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Enron Mail |
Messrs. Haedicke and Taylor suggested that I contact you with regard to
ISDA's request below in connection with the IRS proposed regulation, which affects weather and energy supply derivatives. Don Moorehead, the drafter of the comment letter, believes further explication of these transactions would be quite helpful. Please call me at 212-332-2562 should you need further information. Thanks very much in advance, Ruth -----Original Message----- From: Ruth Ainslie To: Mark Haedicke; Mark Taylor Cc: Don Moorehead; Pedro Martinez Sent: 3/21/01 7:30 PM Subject: ISDA Tax Committee - comment letter on proposed IRS hedging regulations: Weather Derivatives and Energy Derivatives Mark and Mark: This is a request for assistance from the TaxCommittee, which is preparing a comment letter on the January 2001 proposed IRS regulations concening hedging transactions. Most of the comment letter addresses whether the Proposed Regulations implement Congressional intent in replacing risk reduction with risk management as the standard for hedging transaction status. The Proposed Regulations provide that unless explicity permitted, "a hedging transaction does not include a transaction entered into to manage risks other than interest rate or price changes, or currency fluctuations,..." The Preamble to the Proposed Regulations indicate that the Service wishes to receive comments on additional risks that should be covered. Here is an excerpt from the draft comment letter " The Preamble to the Proposed Regulations indicates that a weather derivative used by an energy producer to hedge against the risk of decreases in the volume of sales resulting from variations in weather patterns will not qualify as a hedge transaction until the Service exercises its regulatory authority. The Service should do so now. Don Moorehead (who has an active tax practice as well as the active "Hill" practice we know so well) is the drafter and makes strong arguments for extending hedge transaction treatment to weather derivatives. To help with the argument, we would like to attach as an exhibit specific examples of types of weather derivatives that could be incorporated in the final regulations. A similar concern exists with respect to energy supply derivatives. Quoting again from the draft letter: Under the Proposed Regulations, if a business that is an intensive user of energy (e.g., an aluminum producer) enters into a transaction to manage the risk of increased energy prices, that transaction apparently can qualify as a hedge transaction. If, however, the transaction is intended to manage the risk of an energy supply interruption, it apparently will not qualify as a hedge transaction... The energy supply derivative, like the weather derivative, alters the taxpayer's exposure to risks that are inherent in its core economic activities and there is no discernable policy rationale for delay in extending hedge transaction treatment to energy supply derivatives, particularly in light of the exclusivity provisions of the Proposed Regulations. To help with the argument, we would like to attach as an exhibit specific examples of types of energy price and supply derivatives that could be incorporated in the final regulations. We look to you for help in this lists of products. Could you please point us to someone at Enron who could supply such lists and promote more "risk management" tax treatment for weather/energy derivatives? Thanks in advance and regards, Ruth
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