Exhibit 10.8


                             SUBORDINATION AGREEMENT


     THIS SUBORDINATION AGREEMENT (the "Subordination  Agreement"),  dated as of
December  20,  1996,  by and  among  Indianapolis  Power  & Light  Company  (the
"Subordinated  Creditor"),  IPL Funding Corporation (the "Seller"), and ABN AMRO
Bank N.V., as agent for the Purchasers (as defined below) (in such capacity, the
"Agent"),  for the  benefit of the Agent and the  Purchasers  (the Agent and the
Purchasers being collectively referred to herein as the "Senior Creditors");

                                   WITNESSETH:

     WHEREAS,  the Seller has entered into a Receivables Sale Agreement dated as
of  December  20, 1996 (as the same may be amended,  restated,  supplemented  or
otherwise modified from time to time, the "Receivables Sale Agreement"),  by and
among the Seller,  ABN AMRO Bank N.V.,  as  provider  of the  program  letter of
credit (the "Enhancer"), the liquidity providers from time to time party thereto
(the "Liquidity  Providers"),  Windmill  Funding  Corporation  ("WINDMILL",  and
together with the Liquidity  Providers and the Enhancer,  the  "Purchasers") and
the Agent; and

     WHEREAS,  the Seller has entered  into a  Receivables  Purchase  Agreement,
dated  as  of  December  20,  1996  (as  the  same  may  be  amended,  restated,
supplemented or otherwise modified from time to time, the "Receivables  Purchase
Agreement"), by and among the Seller and the Subordinated Creditor; and

     WHEREAS,  the  Seller  has and  may,  from  time to time,  execute  certain
instruments  and enter into certain  agreements  pursuant to which it will incur
obligations to the Subordinated Creditor; and

     WHEREAS,  it is a  condition  precedent  to the  obligations  of the Senior
Creditors under the Receivables  Sale Agreement that the  Subordinated  Creditor
agree to execute and deliver this Subordination Agreement.

     NOW, THEREFORE, in consideration of the premises and in order to induce the
Senior  Creditors to enter into the Receivables  Sale Agreement with the Seller,
and in  consideration  of the  execution  thereof,  the parties  hereby agree as
follows:

     Section 1. Definitions. All capitalized terms used herein and not otherwise
defined  herein  shall  have the  respective  meanings  ascribed  thereto in the
Receivables Sale Agreement.  For the purposes of this  Subordination  Agreement,
the following terms shall have the following meaning:

     "Senior  Debt" shall mean all of the  indebtedness,  liabilities  and other
obligations  of the  Seller at any time owed to any Senior  Creditor,  direct or
indirect,  absolute  or  contingent,  due or to  become  due,  now  existing  or
hereafter arising under or in connection with the Receivables Sale Agreement (or
any other documents  executed  thereunder or in connection  therewith),  and all
interest on any such  obligations  owed by the Seller to any Senior  Creditor in
connection  therewith whether payable prior to, during the pendency of, or after
a bankruptcy,  insolvency,  or similar proceeding with respect to the Seller and
all  Collections  payable to any Senior Creditor or any other Person (other than
the Seller).

     "Subordinated  Debt" shall mean all of the  indebtedness,  liabilities  and
other  obligations of the Seller at any time owed to the Subordinated  Creditor,
direct or indirect,  absolute or contingent,  due or to become due, now existing
or hereafter  arising under or in connection  with any  instrument or agreement,
whether oral or written, including, without limitation, the Receivables Purchase
Agreement and the  Subordinated  Note, and all interest on any such  obligations
owed by the Seller to the Subordinated Creditor whether payable prior to, during
the pendency of, or after a bankruptcy,  insolvency or similar  proceeding  with
respect to the Seller.

     "Subordinated Note" shall mean, the Revolving Subordinated  Promissory Note
dated December 20, 1996, from the Seller to the Subordinated Creditor.

