolf, which had already been funded. The reason were -- the reasons were twofold. First, the Soviet Union had gone south. Secondly, the cost of the Sea Wolf was heading north. The -- okay, let's stop there.

INTERVIEWER: That was great, though. That was really good.

MR. DONNELLY: I worked on that one. Okay. Okay, and I can talk more about the price of the Sea Wolf, but just to go through the chronology. Okay. The Bush administration, again, decided to go ahead and only fund the first Sea Wolf. Well, Congress didn't like that too much. Also in 1992, Congress -- the appropriators -- said, "We are going to fund the second Sea Wolf and, Navy, here are $540 million. You can use it at your discretion. And one of the things you can use it for is, if you choose to, to buy a third Sea Wolf submarine."

CAMERAMAN:Hey, Steve.

INTERVIEWER: Yes.

CAMERAMAN:The batteries are running out.

INTERVIEWER: Okay.

(Recording interruption.)

MR. DONNELLY: Okay. Okay. In 1993, when the Clinton administration had arrived in Washington, they conducted a so-called "bottom-up review," of Pentagon priorities. And one of the things that that review determined was that the U.S. should go ahead and build that third Sea Wolf submarine. So we'd already had two, they said, "Go ahead and build a third." Now, between the Congress's decision to reverse Bush's move to stop Sea Wolf number 1 and the Clinton administration's decision to go ahead and build a third one, we're starting to see the emergence of a national policy to not let submarine makers sink any more than we let submarines sink. The policy to maintain two submarine makers that are capable of not -- not only capable, but engaged in designing and building submarines, is the product not of -- it's the product of two administrations. It's the product of more than one Congress. It's the product of more than one party. And what we've ended up with today may be sort of messy, but so is democracy.

Okay. Overall, there were basically three reasons why the Sea Wolf program was continued. And, again, these were shared by the administration and by -- by two administrations and by the Hill. One was the new Attack submarine would not come online until 1998, so the extra Sea Wolfs were considered to be a bridge for the sub makers, specifically for Electric Boat, until the new Attack submarines started. Newport News still made nuclear-powered aircraft carriers. They could fall back on that. Electric Boat was like the boy in the bubble, it was a company in a bubble, it was in an oxygen tent and it had to be kept alive. That was the policy. In addition to that, the argument went -- and it won the day -- that, "We've sunk so much money into the Sea Wolf so far, we might as well go ahead. In fact, it would probably," they said, "cost -- " stopping -- let me try that again.

INTERVIEWER: Uh-huh. Just one thing. This is going so well. Are you looking into the camera at all? Consciously?

MR. DONNELLY: I'm trying not to. Shouldn't I? I should not.

INTERVIEWER: Just look at me. This is really going well, and I don't want to -- you know.

MR. DONNELLY: No, that's a good point.

INTERVIEWER: Just look at me when you're talking and you'll look fine on camera.

MR. DONNELLY: Okay.

INTERVIEWER: I didn't want to throw you off, you were getting in a good sound bite there.

MR. DONNELLY: Okay. The cost of completing the Sea Wolf -- the third Sea Wolf and, in fact, the second Sea Wolf would be not much more than it would cost to stop the program. So the argument went, "We've spent so much money, let's go ahead and finish the job."

In addition, it was pointed out, correctly, that these are not white elephants. I mean, the Sea Wolf is a very capable submarine, and even though the mission it was originally designed for, to fight the Soviet Navy, had since gone into the historical dustbin, it was still quite capable of doing a lot of post-Cold War missions: intelligence surveillance and reconnaissance, inserting and extracting SEAL teams, conducting land attack strike missions, supporting the carrier battle group. So it wasn't doing what it was designed for, but neither was it a useless asset.

INTERVIEWER: Okay.

MR. DONNELLY: Okay, so that about covers the Sea Wolf.

INTERVIEWER: Okay.

DONNELLY: Now I can talk a little about the new Attack submarine.

INTERVIEWER: Okay.

MR. DONNELLY: Okay.

INTERVIEWER: Well, let's -- I can't think of anything right now. Let's go with what will set the new Attack submarine apart from its predecessors?

