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�� <br />Subtask E — Refinement of Critical Assumptions <br />� <br />To date, assumptions critical to the economic analysis have been: <br />Appropriate prices and ranges for each market tier; additional review of <br />avoided costs <br />Participation rates and frequency of fallowing by ditch company <br />These assumptions will be re-examined in the course of the analysis as additional information <br />becomes available and as the concept is refined. <br />HDR's Engineering and Economic Feasibility Study contained an overview of the avoided <br />cost water supplies to municipal Front Range water providers. This subtask will further develop <br />avoided cost information for municipal Front Range water providers and standardize such <br />information on some comparable basis, such as raw water delivered to a water treatment plant. <br />This analysis will also include necessary treatment to address the quality of leased water (see <br />Task G below). It will also include delivery costs (see Task F below). The purpose of this <br />analysis is to better understand the market in which water leasing must compete to succeed. <br />Deliverable Estimates on a basis comparable to Lower Valley leased water including <br />delivery costs and water treatment costs where applicable, perhaps presented as ranges, of <br />the cost of raw water delivered to Front Range municipal water providers. <br />An additional assumption required fior future analysis will be the selection of the rates of <br />inflation and discounting, and whether inflation is measured through the CPI or other <br />recognized price indices. In add�ion, this subtask will examine altemate or additional price <br />escalation factors, such as the municipal water rates, the fair market value of Lower Valley <br />water rights sold for dry up and transfer to municipal use, and other measures that may be <br />relevant to the future lease value of water. <br />Needless to say, small reductions in negotiated rates of inflation or escalation can result in <br />millions of dollars of foregone revenues, considering the compounding effects. This subtask <br />will make recommendations on the inflation measure and the discount rate. <br />Deliverable: Development and evaluation of altemate price escalation factors for long-term <br />water leases. <br />This subtask wiH assess altemative pay-out methods and evaluate their tax implications <br />with respect to various organizational structures. <br />To date, the economic analysis has assumed that a potential lessee will pay for their water <br />supply in equal annual payments, based on a take-ar-pay contract structure. These payments <br />would likely increase over time, perhaps related to inflation. There is a range of a�emative pay- <br />out methods, each with different tax implications, as demonstrated by PVID's "front-loaded " <br />payment strategy. This subtask will examine three distinct strategies, including their tax <br />implications and their acceptability to lessors and lessees. <br />January 22, 2009 5 <br />