     Section  2.  Subordination.  All  Subordinated  Debt shall be and hereby is
expressly made  subordinate and junior in right of payment to all Senior Debt to
the extent and in the manner provided herein.  The Subordinated  Creditor hereby
agrees that it shall not, at any time,  accelerate or otherwise cause all or any
part of the  Subordinated  Debt to mature  prior to its  scheduled  maturity (if
any). After the occurrence and during the continuance of a Termination  Event or
a  Potential   Termination   Event,  until  all  Senior  Debt  shall  have  been
indefeasibly paid in full:

          (a) the  Seller  shall not,  without  the  consent of the  Instructing
     Group,  directly  or  indirectly,  make any payment  with  respect to or on
     account of, or transfer any  collateral  for any part of, the  Subordinated
     Debt;

          (b) the  Subordinated  Creditor  shall not demand,  sue for, or accept
     from the Seller or any other Person any such payment or collateral  (to the
     extent  not  permitted  pursuant  to clause  (a)  above) nor take any other
     action to collect upon any such payment or to enforce its rights in respect
     of the Subordinated Debt or any collateral  securing any Subordinated Debt,
     including,  without  limitation,  pursuant to a setoff of Subordinated Debt
     against debt owed by the Subordinated Creditor to the Seller; and

          (c) neither the Seller nor the  Subordinated  Creditor shall otherwise
     take any  action  prejudicial  to or  inconsistent  with each of the Senior
     Creditors' priority position created by this Subordination Agreement.

     Section 3. Limitations on Subordinated  Creditor Actions.  The Subordinated
Creditor  will not commence or join with any other  creditor or creditors of the
Seller in commencing any bankruptcy,  reorganization  or insolvency  proceedings
against the Seller. At any general meeting of creditors of the Seller, or in the
event  of any  proceeding,  voluntary  or  involuntary,  for  the  distribution,
division  or  application  of all or part of the  assets  of the  Seller  or its
business,  or any receivership,  insolvency or bankruptcy  proceeding,  or in an
assignment for the benefit of creditors or a proceeding by or against the Seller
for  composition  or  extension  or  otherwise,  if all Senior Debt has not been
indefeasibly paid in full at the time, without limiting the generality of any of
the other provisions hereof, the Agent, for the benefit of the Senior Creditors,
is hereby irrevocably authorized at any such meeting or in any such proceeding:

          (a) to enforce claims comprising  Subordinated Debt in the name of the
     Subordinated Creditor, by proof of debt, proof of claim, suit or otherwise;

          (b) to  collect  any  assets of the  Seller  distributed,  divided  or
     applied by way of dividend or payment, or such securities issued on account
     of Subordinated Debt and apply the same, or the proceeds of any realization
     upon the same that the Agent in its sole  discretion  elects to effect,  to
     Senior Debt until all Senior Debt shall have been indefeasibly paid in full
     (each of the  Senior  Creditors  hereby  agreeing  to  render  any  surplus
     remaining  after such payment to the  Subordinated  Creditor or to whomever
     may otherwise be entitled thereto); provided, however, that this subsection
     (b) does not apply to any assets of the Seller received by the Subordinated
     Creditor  prior to and not in connection  with any such meeting or any such
     proceeding if receipt by the Subordinated  Creditor was not in violation of
     any of the other terms hereof;

          (c) to vote  claims  comprising  Subordinated  Debt and to  accept  or
     reject  any  plan  of  partial  or  complete  liquidation,  reorganization,
     arrangement, composition or extension; and

          (d) to take  generally any action in connection  with any such meeting
     or proceeding which the Subordinated Creditor might otherwise take.

After the  commencement  of any such  bankruptcy,  insolvency or  reorganization
proceeding,  the  Subordinated  Creditor  may  inquire  of the Agent in  writing
whether the Agent intends to exercise the  foregoing  rights with respect to the
Subordinated  Debt.  Should the Agent  fail,  within  thirty (30) days after its
receipt  of such  inquiry  or such  shorter  period as may be  required  in such
proceeding,  either to file a proof of claim with  respect  to the  Subordinated
Debt and to furnish a copy thereof to the  Subordinated  Creditor,  or to inform
the  Subordinated  Creditor in writing that it intends to exercise its rights to
assert the claims  arising with respect to the  Subordinated  Debt in the manner
hereinabove  provided,  the Subordinated  Creditor may, without  prejudicing the
rights of the Senior Creditors hereunder,  but shall not be required to, proceed
to file a proof of claim  with  respect to the  Subordinated  Debt and take such
further steps with respect  thereto,  not inconsistent  with this  Subordination
Agreement, as the Subordinated Creditor may deem proper.