MR. DONNELLY: Okay. All right. Okay. The new Attack submarine program has as its objective to be as capable as the Sea Wolf in important ways, especially post-Cold War ways: the special operations, the eavesdropping, the land attack strike mission. So it has to be as capable, it has to be particularly at least as stealthy -- and they say it will be at least as stealthy; that's the official position, anyway -- and crucially, it has to be more affordable than the Sea Wolf. So what are these post-Cold War missions?

Well, I touched on them a little bit. Basically, the new Attack submarine will be able to receive much more data more rapidly, be able to to talk to satellites. It will have a detachable submarine for Special Operations Forces, kind of a mini-sub from the mother sub. It will be able to fire a Navy version of the Army tactical missile system, a follow-on to the harpoon torpedo. It will be able to lay a new mobile mine that they're developing. All of these are the advertised capabilities of the new Attack submarine that set it apart.

Now, in terms of some of the other aspects of it, it is also being designed in such a way that it is flexible enough to incorporate advances as they come along. The commercial sector in electronics, computing, communications, is outpacing the military right now, so they want to be able to take advantage of those new technologies and, in fact, the submarine's being built in what they call a modular fashion, where they're literally able to work on the new and improved version, pull out the old, plug in the new, and it plays just as well. The other buzzword being used is "open systems architecture." It's supposed to be flexible. Now, whether this all works out as planned remains to be seen.

INTERVIEWER: Good. That was great. Now, why -- in planning to build the future subs, why did the Navy originally select GD as the sole contractor for the 30 new submarines?

MR. DONNELLY: Okay. Okay. In 1995, the Navy position on the new Attack submarine was to have Electric Boat produce the first couple of submarines, okay. Electric Boat was still in a tough position vis-a-vis Newport News, because Newport News had its aircraft carrier business. The Navy also said, "There's not enough submarine production to justify having two different sub makers do this, so it'll cost less to do it. And besides, we can compete later." That was the position of the administration going into 1995.

Congress was not very happy with that position. In particular, the Virginia lawmakers stood up and were outraged. The Virginia lawmakers are very well represented on the national security committees. On the Senate Armed Services Committee both Virginia Senators sit on it. On the House National Security Committee right now, there is a chairman and two ranking members from Virginia. And they successfully argued that to give Electric Boat the first couple submarines would give them a leg up that Newport News would not be able to overcome, starting from cold, starting from scratch. Despite the opposition of Senator Joe Lieberman, a Democrat from Connecticut, the Virginia lawmakers won the day.

What emerged was in the 1995 defense bill, a plan was crafted whereby rather than building two submarines in a four-year period, four submarines would be built in that same timeframe, and the two sub makers would both be involved, they would alternate. Electric Boat would make one in '98, would make the boat that was funded in '98. Newport News the one in '99. Electric Boat in 2000, Newport News in 2001. Thereafter, for the remaining 26-odd submarines, there would be the option to compete. So that is, as of today, the current law, that these two sub makers will alternate the first four and compete thereafter.

Okay. In 1998 -- that brings us to this year, fiscal year '98's bill, or 1997. The two submarine makers came to Capitol Hill with a proposal that was quite stunning. And that was that even though they had spent the last couple of decades competing to build the nation's Attack subs, now they would in fact work together jointly to do it. Fundamentally, they argued that there was not enough submarine business to justify continuing their competition. The Navy agreed. The Navy said to Congress, "This is consistent with your intent to keep two submarine manufacturers and designers alive and working, it also will save money in the near term. It will save hundreds of millions of dollars because we will not have two separate submarine manufacturers maintaining two different infrastructures, climbing two separate learning curves, et cetera."

So -- "And in addition," they said, "what about competition? Well, competition," they said, "is moot." The Navy argument is that if you have so few submarines, there is no competition, to begin with. Both submarine makers know that the U.S., in the policy that we are talking about here, that's emerged from both administrations, several Congresses, they're not going to let a sub maker sink. Both submarine makers know that. Okay? So both submarine makers -- so there's no, there's no stick. There's also no carrot, because if they're only building a boat a year, they know that it's going to be an allocation, one boat this year to one company, one boat to the next. So the Navy said, "Hey, there's no competition anyway." So that was their argument, going in, in support of teaming.

