required to pay just compensation or, if it is considered a “taking,” that any amount providedas compensation would be sufficient to pay the full amount of principal of and interest on thetransition bonds or to pay these amounts on a timely basis.***Future state legislative action could reduce the value of the transition bonds.***     Despite its pledge in the Restructuring Act not to take or permit certain actions that wouldimpair the value of the transition property or the transition charges, the Texas legislature mightattempt to repeal or amend the Restructuring Act in a manner that limits or alters the transitionproperty so as to reduce its value. It might be possible for the Texas legislature to repeal oramend the Restructuring Act notwithstanding the State’s pledge if the legislature acts in order toserve a significant and legitimate public purpose. Any such action, as well as the costly andtime-consuming litigation that likely would ensue, might adversely affect the price and liquidity,the dates of payment of interest and principal and the weighted average lives of the transitionbonds. Moreover, the outcome of any litigation cannot be predicted. Accordingly, bondholders mightincur a loss on or delay in recovery of their investment in the transition bonds.     If an action of the Texas legislature adversely affecting the transition property or theability to collect transition charges were considered a “taking” under the United States or TexasConstitutions, the State of Texas might be obligated to pay compensation for the taking. However,even in that event, there is no assurance that any amount provided as compensation would besufficient for bondholders to recover fully their investment in the transition bonds or to offsetinterest lost pending such recovery.***The Texas Utility Commission might take actions that could reduce the value of the transition bonds.***     The Restructuring Act provides that a financing order is irrevocable and that the TexasUtility Commission may not directly or indirectly, by any subsequent action, rescind or amend afinancing order or reduce or impair the transition charges authorized under a financing order,except for the true-up adjustments to the transition charges. However, the Texas Utility Commissionretains the power to adopt, revise or rescind rules or regulations affecting CenterPoint Houston.The Texas Utility Commission also retains the power to interpret the financing order, and in thatcapacity might be called upon to rule on the meanings of provisions of the order that might needfurther elaboration. Any new or amended regulations or orders from the Texas Utility Commissionmight affect the ability of the servicer to collect the transition charges in full and on a timelybasis, the rating of the transition bonds or their price and, accordingly, the amortization of thetransition bonds and their weighted average lives.     The servicer is required to file with the Texas Utility Commission, on our behalf, certainadjustments of the transition charges. True-up adjustment procedures have been challenged in thepast and may be challenged in the future. Challenges to or delays in the true-up process mightadversely affect the market perception and valuation of the transition bonds. Also, any litigationmight materially delay transition charge collections due to delayed implementation of true-upadjustments and might result in missing payments or payment delays and lengthened weighted averagelife of the transition bonds.**Servicing Risks*****Inaccurate consumption forecasting or unanticipated delinquencies or charge-offs might reduce scheduled payments on the transition bonds.***     The transition charges are generally assessed based on forecasted customer usage. The amountand the rate of transition charge collections depend in part on actual electricity usage and theamount of collections and write-offs for each customer class. If the servicer inaccuratelyforecasts electricity consumption or uses inaccurate customer delinquency or charge-off data whensetting or adjusting the transition charges, there could be a shortfall or material delay intransition charge collections, which might result in missed or delayed payments of principal andinterest and lengthened weighted average life of the transition bonds.     The servicer has experienced difficulties from time to time in making accurate forecasts ofelectricity consumption because of unexpected weather conditions. Inaccurate forecasting ofelectricity consumption by the servicer might result from, among other things, unanticipatedweather or economic conditions, resulting in less
 

 
