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