     Subject  to and from and  after  the  indefeasible  payment  in full of all
Senior Debt, the Subordinated  Creditor shall be subrogated to the rights of the
Senior  Creditors  to receive  payments or  distributions  of cash,  property or
securities  of the Seller  applicable to the Senior Debt until all amounts owing
on the Subordinated  Debt shall be paid in full. After the indefeasible  payment
in full of all Senior Debt, the Senior Creditors, at the Subordinated Creditor's
expense, will duly execute, acknowledge and deliver all such documents and other
items and take such other action as the  Subordinated  Creditor  may  reasonably
request to permit the  Subordinated  Creditor to be  subrogated to the rights of
the Senior Creditors in accordance with the immediately preceding sentence.  The
provisions of this  Subordination  Agreement are and are intended solely for the
purpose of defining the  relative  rights of the  Subordinated  Creditor and the
Senior Creditors.  Nothing contained in this Subordination Agreement is intended
to or shall impair,  as between the Seller,  its creditors other than the Senior
Creditors and the Subordinated  Creditor, the obligation of the Seller, which is
absolute and unconditional, to pay to the Subordinated Creditor the Subordinated
Debt as and when the same shall  become due and payable in  accordance  with its
terms,  or to affect  the  relative  rights  of the  Subordinated  Creditor  and
creditors of the Seller other than the Senior Creditors.

     Section 4. No Commingling.  Should any payment or distribution  (whether in
cash or other  property) on account of, or any  collateral  for any part of, the
Subordinated Debt be received by the Subordinated  Creditor in violation of this
Subordination Agreement, such payment or collateral shall be delivered forthwith
by the recipient to the Agent for  application to Senior Debt in accordance with
Section 5 hereof, in the form received.  The Agent is irrevocably  authorized to
supply any required endorsement or assignment which may have been omitted. Until
so delivered,  any such payment or collateral  shall be held by the recipient in
trust for the Senior  Creditors and shall not be commingled  with other funds or
property of the recipient.

     Section 5.  Application of Funds.  Any funds received by the Agent pursuant
to this Subordination Agreement, unless otherwise specifically provided pursuant
to the terms hereof,  shall be applied as a Collection  under Section 2.3 of the
Receivables Sale Agreement.

     Section 6. Title. The Subordinated  Creditor hereby represents and warrants
to the Senior  Creditors  that it is the lawful owner of the  Subordinated  Debt
attributable  to it and no part thereof has been assigned to or  subordinated or
subjected to any other lien or encumbrance  creating or evidencing  subordinated
debt in favor of  anyone  other  than the  Senior  Creditors.  The  Subordinated
Creditor may not sell, transfer or assign all or any portion of the Subordinated
Debt or  create  or suffer  to exist  any lien or  encumbrance  thereon  or with
respect thereto.

     Section 7. Specific  Performance;  Waiver. The Agent for the benefit of the
Senior  Creditors is hereby  authorized to demand  specific  performance of this
Subordination Agreement,  whether or not the Seller shall have complied with the
provisions hereof  applicable to it, at any time when the Subordinated  Creditor
shall have  failed to comply with any  provision  hereof  applicable  to it. The
Subordinated  Creditor  hereby  irrevocably  waives  any  defense  based  on the
adequacy  of a remedy at law which  might be  asserted as a bar to the remedy of
specific  performance  hereof in any action brought  therefor by the Agent.  The
Subordinated Creditor further waives presentment,  demand, notice and protest in
connection  with all instruments  and agreements  creating or evidencing  Senior
Debt or  Subordinated  Debt,  notice  of the  acceptance  of this  Subordination
Agreement   and  proof  of  reliance   upon  the  existence  or  terms  of  this
Subordination  Agreement  by the Senior  Creditors or any other holder of Senior
Debt or other  action  taken in  reliance  hereon and all demands and notices of
every kind in connection with this Subordination  Agreement,  the Senior Debt or
time of  payment of the  Senior  Debt or  Subordinated  Debt.  The  Subordinated
Creditor  assents  to any  renewal,  extension  or  postponement  of the time of
payment of Senior Debt or any other  indulgence  with  respect  thereto,  to any
substitution,  exchange or release of  collateral  therefor,  to the addition or
release  of any  Person  primarily  or  secondarily  liable  thereon  and to the
provisions of any instrument, security or other writing evidencing Senior Debt.

     Section 8. Further  Assurances.  The Seller and the  Subordinated  Creditor
shall execute and deliver to the Agent such further  instruments,  agreements or
documents and shall take such further action as the Instructing Group may at any
time or times reasonably request in order to carry out the provisions and intent
of this Subordination Agreement.

     Section 9. Senior  Creditors'  Duties.  The rights granted to the Agent for
the benefit of the Senior  Creditors and to the Senior  Creditors  hereunder are
solely for the protection of the Senior  Creditors and nothing herein  contained
shall  impose on the Agent or on any Senior  Creditor any duties with respect to
any  property  or rights of the  Seller or the  Subordinated  Creditor  received
hereunder.  The Senior  Creditors  shall have no duty to preserve rights against
prior parties in any property of any kind received hereunder.