electricity consumption than forecast; general economic conditions being worse than expected,causing retail electric customers to migrate from CenterPoint Houston’s service territory or reducetheir electricity consumption; the occurrence of a natural disaster or an act of terrorism or othercatastrophic event; changes in the market structure of the electric industry; customers consumingless electricity because of increased energy prices or conservation effort; or customers switchingto alternative sources of energy, including self-generation of electric power.     The servicer’s use of inaccurate delinquency or charge-off rates might result also from, amongother things, unexpected deterioration of the economy or the declaration of a moratorium onterminating electric service to customers in the event of extreme weather, either of which wouldcause greater delinquencies or charge-offs than expected or force CenterPoint Houston or REPs togrant additional payment relief to more customers, or any other change in law that makes it moredifficult for CenterPoint Houston or REPs to terminate service to non-paying customers or thatrequires CenterPoint Houston or REPs to apply more lenient credit standards in accepting retailelectric customers.***We depend on CenterPoint Houston or its successor or assignee, acting as servicer of the transition property.***     CenterPoint Houston, as servicer, is responsible for, among other things, calculating, billingand collecting the transition charges from REPs, submitting requests to the Texas UtilityCommission to adjust these charges, monitoring the collateral for the transition bonds and takingcertain actions in the event of non-payment by a REP. The trustee’s receipt of collections inrespect of the transition charges, which are used to make payments on the transition bonds, dependsin part on the skill and diligence of the servicer in performing these functions. The systems theState of Texas and the servicer have in place for transition charge billings and collections might,in particular circumstances, cause the servicer to experience difficulty in performing thesefunctions in a timely and completely accurate manner. If the servicer fails to make collections forany reason, then the servicer’s payments to the trustee in respect of the transition charges mightbe delayed or reduced. In that event, our payments on the transition bonds might be delayed orreduced.***If we replace CenterPoint Houston as the servicer, we may experience difficulties finding and usinga replacement servicer.***     If CenterPoint Houston ceases to service the transition property, it might be difficult tofind a successor servicer. Also, any successor servicer might have less experience and ability thanCenterPoint Houston and might experience difficulties in collecting transition charges anddetermining appropriate adjustments to the transition charges and billing and/or paymentarrangements may change, resulting in collection disruption. A successor servicer might charge feesthat, while permitted under the financing order, are substantially higher than the fees paid toCenterPoint Houston as servicer. In the event of the commencement of a case by or against theservicer under the United States Bankruptcy Code or similar laws, we and the trustee might beprevented from effecting a transfer of servicing due to operation of the bankruptcy code. Any ofthese factors and others might delay the timing of payments and may reduce the value of thetransition bonds.***It might be difficult to collect transition charges from REPs.***     As required by the Restructuring Act, retail electric customers pay the transition charges toREPs who supply them with electric power. The REPs are obligated to remit payments of thetransition charges, less a specified percentage allowance for charge-offs of delinquent customeraccounts, within 35 days of billing from the servicer, even if they do not collect the transitioncharges from retail electric customers. Because the REPs bill most retail electric customers forthe transition charges, we have to rely on a relatively small number of entities for the collectionof the bulk of the transition charges. As of December 31, 2007, CenterPoint Houston did businesswith 74 REPs. Reliant Energy, Inc. (RRI) through its subsidiaries, is CenterPoint Houston’s largestcustomer, accounting for approximately 48% of CenterPoint Houston’s outstanding receivables fromREPs as of December 31, 2007.     Failure by the REPs to remit transition charges to the servicer might cause delays in paymentson the transition bonds and adversely affect the value of the transition bonds. The servicer doesnot pay any shortfalls resulting from the failure of any REP to forward transition chargecollections.