How does the teaming work? Well, basically these two companies are partners. One company will be responsible for a certain element of the submarine, the other for another element. For example, Electric Boat is in charge of the command and control room, Newport News is in charge of the sale(?) of the submarine. What will alternate between them is final assembly. Even though they're not competing for the overall construction contract for a sub, they are able to compete for smaller contracts based on innovations that one company might make. If I have a better material that will make the submarine more stealthy, then I can get a smaller innovation contract.

INTERVIEWER: Okay. Sounded good. Now, I'm just curious and you may not be willing to talk about this, but first the Navy said, "We're just going to build two." Then Congress and the Navy worked out a plan to build four in two different shipyards. So why did they want to build two first and then all of a sudden four became the number in the same amount of years, they sort of doubled their --

MR. DONNELLY: Because -- okay.

INTERVIEWER: Okay, you want to back up just a little.

MR. DONNELLY: Oh, yeah, yeah.

INTERVIEWER: -- in the light. Okay.

MR. DONNELLY: Yeah. They decided to build four submarines in four years instead of -- with two sub makers, instead of two submarines in four years with two sub makers because if you're going to add two new submarine makers you'd better have the business to justify doing that. The Navy came back and said, "We'd like to do this. This is the Congress's intent. But we don't have the money to do this. And one of the ways we can get the money is by teaming, because we can save several hundred million dollars in the near term." Now, whether that money is saved in the long term or whether money in general is saved in the long term is a separate and ferociously debated question.

INTERVIEWER: I guess we should talk about that a little bit but, you know, how -- you know, what are some of the ways that this new teaming arrangement has come under fire from critics throughout there?

MR. DONNELLY: Okay. Okay. The teaming arrangement that the Navy proposed this year was accepted by the Senate Armed Services Committee. However, the House National Security Committee rejected it. Specifically, a Republican from California named Duncan Hunter is chairman of the Procurement Panel on the House National Security Sub Commit -- Committee, excuse me. The -- Hunter is -- fundamentally, his argument is, "Competition is better. Competition is better in principle and it's better in this case." Now, he has periodically said maybe we should just go to one sub maker. It remains to be seen whether he would go to the wall for that position. But he's ready to argue and he is responsible for the provision as it exists now in law that says that these submarine makers should compete. He thinks that is the way to drive down costs, that tension of competition is the way to drive down costs. To make sure that the new Attack submarine doesn't repeat the cost growth that the Sea Wolf experienced. Not only that, not only the cost, he is also interested in having as innovative a platform as possible and, likewise, he believes that competition is the way to get -- competition not just for small innovative research contracts, but competition for whole subs is the way to get technology to flourish. As an aside, Hunter is concerned that the new Attack submarine is not going to be a leap-ahead technology over the Sea Wolf, and he believes that teaming will make it even more likely that it will not leap ahead.

INTERVIEWER: You've already said that the Navy felt that building two subs at two different shipyards or even -- yeah, two subs at two different shipyards wouldn't be enough to foster competition, yet along -- or keep the place -- the two sub yards alive. Would Hunter then advocate dumping more money and more contracts onto both of the submarine yards?

MR. DONNELLY: I'm not sure I follow that.

INTERVIEWER: Well, you said earlier that the Navy felt like two subs wasn't enough to foster competition.

MR. DONNELLY: If you're going to have two companies involved --

INTERVIEWER: Right.

MR. DONNELLY: -- you're going to have to have more than two subs in four years.

INTERVIEWER: Right.

MR. DONNELLY: Because that's a half a sub a year.

INTERVIEWER: Right.

MR. DONNELLY: And a half a sub a year is not enough to keep these yards going.

INTERVIEWER: Right. So now, is Hunter saying that just pour money onto this issue, give them more money, let them build more subs, both of the yards independently, let them build more subs -- is that what he would be advocating? I'm just trying to understand.