     Section  10.  No  Prejudice  or  Impairment.  (a)  The  rights  under  this
Subordination  Agreement  of the Agent and the Senior  Creditors  as against the
Subordinated  Creditor  shall remain in full force and effect without regard to,
and shall not be impaired or affected by:

          (i) any act or failure to act on the part of any  Senior  Creditor  or
     the Seller; or

          (ii)  any  extension  or  indulgence  in  respect  of any  payment  or
     prepayment  of any  Senior  Debt or any part  thereof  or in respect of any
     other amount payable to any holder of any Senior Debt; or

          (iii) any  amendment,  modification  or  waiver  of,  or  addition  or
     supplement to, or deletion from, or compromise,  release,  consent or other
     action in respect of, any of the terms of any Senior Debt, any agreement or
     instrument  creating or evidencing  any Senior Debt or any other  agreement
     which may be made relating to any Senior Debt; or

          (iv) any exercise or nonexercise by the Senior Creditors of any right,
     power,  privilege or remedy  under or in respect of such Senior  Debt,  any
     agreement  or  instrument  creating  or  evidencing  Senior  Debt  or  this
     Subordination  Agreement or any waiver of any such right, power,  privilege
     or remedy or of any default in respect of such Senior Debt,  any  agreement
     or  instrument  creating or  evidencing  Senior Debt or this  Subordination
     Agreement,  or any receipt by any Senior  Creditor of any security,  or any
     failure by any Senior  Creditor to perfect a security  interest  in, or any
     release by any Senior  Creditor  of, any  security  for the  payment of any
     Senior Debt; or

          (v)  any  merger  or  consolidation  of  the  Seller  or  any  of  its
     Subsidiaries  into or with any other Person,  any change in the  existence,
     structure  or  ownership  of the Seller or any of its  Subsidiaries  or any
     sale, lease or transfer of any or all of the assets of the Seller or any of
     its Subsidiaries to any other Person; or

          (vi) any insolvency, bankruptcy,  reorganization or similar proceeding
     against  or  affecting  the  Subordinated   Creditor,  the  Seller  or  the
     Receivables; or

          (vii) the  existence  of any claim,  setoff or other  rights  that the
     Subordinated Creditor or the Seller may at any time have against any Senior
     Creditor; or

          (viii) any  invalidity or  unenforceability  of any Senior Debt or any
     provision or provisions of any instrument,  document or agreement  creating
     or evidencing any Senior Debt; or

          (ix)  absence  of any notice  to, or  knowledge  by, any holder of any
     Subordinated  Debt of the  existence or occurrence of any of the matters or
     events set forth in the foregoing subdivisions (i) through (viii); or

          (x) any other circumstance.

     (b)  The  obligations  of the  holders  of  Subordinated  Debt  under  this
Subordination Agreement shall continue to be effective, or be reinstated, as the
case may be, if at any time any  payment in respect of any Senior  Debt,  or any
other  payment to any  holder of any Senior  Debt in its  capacity  as such,  is
rescinded or must otherwise be restored or returned by the holder of such Senior
Debt for any reason, all as though such payment had not been made.

     Section 11. Lien Subordination.  All liens or encumbrances on any assets or
properties of the Seller in favor of the Subordinated Creditor, whether incurred
or created  prior to,  subsequent  to, or on the date hereof,  regardless of the
time of the recording, perfection or filing thereof or the date on which amounts
secured  thereby shall be or have been  advanced to the Seller,  shall be at all
times junior,  subject and  subordinate in all respects to liens or encumbrances
granted by the Seller prior to, subsequent to, or on the date hereof in favor of
the Senior Creditors created under or pursuant to the Receivables Sale Agreement
or otherwise  (collectively referred to herein as the "Senior Creditors' Liens")
and to all  amendments,  modifications,  renewals and  extensions  of the Senior
Creditors'  Liens (all of which may be entered into without notice to or consent
of the Subordinated Creditor).

     Section  12. No  Waiver;  Remedies.  No failure or delay on the part of the
Agent for the benefit of the Senior Creditors in exercising any power,  right or
remedy under this Subordination Agreement shall operate as a waiver thereof; nor
shall any single or partial exercise of any such power, right or remedy preclude
any other further exercise thereof or the exercise of any other power,  right or
remedy.  The rights and remedies  provided in this  Subordination  Agreement are
cumulative  and  nonexclusive  of any rights or remedies  provided  by law.  Any
waiver of this  Subordination  Agreement shall be effective only in the specific
instance and for the specific purpose for which given.

