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..~ . . ~ Tudor Engineering Page 6 of average annual water delivery (the latter is not shown in the Interim Report). The discussion of the market price of municipal water rights now included in the Interim Report, but not used in the benefit calculations, has been a source of some confusion to readers. It will be more meaningful if related to the additional cost of storing and delivering water through the alternative means when that cost is expressed in terms of water delivered. The second method of municipal water supply benefit estimation should be the opportunity cost of water in the agricultural sector, as described by Bob Young in his earlier memo to Tudor. I believe that this method is properly grounded in economic theory, but that it may provide an underestimate of true economic value because it neglects transaction costs. It, therefore, establishes a lower bound for the value of M&I water. The alternative cost of storage method, on the other hand, establishes an upper bound for M&I water value. Sensitivity analysis will help to reveal whether it would be useful to attempt a quantification of transaction costs in the context of a subsequent Cache La Poudre study, should one occur. Imolementation of the Alternative Cost Aooroach The alternative cost approach to benefit estimation also requires that comparable costing procedures be employed for the hydropower project and its alternative if economic benefits are to be correctly estimated. It is not proper to use the procedures of economic analysis on one project and those of financial feasibility analysis on its alternative. Therefore, the same discount rate (7 1/2%, with 5% and 10% used for purposes of sensitivity analysis) must be used for both the hydropower project and its alternative. Furthermore, if insurance costs are to be charged against the coal cycling alternative, then a similar risk premium should be charged