This is a very interesting question, as it relates to a section of policy which is badly drafted and therefore requires some reasonable interpretation.
The problem here is that the official tournament shortcut, as worded in the MTR, simply does not make sense:
Originally posted by MTR 4.2:
If a player casts a spell or activates an ability with X in its mana cost without specifying the value of X, it is assumed to be for all mana currently available in his or her pool.
Let's consider the central case where this shortcut would apply (ignoring the Thalia complication for the present): a player taps out–let's assume he can generate RRR from all his lands–and casts Devil's Play targeting his opponent without specifying a value for X. Obviously, the player intends X to equal 2 (given that Devil's Play costs XR), and this is the result that the shortcut obviously intends to happen. The problem is that, at the time the spell is announced and put on the stack, the player has RRR in his mana pool, which by the strict wording of the shortcut would mean that X is assumed to be 3, not 2 (as RRR is “all mana currently available in his or her pool”). This would mean that, when the time comes to pay the spell's cost, the total cost is calculated to be 3R, the player is unable to pay the cost, and the game rewinds the casting of the spell.
I think it is clear that this result is obviously not what was intended when the shortcut was drafted. It therefore follows that the wording of the shortcut cannot be interpreted literally. Rather, the shortcut ought to be interpreted to mean something like this:
If a player casts a spell or activates an ability with X in its mana cost without specifying the value of X, it is assumed to be for all mana currently available in his or her pool, disregarding any mana required to pay other costs associated with the casting of the spell or activation of the ability
Thus, given that R is another cost associated with casting Devil's Play, the shortcut does not count it when determining the assumed vale for X. X is therefore assumed to be 2, which is as intended.
Now at last we come to the question at hand: what happens when there is a Thalia in play? This essentially boils down to a question of policy which has yet to be answered: how broadly should we interpret “other costs associated with casting the spell …”? Should that only include the non-X portion of the mana cost printed on the card itself? Should it also include mandatory costs like those imposed by Thalia or Sphere of Resistance? Should it also include optional costs like kicker?
Personally, I would choose the first option: by restricting the interpretation only to the non-X portion of the printed cost, we ensure that the shortcut functions as intended whilst reading as little as possible into the text of the rules. If this is the case, the correct answer to this question is that X is assumed to be 2 (because the R in Devil's Play's cost is disregarded, but not the 1 from Thalia's ability, when calculating “all mana currently available in his or her pool”), so the total cost (including Thalia) to cast the spell is 3R. Casting a spell which costs 3R with only RRR is a textbook case of a GPE: GRV. From the question, it seems the error was caught as the spell was going to resolve, so it is too late to do a rewind under the comp rules (which mandate a rewind only when a player finds himself unable to pay the cost at the time costs must be paid). We therefore give A a Warning for GPE: GRV and ask the head judge for permission to rewind. If I were head judge, I would certainly grant permission, as the error was caught immediately with no intervening decision points.
I would, however, find it reasonable if policy makers chose also to include mandatory costs from external sources (such as Thalia) within the interpretation of “other costs associated with casting the spell…”. If that is the case, then the correct answer to this question is that X is assumed to be 1 (because the shortcut disregards both the R from Devil's Play's printed cost and the 1 from Thalia when calculating “all mana currently available in his or her pool”), meaning that the total cost to cast the spell was 2R. The casting of the spell was therefore perfectly legal, N takes 1 damage, and the players are instructed to play on.
TL; DR: the answer depends upon choosing a particular interpretation of a badly worded shortcut; I would personally choose the interpretation which leads to a rewind, because that interpretation preserves the intended function of the shortcut whilst reading into it as little extra meaning as possible.
Edited Robert Hinrichsen (June 5, 2013 05:58:45 PM)