     Section 13.  Amendments,  etc. No amendment,  supplement,  modification  or
waiver of any  provision  of this  Subordination  Agreement  nor  consent to any
departure  by the Seller or the  Subordinated  Creditor  therefrom  shall in any
event be effective unless the same shall be in writing and signed by the Seller,
the  Subordinated  Creditor and the Agent and  consented  to by the  Instructing
Group.

     Section 14. Governing Law;  Submission to Jurisdiction.  This Subordination
Agreement  shall be governed by and  construed in  accordance  with the internal
laws of the State of Illinois.  The Subordinated  Creditor and the Seller hereby
submit to the nonexclusive  jurisdiction of the United States District Court for
the Northern  District of Illinois and of any  Illinois  state court  sitting in
Chicago for purposes of all legal proceedings arising out of or relating to this
Subordination   Agreement  or  the   transactions   contemplated   hereby.   The
Subordinated  Creditor and the Seller hereby  irrevocably  waive, to the fullest
extent it may  effectively  do so, any  objection  which it may now or hereafter
have to the laying of the venue of any such  proceeding  brought in such a court
and any claim that any such proceeding  brought in such a court has been brought
in an inconvenient  forum.  Nothing in this Section 14 shall affect the right of
the Agent or any Senior  Creditor to bring any action or proceeding  against the
Subordinated Creditor or the Seller or their respective properties in the courts
of other jurisdictions.

     Section 15. Assignment.  This Subordination  Agreement shall (i) be binding
upon the Seller and the Subordinated  Creditor,  and their respective successors
and assigns and (ii) inure to the benefit of and be enforceable by the Agent for
the benefit of the Senior Creditors and their respective successors, transferees
and  assigns;  provided  however,  that the  obligations  of the  Seller and the
Subordinated  Creditor  hereunder may not be assigned,  transferred or delegated
without  the  prior  written  consent  of  the  Agent  and  any  such  purported
assignment, transfer or delegation absent such consent shall be void.

     Section 16. Confidentiality of Agreement.  Unless otherwise consented to by
the Agent,  the Seller and the  Subordinated  Creditor will use its best efforts
not to disclose  without the prior written  consent of the Agent the contents of
this Agreement,  the Receivables  Sale Agreement,  or any other  confidential or
proprietary  information furnished by the Agent or any Purchaser,  to any Person
other than to its officers,  directors,  members, managers,  employees,  outside
accountants,  auditors,  attorneys  or  financial  advisors  or as  required  by
applicable law or Governmental Authorities with appropriate jurisdiction.

     Section 17. Headings; Counterparts.  Section headings in this Agreement are
for reference only and shall not affect the construction of this Agreement. This
Agreement  may be executed by different  parties on any number of  counterparts,
each of which shall  constitute  an original and all of which,  taken  together,
shall constitute one and the same agreement.

     Section 18. Cumulative Rights and Severability.  All rights and remedies of
the Senior  Creditors and Agent hereunder shall be cumulative and  non-exclusive
of any  rights  or  remedies  such  Persons  have  under law or  otherwise.  Any
provision hereof this is prohibited or unenforceable in any jurisdiction  shall,
in such  jurisdiction,  be  ineffective  to the  extent of such  prohibition  or
unenforceability without invalidating the remaining provision hereof and without
affecting such provision in any other jurisdiction.

     Section  19.  Entire  Agreement.  This  Agreement  constitutes  the  entire
understanding of the parties thereto  concerning the subject matter hereof.  Any
previous or contemporaneous agreements, whether written or oral, concerning such
matters are superseded hereby.



<PAGE>



     IN WITNESS  WHEREOF,  the parties  hereto  have  caused this  Subordination
Agreement  to be duly  executed  and  delivered  by its officer  thereunto  duly
authorized as of the date first above written.


                                        ABN AMRO Bank N.V., as Agent

                                        By: /s/ Mary C. Casey
                                           -------------------------------------
                                           Title: Vice President
                                                 -------------------------------
                                        By: /s/ Robert C. Smolka
                                           -------------------------------------
                                           Title: Group Vice President
                                                 -------------------------------

                                        INDIANAPOLIS POWER & LIGHT COMPANY

                                        By: /s/ John R. Brehm
                                           -------------------------------------
                                           Its: SVP-Finance and Information
                                                  Services
                                               ---------------------------------

Accepted and Agreed:


IPL FUNDING CORPORATION


By: /s/ Steven L. Meyer
   ----------------------------
   Its:  Treasurer
       ------------------------