 

 
     Adjustments to the transition charges and any credit support provided by a REP, whileavailable to compensate for a failure by a REP to pay the transition charges to the servicer, mightnot be sufficient to protect the value of the transition bonds.     The Restructuring Act provides for one or more REPs in each area to be designated the“provider of last resort” for that area or a specified customer class. The provider of last resortis required to offer basic electric service to retail electric customers in its designated area,regardless of the creditworthiness of the customers. The provider of last resort might face greaterdifficulty in bill collection than other REPs and therefore the servicer may face greaterdifficulty in collecting transition charges from the provider of last resort.     REPs may issue a single bill to retail customers that include all charges related to thepurchase of electricity, without separately itemizing the transition charge component of the bill.A REP’s use of a consolidated bill might increase the risk that customers who have claims againstthe REP will attempt to offset those claims against transition charges or increase the risk that,in the event of a bankruptcy of a REP, a bankruptcy court would find that the REP has an interestin the transition property and would make it more difficult to terminate the services of a bankruptREP or collect transition charges from its customers.***Competitive metering services might result in unexpected problems in receiving accurate meteringdata.***     Under the Restructuring Act, commercial and industrial retail customers that are required bythe Electric Reliability Council of Texas to have an interval data recorder meter may choose to ownthe settlement and billing meters that are used to measure electric energy delivered to theirlocation or to have those meters owned by a REP, the transmission and distribution utility oranother person authorized by the customer. As of December 31, 2007, CenterPoint Houston continuedto provide metering services related to the installation and removal of meters, meter testing andcalibration, data collection and data management. Should the Texas Utility Commission allow thirdparties to perform those metering services in CenterPoint Houston’s service territory, there mightbe problems converting to the third party’s metering system, taking accurate meter readings andcollecting and processing accurate metering data. Inaccurate metering data might lead toinaccuracies in the calculation and imposition of transition charges and might give rise todisputes between the servicer and REPs regarding payments and payment shortfalls resulting inmissing or delayed payments of principal and interest and lengthened weighted average life of thetransition bonds.***Changes to billing and collection practices might reduce the value of the transition bonds.***     The financing order specifies the methodology for determining the amount of the transitioncharges we may impose. The servicer may not change this methodology without approval from the TexasUtility Commission. However, the servicer may set its own billing and collection arrangements withREPs and retail electric customers, if any, from whom it collects transition charges directly,provided that these arrangements comply with the Texas Utility Commission’s customer safeguards.For example, to recover part of an outstanding bill, the servicer may agree to extend a REP’spayment schedule or to write off the remaining portion of the bill, including the transitioncharges. Also, the servicer may change billing and collection practices, which might adverselyimpact the timing and amount of retail electric customer payments and might reduce transitioncharge collections, thereby limiting our ability to make scheduled payments on the transitionbonds. Separately, the Texas Utility Commission might require changes to these practices. Anychanges in billing and collection practices regulations might make it more difficult for theservicer to collect the transition charges and adversely affect the value of the transition bonds.***Limits on rights to terminate service might make it more difficult to collect the transitioncharges.***     Texas statutory requirements and the rules and regulations of the Texas Utility Commission,which may change from time to time, regulate and control the right of the REP to initiatedisconnection of service. For example, REPs generally may not terminate service to a customer (1)on a holiday or weekend day or the day immediately preceding a holiday or weekend, (2) duringcertain extreme weather conditions, (3) if such disconnection would cause a person to becomeseriously ill or more seriously ill, (4) if such customer is an energy assistance client undercertain circumstances or (5) if the customer is a master-metered apartment complex unless certainnotices are given. To the extent these retail electric customers do not pay for their electricservice, REPs will not be able to collect transition charges from these retail electric customers.Although REPs have to pay the servicer the transition charges
 

 
