Subject: ISDA Tax Committee - comment letter on proposed IRS hedging regul ations: Weather Derivatives and Energy Derivatives
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked]
Date: Wed, 21 Mar 2001 11:30:00 -0800 (PST)

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