Prudency

Wes,
As we discussed on Friday, I think that there is merit to your arguments
regarding the release in prudency in North America. However, this may alter
the way we articulate the relative liquidity of our positions to banks and
ratings agencies. De facto, we will be saying that our balance sheet and
income statement reflect an ability to liquidate gas and power in North
America at the mid with no adverse effects. While this may be true,
typically these types of institutions see the result of liquidating much more
liquid portfolios, i.e., they will not believe that we have perfect
liquidity. I believe that we can satisfy both accounting and credit
considerations if we maintain an ability to calculate an "orderly
liquidation" under a negative pricing scenario (basically, multiple horizon
VAR against a liquidating position). This is what we showed Moody's last
month. The main difference is that the resulting number will be a hit to p&l
as opposed to having reserves against it. This is a long way of saying that
I think it would be a good idea to discuss prudency methodology with both RAC
and Treasury once you have finalized a course of action.
Ted