on behalf of those customers (subject to any charge-off allowance and reconciliation rights),required service to non-paying customers could affect the ability of REPs to make such payment.***Future adjustments to transition charges by customer class might result in insufficientcollections.***     The customers who pay transition charges are divided into customer classes. Transition chargesare allocated among customer classes and assessed in accordance with the formula required under theRestructuring Act and specified in the financing order. A shortfall in collections of transitioncharges in one customer class may be corrected by making adjustments to the transition chargespayable by that customer class and any other customer class. If customers in a class fail to paytransition charges or cease to be customers, the servicer might have to substantially increase thetransition charges for the remaining customers in that customer class and for other customerclasses. This effect might be more extreme in the case of the large industrial and theinterruptible customer classes, which consist of a small number of large customers. These increasescould lead to further failures by the remaining customers to pay transition charges, therebyincreasing the risk of a shortfall in funds to pay debt service on the transition bonds.**Risks Associated with the Unusual Nature of the Transition Property*****We will not receive transition charges in respect of electric service provided more than 15 years from the date of issuance of the transition bonds.***     CenterPoint Houston will not be entitled to charge transition charges for electricitydelivered after the fifteenth anniversary of the issuance of the transition bonds. If transitioncharges collected for electricity delivered through the fifteenth anniversary of the transitionbonds, or from any credit enhancement funds, are not sufficient to repay the transition bonds infull, no other funds will be available to pay the unpaid balance due on the transition bonds.***Foreclosure of the trustee’s lien on the transition property might not be practical, andacceleration of the transition bonds before maturity might have little practical effect.***     Under the Restructuring Act and the indenture, the trustee or the bondholders have the rightto foreclose or otherwise enforce the lien on the transition property securing the transitionbonds. However, in the event of foreclosure, there is likely to be a limited market, if any, forthe transition property. Therefore, foreclosure might not be a realistic or practical remedy.Moreover, although principal of the transition bonds will be due and payable upon acceleration ofthe transition bonds before maturity, the transition charges likely would not be accelerated andthe nature of our business will result in principal of the transition bonds being paid as fundsbecome available. If there is an acceleration of the transition bonds, all tranches of thetransition bonds will be paid pro rata; therefore, some tranches might be paid earlier thanexpected and some tranches might be paid later than expected.**Risks Associated with Potential Bankruptcy Proceedings of CenterPoint Houston or a SuccessorServicer*****The servicer will commingle the transition charges with other revenues it collects, which mightobstruct access to the transition charges in case of the servicer’s bankruptcy and reduce the valueof the transition bonds.***     The servicer is required to remit collections to the trustee within two business days ofreceipt. The servicer does not segregate the transition charges from the other funds it collectsfrom retail electric customers or REPs or its general funds. The transition charges are segregatedonly when the servicer pays them to the trustee.     Despite this requirement, the servicer might fail to pay the full amount of the transitioncharges to the trustee or might fail to do so on a timely basis. This failure, whether voluntary orinvoluntary, might materially reduce the amount of transition charge collections available to makepayments on the transition bonds.     The Restructuring Act provides that our rights to the transition property are not affected bythe commingling of these funds with any other funds of the servicer. In a bankruptcy of theservicer, however, a bankruptcy court might rule that federal bankruptcy law does not recognize ourright to collections of the transition charges that are commingled with other funds of the serviceras of the date of bankruptcy. If so, the collections of the transition charges held by the serviceras of the date of bankruptcy would not be available to pay amounts owing on the
 

 
transition bonds. In this case, we would have only a general unsecured claim against theservicer for those amounts. This decision could cause material delays in payments of principal orinterest, or losses, on the transition bonds and could materially reduce the value of thetransition bonds, particularly if it occurred in the fifteenth year of the transition bonds afterthe completion of which no transition charges can be charged.***The bankruptcy of CenterPoint Houston, as seller of the transition property, might result in lossesor delays in payments on the transition bonds.***     The Restructuring Act and the financing order provide that as a matter of Texas state law: **•** the rights and interests of a selling utility under a financing order, including theright to impose, collect and receive transition charges, are contract rights of the seller;  **•** the seller may make a present transfer of its rights under a financing order, includingthe right to impose, collect and receive future transition charges that retail customers donot yet owe;  **•** upon the transfer to us, the rights became transition property, and transition propertyconstitutes a present property right, even though the imposition and collection oftransition charges depend on further acts that have not yet occurred; and  **•** a transfer of the transition property from the seller, or its affiliate, to us thatexpressly states the transfer is a sale or other absolute transfer is a true sale of thetransition property, not a pledge of the transition property to secure a financing by theseller.These provisions are important to maintaining payments on the transition bonds in accordance withtheir terms during any bankruptcy of CenterPoint Houston.     A bankruptcy court generally follows state property law on issues such as those addressed bythe state law provisions described above. However, a bankruptcy court does not follow state law ifit determines that the state law is contrary to a paramount federal bankruptcy policy or interest.If a bankruptcy court in a CenterPoint Houston bankruptcy refused to enforce one or more of thestate property law provisions described above, the effect of this decision on beneficial owners ofthe transition bonds might be similar to the treatment they would receive in a CenterPoint Houstonbankruptcy if the transition bonds had been issued directly by CenterPoint Houston. A decision bythe bankruptcy court that, despite our separateness from CenterPoint Houston, our assets andliabilities and those of CenterPoint Houston should be consolidated would have a similar effect onbondholders.     