MR. DONNELLY: He's -- Hunter is advocating what is in the law right now, which is to have them alternate final assembly of the first four subs. Then, for numbers 5 through 30, to have the option of competing.

INTERVIEWER: Okay.

MR. DONNELLY: So he's not talking about necessarily adding more money --

INTERVIEWER: Okay.

MR. DONNELLY: -- to do that, although it would cost more -- Hunter's argument is it would cost more, yes, in the short term to be able to have these two companies competing rather than teaming, but that short-term investment is worth it so that you can maintain the viable option for competition in the long run, which will drive down costs. He argues.

INTERVIEWER: Okay. What are some other issues that have come under criticism of late regarding the new Attack sub?

MR. DONNELLY: Let's see. The -- okay, the -- regarding only the sub itself, okay. Not the team plan, per se.

INTERVIEWER: Well, how about will the teaming really produce the cost savings that they're talking about. Or the projected costs savings.

MR. DONNELLY: Okay. It remains to be seen whether or not the teaming arrangement would, in fact, produce cost savings, but looking at the Sea Wolf's history is perhaps instructive. The Sea Wolf -- the first Sea Wolf was supposed to cost $1.9 billion. It in fact cost $2.4 billion. That's a $500 million increase, or about 25 percent. Okay. One reason why that happened, in fairness, is that the projected rate at which these were going to be built declined from three a year to one a year. If you're building fewer subs at a slower rate, it costs more to do. That's just an economic fact of life. However, the Sea Wolf also experienced considerable traditional cost growth.

And one of the areas where it was particularly costive was the -- its combat system, the system that detects targets, that controls the fire control mechanism on the submarine, okay. The new Attack submarine is being watched closely by people like the General Accounting Office analysts, and it is being watched on account of how will this combat system on the new Attack submarine fare in terms of cost and schedule.

And one of the reasons that is being eyed so keenly is because the system is even more complex than the one that caused so many problems with the Sea Wolf. Specifically, fifteen different sub systems, everything that's electronic that doesn't propel the sub, from navigation to communications, are all going to be integrated into a single system. This has never been done before, and they're doing it on an extremely tight schedule, by 2000. It is being watched very carefully as a source of problems.

Another example that's being watched carefully, the Navy's own testers have shown that the external communication system -- there isn't a requirements document for that right now, so they're not even sure what they're going to build. The Navy responds that in fact this is basically a paperwork issue, but the GAO critics say, "Well, if you don't know what you're going to build and you're in a hurry, that could cause some serious schedule and cost risk." So, in other words, if past is prologue, we're in trouble in terms of cost.

INTERVIEWER: Okay. Let's see.

MR. DONNELLY: Oh, I forgot to mention how much the new Attack submarine is going to cost.

INTERVIEWER: Yeah, let's just -- do sort of a brief scope of the program costs and that sort of stuff.

MR. DONNELLY: Okay.

INTERVIEWER: How many subs, what the cost will be, how many years it'll take to complete or close to it.

MR. DONNELLY: Well, (inaudible) should know that.

INTERVIEWER: Like 2005, or something like that? Or is that too late?

MR. DONNELLY: I'm not sure of the date.

INTERVIEWER: If I said like the early part of next century?

MR. DONNELLY: Do that.

INTERVIEWER: That'll work. Okay.

MR. DONNELLY: Right now, the new Attack submarine plan is to build approximately 30 boats. The estimated cost is about $67 billion. That's the Navy's official estimates. They say that the price tag will be $1.65 billion per boat. That's starting with the fifth boat. And that's a traditional measure, number 5 and on. These boats will come online in the early part of next century, around the same time, by the way, that the fifth generation Russian submarine, the Severed Vinsk (phonetic), will also be coming online.

INTERVIEWER: As far as other criticisms go --

CAMERAMAN:Hey, Steve?

INTERVIEWER: Yeah.

(Recording interruption.)

CAMERAMAN:Yeah, I'm ready.

INTERVIEWER: Wait till Mary comes back.

MR. DONNELLY: Okay.

(Recording interruption.)

(End of proceedings as recorded.)