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~".! :{) . . C"~.. ~ We understand, on the liquid C02/coal slurry technology tests ~.' indicate that much higher deliveries of solids can be obtained c: than with a water-based slurry line. Until the liquid C02/coal slurry technology is brought to a commercial scale, we will not have precise data for design engineering. Therefore, whether the AQUATRAIN Project can be competitive at less than 30 million tons per year is something that needs further economic and engineering evaluation. With regard to total throughput, previous work has suggested major markets for C02' soda ash, ChemCoal, and coal to be delivered both for domestic and export use. We are now entering into a market research effort to better quantify those market opportunities. Please allow me, at this time, to share some areas of concern. Naturally, in taking over .the Project, we have reviewed the underlying economic forecasts. Also, we have sought advice from the financial community, to answer questions that have been raised regarding basic AQUATRAIN premise where some part of the coal transport revenues would be used to subsidize the Colorado River salinity control. It is quite clear that regulatory issues are involved, as well as the question of creating a financial structuring that will be adequate to attract the necessary capital. There are also legal and tax questions which we do not believe have been fully resolved. Suffice it to say that so far in our investigation, we remain convinced that the savings in operating both coal transport and saline water diversion in a common system, sharing rights of way corridors, operations, and maintenance, will allow both the coal and saline water objectives to be fulfilled in a combined project at much less cost than they could be accomplished separately. Additional study on this aspect is in progress. However, we can say tentatively that a reasonable "cost of service" allocation could be expected to permit the coal transport to bear something more than 60% of the combined projects' required income. The remainder of the required income must then come from the "privatized public service function"in the form of salinity credits, or other government payments. It is now our dedicated objective to refine this portion of the projects' required revenue to the lowest possible cost to the government. Obviously, if this cost of .privatization" is not greatly lower than other means, AQUATRAIN. ~vill not serve its in tended purpose. To facilitate matters, we are considering having two separate divisions in Aquatrain, Inc. - one for commodity transportation systems, and a second for the salinity control activities. In essence, the salinity control division would be operated on a privatization basis, similar to projects now being done for sewage and water treatment facilities throughout the nation. The determination of federal salinity control payments will need to be acceptable to both Federal and State entities. -3- !