We have taken steps together with CenterPoint Houston, as seller of the transition property,to reduce the risk that in the event the seller or an affiliate of the seller were to become thedebtor in a bankruptcy case, a court would order that our assets and liabilities be substantivelyconsolidated with those of CenterPoint Houston or an affiliate. Nonetheless, these steps might notbe completely effective, and thus if CenterPoint Houston or one of its affiliates were to become adebtor in a bankruptcy case, a court might order that our assets and liabilities be consolidatedwith those of CenterPoint Houston or such affiliate. This might cause material delays in paymentof, or losses on, the transition bonds and might materially reduce the value of the transitionbonds. For example: **•** without permission from the bankruptcy court, the trustee might be prevented from takingactions against CenterPoint Houston or recovering or using funds on behalf of bondholdersor replacing CenterPoint Houston as the servicer;  **•** the bankruptcy court might order the trustee to exchange the transition property forother property, of lower value;  **•** tax or other government liens on CenterPoint Houston’s property might have priority overthe trustee’s lien and might be paid from collected transition charges before payments onthe transition bonds;
 

 
 **•** the trustee’s lien might not be properly perfected in the collected transition propertycollections prior to or as of the date of CenterPoint Houston’s bankruptcy, with the resultthat the transition bonds would represent only general unsecured claims against CenterPointHouston;  **•** the bankruptcy court might rule that neither our property interest nor the trustee’slien extends to transition charges in respect of electricity consumed after thecommencement of CenterPoint Houston’s bankruptcy case, with the result that the transitionbonds would represent only general unsecured claims against CenterPoint Houston;  **•** we and CenterPoint Houston might be relieved of any obligation to make any payments onthe transition bonds during the pendency of the bankruptcy case and might be relieved ofany obligation to pay interest accruing after the commencement of the bankruptcy case;  **•** CenterPoint Houston might be able to alter the terms of the transition bonds as part ofits plan of reorganization;  **•** the bankruptcy court might rule that the transition charges should be used to pay, orthat we should be charged for, a portion of the cost of providing electric service; or  **•** the bankruptcy court might rule that the remedy provisions of the transition propertysale agreement are unenforceable, leaving us with an unsecured claim for actual damagesagainst CenterPoint Houston that may be difficult to prove or, if proven, to collect infull.     Furthermore, if CenterPoint Houston enters bankruptcy proceedings, it might be permitted tostop acting as servicer and it may be difficult to find a third party to act as servicer. Thefailure of the servicer to perform its duties or the inability to find a successor servicer mightcause payment delays or losses on the transition bonds. Also, the mere fact of a servicer or sellerbankruptcy proceeding might have an adverse effect on the resale market for the transition bondsand on the value of the transition bonds.***The sale of the transition property might be construed as a financing and not a sale in a case ofCenterPoint Houston’s bankruptcy which might delay or limit payments on the transition bonds.***     The Restructuring Act provides that the characterization of a transfer of transition propertyas a sale or other absolute transfer will not be affected or impaired by treatment of the transferas a financing for federal or state tax purposes or financial reporting purposes. We andCenterPoint Houston treated the transaction as a sale under applicable law, although for financialreporting and state income and franchise tax purposes the transaction was intended to be treated asa financing. In the event of a bankruptcy of CenterPoint Houston, a party in interest in thebankruptcy might assert that the sale of the transition property to us was a financing transactionand not a “sale or other absolute transfer” and that the treatment of the transaction for financialreporting and tax purposes as a financing and not a sale lends weight to that position. If a courtwere to characterize the transaction as a financing, we expect that we would, on behalf ofourselves and the trustee, be treated as a secured creditor of CenterPoint Houston in thebankruptcy proceedings, although a court might determine that we only have an unsecured claimagainst CenterPoint Houston. See “—The servicer will commingle the transition charges with otherrevenues it collects, which might obstruct access to the transition charges in case of theservicer’s bankruptcy and reduce the value of the transition bonds” above. Even if we had asecurity interest in the transition property, we would not likely have access to the relatedtransition charge collections during the bankruptcy and would be subject to the risks of a securedcreditor in a bankruptcy case, including the possible bankruptcy risks described in the immediatelypreceding risk factor. As a result, repayment of the transition bonds might be significantlydelayed and a plan of reorganization in the bankruptcy might permanently modify the amount andtiming of payments to us of the related transition charge collections and therefore the amount andtiming of funds available to us to pay bondholders.
 

 
***If the servicer enters bankruptcy proceedings, the collections of the transition charges held bythe servicer as of the date of bankruptcy might constitute preferences, which means these fundsmight be unavailable to pay amounts owing on the transition bonds.***     In the event of a bankruptcy of the servicer, a party in interest might take the position thatthe remittance of funds prior to bankruptcy of the servicer, pursuant to the servicing agreement orintercreditor agreement, constitutes a preference under bankruptcy law if the remittance of thosefunds was deemed to be paid on account of a pre-existing debt. If a court were to hold that theremittance of funds constitutes a preference, any such remittance within 90 days of the filing ofthe bankruptcy petition could be avoidable, and the funds could be required to be returned to thebankruptcy estate of the servicer. To the extent that transition charges have been commingled withthe general funds of the servicer, the risk that a court would hold that a remittance of funds wasa preference would increase. Also, we or the servicer may be considered an “insider” with any REPthat is affiliated with us or the servicer. If the servicer or we are considered to be an “insider”of the REP, any such remittance made within one year of the filing of the bankruptcy petition couldbe avoidable as well if the court were to hold that such remittance constitutes a preference. Ineither case, we or the trustee would merely be an unsecured creditor of the servicer.***Claims against CenterPoint Houston might be limited in the event of its bankruptcy.***     If CenterPoint Houston were to become a debtor in a bankruptcy case, claims, includingindemnity claims, by us against it, as seller, under the transition property sale agreement and theother documents executed in connection with the transition property sale agreement would beunsecured claims and would be disposed of in the bankruptcy case. In addition, the bankruptcy courtmight estimate any contingent claims that we have against the seller and, if it determines that thecontingency giving rise to these claims is unlikely to occur, estimate the claims at a loweramount. A party in interest in the bankruptcy of the seller might challenge the enforceability ofthe indemnity provisions in the transition property sale agreement. If a court were to hold thatthe indemnity provisions were unenforceable, we would be left with a claim for actual damagesagainst the seller based on breach of contract principles, which would be subject to estimationand/or calculation by the court. We cannot give any assurance as to the result if any of theabove-described actions or claims were made. Furthermore, we cannot give any assurance as to whatpercentage of their claims, if any, unsecured creditors would receive in any bankruptcy proceedinginvolving the seller.***The bankruptcy of CenterPoint Houston might limit the remedies available to the trustee.***     Upon an event of default under the indenture, the Restructuring Act permits the trustee toenforce the security interest in the transition property in accordance with the terms of theindenture. In this capacity, the trustee is permitted to request the Texas Utility Commission or aTravis County, Texas district court to order the sequestration and payment to bondholders of allrevenues arising with respect to the transition property. There can be no assurance, however, thatthe Texas Utility Commission or the Travis County, Texas district court would issue this orderafter a CenterPoint Houston bankruptcy in light of the automatic stay provisions of Section 362 ofthe United States Bankruptcy Code. In that event, the trustee would be required to seek an orderfrom the bankruptcy court lifting the automatic stay to permit this action by the Texas court, andan order requiring an accounting and segregation of the revenues arising from the transitionproperty. There can be no assurance that a court would grant either order.**Risks Associated with Potential Bankruptcy Proceedings of REPs*****REPs may commingle the transition charges with other revenues they collect. This may cause losseson or reduce the value of the transition bonds in the event a REP enters bankruptcy proceedings.***     A REP is not required to segregate from its general funds the transition charges it collectsbut is required to remit to the servicer amounts billed to it for transition charges, less anamount relating to expected customer charge-offs, within 35 days of the billing by the servicer. AREP nevertheless might fail to remit the full amount of the transition charges owed to the serviceror might fail to do so on a timely basis. This failure, whether voluntary or involuntary, mightmaterially reduce the amount of transition charge collections available on the next payment date tomake timely payments on the transition bonds.
 

 
     The Restructuring Act provides that our rights to the transition property are not affected bythe commingling of these funds with other funds. In a bankruptcy of a REP, however, a bankruptcycourt might rule that federal bankruptcy law takes precedence over the Restructuring Act and doesnot recognize our right to receive the collected transition charges that are commingled with otherfunds of a REP as of the date of bankruptcy. If so, the collections of the transition charges heldby a REP as of the date of bankruptcy would not be available to pay amounts owing on the transitionbonds. In this case, we would have only a general unsecured claim against the REP for thoseamounts. This decision might cause material delays in payments of principal or interest or losseson the transition bonds and could materially reduce the value of the transition bonds, particularlyif it occurred in the fifteenth year of the transition bonds after the completion of which notransition charges can be charged.***If a REP enters bankruptcy proceedings, any cash deposit of the REP held by the trustee might notbe available to cover amounts owed by the REP.***     If a REP does not have the credit rating required by the financing order, it may neverthelessqualify to act as a REP if, among other alternatives, it provides a cash deposit equal to twomonths’ maximum expected transition charge collections. That cash deposit will be held by thetrustee under the indenture. However, it is unclear whether the Restructuring Act creates a lien onthe cash deposit in favor of the trustee. If the REP becomes bankrupt, the trustee would be stayedfrom applying that cash deposit to cover amounts owed by the REP, and the trustee might be requiredto return that cash deposit to the REP’s bankruptcy estate if the bankruptcy court determines thereis no valid right of set-off or recoupment. In that case, the issuer might only have an unsecuredclaim for any amounts owed by the REP in the REP’s bankruptcy proceedings. Several REPs with whichCenterPoint Houston has done business have filed for bankruptcy. CenterPoint Houston, as servicerof the transition bonds, was able to recover the full amount or a substantial majority of thetransition charges from cash deposits or a combination of cash deposits and payments from theseREPs, but there is no assurance that CenterPoint Houston will be able to recover such amounts fromany bankrupt REPs in the future.***If a REP enters bankruptcy proceedings, transition charge payments made by that REP to the servicermight constitute preferences, and the servicer may be required to return such funds to thebankruptcy estate of the REP.***     In the event of a bankruptcy of a REP, a party in interest might take the position that theremittance of funds by the REP to the servicer, pursuant to the financing order, prior tobankruptcy constitutes a preference under bankruptcy law if the remittance of those funds wasdeemed to be paid on account of a pre-existing debt. If a court were to hold that the remittance offunds constitutes preferences, any remittance of such funds made within 90 days of the filing ofthe bankruptcy petition might be avoidable, and the funds might be required to be returned to thebankruptcy estate of the REP by us or the servicer. To the extent that transition charges have beencommingled with the general funds of the REP, the risk that a court would hold that a remittance offunds was a preference would increase. Also, we or the servicer might be considered an “insider”with any REP that is affiliated with us or the servicer. If the servicer or we are considered to bean “insider” of the REP, any such remittance made within one year of the filing of the bankruptcypetition could be avoidable as well if the court were to hold that such remittance constitutes apreference. In either case, we or the servicer would merely be an unsecured creditor of the REP.     Furthermore, the mere fact of a REP bankruptcy proceeding could have an adverse effect on theresale market for the transition bonds and on the value of the transition bonds.**Other Risks Associated with an Investment in the Transition Bonds*****We may incur expenses in excess of caps on such expenses provided in the financing order.***     Under the financing order, transition charges may not be imposed for certain of our ongoingexpenses to the extent they exceed caps provided in the financing order for such amounts. Inaddition, our other assets, substantially all of which are pledged to the trustee under theindenture, may not be used by the trustee to pay such excess amounts. Examples of these capsinclude payment of specified fees and expenses of the trustee and the servicer and other specifiedoperating expenses. We cannot be sure that we will not incur expenses for these purposes in excessof the cap levels and, if this were to occur, we would not have funds to make payments for theseexcess amounts. Creditors of ours which are owed these amounts and not paid may obtain judgmentliens against our assets or seek to place us in bankruptcy.
 

 
***CenterPoint Houston’s indemnification obligations under the transition property sale and servicingagreements are limited and might not be sufficient to protect the value of the transition bonds.***     CenterPoint Houston is obligated under the transition property sale agreement to indemnify usand the trustee, for itself and on behalf of the bondholders, only in specified circumstances andwill not be obligated to repurchase the transition property in the event of a breach of any of itsrepresentations, warranties or covenants regarding the transition property. Similarly, CenterPointHouston is obligated under the transition property servicing agreement to indemnify us, thetrustee, for itself and on behalf of the bondholders, and the Texas Utility Commission only inspecified circumstances.     Neither the trustee nor the bondholders have the right to accelerate payments on thetransition bonds as a result of a breach under the transition property sale agreement or thetransition property servicing agreement, absent an event of default under the indenture.Furthermore, CenterPoint Houston might not have sufficient funds available to satisfy itsindemnification obligations under these agreements, and the amount of any indemnification paid byCenterPoint Houston might not be sufficient for bondholders to recover all of their investment inthe transition bonds. In addition, if CenterPoint Houston becomes obligated to indemnifybondholders, the ratings on the transition bonds will likely be downgraded as a result of thecircumstances causing the breach and the fact that bondholders will be unsecured creditors ofCenterPoint Houston with respect to any of these indemnification amounts.***CenterPoint Houston’s ratings might affect the market value of the transition bonds.***     A downgrading of the credit ratings on the debt of CenterPoint Houston might have an adverseeffect on the market value of the transition bonds.***Alternatives to purchasing electricity through CenterPoint Houston’s distribution facilities may bemore widely utilized by retail electric customers in the future.***     Broader use of distributed generation by retail electric customers may result from customers’changing perceptions of the merits of utilizing existing generation technology or fromtechnological developments resulting in smaller-scale, more fuel efficient, more environmentallyfriendly and/or more cost effective distributed generation. Electric customers within CenterPointHouston’s service territory whose load is served by an on-site power production facility with arated capacity of 10 megawatts or less are not required to pay transition charges under theRestructuring Act except for transition charges associated with services actually provided by thetransmission and distribution utility. Therefore, more widespread use of distributed generationmight allow greater numbers of retail customers to reduce or eliminate their payment of transitioncharges causing transition charges to remaining customers to increase.***Bondholders might receive principal payments on the transition bonds later than expected.***     The amount and the rate of collection of the transition charges, together with the relatedtransition charge adjustments, will generally determine whether there is a delay in the scheduledrepayments of transition bond principal. If the servicer collects the transition charges at aslower rate than expected from any REP, it might have to request adjustments of the transitioncharges. If those adjustments are not timely and accurate, bondholders might experience a delay inpayments of principal and interest and a decrease in the value of the transition bonds.